Strategy and
Management Accounting for
Intangible Assets
Mikhail Davydov
Anna Devyatova
Alexander Shalamov
Ksenia Shneyveys
“Intangible asset management is the most
important issue for top management at
present…”
Sumantra Ghoshal, Professor
London Business School
Intangible assets, % of market value
96
Coca-Cola
94
Microsoft
Intel
85
ABB
85
3M
83
GE
82
BP
74
68
Honda
Chrysler
60
Defining Intangible Assets
Assets having no material form that appear as a result
of (1) past events that has a (2) measurable effect and that
presents a (3) future benefit .
[Financial Accounting Standards Board (FASB)]
Assets arising as a result of past events and possess
three main attributes: they are non physical in nature,
they are capable of producing future economic net
benefits, and they are protected legally or through a
de facto right
[Bouteiller, 2002]
Defining Intangible Assets
Non-physical sources of value (claims to future
benefits) generated by innovation (discovery), unique
organizational designs, or human resource practices
(B. Lev, 2003)
Any asset, belonging to a company or controlled by it,
having no physical or financial (in case of financial
investment) form, but capable of producing future
economic benefits
(D. Volkov, T. Garanina, 2007)
Defining Intangible Assets
Three terms are widely used:
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Intangible Assets — in accounting literature,
Knowledge Assets — by economists,
Intellectual Capital — in management and law
literature;
“and on the whole they come to the same: to the future
benefits that are not embodied materially”.
B.Lev, 2004
Defining Intangible Assets
INTANGIBLE ASSETS =
= INTELLECTUAL CAPITAL =
= KNOWLEDGE ASSETS =
= INTANGIBLES
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Intangible Assets, recognized according to the
accounting standards in accounting and
bookkeeping records
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Other Intangible Assets -- Intangible Assets nonrecognized in accounting and bookkeeping records
Defining Intangible Assets
Composition and structure of intangible
assets
HUMAN
CAPITAL
RELATIONSHIP
CAPITAL
ORGANIZATIONAL (STRUCTURAL)
CAPITAL
INTELLECTUAL CAPITAL
developed by International Federation of Accountants (IFAC, 1998)
Defining Intangible Assets
HUMAN CAPITAL
Definition
capability of a
company to benefit
from knowledge, skills
and experience of
employees, which
immanently pertain to
the latter.
For example:
capability for innovations
 creativity
 know-how and experience
 ability to work in a team
 motivation
 learning capability
 educational and
professional level
 loyalty
etc.

Defining Intangible Assets
RELATIONSHIP CAPITAL
Definition
capability of a
company to benefit
from resources
connected with the
company's external
relations (with
customer, suppliers,
and other
counteragents).
For example:
 brands
 suppliers
 loyalty of the customers
 distribution channels
 business cooperation
 alliances and partnerships
 licensing agreements
 franchising agreements
etc.
Defining Intangible Assets
ORGANIZATIONAL (STRUCTURAL) CAPITAL
Definition
capability of a company
to benefit from
attainments remaining
inside the company.
For example:
Intellectual Property
patents
trademarks
service marks
name of origin of goods
copyright
etc.
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Infrastructural Assets
 corporate culture
 internal administration of the
workflow
 information systems
 management philosophy
 decision-making system
etc.
Intangible Assets
Why are they so important?
Hard for competitors to imitate
A powerful source of sustainable competitive
advantage
Measuring Intangible Assets
If you can’t measure it,
you can’t manage it.
George O. Odiorne
Measuring the value of intangible assets is
the holy grail of accounting.
Robert S. Kaplan, David P. Norton
Measuring Intangible Assets
34 methods for measuring intangible assets
(1950’s – 2004)
Probably, the list is not closed!
4 approaches for measuring intangibles
1)
2)
3)
4)
Direct Intellectual Capital methods (DIC)
Market Capitalization Methods (MCM)
Return on Assets methods (ROA)
Scorecard Methods (SC)
Measuring Intangible Assets
1) Direct Intellectual Capital methods (DIC)
Estimate the $-value of intangible assets by identifying its
various components. Once these components are
identified, they can be directly evaluated, either
individually or as an aggregated coefficient.
Example: Technology broker (TB)
Measuring Intangible Assets
1)DIC Technology broker (TB)
(Annie Brooking, 1996)
Assess the value of the IC of a firm based on diagnostic analysis of
a firm’s response to 20 questions covering four major
components of IC: market assets, human-centered assets,
intellectual property, infrastructure assets.
Questionnaire
indicators.
3 methods of calculating dollar value for IC:
 The cost approach: based on assessment of replacement cost of
the asset;
 The market approach: uses market comparables to assess value;
 The income approach: assess the income-providing capability of
the asset.
Measuring Intangible Assets
2) Market Capitalization Methods (MCM)
Calculate the difference between a company's market
capitalization and its stockholders' equity as the value of its
intellectual capital.
Example: Market measure of
company’s IC
IC=market capitalization-stockholders’s equity
Market value = $ 12.77 billion
Stockholder equity = $ 1.47 billion
IC = $ 11.3 billion
Measuring Intangible Assets
DIC/MCM: FiMIAM methodology
Step 1 : determine the “realized IC”
Market value = $ 12.77 billion
Stockholder equity = $ 1.47 billion
“realized IC” = $ 11.3 billion
Measuring Intangible Assets
DIC/MCM: FiMIAM methodology
Step 2 : identifying the relevant
components of IC
Step 3 : assigning relative weights to IC
components
Step 4: assigning value
 organizational learning
0.04 * $11,3 billion = $ 452 million
 knowledge product
0.08 * $11,3 billion = $ 904 million
 patents
0.07 * $11,3 billion = $ 791 million
Measuring Intangible Assets
3) Return on Assets methods (ROA)
Tangible assets and the annual financial growth figures
are compared to the industry average. Above
average earnings are then utilized to estimate the
value of intangible assets.
Example: Economic Value Added (EVATM)
Calculated by adjusting the company’s disclosed profit
with charges to intangibles. Changes in EVA
provide an indication of whether the firm’s
intellectual capital is productive or not.
Measuring Intangible Assets
4) Scorecard Methods (SC)
The various components of intangible assets or
intellectual capital are identified as indicators
and indices are generated and reported in
scorecards or as graphs.
Balanced Scorecard Method
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A way to systematically measure the alignment
of company’s human, information and
organization capital to the company’s strategy
(by D. Norton and R. Kaplan)
Scandia Navigator
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Developed by Scandia (1994)
IA are divided into: human capital,
customer capital, process capital
and innovation capital
Focuses on: the financial focus, the
customer perspective (customer
focus), the process perspective
(process focus), the human
perspective (human focus), and the
renewal and development perspective
(innovation focus)
200 indicators
Scandia Navigator
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More suitable for service company – limited
applicability for other industries
All measures are expressed in monetary terms,
which is not always desirable for IA
Not clear as how the five perspectives in the
Skandia Navigator relate to each other
Equation that sums tangible and intangible assets
might be wrong as soon as there is no clear
distinction between them
IC Index Approach
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Splits IA into human capital and structural capital,
separating “thinking” and “non-thinking” assets,
then dividing them into subgroups
A company needs to identify key IA indicators
They need to be ranked according to their
importance
Indicators chosen must be weighted and
summarized into a single index
IC Index Approach
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Allows organizations to measure how changes in the market or
changes in other performance indicators correlate with the
changes in the IC Index
BUT
Using aggregates makes it difficult to identify the key business
drivers
Weightings for each of the different measures is done
subjectively which can be dangerous if managers get it wrong
IA Monitor

