Dr. Kretov Kirill - Basic classification of corporate assets.

Summary of Various types of Intangibles.

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

1.0 Introduction

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

Amid the countless complicated and artistic models encountered throughout the last decade, it is now evident for the majority of firms that its valuation of Intangible Assets and Intellectual Capital has shown being more theoretical than practical. Although several studies have been completed around the valuation of Intellectual Capital, a lot of the findings seem more theoretical than practical.

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

The idea of intellectual capital has already been researched by many elite scholars, who have created many interesting theories. However, nearly all of their work is purely theoretical, and their concepts and theories are not widely accepted. Very few of which have been actually applied. For instance, many papers are already discussing intellectual capital and it is importance to some company’s performance; quantitative analyses and reports reveal that intellectual capital is surely an emerging competitive advantage that leads to long-term profits and greatly increases the price of the organization. However, current accounting practices recognize merely a very limited quantity of intangible asset types (with regards to intellectual capital). From the accounting perspective, the option is very limited: you can find R&D and Goodwill (the next being inapplicable to the majority of companies). As long as the organization understands the presence of some particular form of asset may it opt to estimate its value using a given valuation method (you are applicable). However , the final value is not an guarantee of the real price of an asset. Another practitioner might not agree with its valuation principle applied and may propose another that he finds more appropriate, or someone might apply a quantity of theories for the Intellectual Capital of your company are available up with a listing of indicators that might not be accepted or understood by other people who prefer other concepts. Thus, it seems that the basis from the concern is not the possible lack of evaluation methods nevertheless the not enough widely accepted standards for these methods as well as the reporting with the results.

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

Moreover, you will find issues involving patents, trademarks, copyrights, and other forms of “know-how”: exclusive rights, probably the most profitable kind, get simply to patent holders. An accountant los angeles recognizes only those assets identified by current accounting practices (as regulated through the IFRS). Since reporting unrecognized assets is only optional, an accountant may decide never to invest some time reporting them, particularly when his motivation is not quite high, and the man really wants to spare himself the work. Knowledge management scholars know that it is possible to identify where knowledge arises from and classify it using various theories and taxonomies. This could be ideal for companies that apply KM principles to produce value from the continuous identification from the bits of intellectual capital they generate. This has described only a few with the perspectives that the field of intangibles can be considered.

1.1 Historical Overview

Intangible assets aren't today's invention or a phenomenon from the 21st century. Indeed, despite popular misconceptions, this type of asset 's been around for a long period. Throughout human 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 real difference between life and death not merely for your hunter-gatherer but also for his community. Similarly, the inventors from the alphabet, calendar, and mathematics possessed essential intangible knowledge assets.

In modern society, knowledge is becoming far more complicated, specialized, and technical. Mistakes made in the process of a nuclear plant, takes space shuttle, or biological weapons research facility could mean the deaths of millions. Much like in the prehistoric era, knowledge, and expertise have remained assets that may mean the real difference between the life and death from the tribe.

Now, mainly in the planet, companies are increasingly reinventing themselves as service-oriented operations. Manufacturing tangible commodities that consumers can touch, smell, or taste is rapidly being a subject put to rest. These transformations have become increasingly frequent across a broad spectrum of organizations. Most companies rely almost entirely on intangible assets and consider them 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 a lot of companies than their tangible assets. Unlike financial and physical ones, intangible assets are difficult for competitors to mimic, causing them to be a powerful source of sustainable competitive advantage.( Robert S. Kaplan and David P. Norton, “Measuring the Strategic Readiness of Intangible Assets”).

It is well known that most 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 Wealth of Organizations.); after 10 years, 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, value of the property 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 share with the non-material resources in added value creation for your 500 largest American companies was 38%, 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 present investments structure strengthens the prevalence of non-material resources: during the early 80s, 62% of investments inside the American industry were acquisitions of fabric assets; by 1992, that share dropped to 38% and was only 16% in 1999 . Since 1991, US enterprises have been spending more money on information processing equipment than on other equipment; facts are replacing material merchandise stock, and knowledge is pushing out tangible fixed assets.

