Fair Value on Commons-Based Intellectual Property Assets

Jesús García-García1 & Mª Isabel Alonso de Magdaleno2

1 Department of Accounting - jesgar@uniovi.es

2 Department of Business Administration - ialonso@uniovi.es

University of Oviedo (Spain)

4th International Workshop on Free/Libre/Open Source SoftwareFriedrich Schiller University, Jena

July 1-2, 2010

Baruch Lev (2001). Intangibles: Management, Measurement and Reporting.

--- Wikimedia Foundation, Annual Report 2008/09--- Wikimedia Foundation, Annual Report 2008/09

--- Wikimedia Foundation, Annual Report 2008/09--- Wikimedia Foundation, Annual Report 2008/09

--- Wikimedia Foundation, Annual Report 2008/09 --- Wikimedia Foundation, Annual Report 2008/09

--- Novell Inc., Annual Report 2007

--- Mozilla Foundation, Annual Report 2008

--- Red Hat Inc., Annual Report 2008

--- Microsoft Inc., Annual Report 2008

R&D phase(expense)

technological feasibility with recoverability of development costs

pre-commercial phase(capitalize)

general realise

Expense/Capitalize general framework

Database:

• Kernel development history from Linux Foundation.

• Main variables: SLOC (total, added, modified and removed), days of development, commits, numbers of developers, employeers.

• EUROSTAT: Mean annual earnings in high-tech manufacturing and knowledge intensive high technology services for upper secondary and tertiary education.

Valuing the Linux Kernel (1)

Valuing the Linux Kernel (2)

Intermediate COCOMO'81

where,

a=3 b=1.12 ΠCi=1.55

Size=SLOC

Mean salary = 30,040€

Overhead cost factor = 2.4

Results validated developers observed vs. developers predicted. Linear regression R2=86.49%

Valuing the Linux Kernel (3)

Why to value commons-based assets?

• To raise finance

• To put a realistic value on business (know-how)

• For taxation purposes

• To enable effective decision-making

• To report accurately providing true and fair view

Similar to other assets

Not for licensing IP to others

How to report?

No report, it's free!

Corporate Social Responsability

Community Value Report

FinancialStatements:

intangible asset

Corporate Social Responsibility

• Self-regulation to monitor support to law, ethical standards and international norms integrated into business model.

• Perspective broader than inmediate short-term profits.

• Growing support from academia, accounting profession and firms.

• Humanitarism, human development, ecology …

How to value?

Past value

Future value

COST INCURRED: historical data

MARKET PRICE: needs comparable transactions

INCOME: discounted cash-flow /net present value

Initial booking value

Revised booking value (when needed)

Basic financial reporting frameworks

FASBFinancial Accounting Standards Board

GAAPGeneral Accepted Accounting Principles

Based on RULES

IASBInternational Accounting Standards Board

IFRS - IASInternational Financial Reporting Standards

International Accounting Standards

Based on PRINCIPLES

What is an asset?

Future benefit

Exclusive control

Transaction in the past

Future benefit

Value measured with reliability

What is an asset?What is an asset?

What is an intangible asset?

IAS 38

Identifiability

Control

Future benefits

So we would need ....

• An initial gross value

• Useful life and amortization rate, or ...

basis for determining an indefinite life

• Impairment losses (fair value)

• Reconciliation: additions, retirements or revaluations

Intellectual Capital Reporting

Community Value ReportCommunity profile Who are the members and how do they differ from other

communities

Potential to improve loyalty, generate new collaborations and convert from other projects

Collaboration duration How often community collaborates on development

How and when members become loyal

What is the frequency of contact with community

Community role How community is involved in product design, production, delivery or service

Community support What programs are in place to communicate and ensure community satisfaction

Community success How do customers purchase rate (if applicable), downloads rate and overall satisfaction measure up with similar products

Conclusions• Not enough development on financial reporting.

• Commons-based IP assets provide competitive advantage not reflected on financial statements and firm's value.

• Accounting framework is based on transactions, it does not report external voluntary contributions.

• There is chance to generate intangible open source assets, but additional research is needed to evaluate absence of exclusive control and not existance of previous monetary transaction.

• Community Value Report may be a first step as voluntary disclosure.

Thank you for your attention!

It's time for questions and comments.