Accounting for intangibles in SMEs

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ZIMBABWE’s economy for the past decade has been buoyed by entrepreneurs who have since proven their mettle as an indispensable engine driving economic growth.
Small-to-Medium Enterprises (SMEs) have undoubtedly contributed positively to the fiscus, alleviating poverty for the SME owners and their employees, filling in the gap left by large corporates as well as absorbing thousands of formerly unemployed workers who started their own business ventures to eke an honest living.
Much focus has been expended on helping SMEs improve on their financial management, communication channels, marketing strategies, project planning as well as improving their product offering.
The Ministry of Micro, Small-to-Medium Enterprises has over the years roped in the private sector in conducting workshops that have helped SMEs improve their operations in a bid to make them grow.
Because of these workshops, most SMEs have also begun to appreciate sound financial accounting practices such as valuing their businesses and presenting that information in the form of balance sheets, accounting for the firms’ cash projections on the cashflow statements and even tracing firms’ financial transactions using profit and loss statements.
Many an SME owner will have no problems accounting for his/her fixed assets such as land and buildings, machinery, plant and equipment, since these are mostly required by financial institutions to be declared as collateral when one wants to access a loan.
Hence it is noteworthy that most SMEs have made efforts to improve their operations despite the debilitating economic environment which has seen many a small business crumble, mostly due to financial constraints.
However, for the few businesses that are riding on a crest of success, they have mostly been able to identify a gap in the market which they have stepped in to satisfy, and have been able to make good their return.
But one aspect which has not been zeroed in on is generating and accounting for the firm’s intangible assets.
Most large firms define intangible assets based on criteria set out by internationally recognised statutes such as International Accounting Standards and International Financial Reporting Standards.
Intangible assets have no physical existence and basically depend on the value the owner of the firm attaches to the said asset, and this value is rarely transferable to alternative use or separable from the firm, even if it is separately identifiable.
In other words, intangible assets are identifiable non-monetary assets that cannot be seen, touched or physically measured, according to gurufocus.com.
Examples of intangibles are the firm’s research and development, patents, copyrights and trademarks, intellectual property and ‘know-how’ of a production process, film rights, exploration costs, the value of brands and generally the firm’s goodwill.
In simple language, intangible assets relate to the aspects of a business that relate to its established reputation, which has to be sustained and built over the years through the way the business conducts its activities.
Most of you might be familiar with the phrase that in business, it is all about ‘kugadzira zita’.
This is a bastardisation of the concept of intangible assets in an organisation, which, when established, have the propensity to increase the value of the firm in the event one wants to sell the business in the future.
Firms that quickly spring to mind are Lyons, Delta Beverages, Econet Wireless Zimbabwe, Dairibord Limited, La Farge and Sino-Zim, among others.
The case for recognising and accounting for intangible assets on the balance sheets of SMEs is a strong one mostly because these are some of the considerations that drive up the share price of companies when they are listed on the stock exchange.
Most blue-chip companies’ valuations account for a huge chunk of their value.
For instance, as of June 2016, Coca-Cola’s New York Stock Exchange listing accounted for intangible assets to the tune of US$23, 689 million in the first quarter.
However, it is a public secret that most local SMEs are mostly pre-occupied with putting out bush fires and ensuring their survival rather than paying attention to growing the firm’s brand, which ironically is a certain way to ensure the small firm has growth potential and is guaranteed to be a going concern.
In accounting parlance, a going concern is a firm that shows signs it will survive and grow into the future.
Regrettably, most SME owners seem to have found comfort in revelling in the glory of being called a businessman/woman to the extent they have been small business owners for more than a decade, and actually show no upward mobility initiative.
With such an attitude, it is difficult to develop your firm’s brand, let alone grow the business’s goodwill since time and resources have to be invested.
It should also be noted that relying on the value of intangible assets such as goodwill should be embarked on carefully since it depends on abstract concepts that might not be reliably measurable.
Antagonists of goodwill accounting, according to investopedia.com, argue that the measurability of goodwill sometimes comes from abstract and unreliable things such as ideas and people, neither of which are guaranteed to give positive returns to the company forever.
However, whenever investors are analysing the valuation of a firm before they make an investment decision, they mostly consider the intangible assets of the firm and this greatly influences their investment decision.
It is high time our SMEs get to the point that they can account for their intangible assets and include them as part of their business’s valuation.

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