F8- Valuation of Intangible Assets

The private sector has a handy way of assigning market value to tangible and/or intangible assets: the capacity of the asset to generate earnings. Using the M&E (or monitoring & evaluation) framework proposed earlier, this is the same as saying that the value of 1 is the sum of all future 3 (after discounting):


Here are some examples

    1- Anticipation of future earnings: Buyers of stocks bid up the price of a stock when they believe its prospects for generating earnings in the future is very good. Stock buyers use indicators such as Price-Earnings Ratio for this purpose.

    2- Erosion of confidence: In contrast, if buyers of stocks lose confidence in a company’s ability to generate future earnings, they bid down the price of its stock. In the first two weeks of early October 2008, Dow Jones companies lost US$ 2.3 trillion (when their physical and other tangible assets stayed nearly the same). That is the market value of lost confidence (an intangible asset).

    3- Net present value: The value of the expertise of a consultant (an intangible asset) is the present value (assuming a reasonable discount rate) of the stream of her expected annual earnings (less necessary personal expenses) up to her retirement day. For example, the economic value of the expertise of a 45-year old consultant netting Euro 6,000 per month is nearly Euro 1 million at 5% annual discount rate (that is, a principal of Euro 1 million deposited in a bank account earning 5% yearly can support monthly withdrawals of Euro 6,000 up to age 65).

    4- Due diligence process: Acquiring a corporation not listed in the stock exchange (market value is unknown because its stocks are not traded) involves a process of estimating its fair market price by looking at both historical financial performance (tangible assets) and prospects for future growth based on brand, network of customers, growth of customer base, soundness of management policies, vulnerabilities to competition, etc. (all intangible assets).

    5- Premiums: Beachfront hotels adjust the rates of their sea-facing rooms higher than land-facing rooms. The premium is the extra price guests are willing to pay for the scenic view (an intangible asset).

Robert Kiyosaki (author of “Rich Dad, Poor Dad”) defines an asset as anything that yields regular income. Contrary to accounting practice, he claims a family car should not be treated as an asset because it generates regular expenses!

Here is an illustrative list of ordinary things, both tangible and intangible, that generate regular income. Following the view of Kiyosaki, we can call them “assets” or “capital”.

    • Natural capital: “I sell 2 truckloads of mango fruits yearly from my 20 mango trees.”
    • Technology + structural capital: “We patrol our Marine Protected Area against poachers because it regenerates our fish stock.”
    • Social capital: “When I was a child, my godfather gives me a cash gift every Christmas.”
    • Customer capital: “My customers keep coming back and boost my sales because they trust me.”
    • (Negative) psychological capital: “That cooperative has been losing money because of its corrupt manager.”
    • Human capital: “The Philippine economy gets $15 billion yearly remittances from its overseas workers.”
    • Public infrastructure: “The new road enables me to sell my farm products to the town center every week.”
    • Human capital + access to cultural assets: “My part-time job is French and Niponggo speaking tour guide in Bohol province.”
    • Cultural capital + indigenous crafts: “Our Moriones tradition boosts our tourist income every March.”
    • Financial capital: “The trust fund yields $10,000 every year.”
    • Access rights to natural resources through a formal agreement: “Our agreement with the government gave us usufruct rights over our ancestral domain.”
    • Traditional access rights: “I gather and sell firewood from the communal forest every Saturday.”
    • Indigenous knowledge: “Knowing the forest intimately enables the Ayta to survive there for months.”
    • Structural capital: “My PowerPoint presentations attract more clients to my workshops.”

At the conference on “Knowledge Architectures for Development” at the Singapore Management University last March 2008, we proposed the term “metacapital” as a generic term to encompass these various forms of capital (see “Knowledge for Poverty Alleviation: A Framework for Design and Evaluation of Development Projects for Low-Income Communities”).

In monitoring & evaluation (M&E) of KM for development, the issue then is: how do we translate this private sector approach to the development sector? Any ideas?

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2 Responses to “F8- Valuation of Intangible Assets”

  1. 9- Estimating the Benefit from Organizational Learning « The giraffe Says:

    […] economic value of OL/KS we would get. The logic of the computations below is based on NPV computations mentioned in the previous blog, and the same M&E (monitoring & evaluation) framework we had been using in the past several […]

  2. 10- KM4D: Three Viewpoints « The giraffe Says:

    […] and that the broader concept of “intangible assets” and the even broader construct of “metacapital” are preferable units of management than the more limited “knowledge assets” or […]

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