Dr. Kretov Kirill – Basic classification of corporate assets.

Review of Various types of Intangibles.

Dr. Kirill Kretov on various types of intangibles

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

1.0 Introduction

Amid the many complicated and artistic models encountered throughout the last decade, it is now evident for the majority of companies that its valuation of Intangible Assets and Intellectual Capital has shown to become more theoretical than practical. Although numerous numerous studies have been performed about the valuation of Intellectual Capital, a lot of the findings seem more theoretical than practical.


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

The thought of intellectual capital was already researched by many elite scholars, who’ve created many interesting theories. However, most of their job is purely theoretical, and their concepts and theories are not widely accepted. Hardly any of them happen to be actually applied. As an example, many papers have been discussed intellectual capital and it is importance to a company’s performance; quantitative analyses and reports reveal that intellectual capital is an emerging competitive advantage that results in long-term profits and greatly raises the worth of the business. However, current accounting practices recognize only a very limited number of intangible asset types (when it comes to intellectual capital). From the accounting perspective, the selection is quite limited: there are R&D and Goodwill (the second being inapplicable to many companies). As long as the company understands a good some particular form of asset may it choose to estimate its value employing a given valuation method (you are applicable). The problem is that the ultimate value is not an guarantee from the real price of a good point. Another practitioner may not accept its valuation principle applied and may even propose another that he finds appropriate, or someone might use a variety of theories for the Intellectual Capital of a company and come on top of a list of indicators which may ‘t be accepted or understood by other people who prefer other concepts. Thus, it appears that the basis from the concern is not the lack of evaluation methods but the not enough widely accepted standards of these methods but for the reporting from the results.

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

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

1.1 Historical Overview

Intangible assets usually are not today’s invention or perhaps a phenomenon of the Twenty-first century. Indeed, unlike popular misconceptions, this kind of asset has been in existence for some time. Throughout history, knowledge and data 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 along with less risk to himself possessed an intangible asset that meant the difference between life and death not merely for your hunter-gatherer also for his community. Similarly, the people with the alphabet, calendar, and mathematics possessed essential intangible knowledge assets.

In modern society, knowledge is becoming a lot more complicated, specialized, and technical. Mistakes manufactured in the operation of a nuclear plant, toyota tows, or biological weapons research facility could mean the deaths of millions. Much like in the prehistoric era, knowledge, and expertise have remained assets that will mean the main difference between the life and death from the tribe.

Now, particularly in the globe, businesses are increasingly reinventing themselves as service-oriented operations. Manufacturing tangible commodities that consumers can touch, smell, or taste is rapidly learning to be a subject put to rest. These transformations have grown to be increasingly frequent across a large spectrum of organizations. Most companies rely almost entirely on intangible assets and consider them certainly one of their core competitive advantages. This is accurately described within the Harvard Business Review:

Employees skills, IT systems, and organizational cultures can be 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, which makes them a powerful way to obtain sustainable competitive advantage.( Robert S. Kaplan and David P. Norton, “Measuring the Strategic Readiness of Intangible Assets”).

It is popular that a lot of of the business resources in civilized world are intangible: in 1982, the fabric assets of yankee companies constituted 62% of the marketable value (Stewart T.A. Intellectual Capital. The New 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 of them costing only between 10% and 15%. By the end of 1999, the need for the property reflected inside the balance sheet constituted only 6.2% of Microsoft’s rate, 4.6% of SAP’s, and 6.6% of Coca-Cola’s (Daum J.H. Intangible Assets). In 1982, the proportion of the non-material resources in added value creation for the 500 largest American companies was 38%, by 1998 it was 85% (Du Voitel, R.D., Roventa, P. Mit Wissen wachsen-Strategisches Management von intellektuellem Kapital, in.: Perspektiven der Strategischen Unternehmensfuehrung.).

The current investments structure strengthens the prevalence of non-material resources: in the early 80s, 62% of investments within the American industry were acquisitions of cloth 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 than you are on other equipment; details are replacing material merchandise stock, information is pushing out tangible fixed assets.

Prominent economist Leonard Nakamura estimates how the United States invests at least $1 trillion annually in intangibles (Leonard Nakamura, “A Trillion Dollars a Year in Intangible Investment as well as the New Economy,” in John Hand and Baruch Lev, eds., Intangible Assets: Values, Measures, and Risks.), a figure based on the fact that about Six to ten percent of america GDP is spent on intangible assets. Investments in R&D and software have raised significantly over the last Forty years. Simultaneously, the typical cost of goods sold has fallen by more than 10 percent since 1980. Services, which are counted as intangibles, rose from 22% of GDP in 1950 to 39% in 1999.

