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Dr. Kretov Kirill - Basic classification of corporate assets.

Categories: Blog December 28, 2012 @ 7:08 AM 0 Comments      

Review of Various types of Intangibles.

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

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

1.0 Introduction

Amid the many complicated and inventive models encountered over the last decade, it is now evident for many firms that the valuation of Intangible Assets and Intellectual Capital has shown to be 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 concept of intellectual capital was already researched by many people elite scholars, who have created many interesting theories. However, nearly all of their work is purely theoretical, and their concepts and theories aren't widely accepted. Hardly any of them happen to be actually applied. For instance, many papers are already written about intellectual capital and its importance to some company’s performance; quantitative analyses and reports reveal that intellectual capital is definitely an emerging competitive advantage that leads to long-term profits and greatly increases the price of the business. However, current accounting practices recognize only a very limited variety of intangible asset types (with regards to intellectual capital). From the accounting perspective, the choice is extremely limited: you can find R&D and Goodwill (the 2nd being inapplicable to many companies). Only when the company knows a good some particular type of asset may it opt to estimate its value using a given valuation method (if one is applicable). However , the last value is not an guarantee of the real price of a good thing. Another practitioner may well not agree with its valuation principle applied and could propose another which he finds appropriate, or someone might apply a number of theories to the Intellectual Capital of a company are available track of a summary of indicators that may 't be accepted or understood by other people who prefer other concepts. Thus, it seems that the root of the issue is not the possible lack of evaluation methods however the lack of widely accepted standards of these methods and for the reporting from the results.

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

Moreover, there are issues involving patents, trademarks, copyrights, and other forms of “know-how”: exclusive rights, the most profitable kind, are given and then patent holders. An accountant los angeles recognizes just those assets recognized by current accounting practices (as regulated through the IFRS). Since reporting unrecognized assets is only optional, an accountant los angeles could decide not to invest some time reporting them, particularly when his motivation just isn't high, and the man desires to spare himself the work. Knowledge management scholars realize that it's possible to identify where knowledge originates from and classify it using various theories and taxonomies. This could be helpful for companies that apply KM principles to create value through the continuous identification with the bits of intellectual capital they generate. This has described only a few of the perspectives from which the joy of intangibles can be viewed as.

1.1 Historical Overview

Intangible assets usually are not a contemporary invention or a phenomenon with the Modern day. Indeed, despite popular misconceptions, this sort of asset 's been around for a long period. Throughout human history, knowledge and information 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 just for the hunter-gatherer but also for his community. Similarly, the inventors from the alphabet, calendar, and mathematics possessed equally important intangible knowledge assets.

In contemporary society, knowledge is becoming far more complicated, specialized, and technical. Mistakes made in the process of a nuclear plant, toyota tows, or biological weapons research facility often means the deaths of millions. Much like in the prehistoric era, knowledge, and expertise have remained assets that may mean the main difference between the life and death from the tribe.

Now, especially in the planet, organizations are increasingly reinventing themselves as service-oriented operations. Manufacturing tangible commodities that buyers can touch, smell, or taste is rapidly learning to be a subject put to rest. These transformations are becoming increasingly frequent across a large spectrum of organizations. Many companies rely almost positioned on intangible assets and consider them among their core competitive advantages. This is accurately described inside the Harvard Business Review:

Employees skills, IT systems, and organizational cultures are worth a lot more to a lot of companies than their tangible assets. Unlike financial and physical ones, intangible assets are difficult for competitors to mimic, making them a powerful source of sustainable competitive advantage.( Robert S. Kaplan and David P. Norton, “Measuring the Strategic Readiness of Intangible Assets”).

