Can know-how and trade secrets be capitalised?

When acquired in a business combination — yes, both are recognised at fair value under IFRS 3 (UK and global) or ASC 805 (US). When internally generated — generally no, both fall under the IAS 38 paragraph 63 prohibition on internally generated brand-like intangibles. The internal-generation asymmetry creates one of the largest gaps between book value and enterprise value for knowledge-led businesses.

How are trade secrets valued?

Four methods are commonly used. RFR — comparable trade-secret or know-how licensing rates applied to projected revenue. MPEEM — where the trade secret is the primary cash-flow driver. Cost approach — the cost to reverse-engineer or replicate the secret. Income approach via competitive differential — the margin differential attributable to the secret. The choice depends on the nature of the secret and the available evidence.

What protection do UK trade secrets have?

UK trade secrets are protected under the Trade Secrets (Enforcement, etc.) Regulations 2018, which transposed the EU Trade Secrets Directive 2016/943 into UK law. The regulations provide remedies for unlawful acquisition, use, or disclosure of trade secrets. Common-law breach-of-confidence remedies remain available in parallel.

Can trade secrets last indefinitely?

Yes — trade secrets have indefinite legal protection so long as the three statutory tests continue to be met. Coca-Cola's recipe is the canonical example of a trade secret maintained for over a century. The practical useful life, however, is often constrained by reverse-engineering risk, employee turnover, or sector evolution.

What happens to a trade secret if it becomes public?

Loss of secrecy extinguishes the trade-secret status. The asset is no longer protected and the fair value typically falls to zero or near-zero. Accidental disclosure, employee leakage, or competitor reverse-engineering can all trigger this outcome. The IAS 36 impairment trigger is immediate.

Are know-how and trade secrets transferable?

Know-how is typically transferable in documented form — manuals, SOPs, recipes, training materials. Trade secrets are transferable but the transfer must preserve the protection measures; transfer to a party without NDA discipline can extinguish the secret. Licence agreements over trade secrets are common but require careful drafting to maintain secrecy at the licensee level.

How does IP-backed lending treat know-how and trade secrets?

Both are challenging collateral classes for lenders. Know-how can support the lending narrative where it is documented, transferable, and tied to specific revenue streams. Trade secrets are typically supportive evidence rather than primary collateral because the lender's valuation process can itself threaten the secrecy. UK IP-backed lending propositions (NatWest, HSBC, specialist providers) generally focus on patents, trademarks, and registered designs as primary collateral, with know-how and trade secrets supporting the narrative.

Accounting Framework

Know-How vs Trade Secret

Know-how vs trade secret — what each is, why protection regimes differ, and how founders, CFOs, and PE buyers value tacit knowledge in M&A and lending.

Two of the most valuable and most often overlooked intangible-asset categories sit deep inside knowledge-based businesses: know-how and trade secrets. Know-how is practical, technical, or business knowledge developed by an entity through experience — production techniques, operating processes, training materials. Trade secrets are a specific legal category — information meeting three statutory tests: secrecy, commercial value, and reasonable protection. Trade secret is narrower than know-how; the two often coexist within the same asset cluster but the audit, valuation, and protection discipline differs.

Criteria	Know-How	Trade Secret
What it is	Practical, technical, or business knowledge developed through experience	A specific legal category — information meeting secrecy + commercial value + reasonable-protection tests
Scope	Broader — includes information not strictly secret	Narrower — strict legal definition
Legal framework (UK/EU)	Contract law (NDAs, confidentiality clauses); not a discrete statutory regime	EU Trade Secrets Directive 2016/943 (UK Trade Secrets (Enforcement, etc.) Regulations 2018)
Legal framework (US)	Contract law (confidentiality, employee agreements)	Defend Trade Secrets Act 2016; Uniform Trade Secrets Acts at state level
Secrecy requirement	Not strictly required; partial knowledge to third parties is permissible	Required — must not be generally known or readily accessible
Protection requirement	Reasonable confidentiality measures typical	Statutory test — must have taken reasonable steps to keep it secret
Typical content	Documented processes, recipes, training materials, vendor relationships	Recipes, formulations, source code, customer lists with protected status, algorithms, manufacturing processes
Internally generated recognition	Prohibited under IAS 38 paragraphs 63-67	Same — prohibited under IAS 38
Acquired recognition	Recognised at fair value under IFRS 3 / ASC 805	Recognised at fair value under IFRS 3 / ASC 805
Useful life — typical	Finite (3-15 years) based on rate of process obsolescence	Indefinite (if secrecy maintained) or finite (if reverse-engineering risk exists)
Valuation methods	Cost approach (documented processes), RFR (with licensing comparables)	RFR, MPEEM, cost approach, income approach via competitive differential
M&A diligence focus	Documentation transferability, useful-life assessment	Protection measure evidence, secrecy maintenance post-deal, employee retention
IP-backed lending	Secondary collateral — depends on transferability and documentation	Limited — secrecy requirement constrains lender collateral discipline
Loss-of-protection consequence	Documentation lifecycle continues	Loss of trade-secret status — fair value typically falls to zero or below

When to Use Each Approach

Know-How

Acquired manufacturing processes, recipes, operating procedures documented in transferable form
Training materials, manuals, SOP documentation
Vendor and supply-chain know-how where contractually transferable
Cost-approach valuation of documented operating systems

Trade Secret

Recipes, formulations, source code, algorithms with strict secrecy protection
M&A diligence requiring protection-measure evidence and post-deal continuity
Indefinite-life intangibles where secrecy is maintained by access controls and NDAs
Income-approach valuation via competitive differential

Our Verdict

Know-how is the broader category — practical knowledge that creates commercial advantage. Trade secret is the narrower legal category — knowledge meeting strict secrecy, commercial value, and protection tests. Both are typically internally generated (prohibited from balance-sheet recognition) but recognised at fair value when acquired. They often coexist within the same asset cluster; the discipline diverges in protection measures, useful-life classification, and lender collateral suitability.

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