Towards a new model for evaluation of intangibles


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Thesis Corporate Excellence

The premise that intangible assets have to be taken into account for any strategic decision and the numerous attempts to evaluate intangibles or come up with an appropriate measurement tool led to the development of this thesis which aims to become a point of reference for further research on evaluation of intangible assets.

This manual enables companies to start their work on intangibles and choose the most appropriate method for their evaluation. It pays particular attention to the analysis and comparison of methodological principles of evaluation of intangible assets and tries to overcome the barriers caused by lack of regulations and consensus in such areas as the definition, the classification and even the role of intangible assets.

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Towards a new model for evaluation of intangibles

  1. 1. ThesisStrategy DocumentsT01 / 2011Cristina Álvarez VillanuevaMetricsTowards a new model forevaluation of intangibles 1 Intangible assets are among the key factors of success for any company, both at present and in future. Introduction O1: despite the existence of many evaluation This thesis is based on the assumption that methods, none of them is all-inclusive, or valid on intangible assets have to be taken into account in its own without adjustments in any environment. all instances of the decision-making process and With this hypothesis in mind, we attempt to prove draws on numerous efforts to evaluate them and that there is no adequate evaluation method that find an accurate measurement tool2. The thesis aims could enable successful management of intangible to list available references, which may be used to assets and that the term all-inclusive does not find all available information about evaluation of correspond to reality. intangible assets3. Finally, it is a reference material, which would enable companies to increase their H2: Despite a notable evolution in recognition of awareness of intangible assets and to choose the intangible assets, they are not effectively reported most appropriate method for their evaluation. for proper management and incorporation in financial statements, thus impeding standardization This is an in-depth research, which analyses and of their evaluation compares major methodologies of evaluating intangible assets and attempts to overcome the O2: communication steps that have to be made in barriers resulting from lack of standardization and order to improve the recognition and management consensus in such areas as definition, classification of intangible assets. and even importance. O3: find out whether companies have good grasp of Starting hypothesis 4 different methods for evaluation of intangibles. H1: There is no universal method of valuing intangible assets, which would hold for any This hypothesis aims to find out whether there is company and any circumstances. a good communication system, which encouragesDocument prepared by Corporate Excellence - Centre for Reputation Leadership, citing the doctoral thesis “Towards a new model for evaluation of intangibles” by CristinaÁlvarez Villanueva, Universitat Jaume I, Castellón.1. The justification of this study is based on the lack of standards in this field – intangibles have been overlooked for a long time in Economics and Accounting -2. The work titled The Systems of Evaluating the Intangibles and Their Relationship with Strategic Decision-Making in the Company. Current Situation (ÁlvarezVillanueva, 2007) lays the foundation for this research. The work is an introduction to the measurement of intangibles with an emphsis on strategic decisión-making in the business environment.3. Although there are many texts discussing intangible assets, there is still no manual which would cover the whole scope of intangible assets and relate them to the models based on their characteristics.4. The methodology used in this doctoral thesis is linear, developed in three main stages: 1) theoretical research (Contextual Framework and Theoretical Framework), which analyses features of different intangible assets; 2) Field work (Empirical Framework), used to check the starting hypothesis and questions that arose in the course of the research; 3) Findings and suggestions for further research (Conclusive Framework).