It really is popular that many of the business resources in western world are intangible: in 1982, the fabric assets of yankee companies constituted 62% of these marketable value (Stewart T.A. Intellectual Capital. The newest Insightful 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 at only between 10% and 15%. By the end of 1999, value of the house reflected inside the balance sheet constituted only 6.2% of Microsoft’s market price, 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 that 500 largest American companies was 38%, by 1998 it absolutely was 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 in the American industry were acquisitions of fabric assets; by 1992, that share dropped to 38% and only agreed to be 16% in 1999 . Since 1991, US enterprises have been spending more income on information processing equipment compared to other equipment; information is replacing material merchandise stock, information is pushing out tangible fixed assets.

Prominent economist Leonard Nakamura estimates that the Usa invests no less than $1 trillion annually in intangibles (Leonard Nakamura, “A Trillion Dollars annually in Intangible Investment and also the New Economy,” in John Hand and Baruch Lev, eds., Intangible Assets: Values, Measures, and Risks.), a figure based on the truth that about 6 to 10 percent of america GDP is allocated to intangible assets. Investments in R&D and software have raised significantly during the last Forty years. Simultaneously, the average expense of goods sold has fallen by a lot more than 10 percent since 1980. Services, which can be counted as intangibles, rose from 22% of GDP in 1950 to 39% in 1999.

These dramatic changes (Margaret Blair, and Steven Wallman, “The Growing Intangibles Reporting Discrepancy,” Unseen Wealth: Report with the Brookings Task Force and Intangibles.) not only document a definite rise in investments in intangible assets but in addition underscore the growing value of intangibles as an important element of contemporary business.

2.0 Basic classification of corporate assets

Every organization possesses multiple forms of assets, which it combines to produce goods and services. The objective of this is always to classify these assets depending on their common attributes.

All assets can be divided into two major types. The first type incorporates conventional assets which can be touched, sensed, and felt: these are known as tangible assets. Any asset that does not fit the above mentioned description may be categorized as intangible. In accordance with IFRS (IAS-38 Intangible Assets, Issued in September 1998, revised in January 2008.), an Intangible Asset is surely an identifiable non-monetary asset without physical substance. An intangible asset has to be identifiable, a requirement that distinguishes it from goodwill.

Tangible assets are usually associated with intangible assets, as represented within the diagram from the overlap between the two major categories. For example, when a company produces physical commodities, it's going to normally have some kind of ip (IP) connected with and active in the manufacturing process.

Most physical products, however, can't be patented in their entirety. As an example, a laptop made by Sony might include not just a patented CPU cooling technology, the Sony brand name, and also the VAIO trademark but in addition a Blue-ray player, which relies upon technology developed and patented through the Blue-Ray Disk Association (BDA). Similarly, automobile industry giants like BMW incorporate components, for example This stuff and MP3 players, that are patented by other organizations.

Alternatively, an organization may also possess intellectual property which has not utilized in any manufacturing or production process. As an example, Gm maintains a comprehensive portfolio of inventions and licensed intellectual property as well as its vast array of trademarks and patents found in current product offerings. Thus, an overlap between tangible and intangible assets does exist but is merely partial.

Furthermore, the diagram also includes financial assets, which are intangible by definition. Cash and its particular equivalents aren't property, because cash needs no valuation; however, it could still be secured by physical assets. For this reason, the diagram illustrates an incomplete overlap between financial and tangible assets.

J. Cohen proposes that Intangible assets may be categorized into two distinct groups, identifiable and unidentifiable. Furthermore, intangibles (or proto-assets) share some of the features of identifiable and unidentifiable assets along with fit neatly into either of those two classes. Ideas start to see the difference in opinion about the essence of Intangible Assets. From a cpa standpoint (i.e., for the IFRS), an IA is an identifiable non-monetary asset, but J. Cohen states the IA might be further split up into identifiable, unidentifiable, and proto categories. Those that commence to explore search engine optimization farther might find more severe disagreements among researchers regarding terminology and concepts. In my opinion, a good point should be called by a name identified by accounting practices: if it's not recognized but is clearly identified and valuated, then it's a good thing.