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

2.0 Basic classification of corporate assets

Every organization possesses multiple forms of assets, so it combines to create services and goods. The objective of it would be to classify these assets according to their common attributes.

All assets can be split into two major types. The first type incorporates conventional assets which can be touched, sensed, and felt: they are called 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 definitely an identifiable non-monetary asset without physical substance. An intangible asset should be identifiable, a necessity that distinguishes it from goodwill.

Tangible assets are often connected with intangible assets, as represented within the diagram by the overlap involving the two major categories. For example, when a business produces physical commodities, it’ll normally have some form of ip (IP) related to and active in the manufacturing process.

Most physical products, however, can’t be patented within their entirety. For example, a laptop manufactured by Sony can include not only a patented CPU cooling technology, the Sony manufacturer, as well as the VAIO trademark but additionally a Blue-ray player, which relies on technology developed and patented from the Blue-Ray Disk Association (BDA). Similarly, automobile industry giants like BMW incorporate components, such as These tools and MP3 players, that are patented by other organizations.

On the other hand, a company also can possess intellectual property which has not used in any manufacturing or production process. For instance, Vehicle maintains an extensive portfolio of inventions and licensed intellectual property as well as its range of trademarks and patents utilized in current product offerings. Thus, an overlap between tangible and intangible assets exists but is just partial.

Furthermore, the diagram comes with financial assets, that are intangible obviously. Cash and its particular equivalents aren’t real estate, because cash needs no valuation; however, it may still be secured by physical assets. For that reason, the diagram illustrates a partial overlap between financial and tangible assets.

J. Cohen proposes that Intangible assets may be categorized into two distinct groups, identifiable and unidentifiable. In addition, intangibles (or proto-assets) share a few of the attributes of identifiable and unidentifiable assets but do not fit neatly into either of such two categories. Here we start to see the difference in opinion concerning the essence of Intangible Assets. From a cpa standpoint (i.e., for that IFRS), an IA is an identifiable non-monetary asset, but J. Cohen states that the IA may be further split into identifiable, unidentifiable, and proto categories. Those who start to explore search engine optimization farther will discover more serious disagreements among researchers regarding terminology and ideas. In my opinion, a good point ought to be called by a name identified by accounting practices: if it’s not recognized but is clearly identified and valuated, then it’s an asset.

2.1 Identifiable Intangible Assets (Recognized in Accounting)

Intellectual rentals are most commonly linked to the concept of identifiable intangible assets and includes patents, copyrights, trademarks and trade secrets. These components all share one salient commonality – they’re accorded special legal protection or recognition and so are deemed property ought to be law.

Recognition and protection of ip is not a progression of modern days. The Copyright Act was enacted in the United States in 1790, while President Jefferson’s Patent Act of 1793 codified the thought of patents. Legislation, however, has occasionally proven to be inadequate, raising the possibility of benefits based on the ownership of intellectual property being removed. For example, in 2003 alone, 308 out 526 patent infringement suits filed in the United States were deemed invalid or unenforceable.

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

Research and Development

It is most likely a good idea to begin the discussion about forms of Identifiable intangibles with Research and Development (R&D). Historically there were only two intangible items reported in public company financial statements: R&D and Goodwill. Because of this R&D expense records of public firms happen to be the topic of widespread academic research.

R&D is understood to be an identifiable intangible asset since it may result in the development of ip. For example a company’s research may lead to patents that can be purchased and sold separately. Marketable patents, however, aren’t the only purpose of R&D investments – they frequently cause improved manufacturing techniques, trade secrets and other forms of intellectual property that may do not be patented, but will nonetheless increase the company’s competitiveness. Consequently R&D has the potential for the roll-out of other assets, some of which are discussed below.


There are three basic forms of patents, such as 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 to become enforceable it must be indexed by one or more registry of ip, most of which range from The usa Patent and Trademark Office (USPTO), the eu Patent Office, japan Patent Office, and World Intellectual Property Organization (WIPO).

