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28 Dec 2012

Review of Various Intangibles.

Introduction to Various types of Intangibles by Dr. Kretov Kirill.

“Making the invisible visible may be the CEO’s job” (John Hagel, The McKinsey Quarterly)

1.0 Introduction

Amid the numerous complicated and artistic models encountered during the last decade, it is now evident for the majority of companies that the valuation of Intangible Assets and Intellectual Capital has shown to become more theoretical than practical. Although numerous numerous studies have been carried out on the valuation of Intellectual Capital, most of the findings seem more theoretical than practical.

Dr. Kretov Kirill, December 2009, Geneva, Switzerland.

The thought of intellectual capital has already been researched by many elite scholars, who have created many interesting theories. However, the majority of their work is purely theoretical, and their concepts and theories usually are not widely accepted. Hardly any of these have been actually applied. For instance, many papers have been written about intellectual capital and its importance to some company’s performance; quantitative analyses and reports reveal that intellectual capital is an emerging competitive advantage that results in long-term profits and greatly raises the value of the company. However, current accounting practices recognize just a restricted quantity of intangible asset types (with regards to intellectual capital). From your accounting perspective, the choice is very limited: you can find R&D and Goodwill (the 2nd being inapplicable to most companies). Only if the business understands a good some particular form of asset may it choose to estimate its value utilizing a given valuation method (if one is applicable). However , the last value is not a guarantee with the real price of a good point. Another practitioner may not agree with the valuation principle applied and may propose another that he finds more appropriate, or someone might apply a variety of theories to the Intellectual Capital of the company and come on top of a listing of indicators that might 't be accepted or understood by others who prefer other concepts. Thus, it seems that the main of the problem is not the possible lack of evaluation methods nevertheless the not enough widely accepted standards of these methods but for the reporting from the results.

Introduction to Various types of Intangibles by Dr. Kretov Kirill.

Moreover, you can find issues involving patents, trademarks, copyrights, along with other kinds of “know-how”: exclusive rights, one of the most profitable kind, are given and then patent holders. A cpa recognizes only those assets recognized by current accounting practices (as regulated from the IFRS). Since reporting unrecognized assets is merely optional, a cpa could decide never to invest some time reporting them, especially if his motivation is not very high, and the man really wants to spare himself the job. Knowledge management scholars understand that it's possible to identify where knowledge originates from and classify it using various theories and taxonomies. This can be helpful for businesses that apply KM principles to make value through the continuous identification with the bits of intellectual capital they generate. The foregoing has described only some from the perspectives that the concept of intangibles can be considered.

1.1 Historical Overview

Intangible assets are not a contemporary invention or a phenomenon with the 21st century. Indeed, contrary to popular misconceptions, this sort of asset has been in existence for some time. Throughout history, knowledge and knowledge have remained two of the most precious commodities. The caveman who discovered the key of producing and used a spear to kill a mammoth faster with less risk to himself possessed an intangible asset that meant the main difference between life and death not only for that hunter-gatherer but in addition for his community. Similarly, the people with the alphabet, calendar, and mathematics possessed essential intangible knowledge assets.

In modern society, knowledge is now far more complicated, specialized, and technical. Mistakes made in the process of a nuclear plant, toyota tows, or biological weapons research facility could mean the deaths of millions. Just like in the prehistoric era, knowledge, and expertise have remained assets that can mean the main difference involving the life and death of the tribe.

Now, mainly in the developed world, organizations are increasingly reinventing themselves as service-oriented operations. Manufacturing tangible commodities that buyers can touch, smell, or taste is rapidly learning to be a subject put to rest. These transformations have become increasingly frequent across a large spectrum of organizations. A lot of companies rely almost positioned on intangible assets and consider them certainly one of their core competitive advantages. It was accurately described within the Harvard Business Review:

Employees skills, IT systems, and organizational cultures can be worth much more to many companies than their tangible assets. Unlike financial and physical ones, intangible assets are difficult for competitors to imitate, making them a strong supply of sustainable competitive advantage.( Robert S. Kaplan and David P. Norton, “Measuring the Strategic Readiness of Intangible Assets”).

