Dr. Kretov Kirill - Basic classification of corporate assets.

Review of Various types of Intangibles.

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

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

1.0 Introduction

Amid the many complicated and inventive models encountered over the last decade, it is now evident for the majority of companies that its valuation of Intangible Assets and Intellectual Capital has proven to become more theoretical than practical. Although a number of research has 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 concept of intellectual capital was already researched by many people elite scholars, that have created many interesting theories. However, most of their work is purely theoretical, in addition to their concepts and theories usually are not widely accepted. Not many of these have been actually applied. For instance, many papers have been written about intellectual capital and its importance with a company’s performance; quantitative analyses and reports reveal that intellectual capital is surely an emerging competitive advantage that results in long-term profits and greatly boosts the value of the business. However, current accounting practices recognize merely a very limited quantity of intangible asset types (when it comes to intellectual capital). In the accounting perspective, the choice is quite limited: you can find R&D and Goodwill (the second being inapplicable to many companies). As long as the business understands the existence of some particular form of asset may it choose to estimate its value using a given valuation method (if one is applicable). The problem is that the ultimate value is not an guarantee with the real price of a good thing. Another practitioner might not trust the valuation principle applied and may even propose another which he finds more appropriate, or someone might apply a variety of theories for the Intellectual Capital of your company and come on top of a listing of indicators which may not be accepted or understood by others who prefer other concepts. Thus, it seems that the root with the problem is not having less evaluation methods but the not enough widely accepted standards for these methods but for the reporting of the results.

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

Moreover, there are issues involving patents, trademarks, copyrights, as well as other forms of “know-how”: exclusive rights, one of the most profitable kind, receive only to patent holders. An accountant recognizes solely those assets identified by current accounting practices (as regulated from the IFRS). Since reporting unrecognized assets is just optional, an accountant may decide not to spend time reporting them, particularly if his motivation is not very high, and the man desires to spare himself the task. Knowledge management scholars understand that it is possible to identify where knowledge originates from and classify it using various theories and taxonomies. This is often great for companies that apply KM principles to create value from the continuous identification of the pieces of intellectual capital they've created. This has described just a few of the perspectives from which the joy of intangibles can be considered.

1.1 Historical Overview

Intangible assets aren't a contemporary invention or even a phenomenon from the Twenty-first century. Indeed, contrary to popular misconceptions, this sort of asset 's been around for a long time. Throughout history, knowledge and data have remained two most precious commodities. The caveman who discovered the secret of producing and used a spear to kill a mammoth faster along with less risk to himself possessed an intangible asset that meant the real difference between life and death not only for that hunter-gatherer but also for his community. Similarly, the inventors with the alphabet, calendar, and mathematics possessed incredibly important intangible knowledge assets.

In modern society, knowledge has become much more complicated, specialized, and technical. Mistakes manufactured in the process of a nuclear plant, space shuttle, or biological weapons research facility often means the deaths of millions. Just like in the prehistoric era, knowledge, and expertise have remained assets that may mean the main difference between your life and death from the tribe.

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

Employees skills, IT systems, and organizational cultures count much more to numerous companies than their tangible assets. Unlike financial and physical ones, intangible assets are hard for competitors to mimic, causing them to be a strong way to obtain sustainable competitive advantage.( Robert S. Kaplan and David P. Norton, “Measuring the Strategic Readiness of Intangible Assets”).

It really is well-known that most of the business resources in civilized world are intangible: in 1982, the fabric assets of yank companies constituted 62% of the marketable value (Stewart T.A. Intellectual Capital. The newest Insightful Organizations.); after Ten 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 home reflected inside the balance sheet constituted only 6.2% of Microsoft’s market price, 4.6% of SAP’s, and 6.6% of Coca-Cola’s (Daum J.H. Intangible Assets). In 1982, the proportion of the non-material resources in added value creation for that 500 largest American companies was 38%, and also by 1998 it had been 85% (Du Voitel, R.D., Roventa, P. Mit Wissen wachsen-Strategisches Management von intellektuellem Kapital, in.: Perspektiven der Strategischen Unternehmensfuehrung.).

The present investments structure strengthens the prevalence of non-material resources: during the early 80s, 62% of investments in the American industry were acquisitions of fabric assets; by 1992, that share dropped to 38% and only agreed to be 16% in 1999 . Since 1991, US enterprises happen to be spending more cash on information processing equipment than you are on other equipment; details are replacing material merchandise stock, and knowledge is pushing out tangible fixed assets.

