Intangible
Assets Agendas
Swedish
Governmental policy on Intangibles
A number of public
organisations are involved in institutional reflections and projects
concerning intangible assets. The key public actors are the Swedish
Ministry of Industry, Employment and Communications, The
Swedish National Board for Industrial and Technical Development (NUTEK),
the Swedish Council for Work Life Research (RALF), Invest in Sweden
Agency and Statistics Sweden. Besides, several organisations are
specialised within subsets of intangible assets (Patents, IPR, etc.).
1. Sweden: the
"country of intellectual capital"
"An IC-Navigator
for Nations": a new method to identify, measure and monitor the
intangible capital of a country
Invest in Sweden Agency
(ISA) is the first national investment organisation to apply latest
methods of measuring corporate intellectual capital to assess country
potential and compare nations’ competitiveness and potential. They
consider that international investments will be increasingly determined
by intellectual capital of nations, i.e. country-specific
"soft" investment data.
According to ISA in its
1999 Report "Intellectual capital forms the root of a corporation -
and of a nation - that supply the nourishment for future strength and
growth. A new analytical method enables these previously unevaluated
resources to be assessed and compared. This can be an important tool for
selecting an international location for knowledge-based companies.
Sweden offers highly attractive and competitive intellectual capital
assets - assets of superior value for leading-edge companies". It
is the "Intangible wealth of nation".
To measure this soft
investment data and identify intellectual capital assets, ISA has
adapted a tool developed by a company to apply it to measure hidden
values of countries and assess a country potential: the IC-Navigator
developed for Skandia company. This work has been performed in
cooperation with the Skandia Future Centre (see - Caroline Stenfelt).
ISA has identified a range of
indicators (see Sweden pages).
Towards a national
perspective of IC: an
IC-Navigator for Nation
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Contact
Invest
in Sweden Agency
Kai Hammerich, director-general, ISA
phone: +46-8-402 78 10, or +46-70 642 78
10
e-mail: kai.hammerich@isa.se
Publications (including the
"Invest in Sweden 1999 report -
Assets in intellectual capital")
are available on its web site : http://www.isa.se
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2. Governmental
efforts to increase the transparency of intangibles
In 1986, Statistics
Sweden started a voluntary pilot study on intangible assets,
stimulated by the fast technological change and the growing demand of
firms of information on investment structure. Since 1988, the survey
includes several indicators on intangible investments and covers all
manufacturing companies with more than 500 employees.
In 1991, a government
study was conducted that resulted in asking a special working group to
formulate a government proposal. The report (DS 1991:45) discussed a
proposal making it mandatory for all companies and authorities with more
than 100 employees to work out Human Resources Accounting reports with
profit and loss accounts every year (e.g., personnel turnover, sickness
leave, training, and working environment). For various reasons, the
proposal never reached the Parliament but it has been considered
positive that proposed legislation was submitted to various bodies,
increasing awareness in this matter.
The question of changes
in the legislation has been reconsidered. After a debate in the
Parliament, the standing committee on civil law legislation emphasised
the importance of investigating the necessity of changing the
legislation with respect to the treatment of human capital.
In 1993 the Swedish
Council for Service Industries issued a recommendation for its member
companies to use a number of indicators describing their human capital
in their annual reports. The indicators were based on the Konrad design
with additional input from Skandia. The recommendation was one of the
inputs into the 1995 OECD and EU initiatives to issue recommendations
for reporting on human capital.
Today, the Ministry of
Industry, Employment and Communications supports several research
projects in this field, including its participation within the MERITUM
project and a model of an "IC Knowledge Desk for industrial
growth" (work performed by Skandia Future Centre).
Within the Ministry,
Karin Aldskogius and Lena Wirkkala work more specifically on these
issues. A workshop on Intellectual capital will be organised by the
Minister during the Swedish Presidency on March 19-20 2001 in Växjö in
the framework of an SMEs conference.
The Swedish National
Board for Industrial and Technical - NUTEK (Government Agency for Trade
and Industry) also works on this issue. For example, a survey has been
produced which explores the link between intangible factors and
companies' results. It attempted to measure the significance of
innovations to individual businesses.
3. Intangibles on the
Agenda of the EU Swedish Presidency
Sweden will hold the
Presidency for the first six months of 2001. It is planned to hold an
event on intellectual capital during this period.
As indicated, the
Ministry of Industry will also organise a workshop on IC (March 19-20
2001 in Växjö).
In parallel, issues
involving working life and work environment will be raised during
Sweden's tenure. As one phase in these efforts, the National Institute
for Working Life (NIWL), the National Board of Occupational Safety and
Health (NBOSH) and the Joint Industrial Safety Council (JISC) will hold
a joint conference in January 2001 called Work Life 2000. It will take
place on January 22-25, 2001.
In order to prepare
this event, a total of about 70 preparatory workshops have been and will
be held on important EU subjects between 1998 and 2000. The
"Workshop Statements" will subsequently serve as input to
sessions at the conference.