Prominent economist Leonard Nakamura estimates the United states of america invests no less than $1 trillion annually in intangibles (Leonard Nakamura, “A Trillion Dollars annually in Intangible Investment as well as the New Economy,” in John Hand and Baruch Lev, eds., Intangible Assets: Values, Measures, and Risks.), a figure produced from the fact about 6 to 10 percent of america GDP is spent on intangible assets. Investments in R&D and software have risen significantly throughout the last Forty years. Simultaneously, the typical price of goods sold has fallen by more than Ten 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 of the Brookings Task Force and Intangibles.) not only document a clear boost in investments in intangible assets but additionally underscore the growing value of intangibles being an important part of contemporary business.


2.0 Basic classification of corporate assets

Every organization possesses multiple kinds of assets, so it combines to create goods and services. The goal of this would be to classify these assets based on their common attributes.

All assets could be divided into two major types. The initial type incorporates conventional assets that can be touched, sensed, and felt: these are called tangible assets. Any asset that will not fit the above description could be categorized as intangible. In accordance with IFRS (IAS-38 Intangible Assets, Issued in September 1998, revised in January 2008.), an Intangible Asset is definitely an identifiable non-monetary asset that doesn't have physical substance. An intangible asset must be identifiable, a necessity that distinguishes it from goodwill.

Tangible assets are usually associated with intangible assets, as represented within the diagram by the overlap involving the two major categories. For instance, when a business produces physical commodities, it will usually have some kind of intellectual property (IP) connected with and involved in the manufacturing process.

Most physical products, however, cannot be patented inside their entirety. For instance, a notebook computer made by Sony may include not really a patented CPU cooling technology, the Sony brand, as well as the VAIO trademark but in addition a Blue-ray player, which depends on technology developed and patented by the Blue-Ray Disk Association (BDA). Similarly, automobile industry giants like BMW incorporate components, such as These tools and Audio players, that are patented by other organizations.

On the other hand, a business also can possess intellectual property which has to be used in any manufacturing or production process. For example, General Motors maintains a comprehensive portfolio of inventions and licensed intellectual property 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 by definition. Cash and its equivalents aren't property, because cash needs no valuation; however, it may still be secured by physical assets. Because of this, the diagram illustrates a partial overlap between financial and tangible assets.

J. Cohen proposes that Intangible assets can be categorized into two distinct groups, identifiable and unidentifiable. Additionally, intangibles (or proto-assets) share a few of the features of identifiable and unidentifiable assets but do not fit neatly into either of those two classes. Ideas see the difference in opinion concerning the essence of Intangible Assets. From an accounting standpoint (i.e., for the IFRS), an IA is an identifiable non-monetary asset, but J. Cohen states how the IA may be further split into identifiable, unidentifiable, and proto categories. People who commence to explore seo farther will discover more serious disagreements among researchers regarding terminology and concepts. For me, a good thing needs to be called with a name identified by accounting practices: if it is not recognized but is clearly identified and valuated, then it's a good point.


2.1 Identifiable Intangible Assets (Recognized in Accounting)

    Intellectual residence is mostly from the concept of identifiable intangible assets and includes patents, copyrights, trademarks and trade secrets. These components all share one salient commonality - they may be accorded special legal protection or recognition and are deemed property as a matter of law.

Recognition and protection of ip is not an growth and development of modern days. The Copyright Act was enacted in the usa in 1790, while President Jefferson’s Patent Act of 1793 codified the concept of patents. Legislation, however, has occasionally proved to be inadequate, raising the possibility of benefits produced from the ownership of ip being removed. As an example, in 2003 alone, 308 out 526 patent infringement suits filed in the United States were deemed invalid or unenforceable.

    Aside from temporary monopolies, the main benefit of ip ownership is its potential marketability. Patents are routinely sold, licensed and purchased. IP assets are identifiable, separable and therefore are often purchased or used on someone apart from the inventor or creator.

