1. Strategy and Management Accounting for Intangible Assets Mikhail Davydov Anna Devyatova Alexander Shalamov Ksenia Shneyveys

2. “Intangible asset management is the most important issue for top management at present…” Sumantra Ghoshal, Professor London Business School

3. Defining Intangible Assets Assets having no material form that appear as a result of (1) past events that has a (2) measurable effect and that presents a (3) future benefit. [Financial Accounting Standards Board (FASB)] Assets arising as a result of past events and possess three main attributes: they are non physical in nature, they are capable of producing future economic net benefits, and they are protected legally or through a de facto right [Bouteiller, 2002]

4. Defining Intangible Assets Non-physical sources of value (claims to future benefits) generated by innovation (discovery), unique organizational designs, or human resource practices (B. Lev, 2003) Any asset, belonging to a company or controlled by it, having no physical or financial (in case of financial investment) form, but capable of producing future economic benefits (D. Volkov, T. Garanina, 2007)

5. Defining Intangible Assets Three terms are widely used:  Intangible Assets — in accounting literature,  Knowledge Assets — by economists,  Intellectual Capital — in management and law literature; “and on the whole they come to the same: to the future benefits that are not embodied materially”. B.Lev, 2004

6. Defining Intangible Assets INTANGIBLE ASSETS = = INTELLECTUAL CAPITAL = = KNOWLEDGE ASSETS = = INTANGIBLES  Intangible Assets, recognized according to the accounting standards in accounting and bookkeeping records  Other Intangible Assets -- Intangible Assets non- recognized in accounting and bookkeeping records

7. Defining Intangible Assets Composition and structure of intangible assets

8. Defining Intangible Assets HUMAN CAPITAL Definition capability of a company to benefit from knowledge, skills and experience of employees, which immanently pertain to the latter. For example:  capability for innovations  creativity  know-how and experience  ability to work in a team  motivation  learning capability  educational and professional level  loyalty etc.

9. Defining Intangible Assets RELATIONSHIP CAPITAL Definition capability of a company to benefit from resources connected with the company's external relations (with customer, suppliers, and other counteragents). For example:  brands  suppliers  loyalty of the customers  distribution channels  business cooperation  alliances and partnerships  licensing agreements  franchising agreements etc.

10. Defining Intangible Assets ORGANIZATIONAL (STRUCTURAL) CAPITAL Definition capability of a company to benefit from attainments remaining inside the company. For example: Intellectual Property  patents  trademarks  service marks  name of origin of goods  copyright etc. Infrastructural Assets  corporate culture  internal administration of the work­flow  information systems  management philosophy  decision-making system etc.

11. Intangible Assets Why are they so important? Hard for competitors to imitate A powerful source of sustainable competitive advantage

12. Measuring Intangible Assets If you can’t measure it, you can’t manage it. George O. Odiorne Measuring the value of intangible assets is the holy grail of accounting. Robert S. Kaplan, David P. Norton

13. Measuring Intangible Assets 34 methods for measuring intangible assets (1950’s – 2004) Probably, the list is not closed! 4 approaches for measuring intangibles 1) Direct Intellectual Capital methods (DIC) 2) Market Capitalization Methods (MCM) 3) Return on Assets methods (ROA) 4) Scorecard Methods (SC)

14. 1) Direct Intellectual Capital methods (DIC) Estimate the $-value of intangible assets by identifying its various components. Once these components are identified, they can be directly evaluated, either individually or as an aggregated coefficient. Example: Technology broker (TB) Measuring Intangible Assets

15. (Annie Brooking, 1996) Assess the value of the IC of a firm based on diagnostic analysis of a firm’s response to 20 questions covering four major components of IC: market assets, human-centered assets, intellectual property, infrastructure assets. Questionnaire indicators. 3 methods of calculating dollar value for IC:  The cost approach: based on assessment of replacement cost of the asset;  The market approach: uses market comparables to assess value;  The income approach: assess the income-providing capability of the asset. Measuring Intangible Assets 1)DIC Technology broker (TB)

16. Calculate the difference between a company's market capitalization and its stockholders' equity as the value of its intellectual capital. Example: Market measure of company’s IC IC=market capitalization-stockholders’s equity Market value = $ 12.77 billion Stockholder equity = $ 1.47 billion IC = $ 11.3 billion Measuring Intangible Assets 2) Market Capitalization Methods (MCM)

17. Step 1 : determine the “realized IC” Market value = $ 12.77 billion Stockholder equity = $ 1.47 billion “realized IC” = $ 11.3 billion Measuring Intangible Assets DIC/MCM: FiMIAM methodology

18. Step 2 : identifying the relevant components of IC Step 3 : assigning relative weights to IC components Step 4: assigning value  organizational learning 0.04 * $11,3 billion = $ 452 million  knowledge product 0.08 * $11,3 billion = $ 904 million  patents 0.07 * $11,3 billion = $ 791 million

19. Measuring Intangible Assets 3) Return on Assets methods (ROA) Tangible assets and the annual financial growth figures are compared to the industry average. Above average earnings are then utilized to estimate the value of intangible assets. Example: Economic Value Added (EVA TM ) Calculated by adjusting the company’s disclosed profit with charges to intangibles. Changes in EVA provide an indication of whether the firm’s intellectual capital is productive or not.