In that framework, two workshops were
held in Brussels on the topic on intangible assets:
-
in September 1998, a
"Human Capital workshop" on "The Value of
Investing in the Workforce";
-
in February 1999 on "How
To Manage And Account for Intangibles: Voluntary
guidelines on the disclosure of intangibles: a Bridge
over troubled water?".
"The managing of
intangible assets is a key issue in the creation of wealth for
individuals, organisations and nations. In the past the European
Commission has discussed appropriate measures to increase the
transparency of intangibles, especially those concerned with human
capital. However, too little is known about how the intangibles are
managed and accounted for and how they contribute to growth and
employment. In two workshops, such issues will be discussed. In the
present workshop human capital is highlighted, whereas intangible assets
in general are discussed in the second workshop". (Introduction
to the workshops)
The workshops scientific organisers
were Jan-Erick Gröjer and Ulf Johanson from the Stockholm University.
Denmark
Denmark is also in the
forefront on describing the Knowledge Economy. As Sweden, Denmark is viewed as a
nation with a high potential of IC growth and is regarded to have one of the
most favourable growths of Innovation climate during the last 15 years.
With regard to the measurement
of intangible assets, the Danish government has been conducting a series of
studies started in 1995. In 1998, it launched a Pilot project and conducted a
policy of openness with regard to intangible assets on a standardised basis.
All these studies and projects
have involved and still involve, around the Danish Trade and Industry
Development Council and Danish Agency for Trade and Industry, the main actors
interested in intangible capital issues in Denmark: Copenhagen Business School,
Aarhus University, auditing and consulting firms, Danish Commerce and Companies
Agency, banks, Danish Patent Office, etc.
1.
Preliminary studies on IA
In 1995, the Danish Trade and
Industry Development Council initiated a survey on intellectual capital
accounts.
Prior to that survey, a
preliminary study of four companies and a literature study had already been
carried out by Jan Mouritsen of the Copenhaguen Business School (published in
1996.).
Also, several reports
previously put the emphasis on that topic:
- the "Business and Industry Report
1996" of the Danish Ministry of Business and Industry
already underlined the importance of intellectual capital : this
report describes the company of today as a flexible company with
an intense focus on competence, application of technology,
significant research and development work and close relations
with both customers and suppliers. But, in order to turn
knowledge into a management factor in the company, it must be
measurable in one way or another. The knowledge-intensive
company possesses both equity capital and employee capital
(individual capital or human capital), structural capital and
other intangible assets. Except for equity capital, there are no
systematic statements of the value of these capital types
embodied in intellectual rather than tangible assets.
- The report "Capital and
Growth" (1996) from the Danish Trade and Industry
Development Council also underlined that there was a special
problem to SMEs, which often feature several types of
intellectual capital, but hardly have any possibility to render
them visible. It established that innovative SMEs lack capital
opportunities because financial agents and other interested
parties have difficulties in seeing through the future-oriented
prospects of a knowledge-intensive company. It is stated that
innovation projects and intangible assets often receive only
little attention from investors partly due to difficulties in
understanding the significance of intangible assets and partly
due to lacking possibilities of providing collateral.
The Survey on Intellectual
Capital Accounts survey was aimed at establishing why and how companies which
actually prepare intellectual capital accounts do so. Therefore the intellectual
capital accounts of ten companies have been analysed through interviews. The ten
companies come from different industries in Sweden and Denmark, but are most
often knowledge-intensive : PLS Consult, Rambøll, Skandia, Consultus, Telia,
ABB, Sparekassen Nordjylland (SparNord), The Swedish Civil Aviation
Administration (SCAA), Sparbanken Sverige, WM Data.
The purpose of the ten
intellectual capital accounts examples was to illustrate companies’ motives
for, and ideas with, the work with intellectual capital accounts and to provide
concrete examples of ways to structure and apply intellectual capital accounts:
- Why does the company want to measure
intellectual capital?
- How is the intellectual capital
measured?
- What are the current or potential
effects of the intellectual capital reporting?
- What are the problems with developing
a system for measurement of intellectual capital?
- How does the company establish what to
report to the world?
The survey has been performed
by a task force, coordinated by Henrik Jensen from the Danish Agency of Trade
and Industry.
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Task
force
- Henrik Jensen,
specialist consultant, the Danish Agency
for Development of Trade and Industry
(project manager)
- Professor Jan
Mouritsen, Copenhagen Business School
- Jens Houe
Thomsen, stock analyst, Den Danske Bank
- Jens Sejer
Pedersen, state-authorized public
accountant, Deloitte & Touche
- Lars
Kirkegaard, consultant, Sant+Bendix
- Anja
Otterstrøm, head of section, the Danish
Commerce and Companies Agency
- Sten
Kirkegaard Rasmussen, head of section,
the Danish Commerce and Companies Agency
- Steffen Rebien,
head of section, the Danish Patent
Office
- Søren
Engelsted Jonasen, section manager,
VækstFonden (Business Development
Finance)
- Annette Birch,
head of section, the Danish Agency for
Development of Trade and Industry.
