Ever wondered how much Taylor Swift, 33, earns a month from her pre-recorded albums? According to the British press, it is GBP6.7 million ($11.2 million) a month. Entertainers like Swift earn money from royalties, which is the sum of money paid to a person or entity which holds a patent for the use of the patent.
Royalties are assets which take the form of agreements or licences that lay out the terms by which a third party can use assets that belong to someone else. The owner of the patent receives a cash flow for the period the patent is in effect. If patents are to be valued based on their cash flow, then future cash flows for the life of the patent are discounted with the use of a discount rate back to a net present value.
Royalties are a form of intangible assets (See Page 11 story for many others) that make use of intellectual property, be it the formula for a drug, a song that is played often in public, or a brand’s value.
Back in June 2019, Swift and her former record label, Big Machine Records had disagreements over the ownership of the digital masters of Swift’s first six albums following the sale of Big Machine Records to a private equity firm. The dispute shone a spotlight on the ownership and valuation of intangible assets.
According to International Accounting Standards Board (IAS) 38 which outlines the accounting requirements for intangible assets, an intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable or when it arises from contractual or other legal rights.
Separable assets can be sold, transferred or licensed. Examples of intangible assets include computer software, licences, trademarks, patents, films, copyrights and import quotas, according to IAS 38.
Hub status
As the value of intangible assets gains more prominence versus the traditional fixed assets of plant and property, Singapore has drawn up a roadmap to transform itself into a centre for intangible assets and intellectual property (IP).
Andre Toh, Co-chairman, Intangibles Disclosure Industry Working Group, EY Asean and Asia-Pacific Valuation, Modeling & Economics Leader, and a member of the cross-industry working group which developed the framework, said in a recent interview: “In April 2021, the government laid out a roadmap for Singapore as an intangible asset and IP hub. Within that, the Intangibles Disclosure Framework (IDF) 2023 is about building a trusted ecosystem for valuations and for people to understand what the measurement and evaluation of intangible assets is.”
See also: Fuelled by China’s promise: Golden opportunity for Hong Kong SDR investing
The roadmap aims to strengthen Singapore’s position as a global intangible asset (IA) and IP hub with the launch of the Singapore Intellectual Property Strategy (SIPS) 2030.
A major step towards that objective was the launch of IDF 2023 on Sept 4 by the Intellectual Property Office of Singapore (Ipos) along with the Accounting and Corporate Regulatory Authority (Acra).
As part of the launch, Singapore also launched the Wipo-Singapore Asean Mediation Programme (AMP) where Wipo refers to the World Intellectual Property Office. The AMP subsidises up to $8,000 for mediation of IP and tech disputes administered by the Wipro Arbitration and Mediation Centre Office in Singapore as long as one of the parties is an Asean entity or individual.
The AMP is not limited to court litigation, arbitration or disputes before a national authority. It can cover cases where parties need mediation to conclude an agreement. A trademark dispute case has already been filed under the AMP.
Long-term goal
A long-term goal of SIPS 2030 is to build a credible and trusted intangible asset valuation and reporting ecosystem that supports enterprises in managing and commercialising their intangible assets. This, in turn, helps enterprises unlock benefits from their intangible assets, contributing to overall business strategy and value.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Globally, intangible asset valuation and reporting remain at a nascent stage. No jurisdiction has developed a disclosure framework specifically for intangibles, much less an intangibles-specific valuation framework. Yet, some 90% of the valuation of the S&P 500 is made up of intangibles.
With streaming, live-streaming, the metaverse and a global population living increasingly in the digital world, intangible assets and their valuation are likely to take an increasing part of investor attention.
“The IDF is not just for our own homegrown companies but also companies from elsewhere coming here, [possibly] seeking financing,” adds Murli Ravi, Member, Intangibles Disclosure Industry Working Group, co-founder and managing partner of Tin Men Capital.
As a venture capitalist, Ravi has experience financing companies with mainly intangible assets. The IDF could attract both new companies and venture capital to Singapore.
During the launch of IDF 2023, Indranee Rajah, Minister in the Prime Minister’s Office and Second Minister for Finance and National Development, in a keynote speech on Sept 4, referenced the 2013 IP Hub Master Plan, a 10- year plan to guide Singapore towards becoming a Global IP Hub in Asia.
“It has been a decade since we launched the 2013 IP Hub Master Plan. Since then, we have made significant progress in many areas, including strengthening Singapore as an international hub for IP transactions and management. These goals have not changed under the Singapore IP Strategy 2030. We continue to strive towards fostering a conducive innovation ecosystem; one that equips enterprises with the tools and know-how to manage their IP effectively for growth,” the minister said.
