towards a new model for evaluation of intangibles

IntroductionThis thesis is based on the assumption that intangible assets have to be taken into account in all instances of the decision-making process and draws on numerous efforts to evaluate them and find an accurate measurement tool2. The thesis aims to list available references, which may be used to find all available information about evaluation of intangible assets3. Finally, it is a reference material, which would enable companies to increase their awareness of intangible assets and to choose the most appropriate method for their evaluation.

This is an in-depth research, which analyses and compares major methodologies of evaluating intangible assets and attempts to overcome the barriers resulting from lack of standardization and consensus in such areas as definition, classification and even importance.

Starting hypothesis4

H1: There is no universal method of valuing intangible assets, which would hold for any company and any circumstances.

O1: despite the existence of many evaluation methods, none of them is all-inclusive, or valid on its own without adjustments in any environment. With this hypothesis in mind, we attempt to prove that there is no adequate evaluation method that could enable successful management of intangible assets and that the term all-inclusive does not correspond to reality.

H2: Despite a notable evolution in recognition of intangible assets, they are not effectively reported for proper management and incorporation in financial statements, thus impeding standardization of their evaluation

O2: communication steps that have to be made in order to improve the recognition and management of intangible assets.

O3: find out whether companies have good grasp of different methods for evaluation of intangibles.

This hypothesis aims to find out whether there is a good communication system, which encourages

Intangible assets are among the key factors of success for any company, both at present and in future.

Towards a new model for evaluation of intangibles 1

Metrics

Strategy DocumentsT01 / 2011Cristina Álvarez Villanueva

Thesis

Document prepared by Corporate Excellence - Centre for Reputation Leadership, citing the doctoral thesis “Towards a new model for evaluation of intangibles” by Cristina Álvarez Villanueva, Universitat Jaume I, Castellón. 1. The justification of this study is based on the lack of standards in this field – intangibles have been overlooked for a long time in Economics and Accounting -2. The work titled The Systems of Evaluating the Intangibles and Their Relationship with Strategic Decision-Making in the Company. Current Situation (ÁlvarezVillanueva,

2007) lays the foundation for this research. The work is an introduction to the measurement of intangibles with an emphsis on strategic decisión-making in the business environment.

3. Although there are many texts discussing intangible assets, there is still no manual which would cover the whole scope of intangible assets and relate them to the models based on their characteristics.

4. The methodology used in this doctoral thesis is linear, developed in three main stages: 1) theoretical research (Contextual Framework and Theoretical Framework), which analyses features of different intangible assets; 2) Field work (Empirical Framework), used to check the starting hypothesis and questions that arose in the course of the research; 3) Findings and suggestions for further research (Conclusive Framework).

Thesis 2

Towards a new model for evaluation of intangibles

evaluation of intangible assets and their incorporation in the overall economic system of the organization, or whether this topic is explored only by large companies and only for short-term purposes.

H3: On many occasions evaluation of intangible assets is not performed because companies do not have a good grasp of all different evaluation methods, and often it is not possible to involve an expert who would be able to provide professional advice.

O4: investigate if there is a knowledge gap in the area of intangible assets and if a company needs to bring on board a person or a team who could be responsible for intangible assets.

O5: find out if due to this information gap, evaluation of intangibles is seen more as something strange than as something necessary for the company.

O6: find out whether the communication effort performed by the company in the area of intangible assets is sufficient.

This hypothesis aims to investigate whether an information gap may be the reason why evaluation of intangible assets is not fully effective and, consequently, the progress in management takes longer than it should.

CONTEXTUAL FRAMEWORK

Evolution of intangible assetsIntroduction of intangible assets into the balance sheet took place only in the 80s. Adam Smith, known as the father of modern economics, believed that the source of wealth for any company resided exclusively in production of material values. In his opinion, productive work created tangible products, which had value on the market, whereas unproductive work led to creation of intangibles. Everything changed in 1912, when Schumpeter in his Theory of Economic Development suggested the idea of intangible value in the economic system as well as innovation and the view of intangible assets as fundamental elements for the development and the basis of a company.

From this moment on, many researchers have demonstrated the importance of intangible assets and their contribution to creating value in a company by means of impacting both the internal and the external structure.5

Drawing on the findings of Bounfour (1998; 2003), one can highlight the increasing importance of intangibles

due to the growth and industrialisation of the services sector, the fact that production is no longer purely material, greater role of information and intangibles in the corporate competitive ability and greater concern for creating value for the stakeholders.

Increasingly, newly emerging companies from the very start focus on services and the fundamental importance of information. If in the past intangibles represented around 50% of the market value, at the moment this figure increased to 80%6. This is due to the new model of competition. However, there are still many organisations that do not draw up reports that would enable to evaluate their intangibles with the help of indicators. The reasons for this may by summed up in the following way:

Belief that only financial statements reflect the 1. true value of the company. Fear that the indicators may reveal confidential 2. information about internal infrastructure, clients or employees of the company. Lack of knowledge needed to analyse the 3. evaluation models.Lack of experience needed to choose the 4. right model.

Towards the definition of IAAt present no universal definition of intangible assets is adopted in the financial literature. However, the analysis of different definitions may lead one to identify their characteristics. Presented below are the features associated with an intangible matter:

Be identifiable1. , i.e. can be differentiated from other assets.Potential to generate profit2. , for without this an object cannot be considered an asset.Control,3. a company should be able to control its intangible assets. Thanks to this control, assets can be accounted for at a later stage.

The Economic and Business Dictionary edited by Arthur Andersen (1997:340), suggests the following definition

«Anything that does not have a physical presence and is not intended for sale. For example, intangible assets are industrial designs, goodwill, etc.»

However, the above definition is not accepted by empirical research. Based on her findings, the author recommends the following definition7

«All assets that are not physical or monetary, but can be identified and controlled, can generate economic benefits in future and contribute to creation of value for a company.»

