Dr. Kretov Kirill - Basic classification of corporate assets.
Introduction to Different types of Intangibles.

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

Dr. Kirill Kretov on various types of intangibles

1.0 Introduction

Amid the numerous complicated and inventive models encountered during the last decade, it is now evident for many companies that the valuation of Intangible Assets and Intellectual Capital has proven to become more theoretical than practical. Although a number of research has been carried out around the valuation of Intellectual Capital, most of the findings seem more theoretical than practical.

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

The concept of intellectual capital had been researched by many people elite scholars, that have created many interesting theories. However, most of their job is purely theoretical, and their concepts and theories are not widely accepted. Very few of which happen to be actually applied. For example, many papers are already written about intellectual capital and it is importance with a company’s performance; quantitative analyses and reports demonstrate that intellectual capital is definitely an emerging competitive advantage that brings about long-term profits and greatly boosts the value of the organization. However, current accounting practices recognize only a limited variety of intangible asset types (when it comes to intellectual capital). In the accounting perspective, the option is quite limited: you can find R&D and Goodwill (the 2nd being inapplicable to most companies). Only when the business understands the presence of some particular form of asset may it decide to estimate its value employing a given valuation method (if one is applicable). The problem is that the final value is not an guarantee of the real price of a good point. Another practitioner might not agree with its valuation principle applied and could propose another which he finds appropriate, or someone might apply a number of theories to the Intellectual Capital of your company and come on top of a listing of indicators that might 't be accepted or understood by others who prefer other concepts. Thus, it seems that the root of the issue is not the lack of evaluation methods nevertheless the insufficient widely accepted standards for these methods but for the reporting with the results.

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

Moreover, you will find issues involving patents, trademarks, copyrights, and other kinds of “know-how”: exclusive rights, the most profitable kind, are given and then patent holders. An accountant recognizes solely those assets recognized by current accounting practices (as regulated by the IFRS). Since reporting unrecognized assets is merely optional, an accountant may decide to not invest some time reporting them, especially if his motivation just isn't very high, and that he desires to spare himself the job. Knowledge management scholars realize that it's possible to identify where knowledge arises from and classify it using various theories and taxonomies. This can be helpful for businesses that apply KM principles to produce value through the continuous identification of the items of intellectual capital they've created. The foregoing has described just a few from the perspectives from where the field of intangibles can be considered.

1.1 Historical Overview

Intangible assets aren't today's invention or a phenomenon of the Twenty-first century. Indeed, contrary to popular misconceptions, this type of asset has been in existence for a long time. Throughout human history, knowledge and data have remained two most precious commodities. The caveman who discovered the key of producing and used a spear to kill a mammoth faster along with less risk to himself possessed an intangible asset that meant the difference between life and death not just for your hunter-gatherer but in addition for his community. Similarly, the people with the alphabet, calendar, and mathematics possessed equally important intangible knowledge assets.

In contemporary society, knowledge is now much more complicated, specialized, and technical. Mistakes produced in the operation of a nuclear plant, toyota tows, or biological weapons research facility can mean the deaths of millions. Just like in the prehistoric era, knowledge, and expertise have remained assets that will mean the main difference involving the life and death of the tribe.

Now, especially in the planet, organizations are increasingly reinventing themselves as service-oriented operations. Manufacturing tangible commodities that customers can touch, smell, or taste is rapidly learning to be a thing of the past. These transformations have become increasingly frequent across a broad spectrum of organizations. Many companies rely almost entirely on intangible assets and consider them certainly one of their core competitive advantages. This was accurately described within the Harvard Business Review:

Employees skills, IT systems, and organizational cultures can be worth far more to a lot of companies than their tangible assets. Unlike financial and physical ones, intangible assets take time and effort for competitors to mimic, which makes them a strong source of sustainable competitive advantage.( Robert S. Kaplan and David P. Norton, “Measuring the Strategic Readiness of Intangible Assets”).