20. The various components of intangible assets or intellectual capital are identified as indicators and indices are generated and reported in scorecards or as graphs. Measuring Intangible Assets 4) Scorecard Methods (SC)

21. Balanced Scorecard Method A way to systematically measure the alignment of company’s human, information and organization capital to the company’s strategy (by D. Norton and R. Kaplan)

23. Scandia Navigator Developed by Scandia (1994) IA are divided into: human capital, customer capital, process capital and innovation capital Focuses on: the financial focus, the customer perspective (customer focus), the process perspective (process focus), the human perspective (human focus), and the renewal and development perspective (innovation focus) 200 indicators

24. Scandia Navigator More suitable for service company – limited applicability for other industries All measures are expressed in monetary terms, which is not always desirable for IA Not clear as how the five perspectives in the Skandia Navigator relate to each other Equation that sums tangible and intangible assets might be wrong as soon as there is no clear distinction between them

25. IC Index Approach Splits IA into human capital and structural capital, separating “thinking” and “non-thinking” assets, then dividing them into subgroups A company needs to identify key IA indicators They need to be ranked according to their importance Indicators chosen must be weighted and summarized into a single index

26. IC Index Approach Allows organizations to measure how changes in the market or changes in other performance indicators correlate with the changes in the IC Index BUT Using aggregates makes it difficult to identify the key business drivers Weightings for each of the different measures is done subjectively which can be dangerous if managers get it wrong

27. IA Monitor Three categories are taken into account: 1. intangibles represented by competence of employees 2. intangibles related to the internal structure of the organization 3. those related to the external structure including brand names, image, and relationships with suppliers and most importantly relationships with customers Three measurement groups: growth and renewal, efficiency, stability

28. IA Monitor Emphasises the internal perspective Not a valuation approach

29. Summary  No single method of evaluation is perfect.  Company’s success depends not only on what is measured but also how the measurements are used.  Presence of a great variety of approaches indicates professional and scholar communities’ dissatisfaction with the existing ones.  In the years to come the question of developing optimal techniques for intangible assets’ measurement will play a significant role in management science.

30. Practical approach: Brand Valuation PricewaterhouseCoopers (1)Develop key performance indicators (KPI) to monitor the performance of the intangible (2) Conduct a yearly assessment of the brand value (3) Allocating a value to the brand on a regular basis and tracking it over time.

31. Practical approach: Brand Valuation PricewaterhouseCoopers Year ended March 31 200320022001 PBIT 1 158.93943.39696.03 Less: non-brand income 89.6559.7753.43 Adjusted profit 1 069.28883.62642.60 Inflation compound factor at 6% 1.0001.0641.132 Present value of profits for the brand 1 069.28940.02727.25 Weightage factor 321 Three-year average weighted profits 969.19 Remuneration of capital (5% of average capital employed) 123.52 Brand-related profits 845.67 Tax at 36.75% 310.78 Brand earnings 534.88 Multiple-applied 14.00 Brand value 7 488.00 In Rs Crore

32. Practical approach: Brand Valuation PricewaterhouseCoopers The methodology followed for valuing the brand is given below: (1) Determine brand earnings Determine brand profits by elimination of non-brand profits from the total profits of the company Restate the historical profits at present-day values Provide for the remuneration of capital to used for purposes other than promotion of the brand Adjust for taxes (2) Determine the brand-strength or brand-earnings multiple Brand-strength multiple is a function of a multitude of factors such as leadership, stability, market, internationality, trend, support and protection. These factors have been evaluated on a scale of 1 to 100 internally by the Infosys management, based on the information available within the company. (3) Compute the brand value by multiplying the brand earnings with the multiple derived in step 2 above.

33. Practical approach: Brand Valuation PricewaterhouseCoopers INFOSYSBrand value, Rs Crore Market capitalization, Rs Crore % 20015 37626 92620% 20027 25724 65429% 20037 48826 84728% ………… 200622 91582 15428% 200731 617115 30727%

34. Practical approach: Brand Valuation PricewaterhouseCoopers List of KPIs being used for brand valuation by best practice companies  Number of customers and retention levels  Detailed customer satisfaction results (often from external brand surveys)  Number of complaints from customers  Customer delivery statistics (eg, applications, errors, delays, etc)  Sales trends by brand  Products per customer  Brand values  Brand awareness  Brand association  Employee satisfaction (although the workforce is not an identifiable intangible asset for accounting purposes)  New clients  Success of new product  Price premium paid  Relative market share  customer value  Average revenue per customer  Churn rate  Frequency of purchase  Expiry date  Revenue derived from the innovation  Number of licences granted  Royalty revenues

35. Thank you!