5. See table Evolution of Theoretical Knowledge about the Intangibles in the appendix. Source (Bounfour, 2005:6-7).6. Measuring Intangible Equity (2002).7. Although we use the terms Intellectual Capital and Intangible interchangeably to refer to the same concept, in reality Intellectual Capital (hereafter referred to as IC) may

be considered as a type of intangible assets.

Thesis 3


If we break this definition down, the following components may be identified:

Intangible character is established: 1. non-physicalCompliance with the definition of an asset: 2. identifiable and controllable.Accounting conditions are observed: 3. non-monetaryTwo fundamental characteristics are 4. demonstrated: ability to generate future benefits and create value.The term “capacity” is avoided in order to not 5. to focus exclusively on the human aspect and “intellectual capital” due to its different nature.

Classification of Intangible AssetsIn order to develop a good evaluation methodology, one has to be familiar with the elements that are going to be measured, what forms them and how they can be classified8. The great variety of existing classifications of intangible assets point to the lack of consensus, which makes evaluation of these assets very difficult. The consequences are clear: lack of standardization, and different indicators/evaluation results depending on the chosen method.

Accounting Treatment of Intangible AssetsAccording to the general accounting rule, an asset is any resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. In order to comply with the condition of “intangibility”, the asset has to be identifiable, controllable and able to generate future economic benefits.

The Spanish accounting tradition classifies intangible assets as “inmovilizado inmaterial”. However, the name “activo intangible” as used by IASB and FASB for many years, is still missing from the Spanish accounting framework.9

In January 2005, the EU adopted a regulation on accounting norms with an objective to harmonise financial statements of companies, encouraging transparency and accountability. All companies have to present their statements in accordance with the IFRS (International Financial Reporting Standards). This may be a good occasion for introducing the definition of intangible assets into the statements. However, even according to the new rules, intangible assets will be recognised only partially. Therefore, as long as intangible assets are not recognised as such under the existing accounting standards, their evaluation will be a hard task.

The accounting treatment analysed in this study is structured in accordance with the classification suggested by Ramírez y Tejada10 (2009:175), later developed by Nevado y López (2002:18)11.

A) Identifiable intangible assetsIdentifiable intangible assets are those acquired by third parties, exchanged, those purchased or received as part of business. They may also be generated internally, like R&D expense or software.

Assets presented in the first group may generate future economic benefits, which are reflected in their cost. Assets presented in the second group, on the contrary, do not have a specific acquisition cost

8. Chapter 5 of the Thesis (Towards Evaluation of Intangibles) presents an overview of the most relevant classifications of intangible assets.9. There is only one standard that contains conceptual definition of intangible assets, IAS 38: an “intangible asset” is an identifiable non-monetary asset without physical

substance (IAS 38, Definitions).10. RAMÍREZ CÓRCOLES, Yolanda Y Ángel TEJADA PONCE (2009): “Activos intangibles identificables. ¿Se ha logrado alcanzar una convergencia internacional en su

tratamiento contable?” published in the Journal Estudios Financieros.Revista de Contabilidad y Tributación, Nº 310, Centro de Estudios Financieros, Madrid, pp 169-18411. NEVADO PEÑA, Domingo y Víctor Raúl LÓPEZ RUIZ (2002): El Capital Intelectual: valoración y medición, Financial Times-Prentice Hall, Madrid

Identifiable Non-identifiable

Acquired from third parties Generated internally

Acquired by another company

Generated internally

- Individually- As part of the business

- Other forms

Acquired or external goodwill

Internal goodwill (Intellectual Capital)

- R&D expenses- Industrial Property

- Intellectual Property- Administrative concessions

- Right of disposal- IT applications

- Franchise

- Clientele- Localisation

- Organisational structure- Prestige

- Know-how- Human capital

- Commercial channels

Visible intangible assets Invisible intangible assets

Intangible Assets

Thesis 4


and therefore are associated with a high degree of uncertainty and risk.

This affects their measurement, because acquired assets are easily measured (have a price), while those generated internally need other evaluation methods, which may be highly subjective, and are the object of this doctoral thesis.

B) Non-identifiable intangible assetsThe rest of intangible assets that comply with the definition of an asset but cannot be separated or identified, have a different accounting treatment. They, in their turn, may be acquired by another company (external goodwill) or generated internally (internal goodwill, intellectual capital, human capital, know-how, organisational capital, client capital, etc).

THEORETICAL FRAMEWORK

Evaluation methodsBusiness evaluation is key for business management, for it demonstrates the continuity and potential of the company. Unfortunately, due to a high degree of subjectivity, it is difficult to find a method which would allow one to conduct this evaluation. When we speak about the evaluation, we refer to the economic and financial value of an intangible asset. In other words, it refers to the monetary value rather than its subjective value.

Measurement of intangibles is essential for their adequate management. We are trying to evaluate them in order to assess the quality of management.

The methods of evaluation of intangibles are in fact a simplification of reality and an approximation of the exact value12. However, these methods enable to identify a trend, which demonstrate whether the company’s results are better or worse than in the previous analysis. In this sense the system of evaluating intangibles may be compared to the scales: it may never capture the exact value, but it is important to know whether the value identified is higher or lower than before13.

Classification of the valuation methodsThere are different approaches to the classification of evaluation methods14. This thesis draws on the classification suggested by Sveiby15 (2007) which

is based on two dimensions16. On the one hand, it recognises the following aspects:- organisational level- identified components

On the other hand, the way that results are demonstrated: - monetary value- non-monetary value

Depending on the place in this grid, four types of evaluation methods are identified:

1. Direct Intellectual Capital Methods, DIC2. Market Capitalization Methods, MCM3. Return on Assets Methods, ROA4. Scorecard, SC

Regardless of the methodology, it is important that the company is consistent in application of the chosen method. It doesn’t make sense to change the method frequently because that would not allow the company to have valid comparable results. One has to keep in mind that every method has its advantages and disadvantages depending on the moment or the circumstances in which the method is applied.

