The Intangibles Disclosure Framework: What it is, and Why should SMEs care?
On 4 September 2023, Minister Indranee Rajah launched the Intangibles Disclosure Framework (the “Framework” or “IDF”) at the IP Week Celebratory Dinner. Until now, no jurisdiction has developed a unified framework to help regular businesses identify and understand their intangible assets.
The Framework was spearheaded by the Intellectual Property Office of Singapore (“IPOS”) and the Accounting and Corporate Regulatory Authority (“ACRA”) in a public-private partnership that involved industry experts from the accounting, valuation, law and finance.
Our executive director, Mark Teng (profile) represented the Law Society of Singapore (IP Practice Committee) in the Intangibles Disclosure Working Group, and was involved in intellectual discourse and decisions that lead to the final product. He was featured on CNA938 shortly after.
The 29-page Intangibles Disclosure Framework is now available for free on the IPOS and ACRA websites, but you can also download it here:
At the launch, Minister Indranee emphasised the importance of intangible assets as drivers of business valuation and growth. She also noted the significance of valuation, particularly for intangible assets, to facilitate related transactions and business activities.
“[B]usinesses themselves may not fully appreciate what (intellectual property) they own”
The idea encompasses four pillars, namely Strategy, Identification, Measurement, and Management. Collectively, these pillars set out a structure to guide businesses to disclose their intangible assets in a systematic and consistent manner. This helps potential investors and business partners better appreciate the value of the intangibles and the IP of businesses, thereby allowing businesses to maximise their economic potential.
The IDF is part of the Singapore IP Strategy 2030 and is a key step to help enterprises commercialise intangible assets (“IA”). Improving IA disclosures can lead to better investment decisions, improve risk management, and increase competitiveness in our markets. This initiative will help take Singapore one step closer to realising our vision of becoming a robust global hub for IA and IP transactions.
So, what exactly is the “Intangibles Disclosure Framework”?
The Framework, as the name suggests, is a guide that businesses may use to develop a report that discloses useful information about their intangible assets so businesses may be more accurately valued, and the intangibles more readily commercialised. It is voluntary, and not meant to replace any existing regulatory or accounting standards – working in harmony with disclosure requirements that are already in place
The Framework is intended to be a consistent standard of identification, categorisation, disclosure, valuation, and comparison for intangibles. Its main goal is to “allow stakeholders to make more informed assessments of the business and financial prospects, thereby facilitating the commercialisation of intangibles”.
Rationale
In an increasingly digitised economy, intangibles have risen to prominence. Global payments for the use of IP have increased by 74% over the last decade to US$515.26 billion, and now represents more than 9% of the global import of services. Additionally, the value of intangibles was estimated to hit an all-time high of US$74 trillion in 2021, representing more than half (54%) of overall global value.
In layman terms, a company’s value is largely in its IP or IA. Think about it. If you own a new-economy company, ask yourself these questions:
What’s the value of your real estate?
How about your machinery or physical inventory?
How much cash do you have in your bank account?
The aforesaid are tangible assets, which are defined as: “an asset with exchange value and a physical form” – intangibles are exactly the opposite.
About 90% of the value of the world’s biggest companies, such as Apple, Microsoft and Google are a direct result of their intangible assets. For example, Apple’s legal right to prevent unauthorised use of its brand is arguably its biggest asset. Microsoft’s legal right to prevent unauthorised copies of its Office 365 software is where their value resides.
Start-ups and Small and Medium Enterprises (“SMEs”) can use the IDF to:
better understand the potential of their IP;
develop an IP Strategy so that they can seek the right amount of IP protection;
communicate the true value of their business to stakeholders, such as investors, customers and even employees; and
avoid undervaluing their business.
For example, when raising capital, a business may use the Framework to better inform potential investors of the company’s competitive advantages. Financers will also be better informed of a company’s valuable intangible assets and may be more willing to provide financial support for the company’s growth. The Framework is an important step for companies to take stock of their IP and channel their resources into building more valuable intangibles.
The S-I-M-M Pillars
The Framework sets out four (4) pillars that companies should follow when disclosing their intangibles in a report. These are Strategy, Identification, Measurement and Management. So that no one would ever forget, these 4 pillars spell S-I-M-M. Broadly, the Framework works like this:
1. “S” for Strategy: A company should reiterate its business strategy to remind itself of the direction that it is heading. At this point, the company could consider whether their IP is an integral part of their business strategy, and if not, ask themselves, why so? Then disclose how intangibles contribute to the business, strategy and financial planning where such information is material.
2. Next, “I” for Identification: Here, a company should identify and disclose the nature and characteristics of the intangibles that fit into the definitions provided, and prioritise its key intangible assets that the business strategy relies upon to succeed. Consider whether the appropriate amount of protection has been obtained at this point.
3. “M” is for Measurement: Under this pillar, companies can appraise stakeholders of the strength of their intangibles so that stakeholders can assess the true value of the company. They can do so by disclosing the performance metrics and drivers used to assess an enterprise’s intangibles.
4. Next “M” is for Management: Finally, a company may explain to stakeholders how it intends to maintain its intangibles, manage risks, and seek out opportunities.
Conclusion
Even if you may not wish to publicly disclose your intangibles, we recommend using the IDF to identify, understand and manage your company’s intangible assets. Further to the IDF, we have developed an internal diagnostic tool to help businesses identify their intellectual property assets. If you are interested in optimising your IP protection or adopting the Framework for your business, reach out to us for a consultation.
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Disclaimer
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. That.Legal LLC represents neither party in this dispute and is not privy to any confidential information pertaining to the parties. All facts stated herein are compiled from publicly available sources. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of That.Legal LLC accepts or assumes responsibility, or has any liability, to any person in respect of this article.