Intangible assets in Brazil: separate but inseparable?

From the Brazilian law firm Di Blasi, Parente & Associados comes news that the Brazilian tax authorities have issued Conflict Resolution Decision No. 47 regulating the accounting of intangible assets. As the firm's newsletter explains:

In 2008 Brazil finally adopted international accounting standards. For this reason, the Transition Tax Regime (TTR) was instituted by the Brazilian Provisional Measure No. 449 of December 3, 2008, which was converted into Law No. 11.941 of 2009.

The Brazilian Government’s ultimate purpose of applying the TTR is to prevent the new rules causing disturbances in tax calculation.

Recently, the Brazilian Federal Revenue Office has published a guideline on the accounting standards to be applied by companies that are subjected to the TTR, and that entail research and development expenses. According to this guideline, these companies must adopt the previous accounting rules, namely, the national standards in force on December 31, 2007, both for calculating Income Tax as well as for ascertaining the Social Contribution on Net Income.

Thus, even though the international rules provide for separate accounts for intangible assets, trade marks, patents, industrial designs and non-patented technology must be accounted together with their tangible assets, such as machines and products, exactly as was the case under the previous rules.

The TTR will remain valid until a new law governing the tax effects of new accounting methods and criteria in accordance with international rules to achieve a tax harmonization eventually enters into force.

Maximising IP and Intangible Assets: new report

IP Finance has recently received information concerning the new paper from Athena Alliance, Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. This report may be accessed from Athena's website here, in html and pdf versions) and on Ken Jarboe's weblog The Intangible Economy. According to Ken,

"The paper looks at how, as innovative companies struggle to raise funds, intellectual property and intangible assets are providing alternative ways of financing innovation. The report outlines increasing, but still nascent, means of financing innovation based on these assets in public, private and venture capital markets. As industry has invested capital in research and development to develop new technology and advance other creative activities, intellectual capital has become a valuable asset class, according to the paper. In response, firms specializing in intangible-based financing are springing up, using them to raise capital for the next round of innovation.

The report details equity, equity-debt, debt, and sale-leaseback transactions, both private and public, that have helped companies raise capital, based on careful, rigorous analysis and conservative underwriting standards. For example, the author notes that in 2000, there were two public deals using royalty securitization, raising $145 million. In 2007-08, $3.3 billion was raised in 19 deals.

Unlike some of the exotic financial vehicles, however, the financial products discussed in this paper are some of the most basic financing mechanisms in business. The innovation is in recognizing the value of intangible assets for corporate finance. These new financial firms are using traditional financial techniques in new ways to help innovative companies.

As a case study paper, the report does not get heavily into policy recommendations but builds on earlier Athena Alliance papers, notably Intangible Asset Monetization: The Promise and the Reality. The report does discuss that the important step would be developing sound, industry-wide, underwriting standards .... For example, Small Business Administration (SBA) rules permit its loans to be used for acquisition of intangible assets when buying on-going businesses. However, it appears that the rules are unclear on whether those assets can be used as collateral. The paper recommends that SBA work with commercial lenders to develop standards for using intangible assets as collateral".

Ken asks that this paper be given some airing, so that he can receive the benefit of readers' comments. You can email him here.

Not just a simple subtraction

Via Duncan Bucknell comes a link to Pat Sullivan's Blog, which summarises Pat's post as follows:

"... Pat Sullivan posted a great comment on the (ongoing) myth clung to by many in the Intellectual Asset and Intellectual Property fields - that you can calculate the value of a publicly traded firm's intangible assets by simply subtracting the value of the tangible assets from the current market capitalisation.

This is the line of thinking that generated the often quoted figure that 70% or more of a companies assets are intangibles".

Comments Duncan:

"I've always qualified that by saying here 'intangibles' must include a fudge factor for market perception - which overules everything in the publicly traded stocks. As Pat points out, the current economic crisis and the large market cap losses on stock markets underscore the proposition that the difference in value is not simply attributable to intangible assets".

The truth is that myth is so widely held that it will take generations to eradicate. Like all enduring myths, it is simple to understand, has a superficially comprehensible logic and provides a basis for decision-making without the need to engage in clear-headed thinking.