The core reason for many of these offices would be to behave as the registry of patent information. These organizations check whether a patent application meets various criteria (should be “novel, non-obvious, and useful”) and if so, records the invention as being created and belonging to patentee. The applying process just isn’t rapid and the cost to obtain a patent just isn’t nominal. Mcdougal of this paper (Dr.Kretov Kirill) resides in Switzerland and possesses recently sent a patent application for “a method of password protection against various types of key-logging techniques” towards the European Patent Office (EPO). Besides attorney costs to help draft the application, simply starting the method costs CHF 3,600 as well as the first email address details are likely to arrive no prior to when half a year following your date of application. Normally it requires two to three years to win patent approval. After a successful application, the patent holder has the to exclude others from making, using, or selling its invention for a period of Two decades (which explains why patents are often described as temporarily granted monopolies).

Perhaps most interesting is really a subset of utility patents knows as process or method patents. Through the internet boom from the late 1990s, many start-up technological firms have filed for process patents that described methods that may be helpful to everyone. For example, there is a patent filed on the “process” of employing modem for connecting to the net. Most famous are probably Amazon’s “1-Click” buying feature and Microsoft’s double-click patent. Some critics of the USPTO allege that in 1990s, patent reviews failed to take into account test of “non-obviousness”. Many suggested how the duration of Internet-related process patents needs to be reduced to under Two decades.

However, in spite of the proven fact that many Internet-related process patents were approved just a few led to economic advantage of their inventors. It’s usually logical to inquire about: “Why grant patents at all?” There’s a simple economic rationale: if inventors cannot protect their job to make some money than it, they have little motivation to make the invention in the first place. The right to exclude others by using the invention is a kind of reward for investing the efforts to produce a patentable idea or technology. Patent law generally props up perception of monopolies being oftentimes best for customers. The enforced expiration of patents supposedly produces the right balance: enough protection to inspire innovation, but not a great deal concerning encourage abuse.


U.S. copyright law was established in 1790, through the Second Session of Congress, convened on January 4th as well as the bill was signed into law on May 31st by George Washington. Though the initial idea of copyright dates back to 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 obtaining copyright is relatively simple – the creator of work owns the copyright as soon as the jobs are created. Unlike patents, declaring copyright registration simply gives notice that the creator is claiming copyright to the work, but it doesn’t conclusively establish ownership. Furthermore, the copyright office will not screen submission for possible conflicts with existing copyrighted materials.

Up until 1980s, those who own copyrighted materials, including books or video and audio records weren’t up against mass copying of these works. But lately, due to the rapid growth and development of technology (specially the Internet) enormous sums of copyrighted material were digitalized.

At this time it could be interesting to notice copyright issues related to digital media and also to mention the thought of “fair use”. Fair use is “… any use of copyrighted material that doesn’t infringe copyright while it’s done without the authorization of the copyright holder and lacking any explicit exemption from infringement under copyright law. ” However, fair usage is widely misinterpreted. As an example if someone buys a pc game for around EUR 100, it really is logical can be expected how the buyer will not be happy to shed it as a result of accidental scratching or other physical damage caused to the disk. DVD copying software enables you to make a backup copy, to ensure that if the original disc fights, the buyer will not lose their cash.

However, there is no guarantee that the purchaser won’t choose to share this backup with others. Uploading the image file (exact copy with the disc) with a file-swapping peer-to-peer network may expose it to millions of people, potential customers who’ll not pay for game, but use its pirated copy instead. Some companies are integrating anti-copying techniques that complicate the copying process, but at the cost from the buyer’s ability to produce a backup copy.

Put simply DVD-ripping and peer-to-peer networking software itself can be quite helpful, and could have socially valuable legal uses, even when many times, it can be used for illegal ones. Copyright holders battle to find a solution that will help to prevent unauthorized usage of their job, however with minimal success up to now.


Webster’s dictionary defines trademark as “a distinctive name, phrase, symbol, design, picture, or style used by a small business to spot itself to consumers”. Much like copyright, trademarks can be established through common-law usage. The registration process is somewhere between copyrighting and patenting with regards to the quantity of review conducted and legal assistance required. You will find legal advantages to registration, but trademark search is not needed. Legal counsel normally conducts one search and then know what other trademarks exist that might be mistaken for the one in mind. It’s even feasible for two very similar trademarks to coexist, provided they aren’t apt to be confused. For instance it is possible that some plastic-window manufacturer will make an application for the trademark called “Windows”, even when a very similar trademark is registered by Microsoft. If however a start-up software developer company can provide its web browser and submit an application for the “Internet Explorer” trademark they probably is not going to obtain it, due to the fact the merchandise classes are virtually identical and certain to cause confusion.