It is well-known that a lot of of the business resources in developed countries are intangible: in 1982, the information assets of American companies constituted 62% of their marketable value (Stewart T.A. Intellectual Capital. The newest Helpful Organizations.); after A decade, that share fell to 38%, and current research (R.S., and Norton D.P. Die strategiefokussierte Organisation: Fuhren mit der Balanced Scorecard.) estimates it at just between 10% and 15%. After 1999, value of 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%, by 1998 it was 85% (Du Voitel, R.D., Roventa, P. Mit Wissen wachsen-Strategisches Management von intellektuellem Kapital, in.: Perspektiven der Strategischen Unternehmensfuehrung.).

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

Prominent economist Leonard Nakamura estimates the Usa invests a minimum of $1 trillion annually in intangibles (Leonard Nakamura, “A Trillion Dollars per year in Intangible Investment and also the New Economy,” in John Hand and Baruch Lev, eds., Intangible Assets: Values, Measures, and Risks.), a figure derived from the fact that about Five to ten percent of the US GDP is allocated to intangible assets. Investments in R&D and software have raised significantly during the last 40 years. Simultaneously, the common expense of goods sold has fallen by more than 10 percent since 1980. Services, that 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 with the Brookings Task Force and Intangibles.) not only document a clear rise in investments in intangible assets but additionally underscore the growing price of intangibles being an important component of contemporary business.

2.0 Basic classification of corporate assets

Every organization possesses multiple types of assets, so it combines to produce goods and services. The goal of it is to classify these assets based on their common attributes.

All assets could be divided into two major types. The very first type incorporates conventional assets that may be touched, sensed, and felt: they're known as tangible assets. Any asset that doesn't fit the above mentioned description may be categorized as intangible. According to IFRS (IAS-38 Intangible Assets, Issued in September 1998, revised in January 2008.), an Intangible Asset is definitely an identifiable non-monetary asset that doesn't have physical substance. An intangible asset must be identifiable, essential that distinguishes it from goodwill.

Tangible assets are generally associated with intangible assets, as represented within the diagram by the overlap between your two major categories. As an example, when a business produces physical commodities, it will usually have some kind of ip (IP) associated with and mixed up in manufacturing process.

Most physical products, however, cannot be patented within their entirety. As an example, a laptop manufactured by Sony might include not really a patented CPU cooling technology, the Sony brand, and also the VAIO trademark but additionally a Blue-ray player, which relies upon technology developed and patented from the Blue-Ray Disk Association (BDA). Similarly, automobile industry giants like BMW incorporate components, for example This stuff and Mp3's, which can be patented by other organizations.

On the other hand, a company can also possess ip that has to be employed in any manufacturing or production process. As an example, Vehicle maintains a comprehensive portfolio of inventions and licensed ip in addition to its range of trademarks and patents found in current product offerings. Thus, an overlap between tangible and intangible assets does exist but is merely partial.

Furthermore, the diagram also includes financial assets, that are intangible by definition. Cash and its particular equivalents are not property, because cash needs no valuation; however, it may 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. Additionally, intangibles (or proto-assets) share a few of the features of identifiable and unidentifiable assets but don't fit neatly into either of such two categories. Have a look at start to see the difference in opinion concerning the essence of Intangible Assets. From a cpa standpoint (i.e., for that IFRS), an IA is definitely an identifiable non-monetary asset, but J. Cohen states the IA could be further split into identifiable, unidentifiable, and proto categories. Those that begin to explore search engine optimization farther will see more serious disagreements among researchers regarding terminology and ideas. In my opinion, a good point needs to be called by a name recognized by accounting practices: when not recognized but is clearly identified and valuated, then it's a good thing.

2.1 Identifiable Intangible Assets (Recognized in Accounting)

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

Recognition and protection of ip is not a development of modern times. The Copyright Act was enacted in america in 1790, while President Jefferson’s Patent Act of 1793 codified the concept of patents. Legislation, however, has occasionally proved to be inadequate, raising the possibility of benefits produced from the ownership of intellectual property being removed. As an example, in 2003 alone, 308 out 526 patent infringement suits filed in america were deemed invalid or unenforceable.

