How resilient are your intangibles?

Ramesh Jude Thomas
President & CKO
EQUiTOR Management Consulting Pvt Ltd

Most of us spend large amounts of time and effort building our attitude, capabilities, special skills or indeed our reputation for something in particular. We try hard to be known for our sense of humour or kindness or diligence or whatever. Do we ever know how well we continue to command these? Do we know whether they are being impaired.

Testing for impairment is a significant measure for understanding the change in asset value other than due to prescribed allowable depreciation. This has come into sharp focus particularly in an era in which the lion’s share of what we pay for in acquisitions are the intangible assets of the firm. Unfortunately, even today it is publicly referred to as “testing for the impairment of goodwill.” This reflects the continued denial of the existence of real intangible assets (viz. brands, patents, consumer bases, proprietary technology) that drive cash flows independent of the balance sheet assets.

This has two important implications:

- with such large amounts(beyond the balance sheet) being paid for acquisitions now, there is still no separate due diligence done for the value of the intangibles as business assets
- Although balance sheet items like cash and machinery are checked easily for changes in status and captured in reporting, there is very little recognition of the change in the status of the larger assets that were acquired. Thereby having leaving management with little idea of how value creation could be impacted hereon.

Today more than two thirds of enterprise value lies in the intangible assets. It then stands to reason that at least two thirds of our attention needs to be focused there. When we are reviewing an individual for suitability (interview, marriage, partnership etc.) do we only look at the physical attributes? If not, can we afford guesswork on the non physical?

After having acquired the asset, we still need to keep checking as we go along, about the continued value (utility) of the asset. Impairment testing is nothing but this. But just like the physical assets, we need to know what we are looking for to measure.