New Deloitte and TAQEEM report examines value contribution of intangibles within businesses

Deloitte Middle East in collaboration with the Saudi Authority for Accredited Valuers –TAQEEM – has just released a report which explores  intangible assets and their increasing contribution towards the value composition of businesses. The report examines key trends from the Standard and Poor’s 500 (S&P 500) index over the past three decades and traces the shift in the composition of the S&P 500 index from heavy industry focused corporations with significant tangible asset base, to more information and intangible assets driven corporations.

This Deloitte report  further presents a comparative analysis with Tadawul, the Saudi Arabian stock index, to establish that the Saudi Arabian economy is at the start of a similar transition. A review of select recent regional transactions illustrates how intangible assets are becoming a major value contributor in the region.

Mohammad Araj, Director, Financial Advisory, Deloitte Middle East and accredited member of TAQEEM, said: “Intangibles and goodwill have in recent years, made up an increasing contribution towards the composition of a business. As an example, in one of the most recent acquisitions in the region, the Amazon ? transaction, the amount of US$672m purchase consideration paid was for the intangibles and goodwill. The fact that such balances for intangibles were recognized on the effective date of acquisition, does not mean that they were non-existent before that day, in fact they were created, grown and protected over several years and only recognized for financial reporting purposes as of the acquisition day.”

The focus on intangibles from the stakeholders including management, shareholders and regulatory bodies will continue to evolve in the near future with developing, growing and protecting intangible assets becoming a key stone for having successful businesses and capital appreciation.

The Deloitte report suggests a three-stage approach for businesses to realize maximum benefit from intangible assets:

  • Initial stage (diagnosis and measurement): Identifying the assets and evaluating them. It is noted that 52% of companies do not progress further.
  • Control stage (involvement and value creation): Involvement of key members of the organisation on management of intangibles and associating non-financial indicators with business results for the purpose of value creation. 45% of companies develop to this stage.
  • Advanced stage (differentiation): Developing differentiating strategies, leveraging on the intangibles, can be integrated into business. 3% of companies reach this stage.

“We are seeing an increased number of stakeholders from within the GCC requesting for a pre-transaction purchase price allocation analysis, some of which we have worked with in Saudi Arabia. That is a clear indication that investors are interested to know beforehand what they are paying for and in understanding the value of the intangibles in their target companies. This would provide a justification for any premium paid over and above the proposed purchase price” added Araj.

Sultan Aljorais, Secretary General, TAQEEM provided the regulators perspective: “With the importance of intangible assets in today’s economies, the need for valuation standards becomes crucial. TAQEEM built a robust infrastructure for the valuation of intangible assets and adopted the internationally recognised standards set by the International Valuation Standards Council, which results in promoting transparency and confidence in Saudi Arabia’s economy. This will contribute to achieving the financial sector development program that is vital to Vision 2030 realisation.”

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