Financial methods (DIC, MCM and ROA) are based on the use of financial benchmarks that reflect the value of the intellectual capital in the company.

They are useful in the situations of merger/purchase and during market evaluations/comparisons, for they allow one to evaluate the intellectual capital in monetary terms. Moreover, by yielding a numerical results, these methods enable one to compare companies of the same industry, or assess mergers and acquisitions.

Advantage: yield a numerical value, show how much intangible assets are worth

Disadvantage: confining the value of the asset to a specific quantity may be superficial. At the same time, they do not allow one to identify and measure different elements of the intellectual capital.

Non-financial methods (SC) demonstrate the relationship between the company’s current activities and the capacity to generate benefits in future. These methods offer a global vision of the strategy in the long run, minimising the uncertainty of the decision-making process. Therefore, they deliver information

12. Many researchers agree that it will never be possible to measure the value of intangibles precisely, because in many cases the measurement has a subjective element (commitment, customer satisfaction, loyalty…)

13. This perspective corresponds to the Principle of Uncertainty suggested by W. Heisenberg (1959).14. Irene Pisón Fernández speaks about simple and compound methods; Castilla bases his classification on three criteria: the purpose of evaluation, what is being evaluated, how

to evaluate it; Salinas Fabbri uses two criteria: the purpose and the object of evaluation; Villacorta introduces four criteria: presentation of the results in the quantitative or qualitative form, whether directo or indirect methods are used, whether indicators are used for the calculations and the purpose of the method: the model of control and management, a theoretical model, or a model with a different purpose; Nevado y López, in their turn, simplify the classification saying that there are two major types: conceptual models and global or individual models; Viedman suggests a completely different classification known as the Theory of Intellectual Capital; Finally, Levy y Duffey base their classification on the result: quantitative methods, qualitative methods and other models (the ones that do not belong to any of the two groups).

15. SVEIBY, Karl-Erik (2007): Methods for Measuring Intangible Assets, [available on Internet at www.sveiby.com]16. The choice is based on the fact that this classification draws on earlier works and has a logical and rational structure.

Thesis 5


not captured by financial methods: information about benefits that may be generated in future by activities that cannot be quantified.

Advantage: they offer a snapshot of the situation in the organisation, an immediate overview of the general financial position, and where improvements are needed. These models usually complement financial schemes. It is a tool, which shows how intangible resources generate financial results.

Disadvantage: highly individual character. They depend on the situation in which they are applied and therefore have to be adjusted to every company individually. Because of that, it is difficult to draw comparisons. Besides, as they don’t yield an exact numerical result, they are less favoured in the

business environment. Instead, they may generate large volumes of data that are hard to analyse and communicate without a necessary purely financial perspective. On the other hand, the indicators used by these methods are not convenient for the following reasons: a) it is difficult to separate the indicators or to classify activities of the company in terms of the indicators; b) in many cases they are not connected; c) they are difficult to compare; d) they are subjective; e) there are too many indicators.

Detailed Classification of IA Evaluation Methods The below table is based on the Methods for Measuring Intangible Assets by Sveiby and complemented by other relevant evaluation methods.17

Non-Monetary Monetary

Identified components

SC Methods- BSC- Business IQ/Topplinjen- Celimi- CIBC- Danish Guidelines- Holistic Accounts- IAM- ICBS- IC-dVAL®- IC-IndexTM- IC-RatingTM- Knowlege Audit Cycle- Dow Chemical Model

- University of Western Ontario Model

- Intelect Model- Intellectus Model- MAGIC- Meritum- NICI- Recommendations of

Tjänesteförbundet- Skandia Navigator- Valoración y Gestión- Value Chain

ScoreboardTM

-DIC Methods- AFTF- Citación Ponderada

de Patentes- DEC- FiMIAM- HRCA- IAMS- Inclusive Valuation

Methodology- Intellectual Asset Valuation- Technology Broker- The Value Explorer

ToolkitTM- TVCTM- VCI

Organisational level

MCM Methods- Balance General Invisible- CFROI- CVA- FiMIAM- IAMVTM- Matriz de recursos- MBV- MVA- Q de TobinROA Methods- Architecture for Intangibles

(Human Capital)- CFROI- CIVTM- CVA- EVATM- KCE- Modelo Matemático- MVA- NOVA- VAICTM

Evaluation Methods for Intangible Assets18

17. The document titled Overview and Classification of Existing Evaluation Methods for Intangible Assets presented in the Appendix corresponds to Chapter 8 of the thesis and contains a guide to existing evaluation methods for intangible assets.

18. Methods highlighted with gray will be discussed in more detail in the next section. They were chosen base don the following criteria: 1) the most important and recognised methods in each category according to many authors; and 2) methods that are innovative and clearly different from all others.

Thesis 6


Method Characteristics Pros Cons

MCM - based on the market capitalisation

- appropriate for demonstrating the economic value of the Intellectual Capital.

- appropriate for benchmarking and comparisons.

- does not provide information about the components of the Intellectual Capital

- a purely economic focus limits the perspective

ROA - based on return on assets

- appropriate for benchmarking and comparisons

- determines the economic value of the Intellectual Capital

- is based on traditional accounting rules, and is therefore easily understood by accountants and finance professionals

- does not provide information about the components of the Intellectual Capital

- a purely economic focus limits the perspective

DIC - estimate the economic value of intangible assets by identifying their components

- have to be used in conjunction with the SC methods when standard indicators are defined

- enables evaluation of different components of the Intellectual Capital

- enables combining monetary and non-monetary values

- a clear and easily understandable snapshot of the company’s intellectual capital

- measurements are based on events

- better representation of cause-effect relationship than in the case of financial methods

- measurements are individual for each company

- not appropriate for benchmarking or comparisons

- the more components are analysed and the more values are obtained, the harder it is to conduct the evaluation

SC - identify the components of the Intellectual Capital and generate indices and indicators that are reflected in graphs for scorecards

- quickly deliver the results which are easily understood by the company

- are easily adjusted to detect and correct mistakes in the processes of the company

- a wide scope of results that may help to rectify the company’s current policies

- sensitive to the changes of the context

- the amount of resulting information may be hard to analyse; it is difficult to obtain a single numeric result.