It is well-known that many from the business resources in developed countries are intangible: in 1982, the material assets of yank companies constituted 62% of the marketable value (Stewart T.A. Intellectual Capital. The brand new Helpful Organizations.); after A decade, that share fell to 38%, and current research (R.S., and Norton D.P. Die strategiefokussierte Organisation: Fuhren mit der Balanced Scorecard.) estimates it of them costing only between 10% and 15%. By the end of 1999, the need for the home reflected within the balance sheet constituted only 6.2% of Microsoft’s rate, 4.6% of SAP’s, and 6.6% of Coca-Cola’s (Daum J.H. Intangible Assets). In 1982, the proportion with the non-material resources in added value creation for that 500 largest American companies was 38%, and also by 1998 it had been 85% (Du Voitel, R.D., Roventa, P. Mit Wissen wachsen-Strategisches Management von intellektuellem Kapital, in.: Perspektiven der Strategischen Unternehmensfuehrung.).

The current investments structure strengthens the prevalence of non-material resources: during the early 80s, 62% of investments inside the American industry were acquisitions of cloth assets; by 1992, that share dropped to 38% and only agreed to be 16% in 1999 . Since 1991, US enterprises are already spending more cash on information processing equipment compared to other equipment; information is replacing material merchandise stock, and data is pushing out tangible fixed assets.

Prominent economist Leonard Nakamura estimates the United States invests no less than $1 trillion per year in intangibles (Leonard Nakamura, “A Trillion Dollars a Year in Intangible Investment and also the New Economy,” in John Hand and Baruch Lev, eds., Intangible Assets: Values, Measures, and Risks.), a figure produced from the fact that about Five to ten percent of the US GDP is spent on intangible assets. Investments in R&D and software have increased significantly throughout the last 40 years. Simultaneously, the common expense of goods sold has fallen by greater than 10 percent since 1980. Services, that are counted as intangibles, rose from 22% of GDP in 1950 to 39% in 1999.

These dramatic changes (Margaret Blair, and Steven Wallman, “The Growing Intangibles Reporting Discrepancy,” Unseen Wealth: Report with the Brookings Task Force and Intangibles.) not only document a clear rise in investments in intangible assets but also underscore the growing worth of intangibles as an important component of contemporary business.


2.0 Basic classification of corporate assets

Every organization possesses multiple kinds of assets, who's combines to produce services and goods. The goal of this section is to classify these assets according to their common attributes.

All assets could be divided into two major types. The very first type incorporates conventional assets that may be touched, sensed, and felt: they're referred to as tangible assets. Any asset that doesn't fit the above description may be categorized as intangible. In accordance with IFRS (IAS-38 Intangible Assets, Issued in September 1998, revised in January 2008.), an Intangible Asset is surely an identifiable non-monetary asset that doesn't have physical substance. An intangible asset has to be identifiable, a requirement that distinguishes it from goodwill.

Tangible assets are usually associated with intangible assets, as represented in the diagram from the overlap between your two major categories. As an example, when a company produces physical commodities, it'll will often have some type of ip (IP) related to and active in the manufacturing process.

Most physical products, however, cannot be patented in their entirety. As an example, a laptop made by Sony may include not really a patented CPU cooling technology, the Sony manufacturer, as well as the VAIO trademark but in addition a Blue-ray player, which depends on technology developed and patented from the Blue-Ray Disk Association (BDA). Similarly, automobile industry giants like BMW incorporate components, including This stuff and Mp3's, that are patented by other organizations.

However, a business can also possess intellectual property that has not utilized in any manufacturing or production process. For example, Gm maintains a thorough portfolio of inventions and licensed ip as well as its range of trademarks and patents found in current product offerings. Thus, an overlap between tangible and intangible assets does exist but is just partial.

Furthermore, the diagram includes financial assets, which are intangible obviously. Cash and its equivalents aren't real property, because cash needs no valuation; however, it could be secured by physical assets. For this reason, the diagram illustrates an incomplete overlap between financial and tangible assets.

J. Cohen proposes that Intangible assets can be categorized into two distinct groups, identifiable and unidentifiable. In addition, intangibles (or proto-assets) share some of the features of identifiable and unidentifiable assets along with fit neatly into either of those two classes. Ideas begin to see the difference in opinion about the essence of Intangible Assets. From a bookkeeping standpoint (i.e., for the IFRS), an IA is definitely an identifiable non-monetary asset, but J. Cohen states that the IA may be further separated into identifiable, unidentifiable, and proto categories. Those that commence to explore this field farther will see much more serious disagreements among researchers regarding terminology and ideas. In my opinion, a good point ought to be called by a name identified by accounting practices: if it is not recognized but is clearly identified and valuated, then it is an asset.


2.1 Identifiable Intangible Assets (Recognized in Accounting)

    Intellectual rentals are most often associated with the notion of identifiable intangible assets and includes patents, copyrights, trademarks and trade secrets. These elements all share one salient commonality - they're accorded special legal protection or recognition and so are deemed property as a matter of law.