Trade Secrets

Trade secrets are types of assets that result from in a certain style to do business or proprietary technology that delivers competitive advantage to its holder. It’s something which can be used in ongoing business, being a unique compilation process or data mining system. Based on the Uniform Trade Secret Act (UTSA):

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

Simply speaking, trade secrets are something which provides economic value since they remain unknown towards the competition. As an example one company may abandon e-mail protocol as the communication channel between workers and change to an instant messaging service. Derived economic value could be the insufficient 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 happen to be sent, although not received.

Unlike patents, owning a trade secret does not prevent others from using it. Two firms can independently and simultaneously support the same information as the trade secret, however they cannot hold two separate patents on a similar invention. No one is able someone can prevent another company while using instant messaging service because the internal channel of communication, until the business is unacquainted with this possibility.


Brands tend to be confused with trademarks – actually, mcdougal (Dr. Kirill Kretov) of this paper was surprised to find that Webster’s Merriam dictionary defines brand as synonym to trademark. It is not – brands tend to be more than merely names or trademarks. A brandname is surely an economic asset, because it adds value by conveying information about something. In accordance with Tom Blackett , brands that keep their promise are business assets. They attract loyal clients who regularly come back to them, making it possible for the emblem owner to forecast cash flows and to plan and manage the development of the business enterprise with greater confidence. As a result of brand’s capability to secure income it may be considered an effective asset just as as any other, classical business assets like equipment, cash, investments, and so forth. Concurrently brand owners hold the incentive to “keep their promise”. If eventually industry discovers fraud the business risks to lose a substantial quantity of its clients.

The writer of the paper is a superb fan of Sony products – he believes this company produces beautiful, innovative and durable products and, as a result, he’s ready to pay more for quality. But there are many other Japanese brands available on the market and if suddenly Sony decides to cut corners and trade poor products under its good name, mcdougal will just change to choices.

Software Code

Software code is considered to be just about the most complicated intellectual properties to codify. It’s possible to have a patent for that business procedure that the code enables or trademark certain options that come with the software. Actually, even some section of the code could be kept like a trade secret as the code itself can be copyrighted.

However, this can be complicated by different accounting treatments which largely depend upon whether or not the software thought to be an input to the organization’s manufacturing process, or if the software programs are the firm’s strategy is and of itself. Quite simply the firm may use and/or sell software code. As an example Microsoft Office is a very useful application that organizations would use for word processing or spreadsheet calculation. However the cost of license for any given variety of workplaces might not be treated as valuable intangible property. Simultaneously Microsoft is definitely an valuable intangible property to its creator Microsoft. Note that only Microsoft supports the source code, while people who buy licenses are just 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 necessitates that financial statements will include the next information for each and every type (class) of assets: ways of amortization, outcomes of re-evaluations, estimated life periods (asset remains useful), along with other explanations of serious changes in total price 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, oahu is the specific company that develops a classification of non-material assets, normally according to some principle of these 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). At the same time, the report format can be based on a company. As a result, you will find there’s insufficient standardization along with a nightmare for investors, who have to compare parameters that are very often of various natures and incomparable. Some reports with details about particular “assets” very can be not incomparable just with other companies but despite reports from your same company for several cycles. 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 recently been mentioned that goodwill is just one of two intangible items that were routinely reported in public places company financial statements (a different one is R&D). Goodwill shows up on a company’s books in the event it acquires another company, as well as the buyer naturally must pay more for it compared to fair worth of the web identifiable assets, both tangible and intangible.

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

IFRS 3 “Companies merger” (International Financial Reporting Standards)

By IASB (International Accounting Standards Board)

Goodwill as a result of merger from the companies will be the sum paid by the buyer on the purchase marketable value in expectation of future economic gains. The long run economic gains migh result from your synergy effect of the acquired identified non-material assets or assets which separately usually are not at the mercy of acknowledgement within the financial reporting but which are included in the purchase cost. Goodwill may be the excess of an investment cost over the acquired share with fair value of the identified acquired assets, which can be inseparable from your target company. Actual goodwill price is the purchase cost minus the difference of fair value 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 is the cost overabundance an acquired company within the cost of its identified assets minus obligations. Goodwill reflects such factors as customer demand satisfaction, good management, production efficiency, successful location, etc.