Formula (value of IA)

market valueq = –––––––––––––––––––––––––– assets_replacement_value

Characteristics- this is not a method, it is an indicator- approximate evaluation of IA - multiple applied to the assets’ book value - precursorof the IA evaluation methods

Pros- offers a global view- not necessary to calculate the rate of return - useful for comparing enterprises

Cons- hard to obtain the necessary information

(replacement costs)- depends on the market

Model: Tobin’s Q Rate (James Tobin)

1 MCM methods: calculate the difference between the market capitalisation and the book value as the value of its intellectual capital or its intangible assets:

Thesis 7


Model: Market toBook value (SternStewart andLuthy)


market valueq = –––––––––––––––––––––––––– assets_replacement_value

Characteristics- multiple applied to the assets’ book value- if equity is negative, the overall result is negative

Pros- relatively stable- useful for comparing enterprises -may be used even if the results are negative

Cons- does not provide the exact value of the

Intellectual Capital: the represented items are not intangible assets

- sensitive to accounting standards

Modelo: FiMIAM (Irena Rodov and Philippe Leliaert)

Formula (value of IA)Market value = Tangible capital + Realised intellectual capital + erosion of the intellectual capital

Characteristics- mixed method (MCM and DIC)- evaluates the Intellectual Capital and yields a

numerical result - attempts to link the value of the Intellectual

Capital with the market value rather than the book value

- conducted in six steps

Pros- a simple methodology that can be applied to any

company - numerical result- takes into account market fluctuations (“erosion

of the intellectual capital”)- in addition, measures tangible assets

Cons- finite values of the chosen components of the

intellectual capital - based on the book value of the company

(historical cost)- subjectivity in the choice of the components of

the intellectual capital

Model: Balance Invisible (Konrad Group and KarlSveiby)

Formula (value of IA)Intellectual capital = Individual capital + Structural capital

Characteristics- this is not a method, it is a model of evaluating

intangible assets - precursor of the evaluation methods

Pros- development of an IA classification- generates indicators- a clear view of intellectual assets

Cons- does not yield a numerical value- is not appropriate for comparing enterprises - subjectivity in the choice of IA

2 ROA Methods: offer purely financial solutions, in line with the requirements of the shareholders. Used to evaluate the results, not the organisation:

Model: EVA (Stern Stewart & Co.)

Formula (value of IA)EVA = (ROI – WACC) x Invested Capital orEVA = BAIDT – (VC x cp)

Characteristics- a measure of financial performance based on the

value - enables to estimate the value of the company and

its profitability - a very powerful and popular indicator - it was a great step to recognise that resources used

in a company have an associated cost

Pros- enables one to analyse individual business units - enables one to see the real growth of the company - a good starting point- easy to use and appropriate for making

comparisons

Cons- does not consider future performance - may lead to inconsistencies- businessness profitability has to be higher than

the financing costs- higher accuracy demandsa more complicated

evaluation procedure- short-term focus

Thesis 8


Model: CFROI (HOLT Value Associates)

Model: MVA (Stern Stewart & Co.)

Model: CVA (Boston Consulting Group)


Cash flow – amortisationCFROI = –––––––––––––––––––––––––– Total gross assets

Characteristics- measures return on investment, taking into

account the inflation, age and life of the assets and different amortisation methods

- may be expressed as a ratio or IRR

Pros- relates the results to the company’s ability to

generate cash flows - adjusted to inflation- may be calculated at the level of business units or

at the level of the whole business

Cons- more complicated and less intuitive than EVA- does not take into account the risk of the company - based on historical data- does not have a future perspective

Formula (value of IA)MVA = Market value – invested capital

Characteristics- enables one to detect value in a company - closely related to EVA: it is equal to the sum of

actual values of all EVA expected in future

Pros- allows to determine expectations of the results

delivered by the strategies that may be adopted- incorporates expectations of the sector

Cons- does not take into account the opportunity cost of

the invested capital - does not take into account the dividend- cannot be applied at the level of business units - is not valid for companies not listed on the stock

exchange

Formula (value of IA)CVA = Invested capital x (CFROI –K)

Characteristics- an index based on the value- evaluates the creation or destruction of value in a

company in a consistent and numerical way - a variety of EVA

Pros- may be applied at the level of strategic units - useful when operations are cash-intensive - links short-term and long-term perspectives of

the company

Cons- has to be measured at different times in order to achieve comparability

-a more complicated calculation than EVA

Model: CIV (Evanston Business Investment Corp. Illinois & Kellog School of Business, Northweste)

Formula (value of IA)CIV obtained in seven steps

Characteristics- assumes that the value of intangibles is defined as

the company’s capacity to take over an average competitor which has similar tangible assets.

- a good complement to the MBV method

Pros- makes it possible to compare companies of the

same sector or business units within the company- shows whether a company can generate future

benefits before it is noticed by the market - global index of IA- easy to use

Cons- does not break down IA into components- is not valid if the company’s ROA is below the

average for the sector

Thesis 9


Model: TechnologyBroker (Annie Brooking)

Model: DEC (Eduardo Bueno Campos)

3 DIC Methods:Direct methods calculate the value input of intangible assets by identifying different components. These components may be evaluated directly as individual elements or as an aggregated coefficient.