Research and Development

    It might be a good idea to begin the discussion about types of Identifiable intangibles with Research and Development (R&D). Historically there have been 3 intangible items reported in public areas company financial statements: R&D and Goodwill. Because of this R&D expense records of public firms have been the main topic of widespread academic research.

R&D is understood to be an identifiable intangible asset since it may lead to the development of intellectual property. Like a company’s research can result in patents that can be purchased and sold separately. Marketable patents, however, aren't the sole intent behind R&D investments - they often times cause improved manufacturing techniques, trade secrets and other forms of intellectual property that may not be patented, and often will nonetheless enhance the company’s competitiveness. Consequently R&D has got the possibility of the creation of other assets, many of which are discussed below.


    There are three basic types of patents, which include utility, design, and plant patents. (See U.S. Code Title 35 - Patents , for any full description of patents and patent laws.) For the patent to become enforceable it ought to be indexed by a minumum of one registry of intellectual property, most of which can include America Patent and Trademark Office (USPTO), the ecu Patent Office, japan Patent Office, and World Ip Organization (WIPO).

The core purpose of all of these offices is always to work as the registry of patent information. These organizations check whether a patent application meets various criteria (has to be “novel, non-obvious, and useful”) therefore, records the invention as previously being created and of patentee. The application process just isn't rapid as well as the cost to acquire a patent isn't nominal. Mcdougal with this paper (Dr.Kretov Kirill) resides in Switzerland and has recently sent a patent application for “a way of password protection against various types of key-logging techniques” towards the European Patent Office (EPO). Besides attorney costs to help draft the applying, simply starting the process costs CHF 3,600 and the first email address details are expected to arrive no prior to when six months after the date of application. Normally it requires 2-3 years to win patent approval. After a successful application, the patent holder has the to exclude others from making, using, or selling its invention for Two decades (which explains why patents tend to be referred to as temporarily granted monopolies).

    Perhaps most fascinating is really a subset of utility patents knows as process or method patents. Through the internet boom with the late 1990s, many start-up technological firms have filed for process patents that described methods that could be helpful to everyone. As an example, there exists a patent filed about the “process” of employing modem to get in touch 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 failed to take into account test of “non-obviousness”. Many suggested how the duration of Internet-related process patents should be reduced to under 20 years.

However, despite the undeniable fact that many Internet-related process patents were approved only a few triggered economic advantage of their inventors. It is usually logical to inquire about: “Why grant patents in any way?” There's a simple economic rationale: if inventors cannot protect their work and make some money of it, they've got little motivation to produce the invention to start with. The authority to exclude others while using the invention is a type of reward for investing the efforts to produce a patentable idea or technology. Patent law generally supports the perception of monopolies being oftentimes good for customers. The enforced expiration of patents supposedly produces the right balance: enough protection to inspire innovation, however, not a great deal regarding encourage abuse.


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

    Up until 1980s, those who own copyrighted materials, for example books or car stereo records were not confronted with mass copying of the works. But lately, because of the rapid progression of technology (particularly the Internet) enormous quantities of copyrighted material were digitalized.

    At this point it might be interesting to notice copyright the process of digital media and to mention the thought of “fair use”. Fair usage is “… any usage of copyrighted material that doesn't infringe copyright though it may be done with no authorization of the copyright holder and without an explicit exemption from infringement under copyright law. ” However, fair usage is widely misinterpreted. As an example if a person buys a computer game for approximately EUR 100, it really is logical to expect how the buyer will not be happy to lose it because of accidental scratching or other physical damage caused towards the disk. DVD copying software enables you to make a backup copy, so that in the event the original disc stops working, the customer doesn't lose their money.

However, there isn't any be certain that the buyer is not going to decide to share this backup web-sites. Uploading the look file (exact copy from the disc) with a file-swapping peer-to-peer network may expose it to huge numbers of people, potential customers who will not pay for game, but use its pirated copy instead. Some companies are integrating anti-copying techniques that complicate the copying process, but at the cost of the buyer’s capacity to create a backup copy.