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This work has resulted in a
Memorandum published in May 1997 by the Danish Trade and Industry Council
entitled "Intellectual
Capital Accounts - Reporting and managing Intellectual Capital".
2.
The Danish Intellectual Capital Statements Pilot Project
Background
The Project Intellectual
Accounts started in February 1998 as one of the 7 components of a governmental
initiative aimed to facilitate the transition from the industrial society to the
knowledge society. This 3-year umbrella scheme is called LOK (initials of the
Danish words for management, organisation and competence: "Ledelse,
Organisation og Kompetence - LOK").
Under the Danish Ministry of
Business and Industry, the project is organised by a Project Group. Headed by
the Danish Agency for Trade and Industry, its groups together the Danish
Commerce and Companies Agency, Copenhagen Business School, University of Aarghus,
Arthur Andersen Consulting. Besides the project group, there are three groups
which represent the "users and readers" of IC statements:
- an expert group
- a steering group
- a financial group
Finally, 18 Danish companies
are participating to the project (originally they were 25 but 7 have left the
project for various reasons). They have been selected randomly: the main
selection criteria was their commitment and they are not a representative sample
of Danish companies. All but two of the firms participating in the project are
service companies, and half of them operate in the IT business. They range from
20 employees to 3000.
Combining a process of
theoretical research and field practical development, this project has been
designed:
- to explore how companies that did not
have an intellectual capital statement would create one adapted
to their situations and characteristics. In
fact, according to EFS, "so far discussions on
intellectual capital accounts have referred to pioneering cases
(Skandia, Ramboll). This project is the first attempt to
systematically collect experiences from companies setting up
intellectual capital accounts at the same time."
"Intellectual capital
statements" are defined as "externally published documents,
which provide information to internal and to external parties about
firms’ work to sustain and develop their resources, competencies,
capabilities, and knowledge" (NB: the precise wording remains
undecided: Intellectual Capital Statement, Intellectual Capital Account,
and Intellectual Capital Report).
- to develop cross-industry guidelines
based on the real experiences from the 18 companies having set
up IC statement. These
guidelines will not have a legal status but they will take the
form of an official recommendation from the Danish Government. "It
is too early to talk about standards". Guidelines will
need to be tested.
First results
Starting in February 1998, all
18 firms agreed to develop intellectual capital accounts for the years 1998 and
1999. Each firm was interviewed at least twice per year, a questionnaire was
administrated each year, and several individual meetings and common seminars
have been organised so that they can discuss their progress, and exchange with
the consultants and researchers.
These surveys were oriented
towards the same five questions:
- Why do the firms want to measure
intellectual capital?
- Who is involved in the project?
- How does the firm work with
intellectual capital?
- What is intellectual capital made to
be in the specific firm?
- What potential effects is the
reporting of intellectual capital expected to have?
No single assessment
methodology or theory has been made compulsory: each company was free to choose
its own methodology and indicators, way of presenting the statement, etc. On the
contrary, companies were asked to be creative in order to suggest new ideas and
practical solutions close to business reality.
The first generation of
intellectual capital accounts has been published in May 1999.
The results show that they have
approached IC statements in very different ways and adopted various solutions.
As a result, the IC statements are very different in their content and
presentation.
There is however a common
denominator which is that they felt this work was relevant and productive: they
started for the first time to identify, organise and manage their intellectual
capital, now viewed as a real production factor.
Moreover, publishing of the
intellectual capital accounts has itself proved to be a good way of recruiting
new employees as well as communicating with customers and external partners. The
intellectual capital accounts also improve investors, banks and others ability
to evaluate the companies potential for growth and development. Hereby the
intellectual capital account can help the company to get access to funding.
The publication is available on
EFS site as well as in
paper format under the title : "Developing Intellectual Capital Accounts
– Experiences from 19 companies" from May 1999.
Recent developments and findings
During 2000, more experiences
from the 18 companies have been gathered and several steps have been achieved:
Organisation of a technical
international workshop on intellectual capital statements, 22-23
February 2000
The Danish Agency for Trade and
Industry hosted a workshop on Intellectual Capital Statements in February 2000.
The very first draft of guidelines for intellectual capital statements was
presented and discussed at the workshop.
The participants were divided
into 4 parallel workshop session each discussing a different theme:
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Topics
discussed |
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Group 1
Title: Company
perspective
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- Relevance of
Intellectual Capital Statement (ICS)
- ICS –
Communication or management tool?
- Reporting the
Intellectual Capital
- Challenges
- The Guideline
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Group 2
Title: Financial
perspective
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- Benefits from
Intellectual Capital Statements (ICS)
- Quality of
information
- Complexity of
the model
- Alternative
solutions for investors
|
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Group 3
Title: Accounting
perspective
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- What should be
verified?
- Who should do
the verification of ICS’?
- The future
role of the classical auditor
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Group 4
Title: Innovation and
competence perspective
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- Should the ICS
reflect innovative perspective?
