Cmmu Icc Feb 16 2009

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Developed for CMMU

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

Intellectual CapitalOutlining the Principles of IC Calculations

Nigel W. DawesMonday 16th of February 2009

Project “ICC”

Thailand 2009

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What is the TRUE value of your Company?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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What Is Intellectual Capital?• ... The sum of an organization’s patents, processes,

employees’ skills, technologies, information about customers and suppliers, and old-fashioned experience ...

• ... An individual’s accumulated knowledge and know-how [that] is the source of innovation and regeneration.

• ... ability, skill, and expertise ... Embedded in human brains ...

• ... Knowledge that exists in an organization that can be used to create differential advantage ...

(Hugh MacDonald, ICL)• ... Intellectual capital that has been formalized,

captured, and leveraged to produce a higher-valued asset ...

(Klein and Prusak)

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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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Areopa has invested over 10,000 “man days” and produced 77 patented formulae that can calculate the added value of Intangible Assets and Intellectual Capital in an organisation.

If it cannot be measured then it cannot be managed!

We measure the un-measurable!

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Intellectual Capital Calculation – The Areopa 4 Leaf Model

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IAS 38 - Important Factors - IntangiblesKey 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)

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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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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)

How to achieve Intellectual Capital Calculations?

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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

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The effects of adding the Intellectual Capital Assets to a Traditional Balance Sheet?

In our experience the Traditional Balance Sheet is leveraged between

5 – 12 times5 – 12 times

When IC is applied.

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CONTACT COORDINATES

AREOPAKoningin Astridlaan 201 B5B- 2800 MECHELENBELGIUMTel.: +32 (0)15 433.217

Fax.: +32 (0)15 411.170

www.areopa.com

[email protected]

Ludo PYISMobile: +32 (0)495 [email protected]

Nigel W. DawesMobile: + 66 (0)81 [email protected]

Business

Cmmu Icc Feb 16 2009