From running a business to managing an economy, understanding the value and whereabouts of capital assets is vital. But this isn’t as easy as it sounds, writes John Egan.
What are the capital assets of your business, or indeed of your nation, upon which the productivity of both depend?
In a business you might survey the hardware stretching across the shop-floor and ruminate over the balance sheets of your company accounts. For an economy you will review its national accounts, along with their estimates of the components of Gross Capital Formation (item P5) that contributes to Gross Domestic Product (GDP).
Tangible assets in the form of buildings, equipment and machinery are clearly fixed and relatively straightforward to account for. Knowledge, on the other hand, is intangible but not inconsequential and worthless to its owners. As a business manager surveying the shop-floor you will know that knowledge is out there in the company routines and innovations upon which productivity and survival depend.
But how can you manage your knowledge assets without knowing their location and value?
Some knowledge is already visible and “capitalised”, appearing in company and national accounts as intellectual property. This includes knowledge in computer programmes and databases, together with knowledge acquired through scientific research and development, product development and non-scientific creative activities.
In February, the Office for National Statistics (ONS) in the UK ventured into the territory of the invisible and non-capitalised intangible assets.
Usefully, this exploratory study introduces a classification of these intangibles. This provides a means to recognise and organise the previously unclassified assets. The complete list of already capitalised and currently non-capitalised intangible assets is shown in the graphic below, along with their value to the UK economy as estimated by the ONS.
Rachel O’Brien, head of intangible and infrastructure assets for the ONS, explained in her recent blog that “intangible assets, such as branding and the benefits received from training, are not currently included in headline national accounts, for various reasons such as their benefit is seen [as] being used up too quickly or because it is difficult to estimate their value. This does not mean, of course, that they have no value”.
“… In 2015, investment in [blue] intangible assets included in the national accounts totalled just under £46bn. However, when we included investment in these additional [red] assets, this almost trebles to just over £134bn. While this number is not directly comparable with our headline estimates of investment, it nevertheless helps us to see the value of these intangible assets.”
Two-thirds of the iceberg of intangible assets therefore appears to be submerged and currently invisible.
The ONS report also shows that in 2015 the £134.2bn investment in all intangible assets was comparable to £141.7bn of investment in conventional tangible assets. This is the first time since 2000 that intangible investment is estimated to have been lower than tangible investment.
Taken together, this means that current estimates of Gross Fixed Capital in the market sector of the UK national accounts would actually be increased by almost 50 per cent by the inclusion of the missing non-capitalised intangible assets.
As a result, national economic Gross Value Added (GVA) could be underestimated, in particular the productivity of the UK economy, and the missing intangible capital might go some way to explaining the puzzling lack of productivity growth that has been apparent since the Global Financial Crisis in 2007.
Intangible investments in 2015 by industry sector (Source ONS)
|Agriculture, forestry and mining.||2.6||1.9||0.19:1|
|Electricity, gas and water supply||3.0||2.2||0.18:1|
|Wholesale and retail||18.6||13.8||1.37:1|
|Accommodation and food services||5.1||3.8||0.89:1|
|Information and communication||17.8||13.3||2.16:1|
|Professional and scientific activities||19.5||14.6||2.86:1|
|Arts, household and other services||6.2||4.7||1.25:1|
As it is with the country, so it may well be the case with the companies that make up the UK market sector. Although it will be highly variable depending on the business, as shown in the above table, there could be about 50 per cent more growth of capital assets in your business than is declared on your annual accounts statement.
Recognising this issue is the first step to managing it. And the story might not end there.
It may be that other business expenses could be considered to have intangible but enduring effects on productivity. Indeed, a broad view is that all company operating expenses could fall into this category. Otherwise, one might argue what is their point?
The iceberg could yet be larger than anticipated.
In the same series:
First article: Chief-Exec series: Lifting the lid on UK productivity
Headline Photo Credit: Lightspring/Shutterstock.com