Recognition and protection of ip isn't a development of present times. The Copyright Act was enacted in the United States in 1790, while President Jefferson’s Patent Act of 1793 codified the idea of patents. Legislation, however, has occasionally shown to be inadequate, raising the potential for benefits produced from the ownership of ip being removed. As an example, in 2003 alone, 308 out 526 patent infringement suits filed in the usa were deemed invalid or unenforceable.

    Aside from temporary monopolies, the main advantage of intellectual property ownership is its potential marketability. Patents are routinely sold, licensed and purchased. IP assets are identifiable, separable and are often purchased or used on someone other than the inventor or creator.

Research and Development

    It is probably smart to begin the discussion about forms of Identifiable intangibles with Research and Development (R&D). Historically there was couple of intangible items reported in public places company fiscal reports: R&D and Goodwill. For that reason R&D expense records of public firms happen to be the main topic of widespread academic research.

R&D is defined as an identifiable intangible asset since it may lead to the development of intellectual property. Like a company’s research can lead to patents that are being sold and sold separately. Marketable patents, however, aren't the only purpose of R&D investments - they often lead to improved manufacturing techniques, trade secrets along with other kinds of ip that may do not be patented, but will nonetheless increase the company’s competitiveness. Consequently R&D gets the prospect of the creation of other assets, most of which are discussed below.


    There are three basic types of patents, including utility, design, and plant patents. (See U.S. Code Title 35 - Patents , to get a full description of patents and patent laws.) For your patent to become enforceable it ought to be listed in at least one registry of ip, most of which can include The United States Patent and Trademark Office (USPTO), the eu Patent Office, asia Patent Office, and World Ip Organization (WIPO).

The core reason for most of these offices is always to act as the registry of patent information. These organizations check whether a patent application meets various criteria (should be “novel, non-obvious, and useful”) and if so, records the invention as having been created and belonging to patentee. The application process isn't rapid as well as the cost to obtain a patent just isn't nominal. The author with this paper (Dr.Kretov Kirill) resides in Switzerland and it has recently sent a patent application for “a way of password protection against different types of key-logging techniques” to the European Patent Office (EPO). Besides attorney costs to help draft the applying, simply starting the process costs CHF 3,600 and also the first email address details are expected to arrive no sooner than 6 months after the date of application. Normally it requires two to three years to win patent approval. Following a successful application, the patent holder has the directly to exclude others from making, using, or selling its invention for Two decades (which is why patents in many cases are called temporarily granted monopolies).

    Perhaps best can be a subset of utility patents knows as process or method patents. During the internet boom with the late 1990s, many start-up technological firms have filed for process patents that described methods that might be beneficial to everyone. For example, there exists a patent filed on the “process” of employing modem for connecting to the net. Most famous are probably Amazon’s “1-Click” buying feature and Microsoft’s double-click patent. Some critics with the USPTO allege that during 1990s, patent reviews have failed to take into account test of “non-obviousness”. Many suggested how the duration of Internet-related process patents ought to be reduced to under Twenty years.

However, in spite of the proven fact that many Internet-related process patents were approved only some resulted in economic help to their inventors. It's usually logical to question: “Why grant patents in any way?” There exists a simple economic rationale: if inventors cannot protect their job to make some cash from it, they've got little motivation to create the invention to begin with. The authority to exclude others from using the invention is a kind of reward for investing the efforts to build up a patentable idea or technology. Patent law generally sports ths perception of monopolies being oftentimes best for customers. The enforced expiration of patents supposedly creates the right balance: enough protection to encourage innovation, however, not a lot concerning encourage abuse.


    U.S. copyright law was established in 1790, through the Second Session of Congress, convened on January 4th and the bill was signed into law on May 31st by George Washington. However the initial concept of copyright extends back for the late fifteenth-century England once the printing press was introduced. Copyright is generally made for written material or creative works, including books, photographs, music, video records, and software code. The entire process of applying for copyright is relatively simple - the creator of work owns the copyright as soon as the tasks are created. Unlike patents, filing for copyright registration simply gives notice that the creator is claiming copyright to the work, nevertheless it will not conclusively establish ownership. Furthermore, the copyright office does not screen submission for possible conflicts with existing copyrighted materials.

    Up until 1980s, owners of copyrighted materials, for example books or video and audio records are not up against mass copying of the works. But lately, because of the rapid growth and development of technology (specially the Internet) enormous amount of copyrighted material were digitalized.

