Why are intangible characteristics diffcult to measure?

Answer 1

Actually, the true reason intangibles are difficult to measure is because the definition of intangibles is misleading.

It's been said that "A bad definition can stop progress for hundred years." Saying that intangibles "cannot be measured" has done exactly that - something that has set back a real exploration of intangibles for many decades as we are told "it cannot be done".

Intangibles are capable of measurement. They are capable of being financially valued.

The issue is that our current system of management and valuation is based on legal property rights (contract law exchanges of value). Intangibles do not result in contractual value exchanges which brought people to think that they cannot be measured. This is false. Intangible transactions (changes in the quality of knowledge, collaboration, processes or engagement) create changes in time quality - the effectiveness and efficiency of time. If you would like to view standards related to intangible characteristics (more than 20 of them), please have a look at the book Intangible Management - Tools for Solving the Accounting and Management Crisis. Here is a relevant excerpt:

Intangibles obey very different behavioral laws than do tangibles. In fact, most of the laws governing the behavior of intangibles are the direct opposite of how people have been taught to manage in the past. Intangible Standard IIS1001 explores the foundations of the science of intangible management:

1. Intangibles typically cannot be directly touched

   True intangibles do not have physical form. When an intangible is used (knowledge) it may become part of a tangible; but we cannot touch the knowledge that creates that tangible. (IIS1001. C1). Conversely, tangibles can be directly touched.

2. Intangibles cannot be directly measured

   Tangibles have always been directly measured through financial transactions generated through market exchanges (trading). Your satisfaction (a true intangible) cannot be measured directly and typically cannot be sold through the market system. (IIS1001.C2). Conversely, the traditional way to measure a tangible is directly.

3. Intangibles are not evidenced by financial transactions

   It is incorrect to perceive that the value of a financial transaction can embody the value of an intangible. Consider an expenditure of $1000 to gain new skills. The value of this knowledge is not $1000; it is what you do with it after you have gained it. As accounting looks backwards (into historical transactions), it ignores the fact that intangibles create their value in the future. (IIS1001.C3). Conversely, tangibles are always evidenced by financial transactions.

1. Intangibles create future value

   Examples of intangibles such as knowledge, relationships, expectations, service, quality, and speed create future value as they influence your expectations about the future. As all intangible transactions are future orientated, conventional accounting and management systems ignore their potential impact due to the Conservatism concept (do not recognize it until it happens) and the Materiality concept (exchanges of money must occur as the result must be auditable). (IIS1001.C4). Assets are deemed as a source of future value. Conventional management practices deem that assets are turned into revenue at a cost (expenses). Profitability defines the rate that realized asset value (revenue) exceeds asset costs (expenses).

1. Intangibles cannot be owned

   Legal intangibles, also known as intellectual assets, are a trick of the law to create ownership where none actually exists. (IIS1001.C5). As tangibles are evidenced by financial transactions (exchanges of money), they fall within the definition of a legal property right under legal practice. For example, if a $20,000 computer is stolen, the receipt (evidence of the financial transaction) is sufficient for an insurance claim to be acted upon.

2. Intangibles cannot be voluntarily extinguished

   Under accounting rules an asset must have a useful life at which it no longer has value. This allows assets to be depreciatedor amortized over a period of time. Intangibles cannot be extinguished like tangibles. Intangibles are viewed under Intangible Standards as having an infinite life. As such, depreciation and amortization do not apply to intangibles. (IIS1001.C6). A $20,000 computer may be deemed to have a useful life of 5 years under taxation laws. Using various depreciation methods, the $20,000 expenditure will be turned into an expense at a specified rate until the claims over the asset are extinguished.

3. Intangibles do not diminish with use they increase

   A fundamental foundation of economic theory is that when you add more and more of a resource to a productive process the incremental gain out of adding each successive unit of the resource decreases (the law of diminishing marginal utility). Intangibles behave in the opposite way. The more knowledge you have, the more knowledge you can gain as you talk with others and share your knowledge. Intangibles are subject to increasing returns. (IIS1001.C7). If you use a tangible it literally "wears out" with that use.

4. Intangibles are typically felt when they are removed, not when they are present.

   If you love someone and they leave you, you might say, "I didn't realize what I had until it was gone." Intangible Standards primarily measure and manage the absence of intangible value, not the presence of that value. Such a management concept is counter-intuitive to most. (IIS1001.C8). Conversely, tangibles are defined by their presence, not their absence.

5. The true impact of intangibles is typically not understood or recognized due to the impact of derived demand.

   Derived demand has always been one of the most powerful competitive forces in existence. Derived demand is demand that is literally "derived" or "created", from a new technology, product or service. Derived demand does not exist before the product is produced, only after the technology has been released and used in the market. Television, the telephone, computers, automobiles, airplanes were innovations initially rejected by the market ("if man was meant to fly he would have been given wings"), but grew to become billion dollar industries due to the impacts of derived demand. Intangibles that create significantly changed perceptions, that threaten existing knowledge infrastructures, are the intangibles that underpin new industries and new career paths. (IIS1001.C12)

6. Intangibles can be simultaneously deployed without loss of value

   Tangible assets can only exist in one point of space and a time. In this sense, you cannot drive a car that someone else is driving in Another Country. Intangibles are very different. Information on the internet can be read by 100,000 people at once without loss of value. If correct mechanisms are in place, intangible value can actually increase with multiple usage. (IIS1001.C16)

Hope this helps.