Identifiable and Unidentifiable Intellectual Property

Intellectual property (IP) is an important business asset—just like cash, inventory, or equipment. The key difference is that IP is intangible. That is, you can’t touch it, but it may still hold immense value.

If you review the balance sheets of many listed Australian companies, you’ll see a significant amount recorded under “intangibles.” These figures include identifiable IP such as trademarks, patents, and proprietary software. However, accounting standards typically prevent companies from disclosing the full value of their IP, meaning these assets are often under-represented on paper.

Why Small Business Owners Often Overlook IP

Many small business owners focus on “goodwill” when it comes to valuing their business, but often don’t fully understand what it includes. In accounting terms, goodwill is simply the residual value of a business above the net value of all identifiable assets (both tangible and intangible).

For example, if a business is sold for $10 million and its identifiable net assets are valued at $9 million, then the remaining $1 million is considered goodwill.

But here’s the catch—some of that $1 million might actually be attributable to unidentified intellectual property, such as:

• Patents

• Copyrighted material

• Trademarks and brand assets

• Proprietary software or code

• Know-how and trade secrets

• Customer databases or mailing lists

• Licences or exclusive rights

If these assets aren't identified and valued properly, they get lumped into goodwill—which doesn’t give a clear picture of what you're really buying or selling.

Why IP Is So Hard to Value

Unlike machinery or inventory, which can often be valued with a straightforward market or replacement cost approach, valuing IP is far more complex. A good valuation should be based on the net present value of the future cash flows the IP is expected to generate—not just what it cost to develop.

To illustrate: the value of the rights to a Michael Jackson lyric today is vastly greater than the paper and ink it took to write it.

Identifying IP Can Unlock Value and Tax Benefits

Let’s go back to the $10 million business sale example. If a set of patents is identified post-sale and valued at $500,000, the goodwill value decreases to $500,000 and the identifiable asset base increases to $9.5 million. This not only provides greater clarity in financial reporting but opens up potential strategic and tax advantages.

For instance, the purchaser might:

• Use the patents to justify price increases

• Market them to boost sales volume

• Leverage the identified IP for R&D tax incentives or capital allowances

Even if they do none of the above, simply identifying the IP creates value through clearer asset reporting and potential tax deductibility.

Why This Matters for Small Business

Large companies are investing significant resources into identifying, protecting, and managing their IP portfolios. Small and medium-sized businesses should take the same approach. Even seemingly “invisible” assets can carry significant value, both now and in the future.

If you're looking to sell, raise capital, or improve tax efficiency, having a clear handle on your business’s IP is essential. Don’t leave your most valuable assets off the balance sheet.

Need help identifying and valuing your business’s intellectual property?

Contact the team at Dolman Bateman today, we help Australian businesses uncover and protect the hidden value in their intangible assets.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.