- If the answer
is YES, how could it be done?
- Description of
employees bringing knowledge to the
company – Is it possible?
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The summaries and slides from
the 4 parallel workshop sessions can be downloaded on EFS web site.
Presentation of the first draft of
guidelines for setting up IC statements
Based on the interim results,
researchers connected to the project have prepared draft guidelines. This
framework describes the building blocks of the kind of IC statements that the
Ministry for trade and industry wants Danish companies to develop.
Two documents are available at
present in English:
- The Logic of Intellectual Capital
Statements
- Towards a Guideline for Intellectual
Capital Statements
These guidelines present
indicators from 18 firms’ intellectual capital statements which are classified
into 4 categories:
- Employees
- Customers
- Processes
- Technology
Each category is subdivided in
3 sub-categories, each of them containing items:
- resources
- activities
- effects
Publication of the second IC
statements from each company in May 2000 (to be available in
English in June 2000).
Future activities
Three steps are still planned
before the end of the project :
- Early summer 2000
,
the second draft of the guidelines will be terminated. They will
include the results from the second intellectual statement published in
May 2000.
- In Autumn 2000, the second
draft will be circulated among a wide range of interest
organisations and companies for consideration. The Ministry will
organise specific discussions with groups having a special
interests in the guidelines such as companies and accountants.
- In November 2000, the Final
Guidelines will be presented in the framework of a national
conference.
The question now is to know
what will be done after the end of the project.
To be noted that the Danish
Patent and Trademark Office, placed under the Ministry of Trade and Industry, has a
project about valuation of patents. A recent publication has been released on
"new trends in Intellectual Property Rights" which outlines the
current situation in industrial rights and presents a strategy for developing
the IPR area in the coming years. It includes a number of proposals and
initiatives by which the Danish government intends to strengthen the Danish
IPR-culture
and to improve the frame conditions for enterprises in protecting their
knowledge - nationally as well as internationally. It is available for
downloading at: http://www.dkpto.dk/english/start.htm.
Netherlands
In the Netherlands, for
10 years, there has been a high interest of policy makers and
institutions in the influence of technology and knowledge on the
development of the firm and the economy and therefore, on intangible
issues.
Today, Netherlands aims
to play a leading role in Europe concerning disclosure of intangible
assets. According to A. Jorritsma-Lebbink, Minister of Economic
Affairs":
"The
Netherlands is rapidly developing into a knowledge-intensive
economy (..). It is therefore strange that financial accounts
are dominated by information on buildings and machinery, in
other words the "classical" or physical production
factors. The value of "knowledge" - the R&D work,
training, intellectual property, etc. - is not easy to identify
in accounts. And that is in fact the reason why young
knowledge-intensive businesses in particular have very great
difficulty in finding external financiers".
In 1998, the
Government, in particular the Ministry of Economic Affairs, launched an
"Intangible Assets pilot project" on intellectual capital
reporting in association with four firms of accountants. Named
"Balancing Accounts with Knowledge", it shows that
intellectual capital reporting is feasible. Since then, the Dutch
Government has decided a range of follow-up actions.
1. Background of the
project "Balancing Accounts with Knowledge"
The under-reporting of
knowledge has negative repercussions at three function levels:
- Business-internal function:
failure
to render knowledge transparent is preventing management from
making the correct strategic decisions, thereby in turn
preventing knowledge from being optimally used within the
organisation;
- Business-external function:
the
lack of adequate external information concerning intangible
assets could be making it difficult for knowledge-intensive
companies to attract external financing and be correctly
evaluated by external players;
- Social function:
there
is also frequently a lack of insight into specific categories of
intangible assets at macroeconomic level. The government’s own
accounts are also heavily based on tangible investments. This
lack of data makes it difficult for the government to conduct a
policy relating to categories of intangible investments.
This failure to
properly chart intangible production factors could hamper the full
utilisation of the growth potential of the knowledge economy.
Thus, in a letter to
the Lower House of Parliament (parliamentary papers II 1997/1998, 25080,
no. 27), the Minister of Economic Affairs announced that he would be
commissioning a report on the usefulness of, and problems surrounding,
the valuation of intangible assets.
The minister’s letter
was a reply to a request in June 1997 by the Member of Parliament Mrs
Voûte-Droste for a policy statement on intangible assets. It was asked
to conduct an insight into the legal aspects governing the management of
intangible assets and how the private sector deals with these aspects in
practice.
The Minister announced
the launch of the project "Balancing accounts with knowledge"
as follows:
"The
Ministry of Economic Affairs will be launching a pilot project
to allow accountants to gain experience with alternative methods
of "valuing" intangible commercial assets. More
specifically, one or two accountancy firms will be given the
opportunity to acquire experience in compiling "annexes to
annual company accounts" using a number of existing
methods. This newly acquired experience will, it is hoped,
eventually persuade banks to weigh these assets more heavily
when considering applications for finance. The results of this
experiment will be described in a report which will be sent to
parliament for information purposes."
