This essay tries to look insight into the statement that value is predominantly of an intangible nature. Value can be classified as tangible and intangible. For commodities, tangible value is visible or price sticker oriented while the intangible is invisible/untouched but it is indispensable. According to Barron’s Accounting Dictionary, intangible value is the present value of excess earning power of an entity over the normal rate of return, such as trademarks, brand and patents and the like. The utility of a commodity, relative to that of its competitors, is determined by the commodity’s intangible value.
Intangible features are supposed to represent as much as 80% of the total market value, as illustrated by companies like Facebook, Google and Accenture. Therefore, a commodity’ essential value relies on its intangible value. From the theoretical aspect, there is increasing recognition of the great importance of intangible value. Norm Smallwood (2010) categorizes intangible values into four levels-promises, compelling strategies, core competencies and organization capabilities. All these intangible values cannot be physically captured and it’s not easy for competitors to copy.
They delight customers, involve employees, establish reputation among investors and provide long-term sustainable value” (Norm Smallwood, 2010). Norm Smallwood (2010) contends “business leaders must take responsibility for creating intangible value within their organizations in order to restore a healthy economy that we feel safe investing”. Forbes (2008) asserts that, undoubtly, valuing intangibles such as brands and patents, makes more sense rather than listing these critical business assets in the accounting black hole known as goodwill.
Furthermore, Norm Smallwood gets an insight of intangible value and points out that, “intangible value is based on the market’s perception of whether a company is likely to keep its promises about future growth” (Norm Samllwood, 2010). He noticed that the proportion of intangible value in total market valuation has gone up during the last 20 years. “Even during the worst of the recession last year, companies with similar size and earnings had different market valuations partly because investors have more confidence in the future of some companies than others” (Norm Samllwood, 010).
Apart from the literature review, many empirical findings also indicate that primary value emerges intangibly. In the early 1990s a significant change concerning the asset compositions of business became apparent (Baruch and Daum, 2004). “During the 1980s the book value of corporations has been constantly shrinking in relation to market value, however, the residual, which is often regarded as the capital markets view of the value of a corporation’s intangible assets, was rising” (Baruch and Daum, 2004).
Drawing on recent empirical research, and building on related “intangible assets” notions, Baruch and Daum (2004) disclosed the result that, within only ten years the relation between book value and value of intangibles has been totally reversed for the average S&P500 company: between 1982 and 1992 the value of intangibles increased from 38 percent to 62 percent of market value while book value dropped by 24 percent. Such a phenomenon of rising proportion of intangible part in the whole value entity causes tremendous awareness of enterprises.
However, on the other hand, some people firmly believe that intrinsic value does not stem from intangible value and intangible value is not worthy because current material & technique cannot pinpoint its value. Due to the difficulty and unreliability of intangible value measurement, they advocate the fair market valuation. Hahn and Collier (2010) hold that the term “fair market value” turns out to be increasingly significant in financial transactions, particularly companies in the health care service industry.
Whether a financial transaction is a purchase, sale or other contractual arrangements, fair market value has become a major area of concern for many health care providers because a lack of support for a financial arrangement can result in very significant consequences to all parties, including the appraiser” (Hahn and Collier, 2010). In short, even though intangible value is still controversial but we cannot deny its worth. There are a growing number of people accepting that value is predominantly of an intangible nature.
January 9, 2018
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