Intangible assets are those assets that a company has developed and needs to maintain. These may be patents, business processes, supplies, software or information. A company normally spends a lot of time, effort and money in developing these intangible assets so as to protect them from competition and maintain their competitive advantage. Unfortunately, some of the intangible assets such as know-how and process techniques are not so easily monetized. Hence, it is important for companies to carefully measure these intangible assets and determine the costs of their development and maintenance.
Usually, intangible assets are developed during the course of the production process. The company needs to identify all the processes that it undertakes and undertake them in an efficient manner. When the company is able to achieve this, it can use the developed process or technology to protect its intangible assets. At the same time, the process must be sufficiently effective so that it can overcome the competition and remain relevant. To measure these assets, the company must first take into account all the processes and activities related to its core business activity and then add up the individual costs of each process.
The total rate at which intangible assets are developed and maintained, referred to as the development cost, represents the largest component of the overall intangible assets development cost. A company should not expect to break even with development costs and it can only reach the goal of developing strong in-house talent if it sets aside a large part of its assets for this purpose. Thus, the second most important measure of intangible assets is capital budget. The size of the capital budget is determined by the type and number of employees and must therefore be predetermined before the start of any project. This will help determine the allocation of resources between operations, administration and marketing. The third most important measure of intangible assets and development costs is the level of confusion and disarray created by the process and its effects on the organizational culture and values.
It is impossible to remove intangibles from a company. Even, when a firm purchases the intangible assets of another organization, it will still be making direct contributions to the intangible capital of the latter. The only way to measure the development costs effectively is through the use of information technology, such as accounting, bookkeeping, and budgeting.
There are two approaches to measuring intangible assets and development costs. The first one is to use financial accounting, which has been proven to be very effective for a wide range of firms, because it helps to allocate financial transactions more appropriately. The second method is to use the technique called the comparative study of systems. This technique is based on the concept that a firm can easily locate and then compare the relative costs of different intangible assets based on their intangible nature, location, and other factors.
The most common measurement of intangibles is the intangible asset cost or ACO. This refers to the cost of acquiring the intangibles and the extent to which they have to be resold after the purchase or hire. This is often a significant measure of an intangible asset because it indicates the extent to which a firm has to sell its intangible assets to raise funds for its operations. Therefore, this measure can serve as a primary basis for determining a firm’s capital budget. This also serves as a major indicator of the firm’s liquidity because the amount of cash needed to operate the firm or acquire new intangibles is directly proportional to the ACO.
Intangible assets like patents, trademarks, and software are not sold for monetary purposes. They are bought for the purpose of operating the business and acquiring new knowledge. Therefore, the costs of these intangibles do not represent money changing hands but represent money being spent in the operation of the firm. In order to determine the price of a firm’s intangible assets, the amount of cash needed to operate and acquire them must be subtracted from the current value of the firm’s stock and net worth.
The increase in the price of intangibles is due to two factors: depreciation and increase in the ability of the business to employ and develop new technology. These factors are referred to as intangible assets’ flexibility and intangibles elasticity. A firm must therefore allocate part of its capital budget to growth and development costs. The price to sale of these intangibles is referred to as the firm’s intangible assets and development costs.