2.1 Identifiable Intangible Assets (Recognized in Accounting)

Intellectual rentals are most commonly linked to the notion of identifiable intangible assets and includes patents, copyrights, trademarks and trade secrets. These factors all share one salient commonality - they may be accorded special legal protection or recognition and are deemed property really should be law.

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

Aside from temporary monopolies, the main benefit of intellectual property ownership is its potential marketability. Patents are routinely sold, licensed and bought. IP assets are identifiable, separable and are often purchased or allotted to someone apart from the inventor or creator.

Research and Development

It is probably a good idea to begin the discussion about types of Identifiable intangibles with Research and Development (R&D). Historically there was couple of intangible items reported in public company fiscal reports: R&D and Goodwill. For that reason R&D expense records of public firms are already the topic of widespread academic research.

R&D is understood to be an identifiable intangible asset as it could lead to the roll-out of ip. For instance a company’s research can lead to patents that are being sold and sold separately. Marketable patents, however, aren't the only purpose of R&D investments - they often result in improved manufacturing techniques, trade secrets along with other kinds of intellectual property that may do not be patented, and often will nonetheless increase the company’s competitiveness. Consequently R&D gets the prospect of the development of other assets, some of which are discussed below.


There are three basic types of patents, including utility, design, and plant patents. (See U.S. Code Title 35 - Patents , to get a full description of patents and patent laws.) For your patent being enforceable it should be listed in one or more registry of ip, many of which can include The usa Patent and Trademark Office (USPTO), the ecu Patent Office, the Japanese Patent Office, and World Ip Organization (WIPO).

The core reason for all of these offices is always to act 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 owned by patentee. The application form process isn't rapid and also the cost to acquire a patent isn't nominal. Mcdougal of the paper (Dr.Kretov Kirill) resides in Switzerland and it has recently sent a patent application for “a method of password protection against different types of key-logging techniques” for the European Patent Office (EPO). Besides attorney costs to assist draft the application form, simply starting the procedure costs CHF 3,600 and the first results are anticipated to arrive no prior to when 6 months after the date of application. Normally it requires 2-3 years to win patent approval. Following a successful application, the patent holder gets the to exclude others from making, using, or selling its invention for Two decades (which explains why patents tend to be described as temporarily granted monopolies).

Perhaps most fascinating is really a subset of utility patents knows as process or method patents. Throughout the internet boom of the late 1990s, many start-up technological firms have declared process patents that described methods that could be useful to everyone. For instance, there's a patent filed on the “process” of using modem to connect to the Internet. Most famous are probably Amazon’s “1-Click” buying feature and Microsoft’s double-click patent. Some critics with the USPTO allege that in 1990s, patent reviews failed to take into consideration the exam of “non-obviousness”. Many suggested how the lifetime of Internet-related process patents needs to be reduced to under Two decades.

However, despite the undeniable fact that many Internet-related process patents were approved just a few resulted in economic advantage of their inventors. It is probably logical to ask: “Why grant patents in any way?” There is a simple economic rationale: if inventors cannot protect their work to make some funds than it, they've little motivation to make the invention to begin with. The authority to exclude others by using the invention is a type of reward for investing the efforts to build up a patentable idea or technology. Patent law generally supports the perception of monopolies being oftentimes good for customers. The enforced expiration of patents supposedly creates the right balance: enough protection to encourage innovation, although not so much as to encourage abuse.


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

Up until 1980s, owners of copyrighted materials, for example books or audio and video records weren't up against mass copying of the works. But lately, due to the rapid development of technology (especially the Internet) enormous amount of copyrighted material were digitalized.

At now it may be interesting to note copyright the process of digital media also to mention the idea of “fair use”. Fair me is “… any utilization of copyrighted material that does not infringe copyright while it's done without the authorization with the copyright holder and lacking any explicit exemption from infringement under copyright law. ” However, fair use is widely misinterpreted. For instance if someone buys a pc game for approximately EUR 100, it really is logical to expect that the buyer will not be happy to shed it due to accidental scratching or another physical damage caused to the disk. DVD copying software enables you to make a backup copy, in order that in the event the original disc fights, the buyer doesn't lose their cash.