Prominent economist Leonard Nakamura estimates that the United States invests no less than $1 trillion each year in intangibles (Leonard Nakamura, “A Trillion Dollars annually in Intangible Investment and also the New Economy,” in John Hand and Baruch Lev, eds., Intangible Assets: Values, Measures, and Risks.), a figure based on the truth that about Five to ten percent of the US GDP is allocated to intangible assets. Investments in R&D and software have raised significantly over the last Forty years. Simultaneously, the typical expense of goods sold has fallen by greater 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 from the Brookings Task Force and Intangibles.) not only document a clear boost in investments in intangible assets but in addition underscore the growing worth of intangibles being an important part of contemporary business.


2.0 Basic classification of corporate assets

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

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

Tangible assets are often associated with intangible assets, as represented inside the diagram by the overlap between the two major categories. For instance, when a company produces physical commodities, it will normally have some type of ip (IP) associated with and active in the manufacturing process.

Most physical products, however, can't be patented in their entirety. As an example, a notebook computer manufactured by Sony might include not really a patented CPU cooling technology, the Sony brand name, as well as the VAIO trademark but in addition a Blue-ray player, which relies upon technology developed and patented by the Blue-Ray Disk Association (BDA). Similarly, automobile industry giants like BMW incorporate components, such as GPS systems and Mp3's, which are patented by other organizations.

On the other hand, a business also can possess intellectual property which has not yet been utilized in any manufacturing or production process. As an example, General Motors maintains an extensive portfolio of inventions and licensed ip along with its wide array of trademarks and patents found in current product offerings. Thus, an overlap between tangible and intangible assets does exist but is just partial.

Furthermore, the diagram also includes financial assets, that are intangible by definition. Cash and its particular equivalents usually are not real property, because cash needs no valuation; however, it could still be secured by physical assets. For this 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. Furthermore, intangibles (or proto-assets) share a few of the attributes of identifiable and unidentifiable assets but do not fit neatly into either of those two categories. Have a look at begin to see the difference in opinion in regards to the essence of Intangible Assets. From a cpa standpoint (i.e., for that IFRS), an IA is definitely an identifiable non-monetary asset, but J. Cohen states that the IA may be further separated into identifiable, unidentifiable, and proto categories. Those who begin to explore search engine optimization farther will see more serious disagreements among researchers regarding terminology and ideas. I think, a good thing should be called with a name recognized by accounting practices: if it's not recognized but is clearly identified and valuated, then it is a good thing.


2.1 Identifiable Intangible Assets (Recognized in Accounting)

    Intellectual property is most often associated with the concept of identifiable intangible assets and includes patents, copyrights, trademarks and trade secrets. These factors all share one salient commonality - they may be accorded special legal protection or recognition and so are deemed property really should be law.

Recognition and protection of intellectual property isn't a growth and development of modern times. 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 shown to be inadequate, raising the potential of benefits based on the ownership of ip being removed. As an example, in 2003 alone, 308 out 526 patent infringement suits filed in the usa were deemed invalid or unenforceable.

    Aside from temporary monopolies, the main good thing about ip ownership is its potential marketability. Patents are routinely sold, licensed and purchased. IP assets are identifiable, separable and are often purchased or used on someone apart from the inventor or creator.

Research and Development

    It might be smart to begin the discussion about types of Identifiable intangibles with Research and Development (R&D). Historically there were couple of intangible items reported in public company financial statements: R&D and Goodwill. Because of this R&D expense records of public firms are already the topic of widespread academic research.

R&D is defined as an identifiable intangible asset as it may lead to the development of ip. For example a company’s research can lead to patents that can be purchased and sold separately. Marketable patents, however, are not the only reason for R&D investments - they frequently cause improved manufacturing techniques, trade secrets along with other forms of intellectual property that will do not be patented, but will nonetheless increase the company’s competitiveness. Consequently R&D has got the potential for the development of other assets, many of which are discussed below.


    There are three basic forms of patents, which include utility, design, and plant patents. (See U.S. Code Title 35 - Patents , for any full description of patents and patent laws.) For that patent being enforceable it ought to be listed in a minumum of one registry of ip, most of which can include The United States Patent and Trademark Office (USPTO), the eu Patent Office, japan Patent Office, and World Intellectual Property Organization (WIPO).