Quite simply DVD-ripping and peer-to-peer networking software itself can be extremely helpful, and may have socially valuable legal uses, even when issues is used for illegal ones. Copyright holders struggle to take action that can help to avoid unauthorized use of their job, but with minimal success so far.


    Webster’s dictionary defines trademark as “a distinctive name, phrase, symbol, design, picture, or style used by a business to spot itself to consumers”. Just like copyright, trademarks can be established through common-law usage. The registration process is approximately copyrighting and patenting in terms of the level of review conducted and legal assistance required. There are legal benefits to registration, but trademark search is not needed. Legal counsel normally conducts one search only to determine what other trademarks exist that could be wrongly identified as the one into consideration. It's even easy for two very similar trademarks to coexist, provided that they're not probably be confused. For instance it's possible that some plastic-window manufacturer will apply for the trademark called “Windows”, even when an extremely similar trademark is registered by Microsoft. However if a start-up software developer company will create its browser and submit an application for the “Internet Explorer” trademark they almost certainly won't obtain it, simply because the item is virtually identical and sure to cause confusion.

Trade Secrets

    Trade secrets are forms of assets that derive from a certain way to do business or proprietary technology that provides competitive advantage to its holder. It is a thing that is utilized in ongoing business, being a unique compilation process or data mining system. Based on the Uniform Trade Secret Act (UTSA):

"Trade secret" means information, such as a formula, pattern, compilation, program device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to, rather than being readily ascertainable by proper means by, other persons who can obtain economic value from the disclosure or use, and (2) may be the subject of efforts that are reasonable underneath the ways to maintain its secrecy.”

To put it briefly, trade secrets are something which provides economic value since they remain unknown for the competition. As an example one company may abandon e-mail protocol because the communication channel between workers and switch to an instant messaging service. Derived economic value could be the not enough spam, instant message delivery, and improved security. Meanwhile, its competitors will still using slow and unsecure e-mails, waste 90% of these traffic on spam, and wonder why messages are already sent, but not received.

    Unlike patents, having a trade secret will not prevent others while using it. Two firms can independently and simultaneously support the same information because the trade secret, nevertheless they cannot hold two separate patents on the identical invention. No one is able someone can prevent another company from using instant messaging service because the internal channel of communication, except if the business is not aware of this possibility.


Brands are often wrongly identified as trademarks - in reality, mcdougal (Dr. Kirill Kretov) of this paper was surprised to locate that Webster’s Merriam dictionary defines brand as synonym to trademark. It isn't - brands less difficult more than just names or trademarks. A brand name is an economic asset, as it adds value by conveying details about an item. Based on Tom Blackett , brands that keep their promise are business assets. They attract loyal buyers who regularly come back to them, making it possible for the company owner to forecast cash flows and to plan and manage the creation of the business with greater confidence. As a result of brand’s capacity to secure income it may be considered a productive asset just as just like any other, more traditional business assets like equipment, cash, investments, and so on. Concurrently brand owners hold the incentive to “keep their promise”. If eventually the market discovers fraud the organization risks to get rid of an important number of its clients.

Mcdougal of this paper is a great fan of most Sony products - he believes that company produces beautiful, innovative and durable products and, consequently, he is prepared to pay more for quality. But there are lots of other Japanese brands in the marketplace of course, if suddenly Sony decides to cut corners and trade inferior products under its good name, the author only will switch the signal from choices.

Software Code

    Software code is considered to be one of the most complicated intellectual properties to codify. It's possible to have a patent for your business method that the code enables or trademark certain options that come with the software. In fact, even some area of the code can be kept like a trade secret while the code itself can easily be copyrighted.