    At this time it could be interesting to note copyright the process of digital media also to mention the thought of “fair use”. Fair me is “… any use of copyrighted material that doesn't infringe copyright even though it is done without the authorization with the copyright holder and lacking any explicit exemption from infringement under copyright law. ” However, fair usage is widely misinterpreted. For example if someone else buys some type of computer game for about EUR 100, it is logical to anticipate the buyer enamoured to shed it because of accidental scratching or another physical damage caused for the disk. DVD copying software can be used to make a backup copy, so that in the event the original disc stops working, the buyer will not lose their funds.

However, there is no be certain that the purchaser won't decide to share this backup with others. Uploading the picture file (exact copy with the disc) with a file-swapping peer-to-peer network may expose it to thousands of people, potential customers who'll not pay for game, but use its pirated copy instead. Some publication rack integrating anti-copying techniques that complicate the copying process, but at the cost from the buyer’s capacity to create a backup copy.

In other words DVD-ripping and peer-to-peer networking software itself can be extremely helpful, and may even have socially valuable legal uses, even if it often is used for illegal ones. Copyright holders struggle to take action that will help to avoid unauthorized utilization of their work, though minimal success to date.


    Webster’s dictionary defines trademark as “a distinctive name, phrase, symbol, design, picture, or style used by a company to recognize itself to consumers”. The same as copyright, trademarks can be established through common-law usage. The registration process is approximately copyrighting and patenting with regards to the amount of review conducted and legal assistance required. You can find legal benefits to registration, but trademark search is not required. Legal counsel normally conducts one search and then figure out what other trademarks exist that may be confused with usually the one in mind. It really is even easy for two very similar trademarks to coexist, so long as they are not probably be confused. For instance it's possible that some plastic-window manufacturer will apply for the trademark called “Windows”, even if a very similar trademark is registered by Microsoft. If however a start-up software developer company can provide its browser and submit an application for the “Internet Explorer” trademark they almost certainly is not going to obtain it, simply because the merchandise classes are much the same and sure to result in confusion.

Trade Secrets

    Trade secrets are types of assets that derive from in certain manner of doing business or proprietary technology that provides competitive advantage to its holder. It really is something which is utilized in ongoing business, being a unique compilation process or data mining system. In line with the Uniform Trade Secret Act (UTSA):

"Trade secret" means information, including a formula, pattern, compilation, program device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not generally recognized to, and not being readily ascertainable by proper strategies by, other persons who can obtain economic value looking at the disclosure or use, and (2) will be the subject of efforts that are reasonable beneath the ideas to maintain its secrecy.”

To put it briefly, trade secrets are something that provides economic value since they remain unknown towards the competition. For instance one company may abandon e-mail protocol as the communication channel between workers and switch to an instant messaging service. Derived economic value may be the insufficient spam, instant message delivery, and improved security. Meanwhile, its competitors will still using slow and unsecure e-mails, waste 90% of their traffic on spam, and wonder why messages have been sent, although not received.

    Unlike patents, buying a trade secret doesn't prevent others from using it. Two firms can independently and simultaneously hold the same information since the trade secret, however they cannot hold two separate patents on exactly the same invention. There is no way someone can prevent another company by using instant messaging service because the internal channel of communication, until the organization is not aware of this possibility.


Brands tend to be wrongly identified as trademarks - in fact, the writer (Dr. Kirill Kretov) with this paper was surprised to locate that Webster’s Merriam dictionary defines brand as synonym to trademark. It isn't - brands tend to be more than just names or trademarks. A brand name is surely an economic asset, since it adds value by conveying information about an item. Based on Tom Blackett , brands that keep their promise are business assets. They attract loyal clients who regularly go back to them, allowing for the brand owner to forecast cash flows and also to plan and manage the introduction of the business enterprise with greater confidence. Due to the brand’s capacity to secure income it may be considered an effective asset just as as any other, classical business assets like equipment, cash, investments, and so on. Concurrently brand owners possess the incentive to “keep their promise”. If eventually the market discovers fraud the company risks to shed a substantial variety of its clients.

The writer of this paper is a superb fan of Sony products - he believes that this company produces beautiful, innovative and sturdy products and, consequently, he is prepared to pay more for his or her quality. But there are lots of other Japanese brands available and when suddenly Sony decides to cut corners and trade low quality products under its good name, the author will just change to available choices.

Software Code

    Software code is considered being just about the most complicated intellectual properties to codify. It is possible to have a patent for that business method that the code enables or trademark certain features of the application. Actually, even some part of the code could be kept like a trade secret even though the code itself can be copyrighted.