The core reason for most of these offices is to behave as the registry of patent information. These organizations check whether a patent application meets various criteria (must be “novel, non-obvious, and useful”) and if so, records the invention as being created and of patentee. The application process isn't rapid as well as the cost to acquire a patent is not nominal. Mcdougal of the paper (Dr.Kretov Kirill) resides in Switzerland and it has recently sent a patent application for “a way of password protection against different types of key-logging techniques” towards the European Patent Office (EPO). Besides attorney costs to assist draft the applying, simply starting the process costs CHF 3,600 and the first answers are expected to arrive no sooner than 6 months following the date of application. Normally it requires two to three years to win patent approval. After a successful application, the patent holder has got the right to exclude others from making, using, or selling its invention for Two decades (which explains why patents are often referred to as temporarily granted monopolies).

    Perhaps best is a subset of utility patents knows as process or method patents. During the internet boom with the late 1990s, many start-up technological firms have filed for process patents that described methods that may be helpful to everyone. For instance, there's a patent filed around the “process” of utilizing modem to connect to the web. Most famous are likely Amazon’s “1-Click” buying feature and Microsoft’s double-click patent. Some critics from the USPTO allege that in 1990s, patent reviews have failed to take into consideration test of “non-obviousness”. Many suggested how the duration of Internet-related process patents needs to be reduced to under 20 years.

However, in spite of the proven fact that many Internet-related process patents were approved just a few led to economic benefit to their inventors. It is usually logical to inquire about: “Why grant patents whatsoever?” There is a simple economic rationale: if inventors cannot protect the work they do to make some cash of it, they've got little motivation to make the invention to start with. The right to exclude others by using the invention is a kind of reward for investing the efforts to build up a patentable idea or technology. Patent law generally props up notion 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. However the initial notion of copyright extends back towards the late fifteenth-century England when the printing press was introduced. Copyright is generally created for written material or creative works, for example books, photographs, music, video records, and software code. The whole process of trying to get copyright is comparatively easy - the creator at work owns the copyright once the tasks are created. Unlike patents, submitting copyright registration simply gives realize that the creator is claiming copyright to the work, nevertheless it doesn't conclusively establish ownership. Furthermore, the copyright office does not screen submission for possible conflicts with existing copyrighted materials.

    Up until 1980s, people who just love copyrighted materials, such as books or video and audio records are not faced with mass copying of their works. But lately, due to the rapid progression of technology (especially the Internet) enormous sums of copyrighted material were digitalized.

    At this point it could be interesting to note copyright the business of digital media also to mention the thought of “fair use”. Fair me is “… any usage of copyrighted material that does not infringe copyright while it's done minus the authorization of the copyright holder and without an explicit exemption from infringement under copyright law. ” However, fair use is widely misinterpreted. As an example if someone else buys a pc game for around EUR 100, it really is logical to expect the buyer will not be happy to lose it due to accidental scratching or other physical damage caused for the disk. DVD copying software enables you to make a backup copy, to ensure that if the original disc fights, the purchaser will not lose their money.

However, there isn't any be certain that the purchaser is not going to choose to share this backup with other people. Uploading the image file (exact copy with the disc) to some file-swapping peer-to-peer network may expose it to thousands of people, possible buyers who will not pay back for game, but use its pirated copy instead. Some publication rack integrating anti-copying techniques that complicate the copying process, but at the expense with the buyer’s capability to develop a backup copy.

Put simply DVD-ripping and peer-to-peer networking software itself can be very helpful, and could have socially valuable legal uses, even if issues is utilized for illegal ones. Copyright holders find it difficult to change it that can help to avoid unauthorized use of their work, though minimal success so far.


    Webster’s dictionary defines trademark as “a distinctive name, phrase, symbol, design, picture, or style employed by a business to recognize itself to consumers”. Much like copyright, trademarks can be discovered through common-law usage. The registration process is approximately copyrighting and patenting the amount of review conducted and legal assistance required. You can find legal benefits to registration, but trademark search is not necessary. A lawyer normally conducts one search simply to know what other trademarks exist that could be wrongly identified as the main one in mind. It really is even possible for two virtually identical trademarks to coexist, provided that they are not probably be confused. As an example it is possible that some plastic-window manufacturer will make an application for the trademark called “Windows”, even if a really similar trademark is registered by Microsoft. You can definitely a start-up software developer company can provide its internet browser and make an application for the “Internet Explorer” trademark they probably won't obtain it, simply because the product classes are much the same and certain to result in confusion.

