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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)