The pilot project was
prepared by approaching all the accountancy firms in the Netherlands via
a tendering procedure to which the NIVRA (Organisation of Chartered
Accountants) and the NOVAA (Organisation of SME-accountants) lent their
support. Four firms were selected (Ernst & Young, KPMG,
PricewaterhouseCoopers and Walgemoed). These firms were asked to develop
a method for including intangible assets in their financial reporting.
They were then asked to apply this method to three of their clients, who
should preferably be knowledge-intensive companies. The accountancy
firms were deliberately given complete freedom in their choice of
methodology. This resulted in a range of methods which are briefly
discussed in the next section.
The project was
supervised by a monitoring group consisting of members of the
accounting profession and from related sectors such as banking,
institutional investment, the stock exchange and business and industry.
This broadly based committee was appointed mainly to improve the
external function of the annual reporting requirement. In particular,
the project has been carried out in consultation and cooperation with
the Royal Netherlands Institute of Chartered Accountants (Koninklijk
Nederlands Instituut van Registeraccountants) and the Netherlands
Order of Management Consultant Accountants (Nederlandse Orde van
Accountants administratieconsulenten - NovAA).
The results of the
pilot project were set out in a report
"Intangible assets. Balancing accounts with knowledge" published
in June 1999 in order to coincide with the OECD conference,
"Measuring Intellectual Capital", which was organised in
Amsterdam in cooperation with the Dutch Ministries of Economic Affairs
and of Education, Culture and Science (see OECD
pages).
This report was also
sent to the Lower House of the Dutch Parliament. This prompted the
chairman of the permanent parliamentary committee for Economic Affairs
to ask the government for its standpoint on the issue.
2. The findings
The report gives a
detailed description of the four methods. Each of the four firms chose a
totally different approach, as originally intended by the project. The
aim was that the Ministry of Economic Affairs should "familiarise
itself with the entire field of play, without restricting itself to the
official margins".
The shared conclusion
reached by the studies was that the companies surveyed had the least
objections to providing a combination of retrospective/non-accountable
information for external reporting purposes. As regards
prospective/accountable methods, the companies surveyed recognised a
value mainly for their internal management processes, but were still
extremely reluctant to use these for external reporting, due to
strategic reasons and the possible tax repercussions of providing
insight into intangible assets. However, the report does describe an
instance in which a company gained an external benefit (namely more
finance) from providing insight into its intangible assets. It was also
found that financial analysts look more favourably on a liberal supply
of (prospective) information. One company remarked that it was better
for companies to publicise their own information themselves than for the
outside world to speculate about it.
According to the
Minister, a trend is currently visible, especially in the US, in which
the provision of principally non-financial information concerning
intangible assets is strengthening the position of employers on the
labour market, which is short of knowledge-workers.
The conclusion must
therefore be that it will only be possible to make new inroads with
regard to external financial reporting if it is done as an extension to
internal reporting. Ultimately, it may well be that pressure from
external players (shareholders, financial analysts and banks) will force
the publication of this information. The driving force behind this trend
may then effectively shift from business-internal to business-external
factors.
3. What role for the
public policy?
According to the
Ministry of Economic Affairs, removing the bottlenecks surrounding
internal business operations is primarily up to the companies
themselves.
However, by addressing
institutional conditions, the government can help to promote awareness
among companies concerning the importance of internal business
management. The government can also help to remove bottlenecks relating
to external and social functions.
The study also showed
that institutional conditions must tie in with the perceptions, concerns
and priorities of entrepreneurs. In other words, they must interface
smoothly with internal applications relating to commercial management, otherwise
they will be seen as an added burden.
4.
The Dutch Agenda on Intangibles
In order to continue to
take part in the debate concerning intangible assets and transparency in
the Netherlands, the Dutch government wants to encourage more attention
to be given to the topic.
In fact, the Government
tends to consider that if it does not act, there will be no spontaneous
continuation of the work done:
- it feels that the initial
impetus it has been provided will not be enough to
persuade the private sector to continue the initiative
of its own accord;
- if the topic has now become
more and more widely discussed in academic circles, and
is increasingly generating discussion and publications
at both national and international level, it has not
always resulted in more practical information for the
companies themselves.
The government has
therefore suggested a number of follow-up actions. These
proposed follow-up actions are designed to tackle the bottlenecks
hampering the internal, external and social functions.
Follow-up actions
concerning the "Internal function" : an Intangible assessment
tool for SMEs and a promotional campaign for entrepreneurs
According to the fact
that the pilot study "Balancing Accounts with Knowledge"
analyses large and medium-sized companies, there is a need to cover SMEs
for which the topic of intangible assets is different (in particular for
start-ups companies).
The Ministry of
Economic Affairs has decided in conjunction with NIVRA to commission the
EIM to develop an assessment tool to measure the intangible
commercial aspects of business management in a clear and objective way.