EVS 2000 (European Valuation Standards) (latest 2009)

By TEGOVA (The eu Number of Valuers’ Associations)

You can find three kinds of non-material assets subject to evaluation: business goodwill (unallotted non-material assets), personal goodwill, and identified non-material assets. Business goodwill is inseparable from your company and can be considered inside the balance sheet after company sale, according to IFRS. Personal goodwill just isn’t transferred under sale and is not considered at company cost calculation.

As possible seen from the given definitions, in a variety of business accounting standards, you can find practically no discrepancies in regards to the essence of goodwill. Thus, more often than not, goodwill value appears if company acquisition happens, and the difference between purchasing cost as well as the fair price of identified assets is calculated.

Quite simply, the standard understanding of goodwill origins is in the following: Goodwill arises when a company is acquired at a price exceeding its assets’ marketable values sum. Subsequently, this excess may be explained by doing this: The business enterprise market price overall includes the expense of all assets, including the ones not reflected in the balance sheet. As it is termed that inside the balance sheet un-identifiable assets cannot (should not) be reflected, their expense is embodied in goodwill. The remainder approach to goodwill calculation is founded on it.

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

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

•    Sales price of an acquired enterprise depending on a seller’s ability to prove our prime price or on the buyer’s capacity to beat on the price, on commission intermediaries, etc.;

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

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

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

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

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

•    Identified assets depreciation methods;

The marketable value of both assets as well as the business overall is set for cases of probable best utilization. It is pretty obvious the most effective methods of use for separate assets and business overall cannot coincide: The asset markets develop intoxicated by various factors compared to the business markets. In other words, a small business expense is determined by money flows from sale with the services or goods made by the company and the price of separate assets essential for production – by money flows from sale of these assets.

Thus, efficient use of the business overall and also separate assets are non-comparable, which means that the company overall and separate assets marketable values may also be non-comparable. Completeness of company asset representation inside the balance sheet is not important: If the cost of all assets is created the balance sheet, even those not recognized by standards of the business accounting, the sum assets marketable values basically will not coincide with business cost overall. If cost over these assets’ use within this business is greater than cost at average market alternative approach to use, the goodwill will probably be positive, or even – negative. Still, negative goodwill will not testify to inefficient activities inside business as we understand a powerful business as the one which has assets return with an average branch level. Incomparability valuations of economic as a whole and also separate assets is caused by the truth that the company valuation overall is produced with a view of business continuation, and evaluation of every asset is created proceeding in the assumption of the independent sale (separately from your property complex contained in the business).

To ensure the above mentioned we’ll present the next provisions. Goodwill evaluation is usually coupled to the value assessment of a business as a whole, which non-material assets and intellectual property valuation specialists specify. Business cost calculation methods are based on revealing forecast data concerning company activities, on assets creation costs measurement or on comparison of activity indicators with all the comparable companies from a goal database. From the market point of view a company cost shall not depend upon the expense of its elements, as business is an “ongoing concern”, and its partition into elements shall happen simply with a look at real or fictitious liquidation. Acting company is always considered as just one complex that can still act in the future (IFRS, Principles).

Most material and non-material assets, in their merge running a business, lose their liquidity because of their greater specificity and sometimes complete inseparability from the business. They are assets which are created because of this business and possess few other application, as because of technological specificity and to attachment to some internet site. (Tangible examples are various constructions like bridges and pipelines; an intangible example might be a value associated with personal ties of ex-owners with clients and suppliers.) Besides, sometimes there are restrictions inside their use: long-term obligations, contracts, government requirements (for instance, ecological regulations), or social responsibility from the business. It’s also impossible to dismiss management and personnel errors. Under these conditions, market evaluations of assets take time and effort and can be substituted with substitution costs. Thus, assets often lose their independent marketable value; it remains only as a historic fact of investments realization in to these assets before. This price is also essential to investors like a reference point for risk identification of present and future investments.

Bringing it all up, we are able to conclude the goodwill concept can be used in the narrow and a wide sense. Inside a narrow sense, goodwill is thought as the accounting assets meeting the financial reporting standards criteria. Only acquired goodwill is acknowledged; internally created goodwill is forbidden to reflect inside the balance sheet. The goodwill size is determined being a difference between the acquisition price of the business and also the book value of its material, non-material and cash assets and obligations. In a wide sense, goodwill is a complex of all intangible company assets. Hence, we can talk about the goodwill of an operating company only inside the meaning not the same as accounting sense. The approximate feeling of this is expressed by the terms reputation, business standing, or/and company brand. But such goodwill (in a wide sense) is not shown in the balance sheet. Some authors, speaking about 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 desires to know precisely what he is buying (or just speaking, what he gets in substitution for his money). If it is a site company (an IT company that are operating 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 general company value. This value will most likely can be found in some type of goodwill, but what makes these numbers? With current accounting practices, most of the time we handle an “expensive black box”. It is a reason a potential buyer will perform a due-diligence with the company. It can help to judge the intangible assets belonging to this company.