However, this really is complicated by different accounting treatments which largely depend on whether or not the software thought to be a port for the organization’s manufacturing process, or whether the software is the firm’s method is as well as itself. In other words the firm may use and/or sell software code. As an example Microsoft 'office' is a very useful application that organizations would use for word processing or spreadsheet calculation. However the price of license to get a given quantity of workplaces may not be treated as valuable intangible property. Simultaneously Microsoft office is definitely an valuable intangible property to the creator Microsoft. Remember that only Microsoft supports the source code, while people who buy licenses are merely given its compiled version.


2.2 Questionable Recognition

    Accounting standards as a rule have high requirements regarding disclosure of knowledge about non-material (intangible) assets. For instance, IFRS-38 necessitates that fiscal reports ought to include the following information for each type (class) of assets: ways of amortization, outcomes of re-evaluations, estimated life periods (asset remains useful), as well as other explanations of significant modifications in total price of non-material assets. Reporting also needs to range from the total cost of R&D, which is thought to be spending for that current period. However, oahu is the specific company that develops a classification of non-material assets, normally depending on some principle of their homogeneity.

    In other words, IFRS recommends disclosure of information about valuable intangible (non-material) assets which can be owned by a company although not recognized by current accounting practices (CAP). At the same time, the report format could be defined by a company. Consequently, there exists a lack of standardization and a nightmare for investors, that have to compare parameters which are often of numerous natures and incomparable. Some reports with information about particular “assets” may be not incomparable simply with other companies but despite having reports in the same company for various time periods. Some researchers have already identified this gloomy of flexibility and freedom in reporting and classification allowed by IFRS.


    Goodwill is probably the most commonly discussed unidentifiable asset. It has been recently mentioned that goodwill is one of two intangible items that were routinely reported in public places company financial statements (another is R&D). Goodwill appears over a company's books in the event it acquires another company, and the buyer naturally has to pay more for this compared to fair value of the web identifiable assets, both tangible and intangible.

    Numerous goodwill definitions are located in various documents and standards controlling the business accounting and estimate activities (IFRS, USA GAAP). Note that given definitions are paraphrased and not exact citations from sources.

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

By IASB (International Accounting Standards Board)

Goodwill arising from merger with the companies is the sum paid by the buyer within the purchase marketable value in expectation of future economic gains. The near future economic gains might occur in the synergy effect with the acquired identified non-material assets or assets which separately are not subject to acknowledgement inside the financial reporting but which can be a part of the purchase cost. Goodwill is the more than a purchase cost on the acquired share with fair price of the identified acquired assets, which are inseparable from the target company. Actual goodwill expense is the purchase cost minus the difference of fair price of identified assets, obligations and contingent obligations.

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

By USGAAP (US Generally Accepted Accounting Principles)    

Goodwill is the cost overabundance an acquired company within the expense 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 eu Band of Valuers’ Associations)

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

As possible seen in the given definitions, in several business accounting standards, you will find practically no discrepancies regarding the essence of goodwill. Thus, more often than not, goodwill value appears if company acquisition takes place, and also the distinction between the acquisition cost as well as the fair worth of identified assets is calculated.

In other words, the traditional comprehension of goodwill origins lies in these: Goodwill arises when a clients are acquired at a price exceeding its assets’ marketable values sum. Consequently, this excess may be explained by doing this: The company market price overall includes the cost of all assets, including the ones not reflected in the balance sheet. As it is known that within the balance sheet un-identifiable assets cannot (must not) be reflected, their expense is embodied in goodwill. The rest of the approach to goodwill calculation is dependant on it.

However goodwill happens not merely once the company possesses unrecorded intangible assets. We are able to give types of some factors irrelevant to the price of intangible company assets that influence goodwill value and are susceptible to be reflected in the company-buyer balance sheet:

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

•    Sales cost of an acquired enterprise based on a seller's capability to prove the high price or about the buyer's capability to beat along the price, on commission intermediaries, etc.;

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

•    Award paid at acquisition (more than purchasing price over market capitalization at this time of purchasing);

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

•    Goodwill allowances methods (in numerous national accounting standards, allowance throughout the permitted by accounting standards period; immediate allowance of this value at the expense of equity capital or lack of the allowance in general is accepted);

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

•    Identified assets depreciation methods;

The marketable value of both assets and the business overall is determined for cases of probable most reliable utilization. It is obvious how the most effective methods of use for separate assets and business as a whole cannot coincide: The asset markets develop intoxicated by different factors than the business markets. Put simply, a business price is based on money flows from sale of the services or goods created by the business enterprise and also the cost of separate assets required for production - by money flows from sale of these assets.