However, this really is complicated by different accounting treatments which largely depend on whether or not the software viewed as a port towards the organization’s manufacturing process, or whether the software program is the firm’s strategy is and also itself. In other words the firm could use and/or sell software code. As an example 'microsoft office' is a very useful application that organizations may also use for word processing or spreadsheet calculation. However the expense of license for a given variety of workplaces is probably not treated as valuable intangible property. Concurrently Microsoft office is definitely a valuable intangible property to its creator Microsoft. Note that only Microsoft props up source code, while those that buy licenses are just given its compiled version.


2.2 Questionable Recognition

    Accounting standards ordinarily have high requirements regarding disclosure of information about non-material (intangible) assets. For example, IFRS-38 requires that financial reports will include these information for each and every type (class) of assets: types of amortization, results of re-evaluations, estimated life periods (asset remains useful), as well as other explanations of great alterations in total value of non-material assets. Reporting must also range from the sum total of R&D, which is thought to be spending for that current period. However, it is the specific company that develops a classification of non-material assets, normally depending on some principle of these homogeneity.

    In other words, IFRS recommends disclosure of data about valuable intangible (non-material) assets which can be of a company but not identified by current accounting practices (CAP). Concurrently, the report format could be based on an organization. Consequently, there exists a insufficient standardization and a nightmare for investors, that have to match parameters which can be very often of various natures and incomparable. Some reports with details about particular “assets” very can be not incomparable just with other programs but even with reports from the same company for several periods of time. Some researchers have already identified this negative side of flexibility and freedom in reporting and classification allowed by IFRS.


    Goodwill is just about the commonly discussed unidentifiable asset. It's been recently mentioned that goodwill is just one of two intangible items which were routinely reported in public places company financial statements (a different one is R&D). Goodwill shows up on the company's books in the event it acquires another company, as well as the buyer naturally must pay more because of it than the fair price of the net identifiable assets, both tangible and intangible.

    Numerous goodwill definitions can be found in various documents and standards regulating the business accounting and estimate activities (IFRS, USA GAAP). Remember that given definitions are paraphrased rather than exact citations from sources.

IFRS 3 "Companies merger" (International Financial Reporting Standards)

By IASB (International Accounting Standards Board)

Goodwill as a result of merger of the companies may be the sum paid from the buyer over the purchase marketable value in expectation of future economic gains. The long run economic gains migh result in the synergy effect from the acquired identified non-material assets or assets which separately are not susceptible to acknowledgement within the financial reporting but that are an element of the purchase cost. Goodwill may be the overabundance a purchase cost on the acquired be part of fair price of the identified acquired assets, which can be inseparable from the target company. Actual goodwill price is purchasing cost without the difference of fair worth of identified assets, obligations and contingent obligations.

SFAS 142 "Goodwill as well as other intangible assets"(Financial Accounting Standards)

By USGAAP (US Generally Accepted Accounting Principles)    

Goodwill will be the cost excess of an acquired company within the price of its identified assets minus obligations. Goodwill reflects such factors as customer demand satisfaction, good management, production efficiency, successful location, etc.

EVS 2000 (European Valuation Standards) (latest 2009)

By TEGOVA (The ecu Band of Valuers’ Associations)

There are three categories of non-material assets subject to evaluation: business goodwill (unallotted non-material assets), personal goodwill, and identified non-material assets. Business goodwill is inseparable from the company and is considered in the balance sheet after company sale, according to IFRS. Personal goodwill is not transferred under sale and isn't considered at company cost calculation.

As can be seen in the given definitions, in a variety of business accounting standards, you can find practically no discrepancies concerning the essence of goodwill. Thus, usually, goodwill value appears if company acquisition happens, and the distinction between purchasing cost and the fair value of identified assets is calculated.

In other words, the standard comprehension of goodwill origins lies in the following: Goodwill arises when a company is acquired at a price exceeding its assets’ marketable values sum. Consequently, this excess may be explained this way: The company selling price overall includes the cost of all assets, like the ones not reflected within the balance sheet. As it is termed that inside the balance sheet un-identifiable assets cannot (should not) be reflected, their price is embodied in goodwill. The residual method of goodwill calculation is dependant on it.