  2. 2. Towards a new evaluation of intangible assets and their incorporation due to the growth and industrialisation of the servicesmodel for evaluation in the overall economic system of the organization, sector, the fact that production is no longer purelyof intangibles or whether this topic is explored only by large material, greater role of information and intangibles in companies and only for short-term purposes. the corporate competitive ability and greater concern for creating value for the stakeholders. H3: On many occasions evaluation of intangible assets is not performed because companies do Increasingly, newly emerging companies from the not have a good grasp of all different evaluation very start focus on services and the fundamental methods, and often it is not possible to involve importance of information. If in the past intangibles an expert who would be able to provide represented around 50% of the market value, at the professional advice. moment this figure increased to 80%6. This is due to the new model of competition. However, there are O4: investigate if there is a knowledge gap in the still many organisations that do not draw up reports area of intangible assets and if a company needs to that would enable to evaluate their intangibles with bring on board a person or a team who could be the help of indicators. The reasons for this may by responsible for intangible assets. summed up in the following way: O5: find out if due to this information gap, evaluation 1. Belief that only financial statements reflect the of intangibles is seen more as something strange true value of the company. than as something necessary for the company. 2. Fear that the indicators may reveal confidential information about internal infrastructure, clients O6: find out whether the communication effort or employees of the company. performed by the company in the area of intangible 3. Lack of knowledge needed to analyse the assets is sufficient. evaluation models. 4. Lack of experience needed to choose the This hypothesis aims to investigate whether an right model. information gap may be the reason why evaluation of intangible assets is not fully effective and, Towards the definition of IA consequently, the progress in management takes At present no universal definition of intangible longer than it should. assets is adopted in the financial literature. However, the analysis of different definitions may lead one to identify their characteristics. Presented below are CONTEXTUAL FRAMEWORK the features associated with an intangible matter: Evolution of intangible assets 1. Be identifiable, i.e. can be differentiated from Introduction of intangible assets into the balance other assets. sheet took place only in the 80s. Adam Smith, 2. Potential to generate profit, for without this an known as the father of modern economics, believed object cannot be considered an asset. that the source of wealth for any company resided 3. Control, a company should be able to control its exclusively in production of material values. In intangible assets. Thanks to this control, assets his opinion, productive work created tangible can be accounted for at a later stage. products, which had value on the market, whereas unproductive work led to creation of intangibles. The Economic and Business Dictionary edited by Everything changed in 1912, when Schumpeter in Arthur Andersen (1997:340), suggests the following his Theory of Economic Development suggested the definition idea of intangible value in the economic system as well as innovation and the view of intangible assets «Anything that does not have a physical presence as fundamental elements for the development and and is not intended for sale. For example, intangible the basis of a company. assets are industrial designs, goodwill, etc.» From this moment on, many researchers have However, the above definition is not accepted demonstrated the importance of intangible assets by empirical research. Based on her findings, the and their contribution to creating value in a author recommends the following definition7 company by means of impacting both the internal and the external structure.5 «All assets that are not physical or monetary, but can be identified and controlled, can generate Drawing on the findings of Bounfour (1998; 2003), one economic benefits in future and contribute to can highlight the increasing importance of intangibles creation of value for a company.»5. See table Evolution of Theoretical Knowledge about the Intangibles in the appendix. Source (Bounfour, 2005:6-7).6. Measuring Intangible Equity (2002).7. Although we use the terms Intellectual Capital and Intangible interchangeably to refer to the same concept, in reality Intellectual Capital (hereafter referred to as IC) may be considered as a type of intangible assets. Thesis 2
  3. 3. Towards a new If we break this definition down, the following The Spanish accounting tradition classifiesmodel for evaluation components may be identified: intangible assets as “inmovilizado inmaterial”.of intangibles However, the name “activo intangible” as used by 1. Intangible character is established: non-physical IASB and FASB for many years, is still missing from 2. Compliance with the definition of an asset: the Spanish accounting framework.9 identifiable and controllable. 