Human Capital

The term human capital came into the company lexicon after Gary Becker (University of Chicago economist and Nobel Prize-winner) published a novel titled “Human Capital” in 1964. Becker (in addition to Jacob Mincer, Milton Friedman, Sherwin Rosen, and Ted Schultz) came up with economic idea of human capital as distinct from typical financial or physical assets, due to the difference from them meaning that human capital cannot be separated from the humans who possess it. “It is fully consistent with the capital concept as traditionally defined to state that expenditures on education, training, medical treatment, etc., are all investments in capital.” Soon after Becker developed the idea of human capital, economists and consultants started to subdivide and classify it. To put it briefly, this means both physical and intellectual ability.

Many researchers state that human resources will be the best assets of an organization. But wait, how can the administrative centre value of recruiting be discovered using current accounting practices?

For the intellectual organization that focuses on creation of various intellectual capital (not speculation, but real innovative development) which has got the biggest percentage of its value invested in intangible assets, people are everything. The organization can be evaluated by calculating the amount of all the HR spending (salaries, payments to outsourced workers, training programs, various incentives, etc.). Someone may claim that this is precisely what is done to calculate the price, but expense is not really a value the administrative centre represents. It’s more of an expense 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). Regardless of whether that something was tangible or intangible anyway, it provides a value and a price. More valuable is whenever that something is, it will pay to others (the number of people sooo want to have it). If there have been many of them, what can be their price, and just how would this price be determined? Also, in the event that something was bought on the market, for most buyers the fee could be similar (this system or service includes a fixed price). Thus it can be said that it is sort of valuation while using market approach. However, the worth really depends on the type of asset you hold as well as the supply/demand curves for it. If the newest owner obtained it cheaper than these, it means he’s got good contacts (identifies relational capital in IC concept).

In relation to HR, for those who have a job in which you need professionals to do do the job, you don’t simply spend some money, however, you get some quality work and even whether it doesn’t possess a material form still has value. For example, it can be consultation using a lawyer in Switzerland; project duration is 4-6 hours plus an hourly rate will be between 300 and 1000 Swiss francs. Based on your contacts (RC) the price of project (outsource) will be between 1500 and 5000Chf. But following your project’s completion and payment, you begin to possess something – it could be strategies to questions asked during consultation hours as well as other little bit of knowledge in the lawyer seeing you. In other words, you then become the owner of some piece of intellectual capital. If it is not very specific for your needs, probably there are lots of others who are willing to pay a similar price for that kind of information. Thus it can be an intangible asset, which can be valued using a minimum of the cost and market approaches (much more about evaluation will probably be discussed in later parts of this thesis).

However, the wages are a very average reflection with the real creativity of your given person and value generated (profit associated) as a result. Also, there are industry leaders and lagers – industry leaders are the type who pay across the average salary set by industry in order to purchasing people. Industry lagers normally pay unhealthy, but it is not that their hr are worse with regards to creativity, skills, knowledge or experience than others in big companies. Consider all of the possible special areas of practice that are available towards the modern IT companies: There are big companies that would be best in providing their unique services in the marketplace, however they can’t be very best in all possible market niches. It can make possible the situation each time a little band of experts particularly field are a lot easier in the certain task (Activity) than a research center of some big company.

Also, worth mentioning is that it may seem like in today’s economy companies no more compete when it comes to best technology; it is the competition of patented technologies as well as other licenses. Research and development, including creativity, are tied by various legal barriers (patent sharks), so that many professionals aren’t able to enter a certain field of technology.

2.3 Intellectual Capital

Modern lines of world economy development, strengthening of the role of intellectual and data helpful information on production of competitive products have resulted in occurrence of one of the very most scaled financial problems.

Its essence can be defined as follows: as ways of something creation have changed, and data has turned to certainly one of major factors of recent cost creation, it is crucial to reconstruct in appropriate way this content of the public reporting with the companies before their proprietors and other investors. The reporting shall retain the info on cost major factors: company strategy, future monetary flows, non-financial activities, intangible company assets, including business standing.