This will give both entrepreneurs and financiers a better insight into
the intangible aspects of companies. This can then help to make it
easier for new and rapid secondary growth companies to attract
financing. The aim is for the joint Ministry-NIVRA publication on
intangible assets to be accompanied by an online assessment
instrument. This instrument can help the entrepreneur to benchmark
his score against the scores achieved by other entrepreneurs. Companies
will then have a quick reference guide telling them what
information finance providers value when considering an application for
finance. The instrument can also help to improve internal business
management.
The government will
promote these concepts more widely in order to ensure that their use is
more widespread. It will make entrepreneurs more aware of the importance
of transparency within their organisation as a means of improving the
way they operate.
Follow-up actions
concerning "External function"
They will consist in
the following :
Encouraging more involvement by other
stakeholders
The government wants to
conduct a study to find out how far external players, and
especially financiers, shareholders, employers and employees, would
appreciate more transparency in this area.
As a follow-on to the
pilot study, which was fairly general in structure, the relevant
ministries would like to hold further discussions with the
aforementioned external players. The discussion could seek workable and
comparable forms of transparency and explore ways of managing intangible
assets. New forms of investment could also be discussed. These
discussions will also promote more attention for the subject in a wider
forum.
Comparability
of intangible assets: framework and set of indicators
Based on the
information gathered so far and based on the discussions that have been
held with external players, a framework can be drawn up to enable
a comparison to be made between companies. This framework can be based
on internal and external indicators which make visible the
intangible assets within the company. A possible framework would need to
be tested for its applicability in consultation with companies and e.g.
financiers. A next step would be to allow the companies to test the
framework in practice on a voluntary basis.
Legal aspects
The government is not
at present considering imposing more stringent statutory requirements on
the capitalisation of intangible assets:
- the Government tends to
believe that the interest in the subject - encouraged to
some extent by the government - will be sufficient to
encourage the gathering of information that is relevant
to internal, and ultimately also to external, purposes;
- the Government also considers
that the international developments in this respect will
also encourage a growth in the provision of information
in this area. International regulations and directives
are a decisive factor in defining national legislation
and regulations in the institutional framework.
Therefore, it does not need to do more but just to
follow closely to these developments, be they within
IASC and at European level.
The Dutch Minister of
Justice will make a statement to Parliament on the subject in the
foreseeable future.
Fiscal aspects
A discussion is
on-going on this issue. The State Secretary for Finance will publish his
standpoints in the form of a policy rule.
Follow-up actions
concerning the "Social function"
Participation in international
initiatives
The Dutch Government
will actively participate in international work concerning intangibles,
in particular:
- its participation to the OECD
"public-private task force" (see OECD
section);
- its participation to EC
activities;
- its links with other EU member
States interested in this issue (Scandinavia, UK).
Statistical programme for more
balanced statistical information
Two CBS (Dutch
Statistics) statistical surveys on intangible assets have been already
performed. "Despite this, however, the volume of statistical
information on intangible assets is severely underrepresented compared
with the information on tangible assets". The government attaches
great importance to bringing the supply of statistical information on
intangible assets more in line with the supply of information on
tangible assets.
Therefore, the
government "values the projected test implementation of a knowledge
module at the National Accounts, which is being developed by the
CBS.
Also, it will encourage
the participation to international statistics programmes (Eurostat,
Voorburg Group, etc.) : "the government is therefore taking
steps to ensure that the Netherlands plays an active role in these
initiatives".
A R&D programme on intangible
The new approach to
intangible assets will also affect the content of accountancy courses
and business economics in general. In order to ensure that the academic
world adopts a co-ordinated approach to this topic, the government
wishes to encourage a range of disciplines to focus on intangible assets
through a research programme. This could include a survey of the
consequences of this proposal for Corporate Finance, Intellectual
Property, and so on.
"In view of the
recent pilot project and the international interest there has been in
this initiative, the Netherlands could take a leading role in this
sphere within Europe."
United
Kingdom:
The emerging UK Agenda for Intangible Assets
The UK government's
clear recognition of the growing importance of the intangible assets was
first evidenced in a document from 1997 entitled "The UK's
Investment Performance: Fact and Fallacy". In this paper,
Department of Trade and Industry reviewed investment in the UK business
sector and outlined the importance of intangible investment in the
economy.
However, it is in the
following years that the topic of intangible assets became more central
in the institutional reflections of the Blair Government.
In the Competitiveness
White Paper published in December 1998 "Building
the Knowledge Driven Economy", there is a chapter on
"intangible issues" on the part on "Government and
business in the knowledge driven economy". It is written:
"A
central feature of the knowledge driven economy is the
increasing importance of intangible assets, such as human
capital, R&D, brands, contacts and know-how, as a source of
added value and profitability for companies. The prominence of
intangible assets makes information problems more acute since
they are less amenable to observation and measurement by
analysts and potential investors. Often, only the firm itself
can make a reliable judgement as to the knowledge and expertise
embodied in the enterprise".
The immediate
problem for the capital market is improving information flows by
reporting on intangible assets. How can the market place a value
on these assets? Even though few investors use historic cost to
value physical assets, this option is not even available when
valuing intangible assets. Measurement of their value and the
rate at which they depreciate is therefore much more difficult.