3. Accounting conditions are observed: non- In January 2005, the EU adopted a regulation on monetary accounting norms with an objective to harmonise 4. Two fundamental characteristics are financial statements of companies, encouraging demonstrated: ability to generate future transparency and accountability. All companies benefits and create value. have to present their statements in accordance 5. The term “capacity” is avoided in order to not with the IFRS (International Financial Reporting to focus exclusively on the human aspect and Standards). This may be a good occasion for “intellectual capital” due to its different nature. introducing the definition of intangible assets into the statements. However, even according to the Classification of Intangible Assets new rules, intangible assets will be recognised only In order to develop a good evaluation methodology, partially. Therefore, as long as intangible assets one has to be familiar with the elements that are not recognised as such under the existing are going to be measured, what forms them and accounting standards, their evaluation will be a how they can be classified8. The great variety of hard task. existing classifications of intangible assets point to the lack of consensus, which makes evaluation The accounting treatment analysed in this study of these assets very difficult. The consequences is structured in accordance with the classification are clear: lack of standardization, and different suggested by Ramírez y Tejada10 (2009:175), later indicators/evaluation results depending on the developed by Nevado y López (2002:18)11. chosen method. A) Identifiable intangible assets Accounting Treatment of Identifiable intangible assets are those acquired by Intangible Assets third parties, exchanged, those purchased or received According to the general accounting rule, an asset as part of business. They may also be generated is any resource controlled by the entity as a result internally, like R&D expense or software. of past events and from which future economic benefits are expected to flow to the entity. In order Assets presented in the first group may generate to comply with the condition of “intangibility”, the future economic benefits, which are reflected in asset has to be identifiable, controllable and able to their cost. Assets presented in the second group, on generate future economic benefits. the contrary, do not have a specific acquisition cost Intangible Assets Identifiable Non-identifiable Acquired from third parties Generated Acquired by another Generated internally internally company - Individually Acquired or external Internal goodwill - As part of the business goodwill (Intellectual Capital) - Other forms - R&D expenses - Clientele - Industrial Property - Localisation - Intellectual Property - Organisational structure - Administrative concessions - Prestige - Right of disposal - Know-how - IT applications - Human capital - Franchise - Commercial channels Visible intangible assets Invisible intangible assets8. Chapter 5 of the Thesis (Towards Evaluation of Intangibles) presents an overview of the most relevant classifications of intangible assets.9. There is only one standard that contains conceptual definition of intangible assets, IAS 38: an “intangible asset” is an identifiable non-monetary asset without physical substance (IAS 38, Definitions).10. RAMÍREZ CÓRCOLES, Yolanda Y Ángel TEJADA PONCE (2009): “Activos intangibles identificables. ¿Se ha logrado alcanzar una convergencia internacional en su tratamiento contable?” published in the Journal Estudios Financieros.Revista de Contabilidad y Tributación, Nº 310, Centro de Estudios Financieros, Madrid, pp 169-18411. NEVADO PEÑA, Domingo y Víctor Raúl LÓPEZ RUIZ (2002): El Capital Intelectual: valoración y medición, Financial Times-Prentice Hall, Madrid Thesis 3
  4. 4. Towards a new and therefore are associated with a high degree of is based on two dimensions16. On the one hand, itmodel for evaluation uncertainty and risk. recognises the following aspects:of intangibles - organisational level This affects their measurement, because acquired - identified components assets are easily measured (have a price), while those generated internally need other evaluation On the other hand, the way that results are methods, which may be highly subjective, and are demonstrated: the object of this doctoral thesis. - monetary value - non-monetary value B) Non-identifiable intangible assets The rest of intangible assets that comply with the Depending on the place in this grid, four types of definition of an asset but cannot be separated or evaluation methods are identified: identified, have a different accounting treatment. They, in their turn, may be acquired by another 1. Direct Intellectual Capital Methods, DIC company (external goodwill) or generated 2. Market Capitalization Methods, MCM internally (internal goodwill, intellectual capital, 3. Return on Assets Methods, ROA human capital, know-how, organisational capital, 4. Scorecard, SC client capital, etc). Regardless of the methodology, it is important that the company is consistent in application of the THEORETICAL FRAMEWORK chosen method. It doesn’t make sense to change the method frequently because that would not allow the Evaluation methods company to have valid comparable results. One has Business evaluation is key for business management, to keep in mind that every method has its advantages for it demonstrates the continuity and potential of and disadvantages depending on the moment or the the company. Unfortunately, due to a high degree circumstances in which the method is applied. of subjectivity, it is difficult to find a method which would allow one to conduct this evaluation. Financial methods (DIC, MCM and ROA) are When we speak about the evaluation, we refer to based on the use of financial benchmarks that reflect the economic and financial value of an intangible the value of the intellectual capital in the company. asset. In other words, it refers to the monetary value rather than its subjective value. They are useful in the situations of merger/purchase and during market