However goodwill occurs not merely once the company possesses unrecorded intangible assets. We can give types of some factors irrelevant towards the value of intangible company assets that influence goodwill value and so are subject to be reflected inside the company-buyer balance sheet:

•    Cost with the identified assets (the more non-material assets are capitalized, the less remain for goodwill);

•    Sales price of an acquired enterprise according to a seller's ability to prove our prime price or around the buyer's capacity to beat down the price, on commission intermediaries, etc.;

•    Identifiable assets evaluation errors (cost calculation is founded on taken balance, not marketable value of net assets);

•    Award paid at acquisition (overabundance purchasing price over market capitalization right now of buying);

•    A price of all company obligations (more obligations lower the value of goodwill);

•    Goodwill allowances methods (in various national accounting standards, allowance during the permitted by accounting standards period; immediate allowance with this value on the expense of equity capital or deficiency of the allowance generally is accepted);

•    External environment influence: favorable location, favorable conjuncture, new preferences of shoppers, special taxation rates, etc.;

•    Identified assets depreciation methods;

The marketable price of both assets as well as the business as a whole is determined for installments of probable most effective utilization. It is apparent how the most effective ways of use for separate assets and business as a whole cannot coincide: The asset markets develop under the influence of different factors than the business markets. Quite simply, a business expense is determined by money flows from sale with the services or goods created by the business and the expense of separate assets essential for production - by money flows from sale of such assets.

Thus, efficient technique business in general and of separate assets are non-comparable, meaning the business enterprise in general and separate assets marketable values may also be non-comparable. Completeness of company asset representation inside the balance sheet is not important: When the expense of all assets is created the check sheet, even those not identified by standards with the business accounting, the sum assets marketable values basically is not going to coincide with business cost overall. If cost in these assets’ used in this business is higher than cost at average market alternative approach to use, the goodwill is going to be positive, otherwise - negative. Still, negative goodwill will not testify to inefficient activities within the business as we understand an effective business since the the one which has assets return in an average branch level. Incomparability valuations of economic overall as well as separate assets is due to the fact that the company valuation overall is made from a view of business continuation, and evaluation of every asset is created proceeding from your assumption of their independent sale (separately in the property complex within the business).

To verify the above we'll present these provisions. Goodwill evaluation is always coupled to the value assessment of the business in general, which non-material assets and intellectual property valuation specialists specify. Business cost calculation methods provide revealing forecast data concerning company activities, on assets creation costs measurement or on comparison of activity indicators with all the comparable companies from a goal database. From the market perspective a business cost shall not depend upon the expense of its elements, as company is an "ongoing concern", and its particular partition into elements shall happen just with a look at real or fictitious liquidation. Acting company is always thought to be an individual complex that will still act in the future (IFRS, Principles).

Most material and non-material assets, inside their merge running a business, lose their liquidity because of their greater specificity and often complete inseparability in the business. They are assets which are created for this business and possess few other application, as due to technological specificity and also to attachment with a business site. (Tangible examples are various constructions like bridges and pipelines; an intangible example might be a value connected with personal ties of ex-owners with clients and suppliers.) Besides, sometimes there are restrictions inside their use: long-term obligations, contracts, government requirements (for instance, ecological regulations), or social responsibility from the business. Additionally it is impossible to dismiss management and personnel errors. Under these conditions, market evaluations of assets are difficult and is substituted for substitution costs. Thus, assets often lose their independent marketable value; it remains only like a historic fact of investments realization into these assets previously. This price is also required to investors being a reference point for risk identification of present and future investments.

Bringing it all together, we could conclude the goodwill concept may be used inside a narrow along with a wide sense. Inside a narrow sense, goodwill is known since the accounting assets meeting the financial reporting standards criteria. Only acquired goodwill is acknowledged; internally created goodwill is forbidden to mirror within the balance sheet. The goodwill size is determined as a among the acquisition price of the company and also the book price of its material, non-material and money assets and obligations. In the wide sense, goodwill is a complex of all intangible company assets. Hence, we are able to discuss about it the goodwill of the operating company only within the meaning different from accounting sense. The approximate sense of this meaning is expressed by the terms reputation, business standing, or/and company brand. But such goodwill (in the wide sense) just isn't shown within the balance sheet. Some authors, discussing goodwill, would rather think of it as "the company price" or "business reputation", keeping exactly the same sense.

When investor makes a decision to invest money (or buy some company) he normally desires to know precisely what he could be buying (or simply just speaking, what he gets in return for his money). If it is a site company (an IT company that operates in the joy of software development or web applications), then most likely the sum total famous its intangible assets is significantly less space-consuming than the overall company value. This value will most likely come in some type of goodwill, but the thing that makes these numbers? With current accounting practices, in many cases we cope with an “expensive black box”. This is a reason why a potential buyer will do a due-diligence from the company. It will help to evaluate the intangible assets belonging to this company.

