On 31 December 2015, the 25 companies with the biggest market capitalisation listed on the London Stock Exchange (LSE) reported they owned £522bn worth of assets that were physical. Their other assets — various types of intangible capital – were worth more than £5.3trn, accounting for 91.4 per cent of their combined balance sheets.
The pattern of intangible asset ownership varies widely across the FTSE25 companies. The five with the highest proportion of intangible assets (HSBC, Lloyds Bank, Barclays Bank, RBS and Prudential) work in financial services. Companies with more than 60 per cent of their assets in intangibles comprise four consumer good/drinks manufacturers (Reckitt Beckinser, SabMiller, Diageo, Unilever); two cigarette firms (BAT and Imperial Brands); two telecoms firms (Vodafone and BT); three pharmaceutical/biochemical product firms (Shire, Astrazeneca and GSK) and one events, books and information firm (RELX).
Only seven of the 25 had intangible assets worth less than 50 per cent of their balance sheets: BP, ABF, Shell, RTZ, National Grid, BHP and Carnival Corporation.
The aggregate intangible assets of the FTSE25 rose robustly to almost £7bn in 2008 but fell by one-quarter in the subsequent seven years.
The fall in the intangible assets of the FTSE25 was due to a radical reduction in the assets of two banks (Barclays and RBS) following the global financial crisis of 2008/09. In this period, they cut their balance sheets by more than $2trn in total. Almost all the reduction was in intangible assets.
The total assets of RBS at the end of 2015 were only 32 per cent of their peak figure at the end of 2008. At the end of 2015, the total assets of Barclays Bank, another financial institution seriously affected by the global financial crisis, were little more than half the figure at the end of 2008. The total assets of Lloyds bank rose in the period, but that was due to the forced merger with HBOS in 2009. Without that, Lloyds would have reported a similar decline in total and intangible assets since 2008. In contrast, the assets of Shire grew by more than 250 per cent in the period (principally through mergers and acquisitions).
Despite the sharp decline in the total assets of the FTSE25 after 2008, the proportion accounted for by intangibles in their balance sheets was comparatively stable in 2006-15. After reaching a peak of around 95 per cent in 2008, they drifted down to 91.5 per cent in 2015.
The dominance of intangible assets on the balance sheets of most of the largest companies listed on the LSE it can be explained by:
- The increasing significance of service (intangible) production for all companies in advanced economies. Generally, service industries require fewer physical inputs and less tangible capital.
- Technical factors that have allowed companies to book intangibles as balance sheet assets. This is mainly the result of new approaches to dealing with intangible assets adopted by the accounting profession.
- The higher liquidity of intangible assets. This is attractive to corporations because it allows them to buy and sell intangible assets more quickly than tangible assets.
- A higher rate of return on intangible assets compared with that attributable to tangible assets.
- Taxation. Corporations have greater capacity to minimise taxation on intangible assets and the income they generate, both of which can be reported in low-tax jurisdictions.
- Mergers and acquisitions. Companies buying other companies can define the amount paid above the fair value of the acquired company as an asset. This is listed as goodwill in corporate balance sheets.
- The creation of definable intangible assets (patents, copyrights etc) through internal research and development (R&D).
There may be other factors encouraging corporations to invest disproportionately in intangible assets. There is no reason to conclude that the dominance of intangible capital in the balance sheets of large corporations is not repeated in those of smaller and unlisted UK companies.