However, there's no be certain that the customer will not opt to share this backup with others. Uploading the image file (exact copy of the disc) to a file-swapping peer-to-peer network may expose it to thousands of people, potential buyers that will not pay back for game, but use its pirated copy instead. Some information mill integrating anti-copying techniques that complicate the copying process, but at the cost with the buyer’s ability to produce a backup copy.

Put simply DVD-ripping and peer-to-peer networking software itself can be extremely helpful, and may even have socially valuable legal uses, even when many times, it is used for illegal ones. Copyright holders find it difficult to take action that can help to avoid unauthorized usage of their job, however with minimal success to date.


Webster’s dictionary defines trademark as “a distinctive name, phrase, symbol, design, picture, or style used by a small business to identify itself to consumers”. Just like copyright, trademarks can be established through common-law usage. The registration process is somewhere between copyrighting and patenting the amount of review conducted and legal assistance required. You will find legal advantages to registration, but trademark search is not required. An attorney normally conducts one search only to figure out what other trademarks exist that may be wrongly identified as usually the one into consideration. It really is even easy for two much the same trademarks to coexist, provided they aren't probably be confused. For instance it will be possible that some plastic-window manufacturer will submit an application for the trademark called “Windows”, even when a really similar trademark is registered by Microsoft. If however a start-up software developer company can provide its internet browser and apply for the “Internet Explorer” trademark they most likely will not obtain it, simply because the item classes are much the same and certain to result in confusion.

Trade Secrets

Trade secrets are kinds of assets that result from a certain way to do business or proprietary technology that delivers competitive benefits of its holder. It's something that is utilized in ongoing business, like a unique compilation process or data mining system. In line with 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 recognized to, and not being readily ascertainable by proper strategies by, other persons who is able to obtain economic value from its disclosure or use, and (2) will be the subject of efforts which are reasonable beneath the ways to maintain its secrecy.”

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

Unlike patents, owning a trade secret doesn't prevent others from using it. Two firms can independently and simultaneously support the same information as the trade secret, but they cannot hold two separate patents on a similar invention. There is no way someone can prevent another company from using im service as the internal channel of communication, unless the business is not aware of this possibility.


Brands in many cases are confused with trademarks - actually, the writer (Dr. Kirill Kretov) with this paper was surprised to locate that Webster’s Merriam dictionary defines brand as synonym to trademark. It is not - brands less difficult more than merely names or trademarks. A brandname is definitely an economic asset, because it adds value by conveying information regarding a product. According to Tom Blackett , brands that keep their promise are business assets. They attract loyal buyers who regularly return to them, making it possible for the emblem owner to forecast cash flows also to plan and manage the introduction of the business with greater confidence. Due to the brand’s capability to secure income it may be considered an efficient asset in the same manner just like any other, classical business assets like equipment, cash, investments, and so on. Simultaneously brand owners possess the incentive to “keep their promise”. If eventually industry discovers fraud the organization risks to shed a substantial variety of its clients.

Mcdougal with this paper is a good fan of most Sony products - he believes this company produces beautiful, innovative and sturdy products and, consequently, he could be ready to pay more for quality. But there are lots of other Japanese brands available on the market and when suddenly Sony decides to reduce corners and trade poor products under its good name, the author will just switch to available alternatives.

Software Code

Software code has been said to become just about the most complicated intellectual properties to codify. It's possible to get yourself a patent for your business procedure that the code enables or trademark certain options that come with the application. In reality, even some part of the code may be kept as a trade secret as the code itself can be copyrighted.