Aside from temporary monopolies, the major benefit of intellectual property ownership is its potential marketability. Patents are routinely sold, licensed and bought. IP assets are identifiable, separable and so are often purchased or allotted to someone besides the inventor or creator.

Research and Development

It is probably smart to begin the discussion about kinds of Identifiable intangibles with Research and Development (R&D). Historically there were only two intangible items reported in public places company financial statements: R&D and Goodwill. For this reason R&D expense records of public firms have been the main topic of widespread academic research.

R&D is defined as an identifiable intangible asset since it may result in the roll-out of ip. For example a company’s research can result in patents that can be purchased and sold separately. Marketable patents, however, aren't the only reason for R&D investments - they frequently lead to improved manufacturing techniques, trade secrets along with other forms of ip that may never be patented, and often will nonetheless increase the company’s competitiveness. Consequently R&D has got the possibility of the roll-out of other assets, some of which are discussed below.


There are three basic kinds of patents, including utility, design, and plant patents. (See U.S. Code Title 35 - Patents , to get a full description of patents and patent laws.) For that patent to become enforceable it should be indexed by a minumum of one registry of intellectual property, some of which can include The United States Patent and Trademark Office (USPTO), the ecu Patent Office, the Japanese Patent Office, and World Ip Organization (WIPO).

The core reason for all of these offices is to work as the registry of patent information. These organizations check whether a patent application meets various criteria (has to be “novel, non-obvious, and useful”) and if so, records the invention as having been created and of patentee. The application form process is not rapid as well as the cost to acquire a patent is not nominal. The writer of this paper (Dr.Kretov Kirill) resides in Switzerland and possesses recently sent a patent application for “a approach to password protection against various types of key-logging techniques” towards the European Patent Office (EPO). Besides attorney costs to aid draft the application, simply starting the procedure costs CHF 3,600 and the first results are anticipated to arrive no sooner than 6 months following the date of application. Normally it takes 2 to 3 years to win patent approval. After a successful application, the patent holder gets the right to exclude others from making, using, or selling its invention for a period of Two decades (which is why patents are often described as temporarily granted monopolies).

Perhaps best is really 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 could be helpful to everyone. For example, there exists a patent filed on the “process” of using modem for connecting to the net. Most famous are most likely Amazon’s “1-Click” buying feature and Microsoft’s double-click patent. Some critics with the USPTO allege that during 1990s, patent reviews didn't work to take into consideration test of “non-obviousness”. Many suggested how the lifetime of Internet-related process patents ought to be reduced to under Two decades.

However, in spite of the undeniable fact that many Internet-related process patents were approved just a few triggered economic benefit to their inventors. It is probably logical to ask: “Why grant patents whatsoever?” There is a simple economic rationale: if inventors cannot protect the work they do making some cash than it, they've got little motivation to make the invention to begin with. The legal right to exclude others while using the invention is a type of reward for investing the efforts to develop a patentable idea or technology. Patent law generally props up perception of monopolies being oftentimes great for customers. The enforced expiration of patents supposedly creates the right balance: enough protection to encourage innovation, however, not a lot concerning encourage abuse.


U.S. copyright law was established in 1790, during the Second Session of Congress, convened on January 4th and also the bill was signed into law on May 31st by George Washington. Nevertheless the initial concept of copyright goes back to the late fifteenth-century England if the printing press was introduced. Copyright is normally made for written material or creative works, including books, photographs, music, video records, and software code. The process of applying for copyright is pretty easy - the creator of labor owns the copyright as soon as the tasks are created. Unlike patents, declaring copyright registration simply gives observe that the creator is claiming copyright for the work, nevertheless it will not conclusively establish ownership. Furthermore, the copyright office will not screen submission for possible conflicts with existing copyrighted materials.

Up until 1980s, those who own copyrighted materials, for example books or car stereo records weren't faced with mass copying of their works. But lately, due to the rapid development of technology (particularly the Internet) enormous amount of copyrighted material were digitalized.