Trade Secrets

    Trade secrets are types of assets that be a consequence of a certain way to do business or proprietary technology that provides competitive advantage to its holder. It really is something that is utilized in ongoing business, being a unique compilation process or data mining system. According to 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, and not being readily ascertainable by proper means by, other persons who can obtain economic value from the disclosure or use, and (2) will be the subject of efforts which are reasonable beneath the ways to maintain its secrecy.”

Simply speaking, trade secrets are a thing that provides economic value since they remain unknown towards the competition. As an example one company may abandon e-mail protocol since the communication channel between workers and switch to an immediate messaging service. Derived economic value may be the lack of spam, instant message delivery, and improved security. For the time being, its competitors will still using slow and unsecure e-mails, waste 90% of these traffic on spam, and wonder why messages are already sent, however, not received.

    Unlike patents, owning a trade secret doesn't prevent others while using it. Two firms can independently and simultaneously support the same information because the trade secret, nevertheless they cannot hold two separate patents on exactly the same invention. No one is able someone can prevent another company while using im service as the internal channel of communication, until the organization is unaware of this possibility.


Brands in many cases are confused with trademarks - in reality, the author (Dr. Kirill Kretov) with this paper was surprised to locate that Webster’s Merriam dictionary defines brand as synonym to trademark. It's not - brands tend to be more than simply names or trademarks. A brand is definitely an economic asset, as it adds value by conveying information about an item. In accordance with Tom Blackett , brands that keep their promise are business assets. They attract loyal buyers who regularly come back to them, allowing the emblem owner to forecast cash flows and to plan and manage the development of the company with greater confidence. Due to the brand’s ability to secure income it could be classified as a productive asset in the same way just like any other, classical business assets like equipment, cash, investments, and so forth. At the same time brand owners possess the incentive to “keep their promise”. If eventually the marketplace discovers fraud the business risks to get rid of an important variety of its clients.

Mcdougal of this paper is a superb fan of Sony products - he believes this company produces beautiful, innovative and durable products and, because of this, he could be ready to pay more for their quality. But there are many other Japanese brands available on the market and when suddenly Sony decides to reduce corners and trade low quality products under its good name, mcdougal only will switch the signal from choices.

Software Code

    Software code is said to be probably 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 features of the software. Actually, even some area of the code can be kept like a trade secret even though the code itself can be copyrighted.

However, this really is complicated by different accounting treatments which largely rely on if the software regarded as a port to the organization’s manufacturing process, or whether or not the software programs are the firm’s strategy is and also itself. Quite simply the firm may use and/or sell software code. For instance 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 number of workplaces might not be treated as valuable intangible property. Concurrently Microsoft office is definitely an valuable intangible property for the creator Microsoft. Remember that only Microsoft supports the source code, while those who buy licenses are merely given its compiled version.


2.2 Questionable Recognition

    Accounting standards as a rule have high requirements regarding disclosure of data about non-material (intangible) assets. As an example, IFRS-38 requires that financial statements ought to include the next information for every type (class) of assets: types of amortization, connection between re-evaluations, estimated life periods (asset remains useful), as well as other explanations of significant modifications in total worth of non-material assets. Reporting also needs to range from the total cost of R&D, which is considered as spending for your current period. However, it's the specific company that develops a classification of non-material assets, normally depending on some principle of their homogeneity.

    In short, IFRS recommends disclosure of knowledge about valuable intangible (non-material) assets which can be owned by a company but not recognized by current accounting practices (CAP). At the same time, the report format can be based on a business. Because of this, there exists a not enough standardization plus a nightmare for investors, who've to check parameters which can be very often of various natures and incomparable. Some reports with details about particular “assets” very can be not incomparable just with other companies but even with reports from your same company for several cycles. Some researchers have already identified this pessimistic of flexibility and freedom in reporting and classification allowed by IFRS.


    Goodwill is just about the commonly discussed unidentifiable asset. It's got already been mentioned that goodwill is among two intangible things that were routinely reported in public company financial statements (another is R&D). Goodwill shows up on a company's books when it acquires another company, as well as the buyer naturally must pay more for this than the fair worth of the net identifiable assets, both tangible and intangible.