However, this is complicated by different accounting treatments which largely depend on whether the software viewed as a port to the organization’s manufacturing process, or if the software programs are the firm’s product is and of itself. Put simply the firm might use and/or sell software code. For instance Microsoft 'office' is an extremely useful application that organizations would use for word processing or spreadsheet calculation. Nevertheless the cost of license for any given quantity of workplaces may not be treated as valuable intangible property. Simultaneously MS Office is definitely an valuable intangible property to its creator Microsoft. Note that only Microsoft holds the source code, while those who buy licenses are merely given its compiled version.

2.2 Questionable Recognition

Accounting standards normally have high requirements regarding disclosure of data about non-material (intangible) assets. For example, IFRS-38 mandates that financial statements should include these information for each type (class) of assets: ways of amortization, connection between re-evaluations, estimated life periods (asset remains useful), as well as other explanations of significant alterations in total worth of non-material assets. Reporting must also are the total price of R&D, which can be considered as spending for that current period. However, it is the specific company that develops a classification of non-material assets, normally based on some principle of their homogeneity.

In other words, IFRS recommends disclosure of data about valuable intangible (non-material) assets which can be owned by a business but not identified by current accounting practices (CAP). Simultaneously, the report format could be defined by an organization. Because of this, there exists a insufficient standardization along with a nightmare for investors, who've to check parameters that are very often of various natures and incomparable. Some reports with information about particular “assets” very can be not incomparable just with other programs but even with reports from the same company for different periods of time. Some researchers have already identified this gloomy of flexibility and freedom in reporting and classification allowed by IFRS.


Goodwill is among the most commonly discussed unidentifiable asset. It's already been mentioned that goodwill is among two intangible items which were routinely reported in public areas company financial statements (a different one is R&D). Goodwill appears on a company's books in the event it acquires another company, as well as the buyer naturally has to pay more because of it compared to fair worth of the net identifiable assets, both tangible and intangible.

Numerous goodwill definitions are located in various documents and standards governing the business accounting and estimate activities (IFRS, USA GAAP). Observe that given definitions are paraphrased rather than exact citations from sources.

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

By IASB (International Accounting Standards Board)

Goodwill as a result of merger with the companies is the sum paid from the buyer within the purchase marketable value in expectation of future economic gains. The near future economic gains migh result in the synergy effect of the acquired identified non-material assets or assets which separately aren't at the mercy of acknowledgement in the financial reporting but which can be a part of the purchase cost. Goodwill is the more than a purchase cost over the acquired share in fair value of the identified acquired assets, which can be inseparable in the target company. Actual goodwill cost is the acquisition cost minus the difference of fair price of identified assets, obligations and contingent obligations.

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

By USGAAP (US Generally Accepted Accounting Principles)

Goodwill may be the cost excess of an acquired company over 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 European Number of Valuers’ Associations)

You will find three types 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 the company and could be considered within the balance sheet after company sale, according to IFRS. Personal goodwill just isn't transferred under sale and isn't considered at company cost calculation.

As can be seen in the given definitions, in a variety of business accounting standards, you will find practically no discrepancies regarding the essence of goodwill. Thus, most of the time, goodwill value appears if company acquisition occurs, and the distinction between purchasing cost and the fair value of identified assets is calculated.

In other words, the traditional knowledge of goodwill origins lies in these: Goodwill arises whenever a business is acquired at a cost exceeding its assets’ marketable values sum. Subsequently, this excess may be explained this way: The company market price as a whole includes the cost of all assets, including the ones not reflected in the balance sheet. As it is known that inside the balance sheet un-identifiable assets cannot (shouldn't) be reflected, their price is embodied in goodwill. The residual method of goodwill calculation is dependant on it.