At now it may be interesting to notice copyright the business of digital media also to mention the idea of “fair use”. Fair me is “… any utilization of copyrighted material that doesn't infringe copyright even though it is done with no authorization from the copyright holder and with no explicit exemption from infringement under copyright law. ” However, fair use is widely misinterpreted. For instance if someone else buys a pc game for about EUR 100, it is logical to expect that the buyer enamoured to get rid of it due to accidental scratching or another physical damage caused for the disk. DVD copying software may be used to make a backup copy, so that if the original disc stops working, the purchaser doesn't lose their funds.

However, there isn't any be certain that the purchaser will not decide to share this backup with others. Uploading the picture file (exact copy from the disc) to a file-swapping peer-to-peer network may expose it to millions of people, potential customers who will never pay for game, but use its pirated copy instead. Some information mill integrating anti-copying techniques that complicate the copying process, but at the expense of the buyer’s ability to create a backup copy.

Put simply DVD-ripping and peer-to-peer networking software itself can be quite helpful, and may have socially valuable legal uses, even though issues is used for illegal ones. Copyright holders battle to change it that can help to avoid unauthorized utilization of their work, but with minimal success up to now.


Webster’s dictionary defines trademark as “a distinctive name, phrase, symbol, design, picture, or style utilized by a company to identify itself to consumers”. The same as copyright, trademarks can be established through common-law usage. The registration process is somewhere between copyrighting and patenting in terms of the quantity of review conducted and legal assistance required. You can find legal advantages to registration, but trademark search is not required. Legal counsel normally conducts one search simply to figure out what other trademarks exist that could be mistaken for the main one in mind. It is even easy for two virtually identical trademarks to coexist, provided that they are not probably be confused. For example it is possible that some plastic-window manufacturer will submit an application for the trademark called “Windows”, even if a really similar trademark is registered by Microsoft. However if a start-up software developer company can create its web browser and make an application for the “Internet Explorer” trademark they most likely will not obtain it, since the item courses are virtually identical and sure to result in confusion.

Trade Secrets

Trade secrets are forms of assets that derive from in a certain style of doing business or proprietary technology that gives competitive benefit to its holder. It's a thing that is used in ongoing business, like a unique compilation process or data mining system. Based on the Uniform Trade Secret Act (UTSA):

"Trade secret" means information, such as a formula, pattern, compilation, program device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to, and never being readily ascertainable by proper strategies by, other persons who is able to obtain economic value from the disclosure or use, and (2) will be the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Simply speaking, trade secrets are a thing that provides economic value since they remain unknown towards the competition. For instance one company may abandon e-mail protocol since the communication channel between workers and change to an instantaneous messaging service. Derived economic value could be the lack of spam, instant message delivery, and improved security. In the meantime, its competitors will still using slow and unsecure e-mails, waste 90% of their traffic on spam, and wonder why messages have been sent, although not received.

Unlike patents, having a trade secret will not prevent others by using it. Two firms can independently and simultaneously hold the same information as the trade secret, but they cannot hold two separate patents on a similar invention. No one is able someone can prevent another company by using im service since the internal channel of communication, except if the company is unacquainted with 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 merely names or trademarks. A brandname is surely 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 for the company owner to forecast cash flows and also to plan and manage the development of the business with greater confidence. As a result of brand’s ability to secure income it may be viewed as an efficient asset in the same way as any other, classical business assets like equipment, cash, investments, and so forth. Simultaneously brand owners possess the incentive to “keep their promise”. If eventually the market discovers fraud the organization risks to lose a substantial quantity of its clients.

Mcdougal with this paper is a good fan of all Sony products - he believes this company produces beautiful, innovative and durable products and, because of this, he is willing to pay more for his or her quality. But there are numerous other Japanese brands in the marketplace and when suddenly Sony decides to chop corners and trade poor products under its good name, the author will just change to choices.