Thus, efficient technique business overall and also separate assets are non-comparable, meaning the company in general and separate assets marketable values will also be non-comparable. Completeness of company asset representation inside the balance sheet is not important: If the expense of all assets is created the check sheet, even those not recognized by standards of the business accounting, the sum assets marketable values basically will not coincide with business cost as a whole. If cost during these assets’ used in e-commerce is more than cost at average market alternative way of use, the goodwill is going to be positive, if not - negative. Still, negative goodwill will not testify to inefficient activities inside the business when we understand a powerful business because the the one that has assets return at an average branch level. Incomparability valuations of business overall and also separate assets is due to the fact the business valuation overall is produced with a look at business continuation, and evaluation of each asset is created proceeding in the assumption of their independent sale (separately from your property complex within the business).

To confirm the above we will present these provisions. Goodwill evaluation is definitely coupled to the value assessment of a business as a whole, which non-material assets and intellectual property valuation specialists specify. Business cost calculation methods derive from revealing forecast data concerning company activities, on assets creation costs measurement or on comparison of activity indicators with all the comparable companies from an objective database. In the market perspective a company cost shall not depend on the price of its elements, as clients are an "ongoing concern", and its particular partition into elements shall happen only with a view of real or fictitious liquidation. Acting company is always considered as a single complex that will continue to act in the foreseeable future (IFRS, Principles).

Most material and non-material assets, in their merge running a business, lose their liquidity because of their greater specificity and sometimes complete inseparability from the business. They're assets that are created because of this business and have few other application, as owing to technological specificity and also to attachment to 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 you will find restrictions inside their use: long-term obligations, contracts, government requirements (for example, ecological regulations), or social responsibility of the business. It is also impossible to dismiss management and personnel errors. Under these conditions, market evaluations of assets take time and effort and is replaced with substitution costs. Thus, assets often lose their independent marketable value; it remains only being a historic fact of investments realization into these assets previously. This price is also required to investors being a reference for risk identification of present and future investments.

Bringing it all up, we can conclude the goodwill concept can be utilized inside a narrow and a wide sense. In the narrow sense, goodwill is understood because the accounting assets meeting the financial reporting standards criteria. Only acquired goodwill is acknowledged; internally created goodwill is forbidden to mirror in the balance sheet. The goodwill dimension is determined as a difference between buying value of the organization and the book worth of its material, non-material and money assets and obligations. In the wide sense, goodwill is a complex of intangible company assets. Hence, we could speak of the goodwill of your operating company only in the meaning different from accounting sense. The approximate feeling of your intended meaning is expressed by the terms reputation, business standing, or/and company brand. But such goodwill (in the wide sense) isn't shown inside the balance sheet. Some authors, talking about goodwill, choose to think of it as "the company price" or "business reputation", keeping the identical sense.

When investor comes to a decision to invest money (or buy some company) he normally really wants to know exactly what he is buying (or simply just speaking, what he gets in substitution for his money). If it's a service company (an IT company that are operating in the joy of software development or web applications), then likely the sum total of all of its intangible assets is significantly less space-consuming than the entire company value. This value will likely can be found in some type of goodwill, but why is these numbers? With current accounting practices, oftentimes we cope with an “expensive black box”. This is a reasons why a prospective buyer will perform a due-diligence from the company. It helps to evaluate the intangible assets of the corporation.