evaluations/comparisons, for they allow Measurement of intangibles is essential for their one to evaluate the intellectual capital in monetary adequate management. We are trying to evaluate terms. Moreover, by yielding a numerical results, these them in order to assess the quality of management. methods enable one to compare companies of the same industry, or assess mergers and acquisitions. The methods of evaluation of intangibles are in fact a simplification of reality and an approximation of Advantage: yield a numerical value, show how the exact value12. However, these methods enable much intangible assets are worth to identify a trend, which demonstrate whether the company’s results are better or worse than in Disadvantage: confining the value of the asset to the previous analysis. In this sense the system of a specific quantity may be superficial. At the same evaluating intangibles may be compared to the time, they do not allow one to identify and measure scales: it may never capture the exact value, but it different elements of the intellectual capital. is important to know whether the value identified is higher or lower than before13. Non-financial methods (SC) demonstrate the relationship between the company’s current activities Classification of the valuation methods and the capacity to generate benefits in future. These There are different approaches to the classification methods offer a global vision of the strategy in the of evaluation methods14. This thesis draws on the long run, minimising the uncertainty of the decision- classification suggested by Sveiby15 (2007) which making process. Therefore, they deliver information12. Many researchers agree that it will never be possible to measure the value of intangibles precisely, because in many cases the measurement has a subjective element (commitment, customer satisfaction, loyalty…)13. This perspective corresponds to the Principle of Uncertainty suggested by W. Heisenberg (1959).14. Irene Pisón Fernández speaks about simple and compound methods; Castilla bases his classification on three criteria: the purpose of evaluation, what is being evaluated, how to evaluate it; Salinas Fabbri uses two criteria: the purpose and the object of evaluation; Villacorta introduces four criteria: presentation of the results in the quantitative or qualitative form, whether directo or indirect methods are used, whether indicators are used for the calculations and the purpose of the method: the model of control and management, a theoretical model, or a model with a different purpose; Nevado y López, in their turn, simplify the classification saying that there are two major types: conceptual models and global or individual models; Viedman suggests a completely different classification known as the Theory of Intellectual Capital; Finally, Levy y Duffey base their classification on the result: quantitative methods, qualitative methods and other models (the ones that do not belong to any of the two groups).15. SVEIBY, Karl-Erik (2007): Methods for Measuring Intangible Assets, [available on Internet at]16. The choice is based on the fact that this classification draws on earlier works and has a logical and rational structure. Thesis 4
  5. 5. Towards a new not captured by financial methods: information about business environment. Instead, they may generatemodel for evaluationof intangibles benefits that may be generated in future by activities large volumes of data that are hard to analyse and that cannot be quantified. communicate without a necessary purely financial perspective. On the other hand, the indicators Advantage: they offer a snapshot of the situation used by these methods are not convenient for the in the organisation, an immediate overview of the following reasons: a) it is difficult to separate the general financial position, and where improvements indicators or to classify activities of the company in are needed. These models usually complement terms of the indicators; b) in many cases they are not financial schemes. It is a tool, which shows how connected; c) they are difficult to compare; d) they intangible resources generate financial results. are subjective; e) there are too many indicators. Disadvantage: highly individual character. They depend on the situation in which they are applied Detailed Classification of IA and therefore have to be adjusted to every company Evaluation Methods individually. Because of that, it is difficult to draw The below table is based on the Methods for Measuring comparisons. Besides, as they don’t yield an exact Intangible Assets by Sveiby and complemented by numerical result, they are less favoured in the other relevant evaluation methods.17 Evaluation Methods for Intangible Assets18 Non-Monetary Monetary Identified SC Methods - niversity of Western U -DIC Methods components - BSC Ontario Model - AFTF - Business IQ/Topplinjen - Intelect Model - itación Ponderada C - Celimi - Intellectus Model de Patentes - CIBC - MAGIC - DEC - Danish Guidelines - Meritum - FiMIAM - Holistic Accounts - NICI - HRCA - IAM - ecommendations of R - IAMS - ICBS Tjänesteförbundet - nclusive Valuation I - IC-dVAL® - Skandia Navigator Methodology - IC-IndexTM - Valoración y Gestión - Intellectual Asset Valuation - IC-RatingTM - alue Chain V - Technology Broker - Knowlege Audit Cycle ScoreboardTM - he Value Explorer T - Dow Chemical Model ToolkitTM - TVCTM - VCI Organisational MCM Methods level - Balance General Invisible - CFROI - CVA - FiMIAM - IAMVTM - Matriz de recursos - MBV - MVA - Q de Tobin ROA Methods - rchitecture for Intangibles A (Human Capital) - CFROI - CIVTM - CVA - EVATM - KCE - Modelo Matemático - MVA - NOVA - VAICTM17. The document titled Overview and Classification of Existing Evaluation Methods for Intangible Assets presented in the Appendix corresponds to Chapter 8 of the thesis and contains a guide to existing evaluation methods for intangible assets.18. Methods highlighted with gray will be discussed in more detail in the next section. They were chosen base don the following criteria: 1) the most important and recognised methods in each category according to many authors; and 2) methods that are innovative and clearly different from all others. Thesis 5