Software Code

Software code is considered to be one of the most complicated intellectual properties to codify. You'll be able to get yourself a patent for the business procedure that the code enables or trademark certain top features of the program. Actually, even some part of the code can be kept being a trade secret even though the code itself can be copyrighted.

However, this really is complicated by different accounting treatments which largely depend on whether the software thought to be a port to the organization’s manufacturing process, or whether the software is the firm’s strategy is as well as itself. In other words the firm could use and/or sell software code. As an example Microsoft 'office' is definitely a useful application that organizations may also use for word processing or spreadsheet calculation. Nevertheless the price of license for any given quantity of workplaces may not be treated as valuable intangible property. Simultaneously Microsoft is definitely an valuable intangible property for the creator Microsoft. Note that only Microsoft props up source code, while people 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 mandates that financial statements will include these information for every type (class) of assets: methods of amortization, results of re-evaluations, estimated life periods (asset remains useful), along with other explanations of great modifications in total price of non-material assets. Reporting also needs to are the total cost of R&D, which can be regarded as spending for the 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 information about valuable intangible (non-material) assets which can be owned by a business although not recognized by current accounting practices (CAP). Simultaneously, the report format can be based on an organization. As a result, you will find there's lack of standardization and a nightmare for investors, who have to match parameters that are often of numerous natures and incomparable. Some reports with information about particular “assets” very can be not incomparable just with others but despite reports from your same company for various cycles. Some researchers have already identified this gloomy of flexibility and freedom in reporting and classification allowed by IFRS.


Goodwill is just about the commonly discussed unidentifiable asset. It's been recently mentioned that goodwill is just one of two intangible things that were routinely reported in public areas company fiscal reports (another is R&D). Goodwill turns up over a company's books when it acquires another company, and also the buyer naturally must pay more for this than the fair worth of the web identifiable assets, both tangible and intangible.

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

IFRS 3 "Companies merger" (International Financial Reporting Standards)

By IASB (International Accounting Standards Board)

Goodwill due to merger of the companies will be the sum paid by the buyer on the purchase marketable value in expectation of future economic gains. The future economic gains migh result from the synergy effect of the acquired identified non-material assets or assets which separately are not at the mercy of acknowledgement within the financial reporting but that are included in the purchase cost. Goodwill will be the more than an investment cost on the acquired be part of fair value of the identified acquired assets, that are inseparable from the target company. Actual goodwill expense is the purchase cost without the presence of difference of fair value of identified assets, obligations and contingent obligations.

SFAS 142 "Goodwill along with other intangible assets"(Financial Accounting Standards)

By USGAAP (US Generally Accepted Accounting Principles)

Goodwill may be the cost excess of an acquired company on the price 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 ecu Group of Valuers’ Associations)

You will find three types of non-material assets subject to evaluation: business goodwill (unallotted non-material assets), personal goodwill, and identified non-material assets. Business goodwill is inseparable from your company and is considered within the balance sheet after company sale, in accordance with IFRS. Personal goodwill just isn't transferred under sale and isn't considered at company cost calculation.

As can be seen in the given definitions, in several business accounting standards, you can find practically no discrepancies regarding the essence of goodwill. Thus, most of the time, goodwill value appears if company acquisition occurs, and also the distinction between the acquisition cost and the fair worth of identified assets is calculated.

Put simply, the original understanding of goodwill origins is based on the next: Goodwill arises when a company is acquired at a price exceeding its assets’ marketable values sum. Subsequently, this excess could be explained by doing this: The business market price overall is composed of the cost of all assets, such as the ones not reflected inside the balance sheet. As it is termed that inside the balance sheet un-identifiable assets cannot (shouldn't) be reflected, their cost is embodied in goodwill. The remainder way of goodwill calculation is based on it.

