In a Business Combinations, these –by definition– are intangible assets and are therefore recognised separately from goodwill, provided that their fair values can be measured reliably. These intangible assets meet the definition of an intangible asset because they again –by definition– arise from contractual or other legal rights.
These are the legal titles and secrets as assets:
A patent is an exclusive right granted for an invention. While it is certainly true that not all enterprises develop patentable inventions, it is a wrong to believe that patents only apply to complex physical or chemical processes and products or that they are only useful to large corporations. Patents can be obtained for any area of technology from paper clips to computers. Moreover, when people think of patents, what usually comes to mind are major scientific breakthroughs such as Edison’s first electric lamp, or large corporations investing in research and development. But, in fact, most patents aren’t granted for groundbreaking scientific breakthroughs, but rather for inventions that make improvements to existing inventions. For example the second or third generation of a product or a process, that works in a more cost-effective or efficient manner. Legal titles and secrets as assets
Computer software and mask works
If computer software and program formats acquired in a business combination are protected legally, such as by patent or copyright, they meet the contractual-legal criterion for identification as intangible assets. Mask works are software permanently stored on a read-only memory chip as a series of stencils or integrated circuitry. Mask works may have legal protection. Mask works with legal protection that are acquired in a business combination also meet the contractual-legal criterion for identification as intangible assets. Legal titles and secrets as assets
Trade secrets such as secret formulas, processes or recipes
A trade secret is ‘information, including a formula, pattern, recipe, compilation, program, device, method, technique, or process that: Legal titles and secrets as assets
- derives independent economic value, actual or potential, from not being generally known and Legal titles and secrets as assets
- is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.’ Legal titles and secrets as assets
If the future economic benefits from a trade secret acquired in a business combination are legally protected, that asset meets the contractual-legal criterion for identification as an intangible asset. Otherwise, trade secrets acquired in a business combination meet the definition of an intangible asset only if the separability criterion is met, which is often likely to be the case. Trade secrets can have a major impact on the economic success of a firm. Two examples from the USA and Germany demonstrate this. The recipe of Coca—Cola is probably one of the most famous formulas in the world. As it is not protected by a patent, this information is not public. While the ingredients have to be documented on the bottle, the formula itself is still a very well protected secret. Not only technical know-how but also economic trade secrets may often be important for successful businesses. Aldi is a privately owned German discount supermarket chain operating over 8,200 stores through 66 regional companies in 18 countries. This group is a significant example of a successful entity with minimum transparency about its management strategy, financial situations and key numbers. The latter have been one of the best-kept secrets of German industry; only recent legal obligations to disclose certain financial data provided some insight into the sales of this group (about $50 billion in 2008).
Here is a disclosure from General Electric Company Form 10-K 2018
As part of RISK FACTORS in the sub-heading STRATEGIC RISKS the following section is included (page 81)
Intellectual property – Our intellectual property portfolio may not prevent competitors from independently developing products and services similar to or duplicative to ours, and the value of our intellectual property may be negatively impacted by external dependencies.
Our patents and other intellectual property may not prevent competitors from independently developing or selling products and services similar to or duplicative of ours, and there can be no assurance that the resources invested by us to protect our intellectual property will be sufficient or that our intellectual property portfolio will adequately deter misappropriation or improper use of our technology. In the context of the Company’s recent performance and planned portfolio actions, the value of the GE brand may be negatively impacted, and we may offer multiple long-term and concurrent trademark licenses of the GE brand in connection with dispositions that may negatively impact the overall value of the brand in the future. As a result of increased numbers of employee exits due to restructuring activities or otherwise, we also face heightened risks related to the loss or unauthorized use of the Company’s intellectual property or other protected data. We could also face competition in some countries where we have not invested in an intellectual property portfolio. Legal titles and secrets as assets
If we are not able to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected. We also face attempts to gain unauthorized access to our IT systems or products for the purpose of improperly acquiring our trade secrets or confidential business information. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development. In addition, we may be the target of enforcement of patents or other intellectual property by third parties, including aggressive and opportunistic enforcement claims by non-practicing entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming. If GE is found to infringe any third-party rights, we could be required to pay substantial damages or we could be enjoined from offering some of our products and services. The value of, or our ability to use, our intellectual property may also be negatively impacted by dependencies on third parties, such as our ability to obtain or renew on reasonable terms licenses that we need in the future, or our ability to secure or retain ownership or rights to use data in certain software analytics or services offerings.
See also: The IFRS Foundation
Legal titles and secrets as assets
Legal titles and secrets as assets Legal titles and secrets as assets Legal titles and secrets as assets Legal titles and secrets as assets