Human Capital

The phrase human capital got into the business lexicon after Gary Becker (University of Chicago economist and Nobel Prize-winner) published a novel titled “Human Capital” in 1964. Becker (along with Jacob Mincer, Milton Friedman, Sherwin Rosen, and Ted Schultz) came up with economic notion of human capital as distinct from typical financial or physical assets, due to its difference from them in the sense that human capital can't be separated from the humans who possess it. “It is fully in keeping with the capital concept as traditionally defined to express that expenditures on education, training, medical treatment, etc., are all investments in capital.” Soon after Becker developed the concept of human capital, economists and consultants started to subdivide and classify it. To put it briefly, it indicates both physical and intellectual ability.

    Many researchers suggest that hr are the most effective assets of an organization. But exactly how can the main city price of human resources be found using current accounting practices?

For the intellectual organization that focuses on development of various intellectual capital (not speculation, but real innovative development) and that gets the biggest percentage of its value allocated to intangible assets, people are everything. The organization may be evaluated by calculating the quantity of all of the HR spending (salaries, payments to freelancing, training programs, various incentives, etc.). Someone may claim that this really is what exactly is implemented to calculate the price, but price is not a value the administrative centre represents. It is more of a price as capital value concept. It may sound nonsensical, however it basically implies that if someone else incurs cost it assumes that something was bought (money was changed to something). Regardless of whether that something was tangible or intangible in nature, it features a value along with a price. More essential is whenever that something is, it is important to other people (the number of people would love to have it). If there have been many, what can be their price, and just how would this price be determined? Also, in the event that something was bought available on the market, for a lot of buyers the price could be similar (this product or service has a fixed price). Thus it can be stated that it is a kind of valuation using the market approach. However, the worthiness really depends upon the sort of asset you own and also the supply/demand curves because of it. If the new owner obtained it for less money than others, this means he has good contacts (refers to relational capital in IC concept).

In terms of HR, for those who have a task in which you need professionals to complete work for you, you don’t simply spend some money, however, you get some quality work as well as if it doesn’t use a material form still has value. For instance, it could be consultation using a lawyer in Switzerland; project duration is 4-6 hours plus an hourly rate will be between 300 and 1000 Swiss francs. According to your contacts (RC) the expense of project (outsource) will be between 1500 and 5000Chf. But following your project’s completion and payment, you commence to own something - it can be solutions to questions asked during consultation hours as well as other little bit of knowledge from your lawyer talking to you. In other words, you then become the master of some bit of intellectual capital. If it's not very specific for your needs, probably there are lots of others who are able to pay an identical price to the sort of information. As a result it can be an intangible asset, which can be valued using no less than the fee and market approaches (more about evaluation will be discussed in later areas of this thesis).

 However, the salary is a really average reflection with the real creativity of your given person and price generated (profit associated) from it. Also, you can find industry leaders and lagers - industry leaders are the ones who pay across the average salary set by industry so that you can purchasing people. Industry lagers normally pay substandard, but it is not that their human resources are worse with regards to creativity, skills, knowledge or experience than others in big companies. Consider every one of the possible areas of expertise that exist to the modern IT companies: You will find big firms that are best in providing his or her services and products on the market, nevertheless they can’t be best in all possible market niches. Celebrate possible the problem whenever a little group of experts in particular field are many more productive in the certain task (Activity) when compared to a research center of some big company.

Also, worth mentioning is it may seem like in today’s economy companies no longer compete with regards to best technology; it is the competition of patented technologies as well as other licenses. Research and development, including creativity, are tied by various legal barriers (patent sharks), to ensure that many professionals are not allowed to enter a specific field of technology.

2.3 Intellectual Capital

Modern lines of world economy development, strengthening of a role of intellectual and knowledge resources for production of competitive products have triggered occurrence of 1 of the very scaled financial problems.

Its essence can be defined as follows: as ways of something creation have changed, information has considered among major factors of latest cost creation, it is necessary to reconstruct in appropriate way the content from the public reporting of the companies before their proprietors as well as other investors. The reporting shall support the information on cost major factors: company strategy, future monetary flows, non-financial activities, intangible company assets, including business standing.

Needless to say, people reporting is not restricted to merely the financial statements. Because it was discussed earlier, IFRS recommends publication of data about intangible assets not-recognizable by CAP. For example, there are various notes and discussions reported in annual reports (like K-10). However, this field requires farther standardization otherwise it has little practical value. On this paper, Kretov Kirill applies some concepts of intellectual capital so that you can produce a reporting model for that complete capital structure.