Valuation is especially problematic for the human capital
embodied in the workforce, which for more and more companies is
a major source of competitive advantage. (…)
To compete effectively in the
knowledge driven economy we need to overcome these shortcomings.
Achieving that requires a new approach to public policy."
Following the lead
taken by Netherlands and Scandinavian Countries, the UK Government has
decided to launch a specific programme on the value of intangible assets
(besides all other actions and policies related to innovation,
competencies and skills, etc.).
In its implementation
plan of the White Paper, three projects form a sort of "Intangible
programme" or "Value Creation in the Knowledge-Driven
Economy" programme. Each of the projects approaches different
aspects of actions outlined in the White Paper:
- Accounting and Company law
Project: Develop proposals for operating and financial
review
- MARIA project: Company
management and reporting of intangibles
- Research Project: Conduct
longer term research into the measurement and valuation
of intangible assets
1.
Accounting and company Law Project: external reporting of Intangible
assets
At the root of these
problems over sources of finance and the value of intangible assets are
different types of information gap. The Government is working with the
City and industry to find ways of addressing gaps in finance provision
and to improve methods of valuing intangible assets and communications
between companies and their shareholders. The Accounting Standards Board
has been asked to look again at the issue of intangible assets, while
corporate governance issues are being considered further in the
Government's Review of company law.
Accounting review
Therefore, the UK
Accounting Standard Board (ASB) and Institute of Chartered Accountants
in England and Wales (ICAEW) have been asked by DTI, in consultation
with others, to look at the scope for better guidance on disclosure of
intangible assets.
Four steps are planned:
-
Request
that ASB look at scope for guidance on disclosure and
include the project on their annual work-plan
(Achieved);
-
ASB to
consult the accountancy profession on general issues
(Achieved);
-
ASB
begin work with Institute of Chartered Accountants in
England and Wales (ICAEW) in light of initial responses
from profession (Achieved);
-
Initial
findings and draft guidance to be issued by ASB/ICAEW
along with proposals for any further work. Planned for
July 2000.
This task will be
particularly difficult in the UK because of ASB traditional approach and
because of the companies' culture.
In fact, a survey on
information asset valuation in UK companies conducted by researchers
from the Loughborough University (Charles Oppenheim, Joan Stenson and
Richard M.S. Wilson) shows interesting findings. This survey has been
carried out through a series of interviews with accounting and
information professionals, and with representatives of their
professional and regulatory bodies between January and December 1999.
The aim was to identify a method of valuing information assets, which
would allow them to be included on the balance sheet of UK companies.
The valuation method
investigated in most detail was that recommended by the UK Accounting
Standard for Goodwill and Intangible Assets FRS10 (Financial Reporting
Standard - Accounting Standards Board, 1997). FRS10 required that from
the end of 1998, UK companies were permitted to capitalise their
intangible assets as long as those assets have "readily
ascertainable market value".
The obstacles to achieving a valuation
of information assets are the following:
- FRS10 is still an unsuitable
method for the valuation of information assets because
it requires companies to apply strict criteria when
recognising intangible assets (and researchers found no
companies in the UK that are currently using FRS10 to
account for information assets).
- but more fundamentally, the
main obstacle is related to the identification of
information assets and their attributes. "We
found that very few companies held a register of their
information assets, or had taken steps to identify or
assess them at an organisational level. Without
this first step, a valuation was extremely
difficult". Thus according to the survey, "As
a result, there is little impetus to identify and assess
information assets internally or report them externally
(…) Until information assets are widely identified and
assessed by UK companies, few will be able to realise
the financial gain which companies like Skandia in
Sweden and Dow Chemical in the USA have achieved. While
intellectual capital and knowledge management
initiatives have gone some way towards popularising the
need for better management of information assets, on a
practical level we have found that there is little real
understanding in the UK of the potential of information
assets for wealth creation."
A "Modern Company
Law, For a Competitive Economy"
According to the UK
Government, the national current framework of company law is essentially
constructed on old foundations dated form the Victorians in the middle
of the last century. The following additions, amendments and
consolidations have resulted in a complex patchwork of regulation which
is "seriously out of date". The resulting costs and problems
are real and substantial nonetheless.
Therefore, the
Government has decided to launch a thorough and wide-ranging review
of the core company law. It has implemented a Steering Group to monitor
this Review. It is chaired by Richard Rogers, Director, Company Law and
Investigations at the DTI.
The following steps
have been undertaken:
-
In
March 1998, a consultation paper has been published. It
outlined scope and arrangements and terms of reference
for the Review;
-
In
February 1999, the Steering Group has published the
first strategic consultation document ‘The Strategic
Framework’. It described work to date, issues
identified and analysed, and proposals for taking work
forward;
-
In
October 1999, the Steering Group issued three further
consultation documents on specific topics;
-
In
March 2000 the Steering Group issued its second
strategic consultation document 'Developing the
Framework'. It analysed and made proposals on key areas
of governance of companies and on SMEs, including
disclosure and transparency rules.
