Uncovering the secret billions missing from ASX balance sheets

Deloitte’s Frances Drummond, left, and Tim Heberden, right (pictured with IP Advisory partner Derek Minihane). Picture: Gabriella Sukkarr

Almost half of the value of our top 100 largest listed companies is completely undisclosed. It sounds hard to believe, but around $1.18 trillion of assets, or 46 per cent of the value of the ASX100 is absent from company balance sheets.

It is not because of some corporate conspiracy to hide value from shareholders and regulators. It’s to do with some accounting rules and how assets are classified. But these simple accounting regulations carry some very broad implications for our economy and corporate governance.

Let us explain. Broadly, a company can divide their assets into two categories: tangible and intangible. The former typically refers to things that physically exist, such as inventory or real estate, and monetary assets.

The latter refers to a combination of identifiable assets that typically don’t physically exist such as brands, patents, or data. It also includes goodwill, which refers to the value inherent in the human capital, relationships and capabilities of a company.

The curious thing about intangible assets is that they typically only appear on a balance sheet when they are externally acquired. For example, when one company purchases another the purchase price is allocated to identifiable asset acquired (whether tangible or intangible) and residual value is capitalised as goodwill.

But if an intangible asset is internally generated – as are some of the world’s most valuable brands and technologies – for the most part they are excluded from balance sheets under accounting rule, meaning shareholders have an incomplete view of their asset base.

This is important because intangible assets like technology, brands and data are now the dominant drivers of corporate value in advanced economies. Deloitte research reveals old-school net tangible assets account for just 43 per cent of value of the ASX 100.

However, only 11 per cent of these companies’ value is represented by intangible assets shown on their balance sheets. The other 46 per cent of the value of the ASX 1000, as we have mentioned, is undisclosed.

This isn’t a trend that is unique to the Australian bourse. In fact, the value of Australian companies is typically more reliant on old-school tangible assets due to the representation of resources and real estate in our economy.

To compare, our analysis of the US’s S&P 100 index reveals that 71 per cent of its value is derived from undisclosed intangible assets – in part due to the tech-heavy nature of the US economy.

But of course, the Australian economy is changing to address digital transformation, climate and sustainability, and intangible assets like intellectual property, data and brand are pivotal to this transition.

Despite their value, our informal polls show that there is also limited internal visibility of the health and value of homegrown intangibles. However, at Deloitte’s recent Intangible Value Summit, Australian board members and executives recognised that it makes little sense for governance of intangible assets to be inferior to their tangible counterparts.

Nowhere is this more relevant currently than brand and social licence, which is a key intangible asset. One does not have to look far to see situations where corporate behaviour has badly damaged a company’s share price.

Can brands be valued and are there early-warning signals of risk and upside opportunities? The answer is yes, and performance measures should link company actions to stakeholder perceptions and brand value.

Brand asset governance extends beyond the marketing department and should ensure that internal performance metrics and executive incentive targets do not prioritise short-term performance at the expense of brand equity.

The same logic extends to technology and data management. In recent decades, the rapid growth of successful tech and data-centric companies has revealed the explosive growth potential of data, software and other tech-related intellectual property (IP).

As a result, companies from more traditional industries are heavily investing in these areas. It’s now common for CEOs of non-tech companies to proclaim that they are ‘‘tech companies’’ or ‘‘data companies”.

This is a good thing from an economic perspective. Our intellectual property receipts are just 0.3 per cent of our total trade, compared to 1.3 per cent for a comparable economy like Canada.

Our economy would be worth an additional $32bn a year in a decade if we reached the government’s R&D target by lifting business R&D by 1 per cent and assume a 0.11 per cent annual increase in labour productivity (using OECD findings on the relationship between R&D and productivity in Australia).

But as recent events prove, creating and protecting technology and data assets is fraught with risk.

To address the risks and benefit from the upsides, boards should discuss intangible assets and require measures of the strength and value of key in­tangibles.

Lack of balance sheet recognition does not dilute the commercial importance of effective management of $1.18 trillion of asset value.

Tim Heberden and Frances Drummond are members of Deloitte’s IP Advisory practice.