In the corporate world, companies possess many different tangible assets with real marketplace value. Real estate, office equipment, office furniture, computers, cash, and accounts receivable are assets that, if necessary, can be exchanged in trade or used to pay off debts. Assets like these normally carry established market values, which vary depending on different economic and geographic factors. These kinds of assets are relatively easy to quantify and include on financial reports.
However, tangible assets are only part of the total picture. Companies also possess vast arrays of intangible assets. Intangible assets have real vale and are very important to a company's success, but are much harder to measure and quantify than their tangible counterparts. These kinds of assets can be customer-, technology-, or market-based. Examples of intangible assets include organizational ability, research and development, brand equity, customer databases, exclusivity within a particular market or geographic area, software, drawings, special expertise, customer satisfaction, the speed at which companies are able to bring new products and services to market, and more. Such assets usually involve information and are knowledge-based, focusing on products, services, and organizational systems. Knowledge-based, intangible assets are sometimes referred to as intellectual capital.
Although they may not be visible to the naked eye the same way tangible assets are, it is important for companies to take stock of the intangible assets they have and find ways to capture and preserve them. In the early 2000s, there were different ways of doing this. One approach was to keep employees with special knowledge, skills, and abilities happy so that they did not leave and seek employment with competing organizations. Another approach to retaining intangible assets involved storing them in computerized "expert systems." Based on artificial intelligence technology, expert systems are databanks of human knowledge that users can query in order to receive answers to common problems or challenges. Such systems have been used in the finance and insurance fields, where information is key, as well as in retail settings. There also are other ways companies store and share their collective knowledge. Home Depot, which operates a chain of home improvement stores, posts information on its intranet (a private Internet site for employees) containing quick answers to a variety of home improvement and repair questions. This allows employees to consistently provide customers with more value at the store level.
As information and knowledge play increasingly prominent roles in the business world, identifying and managing intangible assets become issues that physical retailers like Home Depot must deal with, as must companies doing business exclusively online. According to Investor Relations Business, Wayne Upton of the Financial Accounting Standards Board indicated this was a challenge for all companies, regardless of size. "The issue of intangible assets is just as important for a company like Pfizer Corp. as it is for a start-up, although Pfizer may do a better job," he explained.
One of the reasons intangible assets are so important is because they can be converted to tangible assets, ultimately generating revenue. Books, software products, equipment, patents, and inventions are prime examples. Intangible assets also are of considerable interest to investors. In the past, a company's book value often was closely associated with its market value. However, by the early 2000s market values often exceeded book values, and the difference was often attributable to the value of a company's intangible assets. The dollar value of such assets is considerable. Futurist cited information from the editors of the Harvard Business School's newsletter, Harvard Management Update, indicating intangible assets were worth "an average of three times more than the physical assets a company may possess, such as equipment and buildings."
Despite the importance of intangible assets to both companies and their investors, they remained difficult to define, recognize, and measure in the early 2000s, and uniform standards for doing so did not exist. The fact that such information was not being disclosed to investors and analysts along with other, more easily quantifiable assets, presented serious problems. After all, it made it more difficult for investors to make sound decisions in the absence of such information. Because of these concerns, professionals in the fields of academia and accounting were seeking to alter the ways companies measured performance and value. By proposing new methods, they acted as change agents, challenging established principles that no longer met the information needs of the business community.
Boulton, Richard E.S., Barry D. Libert, and Steve M. Samek. "A Business Model for the New Economy." Journal of Business Strategy, July/August 2000.
Stewart, Thomas A. "Accounting Gets Radical." Fortune, April 16, 2001.
Wagner, Cynthia G. "Making Intangible Assets More Tangible." Futurist, May/June 2001.
"You're Not Special, FASB Tells Dotcoms." Investor Relations Business, April 30, 2001.
SEE ALSO: Intellectual Capital; Intellectual Property