    Numerous goodwill definitions are available in various documents and standards controlling the business accounting and estimate activities (IFRS, USA GAAP). Observe 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 with the companies may be the sum paid through the buyer on the purchase marketable value in expectation of future economic gains. The long run economic gains can result in the synergy effect from the acquired identified non-material assets or assets which separately aren't susceptible to acknowledgement in the financial reporting but which are included in the purchase cost. Goodwill is the overabundance an order cost over the acquired share in fair price of the identified acquired assets, that are inseparable in the target company. Actual goodwill cost is purchasing cost without the difference of fair price of identified assets, obligations and contingent obligations.

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

By USGAAP (US Generally Accepted Accounting Principles)    

Goodwill may be the cost overabundance an acquired company on the expense of its identified assets minus obligations. Goodwill reflects such factors as customer demand satisfaction, good management, production efficiency, successful location, etc.

EVS 2000 (European Valuation Standards) (latest 2009)

By TEGOVA (The eu Number of Valuers’ Associations)

There are three kinds of non-material assets susceptible to evaluation: business goodwill (unallotted non-material assets), personal goodwill, and identified non-material assets. Business goodwill is inseparable from the company and can be considered within the balance sheet after company sale, based on IFRS. Personal goodwill is not 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, there are practically no discrepancies regarding the essence of goodwill. Thus, most of the time, goodwill value appears if company acquisition happens, as well as the difference between the acquisition cost as well as the fair price of identified assets is calculated.

In other words, the traditional knowledge of goodwill origins lies in these: Goodwill arises whenever a company is acquired at a cost exceeding its assets’ marketable values sum. Consequently, this excess may be explained in this way: The business enterprise market price overall is composed of the expense of all assets, including the ones not reflected within the balance sheet. As it is known that inside the balance sheet un-identifiable assets cannot (should not) be reflected, their price is embodied in goodwill. The remainder way of goodwill calculation is founded on it.

However goodwill takes place not merely if the company possesses unrecorded intangible assets. We are able to give samples of some factors irrelevant towards the value of intangible company assets that influence goodwill value and therefore are susceptible to be reflected in the company-buyer balance sheet:

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

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

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

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

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

•    Goodwill allowances methods (in numerous national accounting standards, allowance through the permitted by accounting standards period; immediate allowance of this value in the tariff of equity capital or lack of the allowance in general is accepted);

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

•    Identified assets depreciation methods;

The marketable value of both assets as well as the business as a whole is decided for installments of probable most effective utilization. It is pretty obvious that the best ways of use for separate assets and business in general cannot coincide: The asset markets develop consuming various factors compared to business markets. Put simply, a small business expense is dependant on money flows from sale with the goods or services created by the business and the expense of separate assets essential for production - by money flows from sale of such assets.

Thus, efficient technique business as a whole as well as separate assets are non-comparable, meaning that the company in general and separate assets marketable values are also non-comparable. Completeness of company asset representation in the balance sheet is not important: If the expense of all assets is entered into the balance sheet, even those not identified by standards with the business accounting, the sum assets marketable values basically is not going to coincide with business cost as a whole. If cost during these assets’ used in e-commerce is higher than cost at average market alternative approach to use, the goodwill is going to be positive, otherwise - negative. Still, negative goodwill doesn't testify to inefficient activities inside business if we understand an effective business since the the one that has assets return in an average branch level. Incomparability valuations of business as a whole and also separate assets is due to the fact the business valuation overall is made with a view of business continuation, and evaluation of each asset is manufactured proceeding from the assumption of the independent sale (separately from the property complex within the business).

To ensure the aforementioned we'll present these provisions. Goodwill evaluation is always attached to the value assessment of your business as a whole, which non-material assets and ip valuation specialists specify. Business cost calculation methods derive from revealing forecast data concerning company activities, on assets creation costs measurement or on comparison of activity indicators using the comparable companies from an objective database. From the market viewpoint a business cost shall not rely on the price of its elements, as business is an "ongoing concern", and it is partition into elements shall happen only with a look at real or fictitious liquidation. Acting business is always considered as a single complex which will continue to act later on (IFRS, Principles).

Most material and non-material assets, in their merge running a business, lose their liquidity for their greater specificity and often complete inseparability from your business. These are assets that are created specifically with this business and also have no other application, as because of technological specificity also to attachment with a website. (Tangible examples are various constructions like bridges and pipelines; an intangible example could be a value associated with personal ties of ex-owners with clients and suppliers.) Besides, sometimes there are restrictions in their use: long-term obligations, contracts, government requirements (for instance, ecological regulations), or social responsibility with the business. Additionally it is impossible to dismiss management and personnel errors. Under these conditions, market evaluations of assets are hard and could be substituted with substitution costs. Thus, assets often lose their independent marketable value; it remains only being a historic fact of investments realization into these assets previously. This cost is also required to investors being a reference point for risk identification of present and future investments.