Three categories are taken into account:
1. intangibles represented by competence of employees
2. intangibles related to the internal structure of the organization
3. those related to the external structure including brand names,
image, and relationships with suppliers and most importantly
relationships with customers

Three measurement groups: growth and renewal,
efficiency, stability
IA Monitor
Emphasises the internal perspective
 Not a valuation approach

Summary
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No single method of evaluation is perfect.
Company’s success depends not only on what is
measured but also how the measurements are used.
Presence of a great variety of approaches indicates
professional and scholar communities’
dissatisfaction with the existing ones.
In the years to come the question of developing
optimal techniques for intangible assets’
measurement will play a significant role in
management science.
Practical approach: Brand Valuation
PricewaterhouseCoopers
(1)Develop key performance indicators (KPI) to
monitor the performance of the intangible
(2) Conduct a yearly assessment of the brand value
(3) Allocating a value to the brand on a regular basis
and tracking it over time.
Practical approach: Brand Valuation
PricewaterhouseCoopers
Year ended March 31
2003
PBIT
1 158.93
943.39
696.03
89.65
59.77
53.43
1 069.28
883.62
642.60
1.000
1.064
1.132
1 069.28
940.02
727.25
3
2
1
Less: non-brand income
Adjusted profit
Inflation compound factor at 6%
Present value of profits for the brand
Weightage factor
2002
Three-year average weighted profits
969.19
Remuneration of capital (5% of average capital
employed)
123.52
Brand-related profits
845.67
Tax at 36.75%
310.78
Brand earnings
534.88
Multiple-applied
14.00
Brand value
7 488.00
2001
In Rs Crore
Practical approach: Brand Valuation
PricewaterhouseCoopers
The methodology followed for valuing the brand is given below:
(1) Determine brand earnings
• Determine brand profits by elimination of non-brand profits from the total
profits of the company
• Restate the historical profits at present-day values
• Provide for the remuneration of capital to used for purposes other than
promotion of the brand
• Adjust for taxes
(2) Determine the brand-strength or brand-earnings multiple
Brand-strength multiple is a function of a multitude of factors such as
leadership, stability, market, internationality, trend, support and
protection. These factors have been evaluated on a scale of 1 to 100
internally by the Infosys management, based on the information
available within the company.
(3) Compute the brand value by multiplying the brand earnings with the
multiple derived in step 2 above.
Practical approach: Brand Valuation
PricewaterhouseCoopers
INFOSYS
Brand value,
Rs Crore
Market
capitalization,
Rs Crore
2001
5 376
26 926
20%
2002
7 257
24 654
29%
2003
7 488
26 847
28%
…
…
…
…
2006
22 915
82 154
28%
2007
31 617
115 307
27%
%
Practical approach: Brand Valuation
PricewaterhouseCoopers
List of KPIs being used for brand valuation
by best practice companies
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Number of customers and retention
levels
Detailed customer satisfaction results
(often from external brand surveys)
Number of complaints from customers
Customer delivery statistics (eg,
applications, errors, delays, etc)
Sales trends by brand
Products per customer
Brand values
Brand awareness
Brand association
Employee satisfaction (although the
workforce is not an identifiable intangible
asset for accounting purposes)
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New clients
Success of new product
Price premium paid
Relative market share
customer value
Average revenue per customer
Churn rate
Frequency of purchase
Expiry date
Revenue derived from the innovation
Number of licences granted
Royalty revenues
Thank you!