Intellectual Capital Intellectual Capital = Human capital + Infrastructure assets + Intellectual property assets + Market assets

Market value= IC + Tangible assets

Characteristics- Objective: audit the value of the intellectual

capital - Attaches more relevance to the IA derived from

intellectual property

Pros- the method evaluates intellectual capital of the

company - importance of the intellectual property- related to the objectives of the company - integrated method

Cons- subjectivity in transforming quantitative results

into qualitative - does not take into account synergies- does not have a time horizon- subjective classification of IA

Intellectual CapitalIntellectual capital = Human capital + Organisational capital+ Technological capital + Client capital

Market value= IC + Book value of the assets

Characteristics- Objective: reinforce the business strategy with knowledge management by locating essential competences

- approaches IA as key factors in creating value - based on the model of competences

Pros- focuses efforts on the objectives of the company - profesional and personal growth of the company’s

members- creates an intelligent organisation that manages

cash flows of the company

Cons- does not take into account the time horizon- does not involve indicators- confusion about the term “competence” and its

definition - different criteria are used by different auditors - inadequate tools may be applied - may be tempted to allow itself follow the inertia of

the company

Model: The Value Explorer (Andriessen & Tiessen)

Intellectual CapitalIntellectual Capital = Human capital + Structural capital+ Client capital

Market value-

Characteristics- Objective: analyse the origin of IA and calculate

their value - model of essential competences- qualitative and quantitative result

Pros- monetary valuation of IA - projection of results into the future - works well for companies whose activity is based

on patents

Cons- takes into account only essential competences- does not take into account synergies of the assets - quantitative value is not reliable and has

redundant elements- it is not an integrated method

Thesis 10


Model: FiMIAM (Irena Rodov & Philippe Leliaert)

Model: Balanced Scorecard (BSC) (Robert Kaplan y David Norton)

4 SC Methods: Scorecard methods are based on indicators and indices with underlying intangible assets, with results shown as graphs. They are similar to direct methods but do not yield numerical results. Their advantage is providing an all-embracing view of the intangible assets, which may be applied at any level of the company and may be adapted to any type of the company.

Intellectual CapitalIntellectual Capital = Human Capital + Structural Capital + Client Capital

Market Value= Tangible C. + Realized CI + erosion of the intellectual capital

Characteristics- mixed method (MCM/DCI)- evaluates the IC and yields a numerical result - attempts to link the value of intellectual capital

with the market value rather than book value- conducted in six steps

Pros- simple methodology that can be applied to any

company - numerical result- takes into account market fluctuations (“erosion

of the intellectual capital”)- evaluates tangible assets

Cons- finite values of chosen IC components - based on the company’s book value- subjective choice of IC’s components

Intellectual Capital Intellectual Capital = Perspective of the client + Internal perspective + Perspective of the employee + Financial perspective

Market value= Intellectual capital

Characteristics- A system of financial and non-financial

evaluation - Objective: view of the company from four

perspectives, characterised by a cause and effect relationship

- Useful as a complement to other financial measurements

- Translates the company strategy into financial and non-financial indicators

- Creates strategic maps

Pros- analysis of horizontal strategic measures - evaluates the contribution of every link in the

value chain and its overall performance - easy to understand, no prior experience needed- attention to the needs of the stakeholders- can be applied to companies and organisational

areas- takes into account interrelations

Cons- weak financial analysis- indicators have to be chosen carefully- subjective indicators- rigid model

Model: Skandia Navigator (Lief Edvinsson)

Intellectual CapitalIntellectual Capital = Human Capital + Structural capital ( =Client C. + Organisational C. (= Innovation C.+ Process C.))

Market value= Financial capital (past) + Intellectual Capital (present and future)

Characteristics- based on the BSC and the Konrad model- Objective: organise management of intangibles

based on five perspectives (financial, client, process, research and development, HR)

- human focus: central element- key factors + strategic objectives

Pros- incorporates financial elements- improved predictive ability - a broader view of the company - can be adapted to any company

Cons- experienced personnel are needed for the

application - it is difficult to apply the same methodology to

different types of capital and their relations- does not analyse synergies between the areas

Thesis 11


Model: Intangible Assets Monitor (IAM) (Karl ErikSveiby)

Model: IC-dVAL® (AhmedBounfour)

Intellectual CapitalIntellectual capital =Internal structure +External structure +Competencies of the personnel

Market Value= Intangible Assets + Invisible Financing

Characteristics- Objective: to see whether intangible assets generate

value and measure them from 4 perspectives (growth, efficiency, innovation and stability)

- Fundamentally non-financial indicators- Business value from the non-financial point of view- Distinguishes between the human and structural

capital- Suggests that a balance may be achieved by

combining the intangible (invisible) and the accountable (visible) information

Pros- view of the company from the non-financial

point of view- combines two aspects, which makes it easy to

understand (external and internal)- easily comparable results

Cons- only 3 indicators- few financial indicators- companies are not compared- does not yield numerical value of the assets- subjectivity in the choice of the assets should be

taken into account

Intellectual CapitalIntellectual Capital = human capital + structural capital

Market value= Intellectual value of nations = financial wealth+ intellectual capital

Characteristics- Objective: view of companies from four different

perspectives and two dimensions- perspectives: resources, processes, output and

intangible assets

Pros- Enables to compare companies- Enables to make projections from the

microeconomic level (company) to the macroeconomic level (nation)

Cons- does not take into account the relationship

between the utilisation of the resources and the result

- Not fully adequate structure of the intellectual capital

EMPIRICAL FRAMEWORK

The thesis then proceeds to an empirical study. The goal of the field work is to expand the scope of study by incorporating qualitative research. Another objective is to obtain additional relevant information about the state of intangible assets in companies in order to highlight the practical aspect of the issue.