However goodwill happens not only when the company possesses unrecorded intangible assets. We are able to give examples of some factors irrelevant towards the worth of intangible company assets that influence goodwill value and therefore are at the mercy of be reflected within the company-buyer balance sheet:

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

• Sales cost of an acquired enterprise according to a seller's ability to prove the top price or about the buyer's capacity to beat on the price, on commission intermediaries, etc.;

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

• Award paid at acquisition (more than purchasing price over market capitalization at the moment of buying);

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

• Goodwill allowances methods (in different national accounting standards, allowance through the permitted by accounting standards period; immediate allowance of the value on the cost of equity capital or lack of the allowance generally speaking 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 set for cases of probable best utilization. It is obvious that the best ways of use for separate assets and business as a whole cannot coincide: The asset markets develop consuming different facets compared to business markets. Quite simply, a business price is determined by money flows from sale from the services or goods made by the company and the expense of separate assets essential for production - by money flows from sale of these assets.

Thus, efficient technique business overall and also separate assets are non-comparable, meaning that the business enterprise as a whole and separate assets marketable values will also be non-comparable. Completeness of company asset representation inside the balance sheet does not matter: When the expense of all assets is created the total amount sheet, even those not recognized by standards from the business accounting, the sum of the assets marketable values basically won't coincide with business cost as a whole. If cost during these assets’ utilization in this business is more than cost at average market alternative way of use, the goodwill will probably be positive, otherwise - negative. Still, negative goodwill doesn't testify to inefficient activities inside business as we understand an effective business since the the one which has assets return at an average branch level. Incomparability valuations of economic overall and also separate assets is caused by the fact that the business enterprise valuation overall is produced with a look at business continuation, and evaluation of every asset is manufactured proceeding in the assumption of their independent sale (separately in the property complex within the business).

To ensure the above we will present these provisions. Goodwill evaluation is definitely attached to the value assessment of your business overall, 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 a goal database. From your market perspective a business cost shall not rely on the price of its elements, as clients are an "ongoing concern", and its particular partition into elements shall happen just with a look at real or fictitious liquidation. Acting business is always considered as just one complex that will still act in the future (IFRS, Principles).

Most material and non-material assets, at their merge running a business, lose their liquidity because of their greater specificity and quite often complete inseparability in the business. They are assets which can be created for this business and also have no other application, as because of technological specificity and 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 within their use: long-term obligations, contracts, government requirements (as an example, ecological regulations), or social responsibility from the business. It is also impossible to dismiss management and personnel errors. Under these conditions, market evaluations of assets are difficult and can be substituted for 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 price is also essential to investors as a blueprint for risk identification of present and future investments.

Bringing it all together, we can conclude the goodwill concept can be used in the narrow along with a wide sense. In a narrow sense, goodwill is understood 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 size is determined as a difference between the purchase worth of the business and also the book price of its material, non-material and money assets and obligations. In the wide sense, goodwill is really a complex of all intangible company assets. Hence, we can talk about the goodwill of an operating company only in the meaning distinctive from accounting sense. The approximate sense of your intended meaning is expressed by the terms reputation, business standing, or/and company brand. But such goodwill (inside a wide sense) is not shown within the balance sheet. Some authors, discussing goodwill, would rather call it "the company price" or "business reputation", keeping the identical sense.

When investor makes a decision to invest money (or buy some company) he normally wants to know exactly what he is buying (or just speaking, what he gets in return for his money). When it is a service company (an IT company that are operating in the joy of software development or web applications), then possibly the sum total of all of its intangible assets is significantly small compared to the overall company value. This value will in all probability come in some kind of goodwill, but why is these numbers? With current accounting practices, in many cases we deal with an “expensive black box”. This can be a reason a prospective buyer will perform a due-diligence of the company. It will help to gauge the intangible assets of the corporation.

Human Capital

The term human capital got into the business enterprise lexicon after Gary Becker (University of Chicago economist and Nobel Prize-winner) published a book titled “Human Capital” in 1964. Becker (together with Jacob Mincer, Milton Friedman, Sherwin Rosen, and Ted Schultz) come up with economic notion of human capital as dissimilar to typical financial or physical assets, due to the difference from them in the sense that human capital can't be separated in the humans who possess it. “It is fully consistent with the capital concept as traditionally defined to express that expenditures on education, training, health care, etc., are investments in capital.” Soon after Becker developed the idea of human capital, economists and consultants begun to subdivide and classify it. In other words, it indicates both physical and intellectual ability.