Of course, the public reporting is not restricted to just the fiscal reports. Since it was discussed earlier, IFRS recommends publication of information about intangible assets not-recognizable by CAP. For example, there are numerous notes and discussions reported in annual reports (like K-10). However, seo requires farther standardization otherwise it’s got little practical value. On this paper, Kretov Kirill applies some concepts of intellectual capital in order to develop a reporting model for the complete capital structure.

Initially the situation of evaluation of intangible factors has arisen in information-saturated companies where the quantity of material assets is insignificant, and the mental potential is high. Investors are not inclined to invest to such companies, plus front from the managers there was an activity of calculation of the intangible assets value and of informing investors to produce more adequate picture about the company activities from the and its prospects.

Modern understanding of intangible factors of latest cost production are embodied in concept “intellectual capital”. The managers managing companies cost are almost single within the opinion in regards to the name of this phenomenon, its content, and also that modern accounting can’t consider 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 is essential to change traditional accounting terms (non-material assets, business standing), and in addition about possibility of cost evaluation of a new indicator, its accounting and showing within the reporting.

Three Major Aspects of Intellectual Capital

Various models and theories of intellectual capital represent generalization worthwhile factors management practice inside the specific companies, and today it’s admitted by both researchers and experts. Because of this each model is exclusive and reflects specificity from the company. Concurrently, accumulating practical experience information of the intellectual capital through the start of current decade has allowed to determine general approaches, to produce about single structure of companies’ knowledge assets. Just about all this problem researchers and managers allocate three aspects of intellectual capital:

1) human capital (HC);

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

3) customer capital (CC).

In some models , the customer capital is known as the capital of relations, or connections (relational capital), but it is understood also as loyalty and customer satisfaction.

Generally speaking, it’s possible to estimate a person’s capital volume from the quantity of intellectual workers and the quantity of information, skills and knowledge that they own, through the amount of leaders, idea men, “revolutionaries”. The need for personnel knowledge and abilities is characterized by specialists’ capacity to solve difficult, non-standard, unexpected problems; employees’ independence and trainability; the capacity of managers to manage transformations; creative activity; tendency to partner interaction; etc. We could estimate progression of a person’s capital through proportion of the forms of activity “inspiring” on search of latest solutions forcing company’s employees to learn new things. Finally, level of human capital binding is estimated through personnel adherence to company’s insight and values, employees’ satisfaction by work and industrial relations, personnel loyalty for the company and retention of leading workers, company’s reputation about the labor market, etc. (Later in the work, a person’s Resources is going to be discussed more into details.)

Organization structural capital is reflected from the number and quality of partners; degree of business partner retention towards the enterprise; integration of the value chain plus an company’s role inside it; accessibility to a flexible and effective business network (on the global scale, too); information system quality; early detection system quality; involving of pressure groups into decision making; procedures of transformation of implicit knowledge into explicit one; partnership level in the organization; quality of network interaction; completeness and excellence of databases; trademarks and patents; codified understanding of technical processes (the quality of completeness and clearness of documentation reflecting consumer value creation within the organization); variety of prototypes for economic problem solution; intellectual property; backlogs on new items; 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, from the following characteristics: expected discounted income from available consumers; quantity of regular company’s customers, their be part of sales amounts, average cooperation experience; customer growth quality and prospects; customers’ satisfaction; company’s “ownership” of the marketplace standard; competitive advantage with new production launch; the level of the concluded contracts; the quality of customer retention towards the organization.

So, you’ll be able to tell that within the provided models there’s more common than distinctions. The overwhelming most of authors recognize presence of intellectual capital independent elements – human, organizational, client, however they are called. At the same time, presently there are a lot of terms anyhow connected with intangible assets: brand, business standing (goodwill), ip, non-material assets, expenses on researches and developments. What is relation of those terms with idea of an intellectual capital? It’s not quite obvious why the typical name “intellectual capital” is used to combine such essentially various and frequently without having the direct regards to the intelligence phenomenon as employees’ value system, enterprise image, brands, customers’ loyalty. Within our opinion, the uniting basis here could be the idea of intellectual capital circulation: employees’ knowledge and capabilities are embodied in organizational processes and relationship with partners that, subsequently, produce 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, in particular, the technique of intangible assets reporting, accepted and identified by the accounting organizations depends.