Human Capital

The word human capital came into the business enterprise lexicon after Gary Becker (University of Chicago economist and Nobel Prize-winner) published a novel titled “Human Capital” in 1964. Becker (in addition to Jacob Mincer, Milton Friedman, Sherwin Rosen, and Ted Schultz) came up with economic concept of human capital as dissimilar to typical financial or physical assets, due to the difference from them in the sense that human capital cannot be separated from the humans who possess it. “It is fully in line with the main city concept as traditionally defined to state that expenditures on education, training, health care, etc., are investments in capital.” Soon after Becker developed the thought of human capital, economists and consultants begun to subdivide and classify it. To put it briefly, it indicates both physical and intellectual ability.

    Many researchers suggest that hr will be the most effective assets of an organization. But exactly how can the administrative centre price of recruiting be discovered using current accounting practices?

For your intellectual organization that focuses on development of various types of intellectual capital (not speculation, but real innovative development) which has the biggest part of its value allocated to intangible assets, individuals are everything. The company can be evaluated by calculating the quantity of all the HR spending (salaries, payments to freelancing, training programs, various incentives, etc.). Someone may state that this really is exactly what is done to calculate the fee, but expense is not really a value the administrative centre represents. It is really an expense as capital value concept. It may sound nonsensical, however it basically implies that if a person incurs cost it assumes that something was bought (money was changed to something). Whether or not that something was tangible or intangible naturally, it features a value and a price. More important is whenever that something is, it will pay to other people (the amount of people would love to get it). If there have been most of them, what would be their price, and how would this price be determined? Also, in the event it something was bought on the market, for many buyers the fee will be similar (this product or service has a fixed price). As a result it can be said that it is a sort of valuation using the market approach. However, the worth really depends upon the type of asset you hold and also the supply/demand curves because of it. If the new owner obtained it for a lower price than others, it indicates he's got good contacts (identifies relational capital in IC concept).

In terms of HR, if you have a job where you need professionals to accomplish do the job, you don’t simply spend money, but you acquire some quality work and even whether it doesn’t use a material form still it has value. For example, it may be consultation using a lawyer in Switzerland; project duration is 4-6 hours as well as an hourly rate could be between 300 and 1000 Swiss francs. Based on your contacts (RC) the price of project (outsource) will be between 1500 and 5000Chf. But after the project’s completion and payment, you start to possess something - it could be solutions to questions asked during consultation hours as well as other bit of knowledge from the lawyer consulting with you. Put simply, you then become the master of some bit of intellectual capital. If it is not very specific in your needs, probably there are many individuals that are prepared to pay a similar price to the type of information. Thus it is really an intangible asset, which may be valued using no less than the price and market approaches (more about evaluation will be discussed in later parts of this thesis).

 However, the salary is a really average reflection of the real creativity of a given person and price generated (profit associated) as a result. Also, you will find industry leaders and lagers - industry leaders are the ones who pay above the average salary set by industry so that you can attain the best people. Industry lagers normally pay below average, but it is not that their human resources are worse when it comes to creativity, skills, knowledge or experience than others in big companies. Consider all of the possible special areas of practice that are available for the modern IT companies: There are big businesses that are best in providing his or her services and products on the market, but they can’t be very best in all possible market niches. It makes possible the situation each time a little band of experts particularly field are many easier in the certain task (Activity) than a research center of some big company.

Also, worth mentioning would it be may seem like in today’s economy companies will no longer compete when it comes to best technology; it's the competition of patented technologies and various licenses. Research and development, including creativity, are tied by various legal barriers (patent sharks), to ensure that many professionals usually are not permitted to enter a specific field of technology.

2.3 Intellectual Capital

Modern lines of world economy development, strengthening of a role of intellectual and data helpful information on output of competitive products have triggered occurrence of just one of the very scaled financial problems.

Its essence can be described as follows: as types of something creation have changed, and knowledge has considered one of major factors of latest cost creation, it is necessary to reconstruct in appropriate way this content with the public reporting with the companies before their proprietors along with other investors. The reporting shall retain the information on cost major factors: company strategy, future monetary flows, non-financial activities, intangible company assets, including business standing.