Bringing it all together, we can conclude that the goodwill concept may be used in a narrow plus a wide sense. In 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 in the balance sheet. The goodwill dimensions are determined being a among the acquisition worth of the organization as well as the book value of its material, non-material and funds assets and obligations. In the wide sense, goodwill is really a complex of most intangible company assets. Hence, we can discuss about it the goodwill of an operating company only inside the meaning distinctive from accounting sense. The approximate a feeling of this is expressed from the terms reputation, business standing, or/and company brand. But such goodwill (in the wide sense) just isn't shown inside the balance sheet. Some authors, talking about goodwill, would rather think of it as "the company price" or "business reputation", keeping the identical sense.

When investor comes to a decision to take a position money (or buy some company) he normally wants to know precisely what he could be buying (or simply speaking, what he gets in substitution for his money). When it is something company (an IT company that operates in the field of software development or web applications), then most likely the sum total famous its intangible assets is significantly less space-consuming than the entire company value. This value will likely can be found in some form of goodwill, but why is these numbers? With current accounting practices, oftentimes we cope with an “expensive black box”. This is a reasons why a prospective buyer will work a due-diligence of the company. It helps to judge the intangible assets of this company.

Human Capital

The word human capital arrived to the business enterprise lexicon after Gary Becker (University of Chicago economist and Nobel Prize-winner) published a book titled “Human Capital” in 1964. Becker (along with Jacob Mincer, Milton Friedman, Sherwin Rosen, and Ted Schultz) created the economic notion of human capital as distinct from typical financial or physical assets, because of its difference from their website meaning that human capital can't be separated from your humans who possess it. “It is fully in line with the main city concept as traditionally defined to state that expenditures on education, training, medical care, etc., are investments in capital.” Soon after Becker developed the thought of human capital, economists and consultants begun to subdivide and classify it. To put it briefly, this means both physical and intellectual ability.

    Many researchers state that human resources are the most effective assets of the organization. But how can the capital value of recruiting be discovered using current accounting practices?

For your intellectual organization that targets creation of various types of intellectual capital (not speculation, but real innovative development) and that has got the biggest part of its value assigned to intangible assets, individuals are everything. The company could be evaluated by calculating how much all the HR spending (salaries, payments to freelancing, training programs, various incentives, etc.). Someone may say that this is exactly what is completed to calculate the price, but cost is not a value the capital represents. It is much more of a cost as capital value concept. It appears nonsensical, nevertheless it basically implies that if a person incurs cost it assumes that something was bought (money was changed to something). No matter whether that something was tangible or intangible in nature, it has a value plus a price. More essential is whenever that something is, it is important to others (the amount of people would love to get it). If there have been many, an amount be their price, and just how would this price be determined? Also, if that something was bought in the marketplace, for most buyers the cost could be similar (this product or service has a fixed price). Thus it can probably be said that it's a sort of valuation while using market approach. However, the value really depends on the kind of asset you hold as well as the supply/demand curves because of it. If the new owner obtained it for less money than the others, this means he's got good contacts (refers to relational capital in IC concept).

In relation to HR, if you have a job in places you need professionals to accomplish work for you, you don’t simply spend cash, but you get some quality work as well as whether it doesn’t have a material form still it has value. For instance, it may be consultation using a lawyer in Switzerland; project duration is 4-6 hours and an hourly rate could be between 300 and 1000 Swiss francs. Based on your contacts (RC) the cost of project (outsource) will probably be between 1500 and 5000Chf. But following the project’s completion and payment, you commence to own something - it could be strategies to questions asked during consultation hours along with other piece of knowledge in the lawyer seeing you. Quite simply, you then become who owns some piece of intellectual capital. When not very specific to your needs, probably there are numerous others who are able to pay a similar price for that sort of information. Thus it is really an intangible asset, which is often valued using a minimum of the cost and market approaches (more about evaluation will be discussed in later sections of this thesis).