  6. 6. Towards a new Method Characteristics Pros Consmodel for evaluationof intangibles MCM - based on the market - appropriate for demonstrating - oes not provide information d capitalisation the economic value of the about the components of the Intellectual Capital. Intellectual Capital - appropriate for benchmarking - purely economic focus a and comparisons. limits the perspective ROA - based on return on - ppropriate for benchmarking a - oes not provide information d assets and comparisons about the components of the - determines the economic Intellectual Capital value of the Intellectual - purely economic focus a Capital limits the perspective - is based on traditional accounting rules, and is therefore easily understood by accountants and finance professionals DIC - stimate the e - nables evaluation of e - easurements are individual m economic value of different components of the for each company intangible assets by Intellectual Capital - ot appropriate for n identifying their - enables combining monetary benchmarking or components and non-monetary values comparisons - a clear and easily - he more components are t - ave to be used in h understandable snapshot of analysed and the more values conjunction with the the company’s intellectual are obtained, the harder it is SC methods when capital to conduct the evaluation standard indicators - measurements are based on are defined events - better representation of cause-effect relationship than in the case of financial methods SC - dentify the i - uickly deliver the results q - ensitive to the changes of s components of the which are easily understood the context Intellectual Capital by the company - he amount of resulting t and generate indices - are easily adjusted to detect information may be hard and indicators that and correct mistakes in the to analyse; it is difficult to are reflected in processes of the company obtain a single numeric graphs for scorecards - a wide scope of results that result. may help to rectify the company’s current policies 1 MCM methods: calculate the difference between the market capitalisation and the book value as the value of its intellectual capital or its intangible assets: Model: Tobin’s Q Rate (James Tobin) Formula (value of IA) Pros - offers a global view market value - not necessary to calculate the rate of return q = –––––––––––––––––––––––––– - useful for comparing enterprises assets_replacement_value Cons Characteristics - ard to obtain the necessary information h - this is not a method, it is an indicator (replacement costs) - approximate evaluation of IA - depends on the market - multiple applied to the assets’ book value - precursorof the IA evaluation methods Thesis 6
  7. 7. Towards a new Model: Market toBook value (SternStewart andLuthy)model for evaluationof intangibles Formula (value of IA) Pros - relatively stable market value - useful for comparing enterprises q = –––––––––––––––––––––––––– -may be used even if the results are negative assets_replacement_value Cons Characteristics - oes not provide the exact value of the d - multiple applied to the assets’ book value Intellectual Capital: the represented items are not - if equity is negative, the overall result is negative intangible assets - sensitive to accounting standards Modelo: FiMIAM (Irena Rodov and Philippe Leliaert) Formula (value of IA) Pros Market value = Tangible capital + Realised - simple methodology that can be applied to any a intellectual capital + erosion of the intellectual company capital - numerical result - akes into account market fluctuations (“erosion t Characteristics of the intellectual capital”) - ixed method (MCM and DIC) m - in addition, measures tangible assets - valuates the Intellectual Capital and yields a e numerical result Cons - ttempts to link the value of the Intellectual a - nite values of the chosen components of the fi Capital with the market value rather than the intellectual capital book value - ased on the book value of the company b - conducted in six steps (historical cost) - ubjectivity in the choice of the components of s the intellectual capital Model: Balance Invisible (Konrad Group and KarlSveiby) Formula (value of IA) Pros Intellectual capital = Individual capital + - development of an IA classification Structural capital - generates indicators - a clear view of intellectual assets Characteristics - his is not a method, it is a model of evaluating t Cons intangible assets - does not yield a numerical value - precursor of the evaluation methods - is not appropriate for comparing enterprises - subjectivity in the choice of IA 2 ROA Methods: offer purely financial solutions, in line with the requirements of the shareholders. Used to evaluate the results, not the organisation: Model: EVA (Stern Stewart Co.) Formula (value of IA) Pros EVA = (ROI – WACC) x Invested Capital - enables one to analyse individual business units or - enables one to see the real growth of the company EVA = BAIDT – (VC x cp) - a good starting point - asy to use and appropriate for making e Characteristics comparisons - measure of financial performance based on the a value Cons - nables to estimate the value of the company and e - does not consider future performance its profitability - may lead to inconsistencies - a very powerful and popular indicator - usinessness profitability has to be higher than b - t was a great step to recognise that resources used i the financing costs in a company have an associated cost - igher accuracy demandsa more complicated h evaluation procedure - short-term focus Thesis 7