Many researchers state that human resources are the most effective assets of your organization. But exactly how can the main city value of human resources be located using current accounting practices?

For that intellectual organization that concentrates on advance of different types of intellectual capital (not speculation, but real innovative development) which gets the biggest part of its value assigned to intangible assets, people are everything. The business can be evaluated by calculating the quantity of all of the HR spending (salaries, payments to outsourced workers, training programs, various incentives, etc.). Someone may say that this can be what exactly is done to calculate the cost, but expense is not a value the main city represents. It really is more of an expense as capital value concept. It appears nonsensical, however it basically signifies that if someone else incurs cost it assumes that something was bought (money was changed to something). Whether or not that something was tangible or intangible in nature, it features a value plus a price. More important is whenever that something is, it will pay to others (how many people would love to contain it). If there was many of them, what would be their price, and just how would this price be determined? Also, if that something was bought available on the market, for most buyers the fee will be similar (the product or service features a fixed price). Thus it can probably be said that it is type of valuation using the market approach. However, the worthiness really is dependent upon the type of asset you hold as well as the supply/demand curves for it. If the new owner obtained it for a lower price than these, this means he's got good contacts (refers to relational capital in IC concept).

In relation to HR, if you have a project in places you need professionals to accomplish meet your needs, you don’t simply spend some money, but you get some good quality work and even if it doesn’t use a material form still it has value. For example, it can be consultation with a lawyer in Switzerland; project duration is 4-6 hours as well as an hourly rate would be between 300 and 1000 Swiss francs. Based on your contacts (RC) the cost of project (outsource) is going to be between 1500 and 5000Chf. But after the project’s completion and payment, you start to possess something - it can be answers to questions asked during consultation hours along with other piece of knowledge from your lawyer consulting with you. Quite simply, you become the master of some bit of intellectual capital. When not very specific for your needs, probably there are many individuals that are willing to pay a similar price to the type of information. As a result it can be an intangible asset, which can be valued using a minimum of the cost and market approaches (more about evaluation will probably be discussed in later areas of this thesis).

However, the salary is a very average reflection with the real creativity of your given person and price generated (profit associated) as a result. Also, you will find industry leaders and lagers - industry leaders are the type who pay across the average salary set by industry so that you can acquire the best people. Industry lagers normally pay substandard, but it is not too their human resources are worse when it comes to creativity, skills, knowledge or experience than others in big companies. Consider all of the possible areas of expertise that exist to the modern IT companies: There are big companies that might be best in providing their particular products and services on the market, nevertheless they can’t be best in all possible market niches. It makes possible the situation each time a little band of experts specifically field are much easier inside a certain task (Activity) when compared to a research center of some big company.

Also, worth mentioning is it appears like in today’s economy companies no longer compete when it comes to best technology; it is the competition of patented technologies and other licenses. Research and development, including creativity, are tied by various legal barriers (patent sharks), in order that many professionals are not permitted to enter a certain field of technology.

2.3 Intellectual Capital

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

Its essence can be described as follows: as ways of a product creation have changed, information has considered one of major factors of new cost creation, it is necessary to reconstruct in appropriate way the content of the public reporting of the companies before their proprietors and other investors. The reporting shall retain the facts about cost major factors: company strategy, future monetary flows, non-financial activities, intangible company assets, including business standing.

Needless to say, people reporting just isn't restricted to just the financial statements. Because it was mentioned before, IFRS recommends publication of information about intangible assets not-recognizable by CAP. For example, there are numerous notes and discussions reported in annual reports (like K-10). However, this field requires farther standardization otherwise it's got little practical value. On this paper, Kretov Kirill applies some concepts of intellectual capital in order to create a reporting model for that complete capital structure.

