IC Accounting

Outlining the Principles of IC Accounting in order to identify the areas for innovation and sustainable growth Nigel W. Dawes Wednesday 7th of November 2007
Developed for

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Confidential, not to be disclosed without written approval of the author(s)

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Why would anyone want to increase their Balance Sheet? There are many reasons Litigation Transfer Pricing Mergers Financing Sale/Acquisition Joint Venture Capital Markets Purchase Price Allocation (PPA) Enforcement Bankruptcy

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The importance of Intellectual Capital and Intangible Assets, the immaterial value of companies such as relationships with business partners, brand awareness (customer/partner capital) and the ability to innovate (e.g. R&D capital), but also the ability to multiply knowledge within the organization (structural capital), has greatly increased in the last two decades. Financial accounting and traditional management instruments are not able to capture these new values and report on them. What is needed is an enhanced concept for corporate reporting and new management tools that will enable companies to manage these new drivers in a systematic way. This should enhance the capability of investors to better understand the value and the potential of the hidden intellectual resources of an enterprise in order to make better judgements about its capabilities to perform in the future.
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IAS 36

IAS 38

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Intangible Assets examples Computer Software Patents Trademarks Brand Names Copyrights Motion Picture Films Customer Lists

Mortgage Service Rights Licenses Import Quotas Franchises Concessions Marketing Rights Customer/Supplier relationships/Contracts

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Intellectual Capital Calculation 4 Leaf Model

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IAS 38 - Important Factors - Intangibles

Key Definitions: 1. Identifiable Non monetary asset without physical substance 2. Definite Life** (Amortization) or Indefinite Life (No Amortization) 3. Controlled by the Enterprise (acquired or self created) 4. Expectation of Future Economic Benefits (based upon reasonable & supportive assumptions)
** Life determined by: Legal Contractual Judicial
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Physical Technological Functional

Analytical Economic
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Intellectual Capital: (Market Value Book Value)? The value of any organization is the sum of (1) the physical tangible and financial capital which one finds on the balance sheet of a company and (2) the intangible assets of a company which are usually described as goodwill on the balance sheet. Sometimes IC is interpreted as the difference between the book value i.e. the historic value of the assets of a company not yet amortized and the market value which equals the perceived present value of the future cash flow of a company. But there are so many different valuations ..
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Intellectual Capital: (Market Value Book Value)? Fair Market Value Insurable Value Collateral Value Ad Valorem Value Acquisition Value Usage Value Fair Value (IASB) Investment Value Market Value Forced Sale Value

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How to achieve Intellectual Capital Calculations? The steps to value .. 1. Data Collection 2. Valuation & Approaches 3. Economic Life Analysis 4. Value Method Conclusion 5. Reporting 6. Set Future Valuation Dates (some Goodwill Mandatory)

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Traditional (Financial) Balance Sheet

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Intellectual Capital Balance Sheet

Assets are either Internal or External and vary from highly structured to not structured at all Assets are either owned by the company (explicit) or borrowed from 3rd parties: staff, customers, alliances, partners, public authorities
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IC Balance Sheet: follows the structure logic of the Financial BS

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Consolidated Balance Sheet

Consolidated Balance Sheet shows the total value of the enterprise, combining financial with IC elements The assets side gives a clear insight into the relative values of ALL assets, offering THE ultimate management tool to managers The liabilities side shows how assets are financed, i.e. who owns the assets Balance Sheet analytics can be developed in line with BS analysis concepts which already exist for the classical Balance Sheet 11/7/2007 15

The effects of adding the Intellectual Capital Assets to a Traditional Balance Sheet? In our experience the Traditional Balance Sheet is leveraged between 5 10 times When IC is applied.
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CONTACT COORDINATES AREOPA Koningin Astridlaan 201 B5 B- 2800 MECHELEN BELGIUM

Tel.: +32 (0)15 433.217 Fax.: +32 (0)15 411.170 www.areopa.com info@areopa.com

Ludo PYIS Mobile: +32 (0)495 213.629 Ludo.pyis@areopa.com Nigel W. Dawes Mobile: + 66 (0)81 0044116 nigel.dawes@areopa.com

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