However goodwill happens not only when the company possesses unrecorded intangible assets. We are able to give examples of some factors irrelevant to the worth of intangible company assets that influence goodwill value and so are susceptible to be reflected inside the company-buyer balance sheet:

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

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

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

•    Award paid at acquisition (excess of purchasing price over market capitalization right now of purchasing);

•    A value of all company obligations (more obligations lower the value of goodwill);

•    Goodwill allowances methods (in different national accounting standards, allowance during the permitted by accounting standards period; immediate allowance of this value in the cost of equity capital or lack of the allowance generally speaking is accepted);

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

•    Identified assets depreciation methods;

The marketable worth of both assets and also the business as a whole is set 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 consuming various factors compared to the business markets. Put simply, a business price is determined by money flows from sale with the goods or services created by the business and also the cost of separate assets necessary for production - by money flows from sale of these assets.

Thus, efficient use of the business overall as well as separate assets are non-comparable, which means that 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 price of all assets is entered into the balance sheet, even those not recognized by standards from the business accounting, the sum of the assets marketable values basically will not coincide with business cost in general. If cost in these assets’ use within this business is more than cost at average market alternative method of use, the goodwill is going to be positive, otherwise - negative. Still, negative goodwill doesn't testify to inefficient activities inside business when we understand a powerful business as the one which has assets return at an average branch level. Incomparability valuations of business overall and of separate assets is brought on by the truth that the business valuation as a whole is produced with a look at business continuation, and evaluation of each asset is manufactured proceeding from your assumption of the independent sale (separately in the property complex included in the business).

To verify the above mentioned we will present these provisions. Goodwill evaluation is always coupled to the value assessment of your business in general, which non-material assets and intellectual property valuation specialists specify. Business cost calculation methods are based on revealing forecast data concerning company activities, on assets creation costs measurement or on comparison of activity indicators using the comparable companies from an objective database. From the market perspective a small business cost shall not rely on the price of its elements, as clients are an "ongoing concern", and it is partition into elements shall happen just with a view of real or fictitious liquidation. Acting clients are always thought to be a single complex that can continue to act in the future (IFRS, Principles).

Most material and non-material assets, in their merge in business, lose their liquidity for their greater specificity and sometimes complete inseparability from your business. They're assets that are created with this business and possess 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 there are restrictions in their use: long-term obligations, contracts, government requirements (for instance, 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 are difficult and is replaced with substitution costs. Thus, assets often lose their independent marketable value; it remains only being a historic fact of investments realization in to these assets before. This price is also necessary to investors being a blueprint for risk identification of present and future investments.

Bringing it all up, we are able to conclude the goodwill concept can be utilized inside a narrow plus a wide sense. In a 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 dimensions are determined like a difference between buying price of the organization as well as the book worth of its material, non-material and funds assets and obligations. In the wide sense, goodwill can be a complex of most intangible company assets. Hence, we are able to talk about the goodwill of the operating company only inside the meaning distinctive from accounting sense. The approximate feeling of this is expressed by the terms reputation, business standing, or/and company brand. But such goodwill (in the wide sense) is not shown within the balance sheet. Some authors, discussing goodwill, would rather think of it as "the company price" or "business reputation", keeping the same sense.

When investor comes to a decision to invest money (or buy some company) he normally wants to know precisely what he's buying (or just speaking, what he gets in exchange for his money). If it's a service company (an IT company that operates in the field of software development or web applications), then possibly the sum total of all of its intangible assets is much smaller than the entire company value. This value will likely appear in some kind of goodwill, but the thing that makes these numbers? With current accounting practices, in many cases we cope with an “expensive black box”. It is a reason why a prospective buyer will perform a due-diligence from the company. It will help to evaluate the intangible assets of this company.

Human Capital

The phrase human capital arrived to the business enterprise lexicon after Gary Becker (University of Chicago economist and Nobel Prize-winner) published a book titled “Human Capital” in 1964. Becker (in addition to Jacob Mincer, Milton Friedman, Sherwin Rosen, and Ted Schultz) created the economic notion of human capital as distinct from typical financial or physical assets, due to its difference from them in the sense that human capital can not be separated from the humans who possess it. “It is fully in line with the administrative centre concept as traditionally defined to say that expenditures on education, training, health care, etc., are typical investments in capital.” Soon after Becker developed the idea of human capital, economists and consultants began to subdivide and classify it. Simply speaking, it indicates both physical and intellectual ability.