Needless to say, the public reporting just isn't limited by only the fiscal reports. Because it was discussed earlier, IFRS recommends publication of information about intangible assets not-recognizable by CAP. As an example, there are many notes and discussions reported in annual reports (like K-10). However, search engine optimization 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 issue of evaluation of intangible factors has arisen in information-saturated companies where the quantity of material assets is insignificant, and the mental potential is high. Investors weren't inclined to invest to such companies, as well as in front with the managers there was clearly an activity of calculation of their intangible assets value and of informing investors to produce more adequate picture concerning the company activities of the and its particular prospects.

Modern understanding of intangible factors of latest cost production are embodied in concept "intellectual capital". The managers managing companies cost are almost single in the opinion concerning the name of the 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 suggest that for intellectual capital accounting it really is required new financial and administrative concept . Financiers discuss whether it's required to change traditional accounting terms (non-material assets, business standing), as well as about potential for cost evaluation of your new indicator, its accounting and showing within the reporting.

Three Major Components of Intellectual Capital

Various models and theories of intellectual capital represent generalization of value factors management practice in the specific companies, and today it's admitted by both researchers and experts. For this reason each model is unique and reflects specificity from the company. At the same time, accumulating of experience and knowledge of your intellectual capital by the beginning of current decade has allowed to find out general approaches, to build up about single structure of companies’ knowledge assets. Almost all this challenge researchers and managers allocate three aspects of intellectual capital:

1) human capital (HC);

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

3) customer capital (CC).

In certain models , the client capital is called the administrative centre of relations, or connections (relational capital), but it's understood also as loyalty and client satisfaction.

Generally speaking, it is possible to estimate a persons capital volume with the variety of intellectual workers and the quantity of information, knowledge and skills that they can own, from the amount of leaders, idea men, "revolutionaries". Value of personnel knowledge and abilities is seen as a specialists' capacity to solve difficult, non-standard, unexpected problems; employees' independence and trainability; the capability of managers to deal with transformations; creative activity; tendency to partner interaction; etc. We can estimate growth and development of a persons capital through proportion from the forms of activity "inspiring" on search of recent solutions forcing company's employees to learn new things. Eventually, level 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, a persons Resources is going to be discussed more into details.)

Organization structural capital is reflected from the number and quality of partners; amount of business partner retention for the enterprise; integration of the value chain as well as an company's role within it; option of a flexible type of and effective business network (on the global scale, too); information system quality; early detection system quality; involving of pressure groups into making decisions; procedures of transformation of implicit knowledge into explicit one; partnership level within the organization; quality of network interaction; completeness and excellence of databases; trademarks and patents; codified familiarity with technical processes (the quality of completeness and clearness of documentation reflecting consumer value creation inside the organization); collection of prototypes for economic problem solution; ip; backlogs on new products; 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; quantity of regular company's customers, their be part of 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 level of the concluded contracts; how much customer retention for the organization.

So, it's possible to tell that in the provided models there is more common than distinctions. The overwhelming most authors recognize existence of intellectual capital independent elements - human, organizational, client, but you are called. At the same time, presently there are lots of terms anyhow connected with intangible assets: brand, business standing (goodwill), ip, non-material assets, expenses on researches and developments. What exactly is relation of these terms with notion of an intellectual capital? It isn't quite obvious why the typical name "intellectual capital" can be used to combine such essentially various and frequently not having the direct relation to the intelligence phenomenon as employees' value system, enterprise image, brands, customers' loyalty. Within our opinion, the uniting basis here can be the notion of intellectual capital circulation: employees' knowledge and capabilities are embodied in organizational processes and relationship with business partners that, subsequently, produce the base for steady relations with customers; cooperation with customers and partners contributes to experience accumulating, growth and development of enterprise employees' knowledge and capabilities.

Ordering and systematization of existing terminology becomes pressing question which, specifically, the method of intangible assets reporting, accepted and recognized by the accounting organizations depends.


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