Initially the problem of evaluation of intangible factors has arisen in information-saturated companies the location where the level of material assets is insignificant, and the mental potential is high. Investors are not inclined to get to such companies, and in front with the managers there is an activity of calculation of the intangible assets value and also informing investors to make more adequate picture in regards to the company activities of the and its prospects.

Modern understanding of intangible factors of latest cost production are embodied in concept "intellectual capital". The managers managing companies cost are almost single inside the opinion regarding the name with this phenomenon, its content, and that modern accounting can’t consider these new assets (employees competence, customers relations, computer and administrative systems, databases, etc.) . Some researchers even declare that for intellectual capital accounting it's required new financial and administrative concept . Financiers discuss be it essential to change traditional accounting terms (non-material assets, business standing), and in addition about possibility of cost evaluation of the new indicator, its accounting and showing in the reporting.

Three Major Components of Intellectual Capital

Various models and theories of intellectual capital represent generalization of worth factors management practice in the specific companies, and today it's admitted by both researchers and experts. Because of this each model is different and reflects specificity from the company. At the same time, accumulating of experience and data of an intellectual capital through the beginning of current decade means to find out general approaches, to build up about single structure of companies’ knowledge assets. Virtually all this problem researchers and managers allocate three aspects of intellectual capital:

1) human capital (HC);

2) structural, or organizational, capital (SC);

3) customer capital (CC).

In some models , the customer capital is named the main city of relations, or connections (relational capital), but it is understood also as loyalty and customer happiness.

Generally speaking, it is possible to estimate the human capital volume with the number of intellectual workers and the level of information, skills and knowledge that they own, through the quantity of leaders, idea men, "revolutionaries". Value of personnel knowledge and abilities is seen as an specialists' capability to solve difficult, non-standard, unexpected problems; employees' independence and trainability; the capacity of managers to manage transformations; creative activity; tendency to partner interaction; etc. We could estimate growth and development of the human capital through proportion with the forms of activity "inspiring" on search of new solutions forcing company's employees to learn something new. Finally, degree of human capital binding is estimated through personnel adherence to company's insight and values, employees' satisfaction by work and industrial relations, personnel loyalty for the company and retention of leading workers, company's reputation on the labor market, etc. (Later within the work, the Human Resources will probably be discussed more into details.)

Organization structural capital is reflected through the number and excellence of business partners; level of business partner retention for the enterprise; integration of the value chain and an company's role inside it; option of an adaptable and effective business network (over a global scale, also); information system quality; early detection system quality; involving of pressure groups into decision making; procedures of transformation of implicit knowledge into explicit one; partnership level in the organization; quality of network interaction; completeness and excellence of databases; trademarks and patents; codified understanding of technical processes (how much completeness and clearness of documentation reflecting consumer value creation within the organization); variety of prototypes for economic problem solution; ip; backlogs on new items; corporate culture market orientation; territorial arrangement advantages; unique technical libraries and databases, customer databases; logistic, sales, advertising, cartel contracts; overcome starting difficulties; licenses.

The corporation customer capital is reflected, through the following characteristics: expected discounted income from available consumers; variety of regular company's customers, their share with sales amounts, average cooperation experience; customer growth quality and prospects; customers' satisfaction; company's "ownership" of the industry standard; competitive advantage with new production launch; the volume of the concluded contracts; the degree of customer retention to the organization.

So, it is possible to tell that in the provided models there is certainly more widespread than distinctions. The overwhelming most authors recognize existence of intellectual capital independent elements - human, organizational, client, however they are called. At the same time, presently there are lots of terms anyhow associated with intangible assets: brand, business standing (goodwill), ip, non-material assets, expenses on researches and developments. What exactly is relation of these terms with idea of an intellectual capital? It's not quite no surprise that the overall name "intellectual capital" can be used to mix such essentially various and frequently without having the direct relation to the intelligence phenomenon as employees' value system, enterprise image, brands, customers' loyalty. Within our opinion, the uniting basis here could possibly be the idea of intellectual capital circulation: employees' knowledge and capabilities are embodied in organizational processes and relationship with business partners that, in turn, create the base for steady relations with customers; cooperation with customers and partners results in experience accumulating, development of enterprise employees' knowledge and capabilities.

Ordering and systematization of existing terminology becomes pressing question where, particularly, the process of intangible assets reporting, accepted and identified by the accounting organizations depends.


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