Many researchers state that recruiting are the most valuable assets of an organization. But wait, how can the administrative centre value of human resources be located using current accounting practices?

For that intellectual organization that targets advance of various intellectual capital (not speculation, but real innovative development) which has the biggest portion of its value allocated to intangible assets, folks are everything. The company could be evaluated by calculating the amount of all the HR spending (salaries, payments to freelancing, training programs, various incentives, etc.). Someone may state that this is exactly what is done to calculate the price, but expense is not just a value the administrative centre represents. It's more of a price as capital value concept. It may sound nonsensical, nevertheless it basically means that if someone else incurs cost it assumes that something was bought (money was changed to something). Whether or not that something was tangible or intangible in nature, 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 was most of them, what would be their price, and how would this price be determined? Also, if that something was bought in the marketplace, for a lot of buyers the cost would be similar (this product or service has a fixed price). Thus it can be stated that it is a sort of valuation while using market approach. However, the worthiness really depends on the sort of asset you possess and also the supply/demand curves for this. If the newest owner obtained it for less money than the others, it means he has good contacts (refers to relational capital in IC concept).

In terms of HR, if you have a task where you need professionals to accomplish do the job, you don’t simply spend money, but you acquire some quality work and also if it doesn’t possess a material form still has value. For instance, it could be consultation having a lawyer in Switzerland; project duration is 4-6 hours and an hourly rate will be between 300 and 1000 Swiss francs. According to your contacts (RC) the cost of project (outsource) will be between 1500 and 5000Chf. But after the project’s completion and payment, you commence to have something - it may be strategies to questions asked during consultation hours or some other bit of knowledge from your lawyer consulting with you. Quite simply, you become the owner of some piece of intellectual capital. If it is not very specific for your needs, probably there are numerous individuals that are prepared to pay the same price to the type of information. As a result it is really an intangible asset, which may be valued using no less than the fee and market approaches (more about evaluation is going to be discussed in later parts of this thesis).

However, the wages are a very average reflection of the real creativity of your given person and cost generated (profit associated) from this. Also, you can 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, however it is not that their human resources are worse in terms of creativity, skills, knowledge or experience than others in big companies. Consider every one of the possible special areas of practice that are offered for the modern IT companies: There are big firms that might be best in providing his or her products and services on the market, however they can’t be finest in all possible market niches. Celebrate possible the situation each time a little band of experts in particular field are many more productive inside a certain task (Activity) when compared to a research center of some big company.

Also, worth mentioning is it appears like in today’s economy companies no more compete when it comes to best technology; it's the competition of patented technologies and other licenses. Research and development, including creativity, are tied by various legal barriers (patent sharks), to ensure that many professionals usually are not allowed to enter a particular field of technology.

2.3 Intellectual Capital

Modern lines of world economy development, strengthening of your role of intellectual and knowledge practical information on manufacture of competitive products have led to occurrence of just one of the most scaled financial problems.

Its essence is a follows: as types of an item creation have changed, and data has considered one of major factors of new cost creation, it is crucial to reconstruct in appropriate way the information of the public reporting of the companies before their proprietors and other investors. The reporting shall support the information on cost major factors: company strategy, future monetary flows, non-financial activities, intangible company assets, including business standing.

Needless to say, people reporting isn't limited by merely the fiscal reports. Because it was mentioned before, IFRS recommends publication of data about intangible assets not-recognizable by CAP. For example, there are various notes and discussions reported in annual reports (like K-10). However, this field requires farther standardization otherwise it has little practical value. On this paper, Kretov Kirill applies some concepts of intellectual capital to be able to develop a reporting model for your complete capital structure.

