Trade secrets are a type of intangible asset that many companies count as part of their total valuation. As an accountant, it’s your job to figure out how much a trade secret is worth while honoring your confidentiality requirement. This can be a challenge, because trade secrets come in many forms, and their value partly depends on the company not disclosing too much about them. A trade secret is any business information that’s valuable, at least in part, because nobody outside of the company knows it.
Say your client runs a recycling center in Alberta. Years ago, one of its engineers figured out how to separate different kinds of glass by heating and cooling it in stages, thus making glass recycling profitable. Imagine this is such an easy thing to do that the company might not want to patent the method, for fear of competitors copying it from the public documents a patent requires. The alternative is to keep details of the process secret and make knowledgeable employees sign nondisclosure agreements rather than file for a patent. Later, if the process becomes an issue in a court case, or other situation where disclosures are mandatory, the company can invoke trade secret protection and refuse to divulge its methods. It can also, in limited cases, legally prevent a competitor from using its secret method if it ever leaks out.
Assessing the value of a trade secret is no easy task. The recipes for both Kentucky Fried Chicken’s 21 herbs and spices and Coca-Cola are both trade secrets, and they’re exactly the same type of information, a recipe, but they’re not equally valuable. If your client is being audited, bringing stock public, or doing anything else that requires a full reporting of assets, the company’s trade secrets necessarily introduce an element of judgment into the process. In the end, you’re probably best off making your most informed guess as to the secret’s value, and then revising that estimate as needed if the numbers are challenged.