The fieldwork included 16 in-depth interviews with experts on the issue19.

CONCLUSIVE FRAMEWORK

Findings

1. The definition of Intangible AssetsThe study found the need for a unified definition of intangible assets, which still does not exist. The author suggests the following definition:

“Any non-physical and non-monetary asset that may be identified and controlled, that may generate

economic benefits in future and contributes to creation of value.”

2. The need for a detailed classification of intangible assets Both the theoretical and the empirical dimensions point to the need for a detailed classification of intangible assets. However, the degree of accuracy should depend on the circumstances and reasonable effort.

3. The role of a detailed classification in evaluation of intangible assetsA classification of intangible assets would be an important tool for their evaluation. When intangible assets are localised and individually described, one can compare them and apply appropriate evaluation methods. But it does not mean that this classification has to be complicated. One has to bear in mind that most of the methods are based on a simple formula: intellectual capital = human capital + structural capital + relational capital.

19. 72 experts have been contacted in the course of the field work, and 33 responses have been obtained. 16 of them have been positive and led to interviews.

Thesis 12


4. Transactions with intangible assets and commercial contracts Companies exchange some of the intangible assets by entering into transactions (cooperation agreements, purchases of companies or products, etc.), which imply exchange of knowledge, brand, image, trust, responsibility, etc.

5. Intangible assets derived from synergies The thesis comes to a convincing conclusion that synergies may generate intangible assets and that existing intangible assets may be expanded by synergies, which may be an advantage for companies creating synergies. However, it is important to be aware of the context in which this process occurs.

6. Intellectual capital and management of strategic resourcesThe thesis shows that measurement of the intellectual capital helps to manage strategic resources.

7. Accounting regulations for intangible assetsLack of accounting standards has been observed with regard to the need of communicating intangible assets. Introduction of such standards is a fundamental step in their evaluation, however their development is still at an early stage.

According to the author of the thesis, accounting standardisation is an important driver of evaluation of intangible assets, as she states that “while there is no concrete and clear impact on financial statements of companies, valuation of intangible assets will remain optional”.

8. Intangible assets on the balance sheet of the companyAlthough accounting standardisation of intangible assets is an important step in their valuation, it is not fundamental. In fact, there is no consensus with respect to their incorporation into the balance sheet. At the same time, there is a tendency to report them in the discussion section of the financial statements. Álvarez points out that although such reporting is of purely informative and decorative character, the mere fact of including intangible assets in the financial statements would be the first step towards drawing attention to them.

9. Types of evaluation methods of intangible assetsThe frameworks of this research point clearly to the fact that there is no consensus on the types of evaluation methods that can be applied to intangible assets. Each of the methods offers certain advantages and has drawbacks that have to be taken into account depending on the moment or the situation. But it is important to understand that the chosen method has to be applied consistently over a period of time in order to have comparable and conclusive results.

The author believes that it is correct to combine financial and non-financial methods. In this way,

on the one hand, financial methods offer results that can be easily compared to the situation on the market, which is important for concluding contracts; on the other hand, non-financial data improves the quality of valuation and management. In fact, many experts interviewed in the course of the empirical study, point to this difference: financial methods for evaluation and non-financial methods for management.

Álvarez Villanueva justifies the creation of a new measurement unit, which, like meter is used for measuring distance or gram for measuring weight, would be able to measure certain characteristics of intangible assets. Álvarez is not a proponent of a global index, which in his opinion would lead to the loss of innumerable shades of meaning. However, he supports creation of a standardised index for each perspective, whose numerical value would have the same value as the financial results (which describe other aspects of the business).

10. Objectives of projects for evaluation of intangible assetsChoosing the evaluation method implies not only knowing the characteristics of the company and its environment, but also taking into account the purpose of evaluation: a transaction, management or accountability. Depending on these factors, one may opt for one or another classification of the methods. Clear understanding of the evaluation’s purpose helps to obtain valid results.

11. The role of intangible assets in strategic decision-makingEvaluation of intangible assets may yield information about generation of value, that may be very useful for the company. It means that intangible assets play an important role in strategic decision-making.

The process of strategic decision-making in a company has developed over time from the classic perspective, where only tangible assets were taken into account, to an integrated approach based on lessons learnt in the past. Intangible assets affect the strategy, and not the other way around.

Álvarez Villanueva believes that evaluation of intangible assets may provide valuable information about the company and therefore should be included in any strategic planning, both short-term and/or long-term.

12. A unified methodThere is no unified method for evaluation of intangible assets, which would enable integrated approach regardless of the circumstances and the environment of the company. In fact, the thesis suggests that one should discard this utopic vision and instead unify the criteria to develop methods that can be applied to different categories depending on the focus.

Thesis 13


It is clear that a combination of methods is needed, which would eliminate those that are mere variations of already existing ones. At the same time, the wide range of methods should be preserved which would enable one to choose the best method depending on the objectives and the context.

13. Intangible assets derived from communicationThere are intangible assets that are derived from communication and depend on it. They are associated with the same problems in terms of evaluation and management as other intangible assets. Brand is probably the most significant asset in this group.

14. Responsibility for intangible assets derived from communicationThere is currently no consensus on who should bear the responsibility for the management of intangible assets in companies.

The author believes that the responsibility for management of intangible assets should be assigned depending on the type of the company. More specifically, on its size and corporate structure.

15. Reporting the intangible assets: discussion section or the balance sheetIncluding intangible assets in the balance sheet of the company implies the use of financial methods for recording them. An exception would be creating new measurement methods that could convert the results of non-financial methods (indicators) into elements with numerical values that could be measured and compared, but only if such method is possible.

Regardless of the used method, the reality demonstrated by the empirical framework is that the information about intangible assets is included only in some cases. That’s why it is recommended to include at least a verbal description of intangible assets in the financial statements of the company. Their incorporation in the balance sheet should be subject to obligatory standardization both in terms of definitions and the evaluation methods.

