SA’s value of intangible assets has flatlined for 20 years

And that’s a problem …

SA’s value of intangible assets has remained more or less flat since 2005 – and that reveals a trove of information about how we value assets such as software, data, intellectual property and brands.

The graph below tells the story. This runs counter to trends in developed markets such as the US and even emerging markets such as China and India, says Daan Steenkamp, economist and CEO at Codera Analytics.

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“We need to start asking why SA companies are failing to accumulate intellectual property and investing in data assets as in many other countries,” says Steenkamp.

This is no small matter. Research by McKinsey shows that fast-growing companies invest 2.6 times more in intangibles than low-growth companies. There’s also been a shift from investment in tangible assets, such as buildings and machinery, to intangibles.

“Rising investment in intangibles has been linked with increasing total factor productivity of entire economies,” says McKinsey.

Research from the Organisation for Economic Co-operation and Development (OECD) shows that the social and economic benefits produced by data can amount to 1%-2.5% of GDP.

Source: Codera Analytics, Stats SA

The reasons for SA’s low value of intangible assets are not hard to find:

• A regulatory environment that discourages investment;
• Procurement policies and regulations that inhibit tech startups;
• Exchange control rules that make it difficult to raise foreign capital;
• The Protection of Personal Information Act (Popia) imposes penalties on companies that misuse private information, but does little to encourage sharing of information; and
• Rigid adherence to accounting rules, specifically IAS (International Accounting Standard) 38, which provides guidance on the measurement of intangible assets.

“South Africa’s intangible assets are valued at the same level they were in 2005, and that’s a big red flag,” says Nicolaas van Wyk, CEO of the Chartered Institute of Business Accountants (Ciba).

“We need to get to the bottom of this now. It could be over-restrictive policies like Popia limiting the reuse of data, weak tax incentives, property security concerns, or exchange controls.

“But I believe the real problem is the overly cautious application of IAS 38. Auditors are being regulated too harshly, and the Financial Reporting Standards Council [FRSC] doesn’t have enough funding to actually shape IFRS [International Financial Reporting Standards] standards to fit South Africa’s needs.

“This is holding back innovation, job creation, and overall economic growth,” he adds.

What JSE data reveals …

An analysis of JSE data since 2020 shows that intangible assets and goodwill as a percentage of market capitalisation has fallen to around 19% from 27% over the last four years.

By far the largest owners of intangible assets on the JSE are the banks, financial services companies and those with strong brands – such as British American Tobacco.

Goldman Sachs grew its intangible asset value 48% over the last four years, while Standard Bank and Nedbank have reported a drop in the value of intangibles over the same period. FirstRand, Capitec and Absa have shown material increases in their intangible asset values over this period.

By way of comparison, Coca-Cola’s trademark value alone is worth about 13% of its total asset value of $101 billion, though its brand value has been more realistically valued at around $100 billion – about a third of its market cap. To attract this kind of brand value, accountants have to be convinced that it is capable of generating an economic return well into the future.

Valuing the intangibles

South African accountants appear to be more timorous in their valuations of intangible assets.

The chart below shows intangible assets plotted against investments in computer software. One would expect the sharp increase in software investments to reflect to some degree in intangible assets, but this is not the case.

This is largely due to accounting rules that generally require self-generated software to be expensed, while externally purchased software can be capitalised. This seems illogical on its face, and there is huge debate in the accounting profession on this topic.

Van Wyk points out that by under-counting intangible assets we are also under-counting profits and, hence, GDP.

This view is supported by the China Journal of Accounting Research, though there is evidence to show that executives whose remuneration is linked to profitability will try to capitalise research and development to bump up profits.

“Management may opportunistically cut R&D spending to boost short-term financial performance, particularly when institutional investors have high portfolio turnover, the CEO is approaching retirement or the company is approaching a specific earnings benchmark,” says the Chinese study.

Source: Codera Analytics, Stats SA and Sars

Computer software makes up a relatively small portion of intangible assets. Far more significant are goodwill and marketing assets, accounting for about half the total.

Goodwill arises when one company acquires another for more than its net asset value. Accountants following IFRS standards tend to impair this periodically as required by accounting rules.

Bankers tend to disregard intangibles in their entirety when it comes to lending money. ADVERTISEMENT: CONTINUE READING BELOW

“We take a very conservative approach because we have to plan for the worst case scenario,” says a prominent banker who asked not to be named.

“In the event of a loan default, we look only at tangible assets that can be attached and sold, and even then we don’t usually get 100% of our money back.”

The value of data

SA’s data ecosystem is underdeveloped, making it difficult for tech startups to embrace technology advances, says Steenkamp.

Elsewhere in the world there is a thriving market for shared data, both in the public and private spheres.

For example, retail researchers are able to purchase anonymised credit card data to see how people are spending their money.

Companies such as Datarade, SAP Datasphere, IBM, Amazon and Google Cloud Hub provide rich data and analytics, generating a high return on investment in a global market now worth more than $1 billion a year.

“Government and private companies are sitting on vast amounts of data that could be shared and monetised, unlocking massive value for the economy,” says Steenkamp.

The issue of intangible assets is reflected in this chart showing SA resident patent applications at a fraction of their levels in the 1980s.

Source: Codera Analytics, World Intellectual Property Organisation

Public institutions in SA have rich data sets that are freely available, but not always on a timely basis. What’s missing are data frameworks for use and sharing.

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Popia may create hesitancy when it comes to data sharing, but that’s just one of several regulatory barriers that discourages investment in intangible assets.

Exchange controls getting in the way

Exchange controls are another barrier. Steenkamp points out that while SA companies can obtain SA Reserve Bank (Sarb) permission to shift their primary listings offshore, the conditions are restrictive: they must remain controlled and managed in SA while remaining tax resident here, and ensure their intellectual property remains registered in SA.

The latest South African Startup Act Progress Report notes that exchange controls have deterred foreign investors over the last 15 years.

This while other African countries such as Tunisia, Congo and Nigeria have enacted startup legislation specifically to attract venture capital funding.

What to do?

What South Africa needs is the establishment of a ‘data commons’ to provide open access to data and research, and to drastically reduce the red tape that blunts investment into intangibles.

“Mechanisms are needed that balance the protection of data [of] citizens and the rights of intellectual property holders with the need to create an enabling environment for data use and sharing for public policy and commercial purposes,” says Steenkamp.

“Data commons create opportunities for the public and private sectors to collaborate on infrastructure development, maintenance, and data asset creation.”

SA also needs to encourage data marketplaces for companies and the public sector to monetise their data and create value for consumers and companies.

If we don’t start addressing the potential for intangibles to accelerate growth, SA is likely to miss out on the fourth industrial revolution and be overtaken by other African countries that see the growth opportunities this revolution presents, adds Steenkamp.

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