Initially the problem of evaluation of intangible factors has arisen in information-saturated companies in which the amount of material assets is insignificant, and also the mental potential is high. Investors are not inclined to invest to such companies, as well as in front with the managers there was clearly a job of calculation of these intangible assets value and also informing investors to make more adequate picture about the company activities with the and it is prospects.

Modern idea about intangible factors of recent cost production are embodied in concept "intellectual capital". The managers managing companies cost are almost single inside the opinion in regards to the name of the phenomenon, its content, and that modern accounting can’t think about these new assets (employees competence, customers relations, computer and administrative systems, databases, etc.) . Some researchers even state that for intellectual capital accounting it's required new financial and administrative concept . Financiers discuss whether it's essential to change traditional accounting terms (non-material assets, business standing), as well as about chance of cost evaluation of the new indicator, its accounting and showing in the reporting.

Three Major Elements of Intellectual Capital

Various models and theories of intellectual capital represent generalization worthwhile factors management practice within the specific companies, now it's admitted by both researchers and experts. For this reason each model is different and reflects specificity of the company. At the same time, accumulating of experience and knowledge of your intellectual capital from the start of current decade has allowed to ascertain general approaches, to build up pretty much 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 a few models , the customer capital is called the capital of relations, or connections (relational capital), but it is understood also as loyalty and customer satisfaction.

In most cases, it's possible to estimate a person's capital volume through the quantity of intellectual workers and also the level of information, skills and knowledge that they can own, from the quantity of leaders, idea men, "revolutionaries". The need for personnel knowledge and talents is characterized by specialists' capability to solve difficult, non-standard, unexpected problems; employees' independence and trainability; the capability of managers to cope with transformations; creative activity; tendency to partner interaction; etc. We are able to estimate progression of a persons capital through proportion of the types of activity "inspiring" on search of new solutions forcing company's employees to understand something totally new. Eventually, degree of human capital binding is estimated through personnel adherence to company's insight and values, employees' satisfaction by work and industrial relations, personnel loyalty to the company and retention of leading workers, company's reputation about the labor market, etc. (Later inside the work, a person's Resources will be discussed more into details.)

Organization structural capital is reflected through the number and excellence of partners; level of business partner retention towards the enterprise; integration of the value chain and an company's role within it; availability of an adaptable and effective business network (on a global scale, too); information system quality; early detection system quality; involving of pressure groups into selection; procedures of transformation of implicit knowledge into explicit one; partnership level inside the organization; quality of network interaction; completeness and quality of databases; trademarks and patents; codified familiarity with technical processes (the degree of completeness and clearness of documentation reflecting consumer value creation in the organization); assortment 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 organization customer capital is reflected, by the following characteristics: expected discounted income from available consumers; quantity of regular company's customers, their share in 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 volume of the concluded contracts; how much customer retention to the organization.

So, you'll be able to tell that within the provided models there is more common than distinctions. The overwhelming most of authors recognize presence of intellectual capital independent elements - human, organizational, client, but you are called. Simultaneously, there are lots of terms anyhow linked to intangible assets: brand, business standing (goodwill), ip, non-material assets, expenses on researches and developments. What's relation of such terms with concept of an intellectual capital? It is not quite no surprise that the typical name "intellectual capital" is utilized to combine such essentially different and frequently not having the direct relation to its the intelligence phenomenon as employees' value system, enterprise image, brands, customers' loyalty. Inside our opinion, the uniting basis here could possibly be the notion of intellectual capital circulation: employees' knowledge and capabilities are embodied in organizational processes and relationship with partners that, in turn, create the base for steady relations with customers; cooperation with customers and partners leads to experience accumulating, development of enterprise employees' knowledge and capabilities.

Ordering and systematization of existing terminology becomes pressing question where, particularly, the technique of intangible assets reporting, accepted and identified by the accounting organizations will be based.

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