Intangible assets analysis for company valuation: a Project Management approach

The continuous evolution of technologies and business models has added several levels of complexity to companies’ valuation in the last decades. The digital transformation of our world has changed the competitive factors, giving much more relevance to what was almost unknown before the dot com revolution: intangible assets. While in the past the major production factors, and consequently the elements on which financial analysis was grounded in, were mainly tangible assets like property, plant and equipment, nowadays the generation of wealth is increasingly based on the development, exploitation and exchange of invisible or intangible values. The biggest companies in the world by market capitalization have founded their strength on knowledge-based technology, software, human capital and other intangible elements and often present big Price-to-Book values, indicating that market participants are willing to pay a substantial premium in excess of the book value of a company’s equity, meaning that they give high worth to the entity’s intangibles. This difference between market and book values can be seen as a proxy for the decreasing significance of reporting and financial accounting: IFRS (International Financial Reporting Standards) allows the recognition of certain intangible assets only, omitting several of the invisible resources companies have and exploit to create value. The reason why IFRS limits the recognition of such assets is linked to the issues and obstacles related with the classical accounting models and also to the features inherent in intangible assets. Over the past few years, there has been an ongoing discussion about the improvement of international accounting standards, yet without a final outcome capable of catching up with the new needs of financial statements users. The present thesis tries to look at this issue under a new aspect, bringing into the debate the discipline of project management and its valuation practices. Hence the research question of this paper is: “Can the valuation of a company’s project portfolio fill the gap between its book and market value?”. To answer the research question, the first step has been to understand what intangible values are, what are their characteristics and how they may contribute to companies’ value. After this, Chapter 2 has dealt with the accounting and reporting side of the topic, describing and analyzing the international standards related to intangible assets, pointing out differences between IFRS and US GAAP standards and highlighting the main issues the current reporting environment brings for the valuation of an entity. After having established a real deficiency of the current accounting system this work has tried to find a possible solution going first through the academic literature presenting several approaches proposed during the years. Finally, a new possible framework has been presented whose approach took inspiration from the project management valuation techniques explained in Chapter 3. The Real Option method has turned out to be a great help to value all those internally generated intangible assets that arise through those planned activities like research and development which are always key for companies, especially in certain industry such as technology and pharma, thus finding a positive answer to the research question since this method allows to disclose more key information related to a big portion of intangible assets on financial statements.