  8. 8. Towards a new Model: CFROI (HOLT Value Associates)model for evaluationof intangibles Formula (value of IA) Pros - elates the results to the company’s ability to r Cash flow – amortisation generate cash flows CFROI = –––––––––––––––––––––––––– - adjusted to inflation Total gross assets - ay be calculated at the level of business units or m at the level of the whole business Characteristics - easures return on investment, taking into m Cons account the inflation, age and life of the assets - more complicated and less intuitive than EVA and different amortisation methods - oes not take into account the risk of the company d - may be expressed as a ratio or IRR - based on historical data - does not have a future perspective Model: MVA (Stern Stewart Co.) Formula (value of IA) Pros MVA = Market value – invested capital - llows to determine expectations of the results a delivered by the strategies that may be adopted Characteristics - incorporates expectations of the sector - enables one to detect value in a company - losely related to EVA: it is equal to the sum of c Cons actual values of all EVA expected in future - oes not take into account the opportunity cost of d the invested capital - does not take into account the dividend - cannot be applied at the level of business units - s not valid for companies not listed on the stock i exchange Model: CVA (Boston Consulting Group) Formula (value of IA) Pros CVA = Invested capital x (CFROI –K) - may be applied at the level of strategic units - useful when operations are cash-intensive Characteristics - inks short-term and long-term perspectives of l - an index based on the value the company - valuates the creation or destruction of value in a e company in a consistent and numerical way Cons - a variety of EVA - as to be measured at different times in order to h achieve comparability -a more complicated calculation than EVA Model: CIV (Evanston Business Investment Corp. Illinois Kellog School of Business, Northweste) Formula (value of IA) Pros CIV obtained in seven steps - akes it possible to compare companies of the m same sector or business units within the company Characteristics - hows whether a company can generate future s - ssumes that the value of intangibles is defined as a benefits before it is noticed by the market the company’s capacity to take over an average - global index of IA competitor which has similar tangible assets. - easy to use - a good complement to the MBV method Cons - does not break down IA into components - s not valid if the company’s ROA is below the i average for the sector Thesis 8
  9. 9. Towards a new 3 DIC Methods:Direct methods calculate the value input of intangible assets by identifying differentmodel for evaluation components. These components may be evaluated directly as individual elements or as an aggregatedof intangibles coefficient. Model: TechnologyBroker (Annie Brooking) Intellectual Capital Pros Intellectual Capital = Human capital + - he method evaluates intellectual capital of the t Infrastructure assets + Intellectual property assets + company Market assets - importance of the intellectual property - related to the objectives of the company Market value - integrated method = IC + Tangible assets Cons Characteristics - ubjectivity in transforming quantitative results s - bjective: audit the value of the intellectual O into qualitative capital - does not take into account synergies - ttaches more relevance to the IA derived from A - does not have a time horizon intellectual property - subjective classification of IA Model: DEC (Eduardo Bueno Campos) Intellectual Capital Pros Intellectual capital = Human capital + - focuses efforts on the objectives of the company Organisational capital+ Technological capital + - rofesional and personal growth of the company’s p Client capital members - reates an intelligent organisation that manages c Market value cash flows of the company = IC + Book value of the assets Cons Characteristics - does not take into account the time horizon - bjective: reinforce the business strategy with O - does not involve indicators knowledge management by locating essential - onfusion about the term “competence” and its c competences definition - approaches IA as key factors in creating value - different criteria are used by different auditors - based on the model of competences - inadequate tools may be applied - ay be tempted to allow itself follow the inertia of m the company Model: The Value Explorer (Andriessen Tiessen) Intellectual Capital Pros Intellectual Capital = Human capital + Structural - monetary valuation of IA capital+ Client capital - projection of results into the future - orks well for companies whose activity is based w Market value on patents - Cons Characteristics - takes into account only essential competences - bjective: analyse the origin of IA and calculate O - does not take into account synergies of the assets their value - uantitative value is not reliable and has q - model of essential competences redundant elements - qualitative and quantitative result - it is not an integrated method Thesis 9