In the IP Survey 2023, only 15% of the companies in Singapore had conducted a standalone valuation of their intellectual property and intangible assets. Of these, less than half were conducted by a certified valuer and appraiser.
“Although many enterprises are aware of the importance of intangible assets, the marketplace — and even the businesses themselves that hold these assets — may not fully appreciate what they own. This, in turn, means that companies may not be valued fairly and their resources may not be commercialised effectively. What the market needs is better information about the intangible aspects of our businesses,” the minister said.
Increasing IP activities in Singapore would drive business and economic growth. It would also encourage companies based here to value their intangible assets better.
Four pillars
The IDF was drawn up to provide better information on intangibles through four pillars: strategy, identification, measurement and management. The strategy pillar supports the disclosure and communication of how intangibles are used in an enterprise’s overall corporate strategy to create returns for its investors, and what role intangibles may play in various aspects of business, potentially allowing the enterprise to gain or preserve a competitive advantage in the market.
The identification pillar includes the definition of an “intangible” and recommends how an enterprise should describe the nature and characteristics of its intangibles.
Under this pillar, it is proposed that intangibles be classified into six categories: marketing-related assets such as trademarks; customer-related assets such as customer lists and relationships; artistic-related assets such as musical works and audiovisual materials; contract-related assets such as royalties, permits, and broadcast rights; and technology-related assets such as patents and software; and human capital.
Some companies including global tech leaders like Meta and Alphabet own a combination of technology, marketing and human capital-related intangibles.
“Human capital actually goes to things like brand or, for example, how many PhDs you might have in your [biotech] firm. These assets may not be captured by financial accounts. For two companies in the same industry, one might have a much higher market cap than the other. The difference might be explained by one company being able to attract more people as employees,” Ravi suggests.
“The whole idea of intangible assets framework is about helping companies figure out the assets they should emphasise to the market or private investors and bankers that currently are not being stated explicitly although it’s implicit in the valuation,” he elaborates.
Secondly, the framework can help differentiate companies within the same industry. “If you’re doing a better job of presenting what your business is about, then obviously you’re going to attract a better set of investors, better prospects, and customers,” Ravi says.
Valuing intangibles
Valuing intangibles comes under the measurement pillar. This pillar provides the information on performance metrics and information required by stakeholders to assess and understand the financial health and performance of an enterprise’s intangibles. However, the disclosure of the monetary value of an enterprise’s intangibles is optional under this pillar.
According to the framework, an enterprise should disclose the key performance indicators (KPIs) used to assess and analyse the financial health and performance of its intangibles. The KPIs or metrics provided should ideally be accompanied by historical data to allow for trend analyses.
The methodologies used to calculate and estimate the disclosed metrics should also be disclosed. If an enterprise chooses to disclose the monetary value of its intangibles, the valuations should be conducted in accordance with the International Valuation Standards (IVS).
The enterprise should include a reconciliation between the intangible assets recorded in their financial statements and the intangibles disclosed based on the framework, and state whether the disclosed monetary value of its intangibles was audited or reviewed.
According to the measurement pillar, other disclosures on monetary value should include the purpose of the valuation and the intended users, the definition of value, the date of valuation, the intangible being valued, the valuation method(s), the valuation assumptions and inputs, a description of the valuation sensitivities to changes in unobservable inputs (such as discount rates).
The management pillar provides guidance on how an enterprise may disclose the manner in which it identifies, assesses and manages the risks and opportunities related to its intangibles, which should come under its overall group risk management practices.
“Management is about knowing the risks and opportunities as well as governance. So, management is about managing your intangible assets and intellectual property in a way that you protect against risks and ensure there’s proper governance and process systems,” Toh says.
“This framework is not just for start-ups. It applies to existing companies with steady cash flows, as well as listed companies, simply because it’s the framework to capture intangibles that businesses own. If a huge portion of the market capitalisation of an established business is above book value, that gap could be due to its intangible assets,” he points out.
With the framework, companies are more likely to have a harmonised method of presenting their intangibles, which would enable investors to make better decisions, Toh adds.
Swift’s solution to her crisis was to create new recordings of all of the musical work in the six albums, using the publishing rights she retained, and to have the finished product sound as close to the original as possible.
She was able to legally re-record those six albums because she wrote her own songs and owns publishing rights to them. She will also own the digital masters once the re-recordings are completed.
