Triangulation: Using Accounting Data to Measure Intangibles

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Rutgers University 1st Symposium on Intangibles included this presentation by Mary Adams, author of Intangible Capital. View a video of the full talk at http://raw.rutgers.edu/1stIntangibles. More information about Mary's firm I-Capital Advisors at http://i-capitaladvisors.com.

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  • Capacity is about the future. At the most basic level, it’s about viability as a going concern. It’s also about capacity to grow—which must include capacity to innovate Incidentally, I haven’t mentioned value much today. The principal way of valuing intangibles is a discounted cash flow based on the expected performance of the asset. But DCF is dependent on a lot of assumptions. This kind of triangulation will inform the development of the DCF Right now I am working with some partners in the IC and investment communities to create a product that will operationalize this triangulation in M&A situations
  • Contrary to fair value movement Would have huge tax implications
  • In business we assess things all the time We do it intuitively, we do it through meetings, we do it through surveys It’s actually the fastest, highest value information Most of the time when you hire a consulting firm, they are doing an assessment of some sort—they may or may not be sharing their methodology
  • Explain chart This has been used 450+ times Results discussed in a recent IAM magazine article available on my website We found that overall, co relatively better at HC and RC than SC—and IP weakest of them all People use this kind of information in strategy, strategic alignment, M&A, Global consulting firm to improve alignment VC’s for funding PE for post-merger problems Lions share smart companies trying to be smarter, find the seeds of next innovation
  • Again, this is not unfamiliar to businesspeople—use indicators all the time In a car factory, speed of the line, number of defects In a service business like Fedex, on time delivery, number of lost packages, % of plane capacity IBM is in the process of creating the kind of knowledge base that they developed about physical production processes in the 1950’s and 60’s—now they are are developing one about knowledge processes—how people communicate: emails vs. phone vs. IM vs. social media. Number of threads in conversations  this is bottom up for learning Other perspective is BSC, dashboards, and external reporting—using just a few KPI’s Valuable and necessary but also very dangerous
  • Triangulation: Using Accounting Data to Measure Intangibles