  10. 10. Towards a new Model: FiMIAM (Irena Rodov Philippe Leliaert)model for evaluationof intangibles Intellectual Capital Pros Intellectual Capital = Human Capital + Structural - imple methodology that can be applied to any s Capital + Client Capital company - numerical result Market Value - akes into account market fluctuations (“erosion t = Tangible C. + Realized CI + erosion of the of the intellectual capital”) intellectual capital - evaluates tangible assets Characteristics Cons - mixed method (MCM/DCI) - finite values of chosen IC components - evaluates the IC and yields a numerical result - based on the company’s book value - ttempts to link the value of intellectual capital a - subjective choice of IC’s components with the market value rather than book value - conducted in six steps 4 SC Methods: Scorecard methods are based on indicators and indices with underlying intangible assets, with results shown as graphs. They are similar to direct methods but do not yield numerical results. Their advantage is providing an all-embracing view of the intangible assets, which may be applied at any level of the company and may be adapted to any type of the company. Model: Balanced Scorecard (BSC) (Robert Kaplan y David Norton) Intellectual Capital Pros Intellectual Capital = Perspective of the client + - analysis of horizontal strategic measures Internal perspective + Perspective of the employee - valuates the contribution of every link in the e + Financial perspective value chain and its overall performance - easy to understand, no prior experience needed Market value - attention to the needs of the stakeholders = Intellectual capital - an be applied to companies and organisational c areas Characteristics - takes into account interrelations - system of financial and non-financial A evaluation Cons - bjective: view of the company from four O - weak financial analysis perspectives, characterised by a cause and effect - indicators have to be chosen carefully relationship - subjective indicators - seful as a complement to other financial U - rigid model measurements - ranslates the company strategy into financial T and non-financial indicators - Creates strategic maps Model: Skandia Navigator (Lief Edvinsson) Intellectual Capital Pros Intellectual Capital = Human Capital + Structural - incorporates financial elements capital ( =Client C. + Organisational C. (= - improved predictive ability Innovation C.+ Process C.)) - a broader view of the company - can be adapted to any company Market value = Financial capital (past) + Intellectual Capital Cons (present and future) - xperienced personnel are needed for the e application Characteristics - t is difficult to apply the same methodology to i - based on the BSC and the Konrad model different types of capital and their relations - bjective: organise management of intangibles O - does not analyse synergies between the areas based on five perspectives (financial, client, process, research and development, HR) - human focus: central element - key factors + strategic objectives Thesis 10
  11. 11. Towards a new Model: Intangible Assets Monitor (IAM) (Karl ErikSveiby)model for evaluationof intangibles Intellectual Capital Pros Intellectual capital =Internal structure +External - iew of the company from the non-financial v structure + point of view Competencies of the personnel - ombines two aspects, which makes it easy to c understand (external and internal) Market Value - easily comparable results = Intangible Assets + Invisible Financing Cons Characteristics - only 3 indicators - bjective: to see whether intangible assets generate O - few financial indicators value and measure them from 4 perspectives - companies are not compared (growth, efficiency, innovation and stability) - does not yield numerical value of the assets - Fundamentally non-financial indicators - ubjectivity in the choice of the assets should be s - usiness value from the non-financial point of view B taken into account - istinguishes between the human and structural D capital - uggests that a balance may be achieved by S combining the intangible (invisible) and the accountable (visible) information Model: IC-dVAL® (AhmedBounfour) Intellectual Capital Pros Intellectual Capital = human capital + structural - Enables to compare companies capital - nables to make projections from the E microeconomic level (company) to the Market value macroeconomic level (nation) = Intellectual value of nations = financial wealth+ intellectual capital Cons - oes not take into account the relationship d Characteristics between the utilisation of the resources and the - bjective: view of companies from four different O result perspectives and two dimensions - ot fully adequate structure of the intellectual N - erspectives: resources, processes, output and p capital intangible assets EMPIRICAL FRAMEWORK economic benefits in future and contributes to creation of value.” The thesis then proceeds to an empirical study. The goal of the field work is to expand the scope of 2. The need for a detailed classification of study by incorporating qualitative research. Another intangible assets objective is to obtain additional relevant information Both the theoretical and the empirical dimensions about the state of intangible assets in companies in point to the need for a detailed classification order to highlight the practical aspect of the issue. of intangible assets. However, the degree of accuracy should depend on the circumstances and The fieldwork included 16 in-depth interviews with reasonable effort. experts on the issue19. 3. The role of a detailed classification in evaluation CONCLUSIVE FRAMEWORK of intangible assets A classification of intangible assets would be an Findings important tool for their evaluation. When intangible 1. The definition of Intangible Assets assets are localised and individually described, one The study found the need for a unified definition can compare them and apply appropriate evaluation of intangible assets, which still does not exist. The methods. But it does not mean that this classification author suggests the following definition: has to be complicated. One has to bear in mind that most of the methods are based on a simple formula: “Any non-physical and non-monetary asset that intellectual capital = human capital + structural may be identified and controlled, that may generate capital + relational capital.19. 72 experts have been contacted in the course of the field work, and 33 responses have been obtained. 16 of them have been positive and led to interviews. Thesis 11