 However, the wages are a really average reflection with the real creativity of your given person and value generated (profit associated) from it. Also, there are industry leaders and lagers - industry leaders are the ones who pay over the average salary set by industry in order to attain the best people. Industry lagers normally pay unhealthy, however it is not too their recruiting are worse when it comes to creativity, skills, knowledge or experience than those in big companies. Consider every one of the possible areas of expertise that exist for the modern IT companies: There are big firms that would be best in providing their particular services and products on the market, however they can’t be finest in all possible market niches. It makes possible the specific situation whenever a little number of experts specifically field are many more lucrative inside a certain task (Activity) than a research center of some big company.

Also, worth mentioning is it seems like in today’s economy companies no more compete with regards to best technology; oahu 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 usually are not able to enter a certain field of technology.

2.3 Intellectual Capital

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

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

Needless to say, the public reporting isn't limited to only the fiscal reports. Since it was mentioned before, IFRS recommends publication of information about intangible assets not-recognizable by CAP. As an example, there are many notes and discussions reported in annual reports (like K-10). However, seo requires farther standardization otherwise it's got little practical value. In this paper, Kretov Kirill applies some concepts of intellectual capital in order to create a reporting model for the complete capital structure.

Initially the issue of evaluation of intangible factors has arisen in information-saturated companies the location where the amount of material assets is insignificant, as well as the mental potential is high. Investors are not inclined to invest to such companies, and in front with the managers there was a task of calculation of the intangible assets value as well as informing investors to produce more adequate picture concerning the company activities of the and it is prospects.

Modern understanding of intangible factors of recent cost production are embodied in concept "intellectual capital". The managers managing companies cost are almost single in 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 declare that for intellectual capital accounting it really is required new financial and administrative concept . Financiers discuss be it essential to change traditional accounting terms (non-material assets, business standing), and in addition about possibility of cost evaluation of your new indicator, its accounting and showing within the reporting.

Three Major Elements of Intellectual Capital

Various models and theories of intellectual capital represent generalization of value factors management practice within the specific companies, and now it's admitted by both researchers and experts. For this reason each model is exclusive and reflects specificity from the company. At the same time, accumulating of expertise and data of your intellectual capital through the beginning of current decade means to find out general approaches, to build up about single structure of companies’ knowledge assets. Almost all this challenge researchers and managers allocate three the different parts of intellectual capital:

1) human capital (HC);

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

3) customer capital (CC).

In a few models , the customer capital is known as the administrative centre of relations, or connections (relational capital), however it is understood also as loyalty and customer satisfaction.

In most cases, you'll be able to estimate a persons capital volume with the variety of intellectual workers and the amount of information, knowledge and skills that they own, through the volume of leaders, idea men, "revolutionaries". Value of personnel knowledge and abilities is seen as a specialists' capability to solve difficult, non-standard, unexpected problems; employees' independence and trainability; the ability of managers to manage transformations; creative activity; tendency to partner interaction; etc. We are able to estimate progression of a person's capital through proportion of the forms of activity "inspiring" on search of recent solutions forcing company's employees to understand something totally new. Eventually, amount of human capital binding is estimated through personnel adherence to company's insight and values, employees' satisfaction by work and industrial relations, personnel loyalty towards the company and retention of leading workers, company's reputation around the labor market, etc. (Later in the work, a person's Resources will be discussed more into details.)

Organization structural capital is reflected by the number and excellence of business partners; amount of business partner retention to the enterprise; integration from the value chain and an company's role within it; option of a flexible and effective business network (on a global scale, also); 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 quality of databases; trademarks and patents; codified understanding of technical processes (the quality of completeness and clearness of documentation reflecting consumer value creation inside the organization); assortment 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, by the following characteristics: expected discounted income from available consumers; number 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 profession standard; competitive advantage with new production launch; the level of the concluded contracts; how much customer retention to the organization.

So, it's possible to tell that inside the provided models there is certainly more common than distinctions. The overwhelming most authors recognize presence of intellectual capital independent elements - human, organizational, client, but you are called. At the same time, presently there are lots of terms anyhow associated 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 isn't quite obvious why the overall name "intellectual capital" is used to blend such essentially different and frequently without having the direct regards to the intelligence phenomenon as employees' value system, enterprise image, brands, customers' loyalty. In our opinion, the uniting basis here could possibly be the notion of intellectual capital circulation: employees' knowledge and capabilities are embodied in organizational processes and relationship with partners that, 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 on which, in particular, the technique of intangible assets reporting, accepted and identified by the accounting organizations depends.