Initially the situation of evaluation of intangible factors has arisen in information-saturated companies the location where the amount of material assets is insignificant, and the mental potential is high. Investors weren't inclined to take a position to such companies, and in front from the managers there was a task of calculation of the intangible assets value and also informing investors to create more adequate picture concerning the company activities with the and its particular prospects.

Modern idea about intangible factors of latest cost production are embodied in concept "intellectual capital". The managers managing companies cost are almost single in the opinion in regards to the name with this phenomenon, its content, and also that modern accounting can’t to understand new assets (employees competence, customers relations, computer and administrative systems, databases, etc.) . Some researchers even state that for intellectual capital accounting it's required new financial and administrative concept . Financiers discuss be it necessary to change traditional accounting terms (non-material assets, business standing), as well as about chance of cost evaluation of a 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 worth factors management practice in the specific companies, now it is admitted by both researchers and experts. For that reason each model is unique and reflects specificity from the company. At the same time, accumulating of experience and knowledge of your intellectual capital through the start of current decade has allowed to ascertain general approaches, to develop more or less single structure of companies’ knowledge assets. Virtually all this problem researchers and managers allocate three aspects of intellectual capital:

1) human capital (HC);

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

3) customer capital (CC).

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

Most of the time, it is possible to estimate the human capital volume from the number of intellectual workers as well as the amount of information, skills and knowledge which they own, from the volume of leaders, idea men, "revolutionaries". Value of personnel knowledge and abilities is characterized by specialists' capability to solve difficult, non-standard, unexpected problems; employees' independence and trainability; the ability of managers to deal with transformations; creative activity; tendency to partner interaction; etc. We can estimate progression of a person's capital through proportion of the types of activity "inspiring" on search of new solutions forcing company's employees to learn new things. Finally, level of human capital binding is estimated through personnel adherence to company's insight and values, employees' satisfaction by work and industrial relations, personnel loyalty towards the company and retention of leading workers, company's reputation around the labor market, etc. (Later in the work, the Human Resources will probably be discussed more into details.)

Organization structural capital is reflected through the number and excellence of partners; level of business partner retention towards the enterprise; integration with the value chain and an company's role inside it; availability of an adaptable and efficient business network (on the global scale, as well); information system quality; early detection system quality; involving of pressure groups into selection; 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 familiarity with technical processes (the degree of completeness and clearness of documentation reflecting consumer value creation within the organization); collection of prototypes for economic problem solution; intellectual property; backlogs on new services; corporate culture market orientation; territorial arrangement advantages; unique technical libraries and databases, customer databases; logistic, sales, advertising, cartel contracts; overcome starting difficulties; licenses.

The business customer capital is reflected, from the following characteristics: expected discounted income from available consumers; quantity of regular company's customers, their share in sales amounts, average cooperation experience; customer growth quality and prospects; customers' satisfaction; company's "ownership" of the marketplace standard; competitive advantage with new production launch; the level of the concluded contracts; the degree of customer retention to the organization.

So, it's possible to tell that inside the provided models there's more widespread than distinctions. The overwhelming most of authors recognize presence of intellectual capital independent elements - human, organizational, client, however they are called. At the same time, there are a number of terms anyhow connected with intangible assets: brand, business standing (goodwill), intellectual property, non-material assets, expenses on researches and developments. What's relation of such terms with notion of an intellectual capital? It isn't quite obvious why the typical name "intellectual capital" can be used to blend such essentially different and frequently without having the direct relation to the intelligence phenomenon as employees' value system, enterprise image, brands, customers' loyalty. Inside our opinion, the uniting basis here could possibly be the concept of intellectual capital circulation: employees' knowledge and capabilities are embodied in organizational processes and relationship with business partners that, consequently, produce the base for steady relations with customers; cooperation with customers and partners contributes to experience accumulating, progression of enterprise employees' knowledge and capabilities.

Ordering and systematization of existing terminology becomes pressing question where, in particular, the method of intangible assets reporting, accepted and identified by the accounting organizations will be based.


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