Course Assignment, HBR article Analysis

1. The Real value of Intangibles

2. Intangible Assets Value of a company = Intangible Assets + Tangible Assets Intellectual Capital Human Capital Customer Capital Organizational Capital Distributor Capital Supplier Capital Intellectual Assets Know-how Contracts Permits and Licenses Non Compete Agreements Intellectual Property Patents Trademarks/Trade Names Copyrights Trade Secrets

3. Value Intangibles

4. THE IMPORTANCE OF VALUATION A major contributor to corporate worth Value of alliances, network, human capital and leadership greater than $1 trillion for USA(2001) Exclusion causes underestimation of the corporate worth Impact on investor decision making Necessary for creation of open, fair and efficient markets

5. Intangible Asset – Customer Relationships In March 2005, bought for £1.113bn. £260m was assigned to the brands RAC and BSM and a 'market' value of £132m was put on contractual customer relationships.

6. I wish I had worked out the value of intangibles as well…

7. VALUATION & MISPRICING Market Overvalues – Wastage of Capital Market Undervalues – This Burdens firms with an excessively high cost of capital

8. Undervalued or Overvalued By Calculating a company’s “comprehensive value”, which takes into account its intangible assets as well as its physical and financial assets, you can assess whether the enterprise is overvalued or undervalued by investors. Source: Harvard Business Review

9. Delayed Market Reaction to an R&D Investment Source: Harvard Business Review

10. Misallocation of resources – a consequence of Undervaluation Shift from “R” to “D”

11. …my teacher warned me, never to under-estimate the REAL value of intangibles…

12. Impact of Correct Valuation “The Soft Assets – a hard Competitive Advantage”

13. EXPLOITABLE HUMAN CAPITAL Source: Harvard Business Review

14. Identifying the Capabilities Determine which part of the business to audit. Create the content of the audit Gather data from multiple groups on current and desired a) 90-degree assessment b) 360-degree assessment c) 720-degree assessment Synthesize the data to identify the most critical capabilities Put together an action plan

15. Issues with Reporting Intangibles Companies are reluctant to disclose competitive disadvantage Issues with identification of the valuableintangibles Shareholder liability issues Managers may misuse information Forgoing innovation and risk reduction by focusing more on the productivity of the intangibles

16. Issues with Reporting Intangibles A lot of value creation is not translated into financial terms Inability to identify which asset to value - what is the source of value creation? Inconsistency in valuation by different organizations Fear of giving away proprietary information

17. Traditional Recording Methods Absence of effective accounting of intangibles Conventionally, intangibles reported on balance sheet only in course ofan acquisition as ‘Goodwill’ Until 2001, GAAP required firm toamortize goodwill as expense FASB stopped requiring companies to amortize Goodwill as expense In 2003, SEC established new guidance for MB&A statements which address the disclosure of non financial performance measures FASB and AICPA developed lists for intangibles but lists barely resembles

18. Issues with Traditional & Existing Reporting and Valuation Methods Based on traditional methods, goodwill appears only upon acquisition. No clear definition – When is technology an expense and when a capability? Irrationality of amortization – Some assets have an indefinite useful life. Exclusion of intangible assets developed internally Inconsistency in reporting Standards

19. Effective Valuation tool Transparent process and assumptions Clear definition of intangible asset Quantifying the value of the intangible asset

20. Recent Developments Addressing intangibles in internal strategy and communication with shareholders Reporting of intangible ratings in annual reports Distribution of white papers & measurement tools by ministries in Japan Treatment of R&D as an investment and not an expense by BEA R&D satellite accounts by BEA to supplement GDP accounts Danish IC Statements

21. Appropriate Measures Government Initiatives in collaboration with stakeholders and interested parties - executives, banks and statisticians The role of macro-economists Accounting bodies should make it mandatory for companies to disclose meaningful information regarding intangibles assets. Companies should voluntarily go for disclosure.

22. NEW TRENDS…. Using Intangible assets as a collateral !!!! Burn Stewart Distillers refinanced with KBC Business Capital $31million Package was linked to the values of brands, accounts receivables etc.

23. Understanding the Value of Intangible Assets

24. Any Questions??? Thank you!