Álvarez Villanueva believes that it is important to include a verbal description of the situation with intangible assets in the company.

16. Management of intangible assets in futureThe importance of intangible assets will be increasing until it becomes a norm for companies. This will be a more professional approach, based on creation of value, focused on experiences and helping companies to survive on the market.

The author agrees that this step will take longer than the phase of recognition and management, and clarifies that one should not confuse management of intangible assets – where they can be treated as a whole or divided into categories – with evaluation,

for it is possible to manage something without knowing its exact value.

Addressing the initial hypothesis, objectives and questions There are some specific conclusions related to the initial hypothesis

H1:• There is no universal failure-proof method of evaluating intangible assets that could be applied to any company and in any circumstances

H2:• Despite significant evolution in recognition of intangible assets, they are not communicated in a way that could be effective for appropriate management and included in financial statements, thus impeding standardization of the evaluation process.

H3:• On many occasions evaluation of intangible assets is not performed because companies do not have access to different evaluation methods. In many cases it is impossible to involve an expert who could offer advice.

Addressing theobjectives:

O1:• Confirm that despite the existence of numerous evaluation methods, there is no single method that could be valid on its own, and could be universally applied in any environment.

There is clearly no universal method for evaluating intangible assets for their proper management. Therefore, the characteristic “universally” does not correspond to reality. The conclusion is that none of the methods is valid on its own.

O2:• Steps that should follow communication in order to improve the recognition and management of intangible assets.

The response may be obtained by means of combining the results of the theoretical and practical approaches. First, it is necessary to review the treatment of intangible assets in acconting as well as the terms and conditions to follow; the empirical perspective demonstrated the need for reporting and suggested including intangible assets in the descriptive part of the reports or the balance sheet of the company. Communication should be followed by the below steps:

1. detect and identify intangible assets2. understand their context in the company3. determine who is responsible

for their management4. apply the necessary management

measurements5. communicate their existence and

evolution across the organisation6. decide whether they should also

be communicated to external parties and in what way

Thesis 14


O3: • Find out whether companies have access to different methods for evaluation of intangibles.

The answer is that companies do not possess sufficient information about the methods of evaluation.

O4:• Find out whether there is a knowledge gap in the area of intangible assets and if one person or team in a company can be assigned responsible for their management.

The answer is that there is not enough information about this field and that it is needed to determine who will be responsible for the management of intangible assets. Clearly, Directors for Communication should not be the only ones responsible for intangible assets. This should be decided individually in every company depending on its characteristics and needs.

O5:• Find out whether due to this lack of information, evaluation of intangibles is seen more as something strange rather than necessary for an average company.

This objective is addressed primarily in the empirical way, which indicates that although some companies are not aware of intangible assets, these cases are quite rare. In fact, every day they are recognised more and more, and one can hope that in future significant progress will be made in this sphere.

O6: • Find out whether the extent of communication about the intangible assets in the companies is or is not sufficient.

Communication has to be more intensive and cover all companies to convince them of the need to manage these assets.

Answers to the questions raised by the study:

P1• : Is there a one-way relationship between the company’s strategy and its intangible assets?

Yes. Both the theory and the practice confirm that the assets are related to the strategy of the company.

P2• : Will measurement of the intellectual capital help to improve the management of the company’s strategic resources?

Yes. Intangible assets have to be taken into account in the process of strategic decision-making, in all decisions that affect the company’s strategy – this is proven by both dimensions of the research.

P3• : Who is responsible for management of intangible assets? Is it the Communication Director?

The answer is no. Opinions on this matter differ, and the answer depends on the size and type of the company.

P4• : In practice, do intellectual capital and intangible asset mean the same?

No. However, there are empirical – not theoretical – discrepancies with regard to the difference between these two terms. From the theoretical point of view, intellectual capital is an element of intangible assets.

P5• : Can intangible assets arise from synergies between companies? Are they in that case transferrable and may become objects of contracts?

Yes. Both the academic and practical dimensions point to the fact that intangible assets may be of internal or external origin.

P6• : Would it be possible in future to develop an evaluation method that would estimate the exact value of intangible assets?

No. Progress will be made in terms of recognition and importance of intangible assets. But one has to discard the search for a universal method as unrealistic both from the theoretical and practical points of view.

P7• : Do companies have access to different methods of evaluation of intangible assets?

No. Results of the empirical research show that communication about these assets should be improved.20

Further steps

1. Development of a new evaluation method based on the findings of this doctoral thesis.

Having carried out an in-depth research on evaluation of intangible assets with an overview and description of most of the existing methods, the author believes that it is an optimal moment for starting a new line of research: creating of a new method.

As the advantages and shortcomings of all methods have been analysed, the author believes that it may be quite easy to determine which aspects can be excluded from the new method, always bearing in mind the initial hypothesis (H1: There is no universal method for evaluating intangible assets).

The method should be focused on business communication and organisational management which could be an improved version of some of the existing methods. The author notes that in order to test the effectiveness of the method, it should be piloted in several companies. After the trial period, preliminary conclusions can be made.

2. Intangible liabilities

The author believes that there is a need to carry out a research on intangible liabilities in order to establish the degree of their relevance.

20. As follows from earlier research, only a few companies communicate the situation with their intangible assets and even fewer account for them. According to the study carried out by Deutsche Bank Research, this is explained by the following reasons (Hoffman, 2005): 1) Accounting regulations provide a basis for measuring the value of intangible assets only in the cases of mergers and acquisitions; 2) El mostrar su valor y el miedo a que esto suponga dar información que aventaje a los competidores; y 3) la inexistencia de un lenguaje común en la valoración de activos intangibles, que aúne los resultados y permita realizar comparativas.