    1. 1. Triangulating Intangibles Mary Adams I-Capital Advisors A strategy for accounting in the knowledge era….
    2. 2. Corporate value is increasingly intangible Research: Ned Davis 2009: 81% intangible Components of - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Market Premium Intangible Book Value Tangible Book Value Components of S&P 500® Market Capitalization - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 S&P 500 Market Cap ($ billions) Market Premium Intangible Book Value Tangible Book Value
    3. 3. Mergers are 70% intangible E&Y: Acquisition Accounting – What’s Next for You? Global sample of 700+ mergers in 2007
    4. 4. The gap is not “goodwill” <ul><li>It’s not the result of some abstract market “feeling” </li></ul><ul><li>It’s the result of 30+ years of investment in the knowledge infrastructure of American corporations (people, processes, info tech, networks) </li></ul><ul><li>Annual investment in knowledge intangibles now exceeds tangible investment…. </li></ul>
    5. 5. It’s about investment in knowledge Business Week, October 29, 2009 (using unpublished data from Corrado, Hulten and Sichel) <ul><ul><li>(includes software, R&D, advertising, and training) </li></ul></ul>U.S. corporate investments - 2007
    6. 6. Knowledge Assets
    7. 7. Filling in the intangible info gap The New Factory The New Management The New Accounting
    8. 8. Narrative is not enough <ul><li>PwC provided two different versions of an annual report </li></ul><ul><li>to groups of analysts: </li></ul><ul><ul><li>Financial statements, narrative, a few key metrics and extensive quantified nonfinancial data [full Coloplast annual report] </li></ul></ul><ul><ul><li>Stripped out quantified nonfinancial data [resulting report still similar to/better than market norm] </li></ul></ul><ul><li>Very different results: </li></ul><ul><ul><li>60% of analysts recommended “buy” </li></ul></ul><ul><ul><li> earnings estimate lower but more consistent </li></ul></ul><ul><ul><li>80% recommended “sell” </li></ul></ul><ul><ul><li> earnings estimate higher </li></ul></ul>Source: http://corporatereporting.com/benefits-reporting.html
    9. 9. How to fill the gap? <ul><li>Inventory </li></ul><ul><li>Measurement - triangulation </li></ul><ul><ul><li>Financials </li></ul></ul><ul><ul><ul><li> investment is easiest but ignored </li></ul></ul></ul><ul><ul><li>Quantitative </li></ul></ul><ul><ul><ul><li>KPI’s popular but dangerous </li></ul></ul></ul><ul><ul><li>Qualitative </li></ul></ul><ul><ul><ul><li>assessments create quantitative data about hard-to-measure but critical data </li></ul></ul></ul><ul><li>Narrative/XBRL </li></ul><ul><ul><ul><li> give them something to talk about </li></ul></ul></ul>
    10. 10. Triangulating intangibles <ul><li>Capacity </li></ul><ul><li>Earnings </li></ul><ul><li>Valuation </li></ul><ul><li>Innovation </li></ul><ul><li>Reputation </li></ul>
    11. 11. I-Capex* ($1.6 trillion/year) <ul><li>Most intangible capital expenditures are expensed under today’s acctg standards </li></ul><ul><li>Cost is actually the most concrete piece of data available about intangibles </li></ul><ul><li>Should be tracked in a management report </li></ul><ul><li>Internally, will help with better decisions </li></ul><ul><li>Externally, will help tell corporate story </li></ul><ul><li>* the new capital expenditure </li></ul>
    12. 12. IC assessment* <ul><li>Systematic analysis of qualitative issues </li></ul><ul><li>Turns qualitative into quantitative data </li></ul><ul><li>Range from self-assessment to broad review by stakeholders (both internal and external) </li></ul><ul><li>Focus on adequacy, performance, risk, outlook </li></ul><ul><li>Can be built for strategy, innovation, valuation, reputation perspectives </li></ul><ul><li>Ideal is a 360-degree review of the entire IC/ knowledge factory portfolio </li></ul><ul><li>* the new balance sheet </li></ul>
    13. 13. Sample assessment output IC Rating™ consolidated report Performance Outlook Risk
    14. 14. Performance measurement* <ul><li>Uses non-financial quantitative indicators </li></ul><ul><li>Examples: headcount, customer demographics, IP mapping, process metrics </li></ul><ul><li>Bottom up for learning </li></ul><ul><li>Top down for management and reporting—key performance indicators (KPI’s) </li></ul><ul><li>* the new income statement </li></ul>
    15. 15. Simple triangulation example <ul><li>Pre- and post- implementation of a new knowledge sharing platform </li></ul><ul><li>Investment in new knowledge sharing platform (human, structural, relationship) </li></ul><ul><li>Qualitative measures (employee communication and collaboration) </li></ul><ul><li>Quantitative measures (number of steps to solve a problem, time to resolution) </li></ul>
    16. 16. Triangulation at corp level <ul><li>FIRST - inventory primary value-creation processes (SC), competencies (HC) and relationships (RC) </li></ul><ul><li> Track annual investments </li></ul><ul><li> Assess performance, risk, outlook </li></ul><ul><li> Track key quantitative measures </li></ul>
    17. 17. For now… <ul><li>We need to work within existing systems </li></ul><ul><li>The place to start is management accounting for bottom-up learning </li></ul><ul><li>Changes to statutory reporting cannot be institutionalized until there is a clear emerging practice </li></ul><ul><li>For now, the best top-down influence is education…and the best place to start is to teach accountants triangulation </li></ul>
    18. 18. Triangulation …to help stakeholders to understand the performance and capacity of the knowledge-era business
    19. 19. Resources <ul><li>I-Capex Is the New Capital Expenditure </li></ul><ul><li>IMA: Statement on Accounting for Intangibles </li></ul><ul><li>Book: www.intangiblecapitalbook.com </li></ul><ul><li>Community: www.icknowledgecenter.com </li></ul><ul><li>Blog: www.smartercompaniesblog.com </li></ul><ul><li>Mary Adams, 781-729-9650 </li></ul><ul><li>[email_address] </li></ul><ul><li>Twitter: maryadamsica </li></ul>

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