  12. 12. Towards a new 4. Transactions with intangible assets and on the one hand, financial methods offer resultsmodel for evaluation commercial contracts that can be easily compared to the situation onof intangibles Companies exchange some of the intangible the market, which is important for concluding assets by entering into transactions (cooperation contracts; on the other hand, non-financial data agreements, purchases of companies or products, improves the quality of valuation and management. etc.), which imply exchange of knowledge, brand, In fact, many experts interviewed in the course image, trust, responsibility, etc. of the empirical study, point to this difference: financial methods for evaluation and non-financial 5. Intangible assets derived from synergies methods for management. The thesis comes to a convincing conclusion that synergies may generate intangible assets and that Álvarez Villanueva justifies the creation of a new existing intangible assets may be expanded by measurement unit, which, like meter is used for synergies, which may be an advantage for companies measuring distance or gram for measuring weight, creating synergies. However, it is important to be would be able to measure certain characteristics of aware of the context in which this process occurs. intangible assets. Álvarez is not a proponent of a global index, which in his opinion would lead to the 6. Intellectual capital and management of strategic loss of innumerable shades of meaning. However, he resources supports creation of a standardised index for each The thesis shows that measurement of the intellectual perspective, whose numerical value would have the capital helps to manage strategic resources. same value as the financial results (which describe other aspects of the business). 7. Accounting regulations for intangible assets Lack of accounting standards has been observed 10. Objectives of projects for evaluation of with regard to the need of communicating intangible assets intangible assets. Introduction of such standards is a Choosing the evaluation method implies not only fundamental step in their evaluation, however their knowing the characteristics of the company and development is still at an early stage. its environment, but also taking into account the purpose of evaluation: a transaction, management According to the author of the thesis, accounting or accountability. Depending on these factors, one standardisation is an important driver of evaluation may opt for one or another classification of the of intangible assets, as she states that “while there methods. Clear understanding of the evaluation’s is no concrete and clear impact on financial purpose helps to obtain valid results. statements of companies, valuation of intangible assets will remain optional”. 11. The role of intangible assets in strategic decision-making 8. Intangible assets on the balance sheet of Evaluation of intangible assets may yield information the company about generation of value, that may be very useful Although accounting standardisation of intangible for the company. It means that intangible assets play assets is an important step in their valuation, it is an important role in strategic decision-making. not fundamental. In fact, there is no consensus with respect to their incorporation into the balance sheet. The process of strategic decision-making in a At the same time, there is a tendency to report them company has developed over time from the classic in the discussion section of the financial statements. perspective, where only tangible assets were taken Álvarez points out that although such reporting is into account, to an integrated approach based on of purely informative and decorative character, lessons learnt in the past. Intangible assets affect the the mere fact of including intangible assets in the strategy, and not the other way around. financial statements would be the first step towards drawing attention to them. Álvarez Villanueva believes that evaluation of intangible assets may provide valuable information 9. Types of evaluation methods of intangible assets about the company and therefore should be included The frameworks of this research point clearly to in any strategic planning, both short-term and/or the fact that there is no consensus on the types of long-term. evaluation methods that can be applied to intangible assets. Each of the methods offers certain advantages 12. A unified method and has drawbacks that have to be taken into account There is no unified method for evaluation of depending on the moment or the situation. But it is intangible assets, which would enable integrated important to understand that the chosen method has approach regardless of the circumstances and the to be applied consistently over a period of time in environment of the company. In fact, the thesis order to have comparable and conclusive results. suggests that one should discard this utopic vision and instead unify the criteria to develop methods The author believes that it is correct to combine that can be applied to different categories depending financial and non-financial methods. In this way, on the focus. Thesis 12