In this report, we can
read that:
"Companies
are increasingly reliant on qualitative and intangible, or
"soft" assets such as the skills and knowledge of
their employees and their corporate reputation. The reporting
framework must recognise this and ensure that companies provide
the markets and other interests with the information they need
to understand companies' business and assess performance."
Deadline for answers is
15 June 2000 and new chapters are scheduled for July 2000.
2.
MARIA Project : Managing And Reporting Intangible Assets
MARIA stands for
"Managing And Reporting Intangible Assets". It is a Best
practice programme which focuses on key business decision makers and
asks what they are doing today to create value in the future. It is
primarily interested in how companies are tackling the measurement of
intangibles, how they are used to support business decisions and how
they are communicating externally. The goal of the project is to
convince decision makers in UK companies that by identifying and
managing dynamically the intangible value of their businesses they will
enhance their ability to compete, achieve long term success and create
wealth.
The project aims to
look at how successful companies are dealing with these issues in order
to develop and share these insights. It also aims to show how to
collectively manage these intangibles based on leading indicators, in
order to extract their value.
The project methodology
is based around "industrialists talking to industrialists". It
includes the following phases:
-
Develop
and pilot questionnaires to elicit and transfer best
practice (Achieved)
-
Interview
relevant companies in the UK and overseas. The project
incorporates a structured interview technique (approx
1½ hours), data from which will be used to form
hypotheses and the collection of lessons and examples
(Achieved). In total 25-50 international companies have
been studied.
The interviews
have focused on the following questions:
- What does ‘value’
mean for your business?
- What market conditions
and factors led to your success?
- What do you focus on
for the future?
- What are your key
intangibles?
- How are they
identified, measured and managed?
- How are they taken
into account in decision making?
- How do you balance
these factors systematically?
- How is value extracted
from them?
- What do you say about
intangibles within your company and why?
- What language do you
use?
- What do you say
externally about intangibles and why?
- Key lessons and advice
to others?
3. Produce and
disseminate a "How to" guide. (2000)
As of end of June 2000,
a new draft report is in preparation.
3. Programme for
Research into the measurement and valuation of intangible assets
Late 1999, DTI has
launched a Study looking at the feasibility and desirability of further
research in the measurement and valuation of intangible assets, in
particular to study the case for, and scope and organisation of, a
DTI-funded programme on Intangible Assets.
Conducted by Ian Miles
and a team from CRIC and PREST (Manchester University), the scoping
study itself had several aims:
- Assess the feasibility of the
basic aims of the proposed programme;
- "Mapping the field"
: defining and classifying IAs ; identifying streams of
research where the research could be developed further
by assessing the opinions of research leaders ; state of
the arts in terms of measurement and valuation ;
defining the goals of a research programme;
- Programme content and
Structure: identifying lines of study within the general
aims of the planned research where key needs for
knowledge could be profitably met; Identify possible
users of the research and their interests in intangibles
as well as public and private sponsorship and
participation; identify potential sources of industry
co-funding or cost sharing; defining the programme size,
structure and activity;
- Suggest next steps;
- Gather existing research
information and literature survey and identify and form
contacts with existing clusters of research and
establish a list of researchers/research teams who might
participate in the programme.
The report, entitled
"Grasping the Nettle" has been presented to DTI in April 2000.
Prior to that, an earlier draft was discussed
at a "Town Hall" meeting in London on 24th March
2000. The study
concluded that such assets were widely recognised to be of increasing
significance to business performance and economic competitiveness but
that the factors behind this development were imperfectly understood.
The authors consider that there
is strong case for intensified research efforts in field and they
propose a scheme to launch a multidisciplinary research agenda, using
a number of approaches to relate together researchers and practitioners.
It is proposed that it be centred
around the following themes:
-
Useful
Measures;
-
The
Role of Intermediaries and Networks;
-
Variations
across firms and sectors in IAs;
-
The
Institutional lnfrastructure.
It is furthermore
suggested that the programme might be structured around two centrepiece
activities, dealing with, respectively, tools and instruments for
tackling measurement and valuation issues posed at the
micro-(firm-level) and macro- (statistical aggregate level) levels of
analysis. The report goes on to suggest structures which can support
these objectives and proposals.
Depending on DTI
decision, the next steps will be to issue call for tenders for research
projects (Summer / Autumn 2000) and to select winning projects (Winter
2000).
|
Contact
DTI
- Innovation Policy and Standards
Directorate – TESE
John Barber
Tel: +44 20-7215-1849 - fax: +44
20-7215-1856
e-mail: john.barber@tidv.dti.gov.uk
CRIC
(Centre for Research on Innovation and
Competition) and PREST (Policy
Research in Engineering, Science and
Technology) - University of Manchester
Ian Miles
Tel: + 44 161 275 7366 - Fax: +44 161
275 7361
http://www.les.man.ac.uk/cric |
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