Thesis 15


The term intangible liability is starting to gain ground. It seems that it should be treated with the same attention as the intangible asset.

3. Territorial intangible assets

The theory of intangible assets in the business area can be extended to other areas, such as territories, nations or sectors.

What are the components of the intellectual wealth of nations? How is it related to the intellectual capital? What is its true value? How can it be measured and/or managed?

These are just some of the questions that need to be answered.

4. Knowledge management

According to the author, the thesis opens a path for further research on the models of knowledge management, such as strategic resources and their relevance for the companies. This is due to the fact that the research of evaluation methods for intangibles carried out for this thesis is based on intellectual capital and not on the basis of knowledge creation21.

21. The autor believes that it is necessary to develop solid knowledge of the subject matter before including intangibles related to knowledge into the framework of this discussion. Doing this would help to broaden the vision of the field instead of reducing it to just one category of intangibles.

Theories of intangibles

Key authors Key viewpoints

Macroeconomic perspective

Theory of the human capital

Becker, 1975Kendrick, 1976Schultz, 1969, 1971Bartel, 1991, 1992

Human capital is considered an important aspect of investments in the physical capital. Individuals are viewed as investors, especially in terms of long-term education. Human factor is an important consideration when it comes to increasing the productivity and innovation by means of expanding the know-how.

Theory of technological change and innovation

Pasinetti, 1981Bernstein, 1989Solow, 1957Arrow, 1962Mansfield, 1968Mansfield et al; 1977Griliches, 1957Sherer,1980Soete y Patel,1985Mohnen y Lepine, 1991

Technical change is an accumulative process. Recent studies uncovered the processes of enhancing innovation and the existence of important differentiating factors. Besides, these studies demonstrate clear evidence of the impact that innovation has on productivity.

Intellectual investment

Caspar y Afriat, 1988Buigues et al, 2000Dosi, 1984Freeman y Perez, 1988Machlup, 1962

Business efficiency depends on the utilisation of intangible resources (intellectual investment). This implies the importance of creating an environment that encourages innovation.

New growth theories

Romer, 1986, 1990Lucas, 1988Grossman yHelpman,1991Barro y Sala-i-Martin,1995

The accumulation of knowledge is the main source of growth. Knowledge includes different elements: human capital, organisational capital, elements of physical capital and technical change.

Evolution theories

Nelson y Winter,1982Dosi, 1988Amendola y Gaffard, 1988Carlsson y Taymaz,1991Carlsson y Eliasson, 1990

The core of a company’s behaviour is its everyday processes. Companies are managed by learning processes rather than optimisation. Innovation is an accumulative (incremental) process.

Analytical approximation

Nakamura, 2001OECD, 1992INSEE, 1992CBS, 1995

Investments in intangibles may be focused if different elements are considered, such as R&D, technological costs, software, market research, distribution expenses or professional education. During the last 20 years, intangibles have been contributing considerably to GDP, exceeding tangible investment. Underestimation of intangibles leads to underestimation of the GDP.

APPENDIX 1

Evolution of theoretical knowledge about intangibles (Bounfour, 2005:6-7)

Thesis 16


Theories of intangibles

Key authors Key viewpoints

La perspectiva microeconómica

Based on competence

Hamel y Prahalad,1990 Expectations of the market are volatile. Besides, business strategies that are based on essential competences are more efficient than those based on market expectations.

Based on resources

Barney, 1991Penrose, 1959Wenerfelt, 1984,1989Dierickx y Cool, 1989Grant, 1991, 1996Peteraf, 1993Nonaka, 1994

Difference between results within the same industry are more impotant than those between industries. These differences are mostly attributable to the specific combination of resources (intangibles) required by each company.

Based on dynamic capabilities

Teece, Pisano y Shuen,1997Teece, 2000

Sustainability of competitive advantages decreases in the long run. Besides, companies have developed dynamic capabilities, such as, for example, “the capacity to manage unique intangible assets”.

Based on intellectual/intangible capital

Brooking, 1997Mouritsen et al., 2003Bounfour, 1998Edvinsson y Malone,1997Itami, 1987Lev, 2001Sveiby, 1997Stewart, 1997Mouritsen, 2003Buck,2003Paulic, 1998Bounfour, 2000, 2003a, b,cItami, 1989

Both the importance and the specific character of intangible resources in the knowledge-based economy require development and implementation of an analytical framework, which would include measurement tools for the results.

Based on creation of knowledge

Nonaka, 1994Nonaka y Takeuchi, 1995Nonaka y Konno,1998

Creation of knowledge is essential for organisational management. Therefore, it is important to develop different ways of conversion and dialogue, especially between the implicit and explicit knowledge.

©2011, Corporate Excellence - Centre for Reputation Leadership Business foundation created by large companies to professionalize the management of intangible assets and contribute to the development of strong brands, with good reputation and able to compete in the global market. Its mission is to be the driver which leads and consolidates the professional management of reputation as a strategic resource that guides and creates value for companies throughout the world.

Legal NoticeThis document is property of the Corporate Excellence - Centre for Reputation Leadership and has as its objective to share business knowledge about Brand, Reputation, Communication and Public Affairs Management.

This document is directed exclusively towards its addressee and contains confidential information, subject to professional secrecy, whose disclosure, copy or non-authorized use is against the Law. If you receive this document by mistake, let us know immediately and erase it without keeping a copy.

Corporate Excellence - Centre for Reputation Leadership is the owner of all the intellectual property rights of the images, texts, designs and any other content or elements of this product and has the necessary permission for its use, and therefore, its copy, distribution, public release or transformation is prohibited, without express authorization from the owner.

towards a new model for evaluation of intangibles

Business

stern stewart

lvarez villanueva believes

intangible assets derived

measuring intangible assets

evaluating intangible assets

account market fluctuations

ia evaluation methods

existing evaluation methods