The
emerging UK Agenda for Intangible Assets
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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."
1. The emerging UK Agenda for Intangible Assets
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
1.1 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:
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Request that ASB look at scope for guidance on disclosure and include the project on their annual work-plan (Achieved);
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ASB to consult the accountancy profession on general issues (Achieved);
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ASB begin work with Institute of Chartered Accountants in England and Wales (ICAEW) in light of initial responses from profession (Achieved);
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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."
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Contact DTI
Company Law and Investigations
Directorate ASB ICAEW: http://www.icaew.co.uk/ |
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:
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In March 1998, a consultation paper has been published. It outlined scope and arrangements and terms of reference for the Review;
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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;
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In October 1999, the Steering Group issued three further consultation documents on specific topics;
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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.
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Contact Department
of Trade and Industry |
1.2 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:
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Develop and pilot questionnaires to elicit and transfer best practice (Achieved)
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Interview relevant companies in the UK and overseas. The project incorporates a structured interview technique (approx 1˝ 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.
4. Publication "creating value from your intangible assets" : this report, highlights how successful organisations in all sectors of the economy, are striving to meet this challenge through the effective utilisation and exploitation of both their tangible and intangible assets.
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Contact Department of Trade
and Industry |
1.3 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:
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Useful Measures;
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The Role of Intermediaries and Networks;
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Variations across firms and sectors in IAs;
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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).
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Contact DTI
- Innovation Policy and Standards
Directorate – TESE CRIC
(Centre for Research on Innovation and
Competition) and PREST (Policy
Research in Engineering, Science and
Technology) - University of Manchester |
2. Other initiatives and actors
The general trend in the UK is to a recognition of the role of intangible assets. More and more frequently, the needs for better understanding and data are expressed. However, the situation is still contrasted. There is little organisation or body mapping and measuring of IAs as such, as in Scandinavia.
2.1 The leading role of the Institute of Chartered Accountants in England & Wales - Centre for Business Performance
The Institute of Chartered Accountants in England & Wales is the largest professional accountancy body in Europe, with over 116,000 members. Working in the public interest under a Royal Charter, its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy.
Interest for Intangible assets has been high since some years. As an example, ICAEW has been associated to the International OECD workshop on intellectual capital. It has also published some studies and organised workshops on this topic, via, in particular, its Centre for Business Performance.
In 1999, ICAEW has launched a project called 2020 Vision Project. The aim is to explore the challenges likely to be faced by leading businesses in the first decade of the new millennium, and the way in which such businesses will relate to providers of human, intellectual and financial capital and to their political environment. Of particular interest is the growth in importance of intangible assets and the issues that boards of major companies should be considering.
The 2020 Vision Project involves a Steering Group comprising senior members of the business and financial communities.
In the project's framework, ICAEW's Centre for Business Performance has published a book entitled "Human Capital and Corporate Reputation: Setting the Boardroom Agenda". It is a collection of contributions by leading business people, personnel experts, academics and accountants. It provides views on the way that boards should be addressing the growing importance of intangible assets such as human capital and reputational capital, and on the measurement, management and reporting on such assets. The publication is available on ICAEW web site.
Other projects are scheduled in the framework of the 2020 Vision Project in 2000 :
- a high level roundtable to discuss issues relating to human capital;
- determination of appropriate research projects on intangible assets;
- a conference for young business leaders of the future, likely to be held at Chartered Accountants' Hall in late 2000.
The launch of the book has offered an opportunity to the newly elected President of ICAEW, Graham Ward (who is also Chairman of the 2020 vision project steering group), to reaffirm the importance of measuring and reporting on intangible assets.
During the press conference held in June 2000, Graham Ward said that cultivating and measuring the "great intangible" of human capital was the next major challenge for both company boards and their accountants He argued that a deliberate strategy is now required: "those businesses that fail to develop one will go the way of the dinosaurs". He also called on accountants to develop vital measurements of value in this area. "Measuring intangibles like human capital may seem like a break with my profession's traditions but it's essential to building Britain's sustainable economic success. People are now the key drivers of profitability. However, this reality and its implications for the way we do business are poorly appreciated by British companies and accountants. The key is to promote informed discussion amongst investors and to create new measurements that confirm value".
According to ICAEW, five steps are urgently needed:
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Detailed reporting to help investors understand how human capital builds long-term corporate value. This should cover the kind of people a company employs, their skills, training philosophy and investment, knowledge management systems and recruitment strategies. The Operating and Financial Review provides one vehicle for this;
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Developing agreed measurement techniques or benchmarks for human capital. Simply identifying and recording intangible assets and indicating their value would be a step in the right direction;
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Devising new strategies for creating and sustaining human capital, involving the creation of a learning culture within the company and links with the educational sector;
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Ensuring an ethical underpinning to corporate activities.
ICAEW has published others reports and a newsletter concerning intangible assets:
- "New Measures for the New Economy" - C. Leadbeater, 2000
- The Treatment of Goodwill and Other Intangibles: Theory, Standards and Practice in France and the UK - S. Archer, D. Alexander, L. Collins and D. Pham, 1995
- The 21st Century Annual Report : in 1998, ICAEW has presented an "interactive prototype" of how the annual report could look in the 21st Century which was presented to the finance directors and chairmen of 160 Plc's.
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Contact ICAEW
- 2020 Vision Project Director: Anthony
Carey |
2.2 Research on Intangible assets
As mentioned above, the University of Manchester is active with ESRC (Centre for Research on Innovation and Competition), PREST (Policy Research in Engineering, Science and Technology) and the CRIC Center.
Ian Miles is a Director of PREST and a CRIC Co-Director. Before coming to Manchester in 1990, hes was for 18 years a researcher at SPRU (the Science Policy Research Unit) at the University of Sussex. His research interests include innovation studies, foresight, indicators (social indicators and S&T data), service sectors and e-commerce. He was responsible for the feasibility study for DTI concerning a programme for research into the measurement and valuation on intangible assets. More details are available on his personal web pages.
Other researchers are Hugh Cameron, Jeff Butler and Mark Tomlinson.
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Contact University
of Manchester |
Apart from the CRIC Center, the focus on measurement and valuation of Intangible Assets is rather poorly represented in the great majority of UK research efforts to date. In fact, Ian Miles and his team have identified a wide range of disciplines and practitioners looking only at subsets of Intangible assets and there is work underway on various types of IA and on a number of specific issues (R&D, IPR, training, adverstising, companies performance, brands, etc. - a list with contact details is annexed to the CRIC report). These teams are not explicitly labelled IA, and IA is not yet an umbrella concept under which they coordinate or exchange.
However, as indicated by the CRIC study, this situation could evolve, as shown by the growing activities of research centres.
Also, the Research Councils are more and more interested in many aspects of the Intangible Assets Agenda as "Knowledge" has become a core theme in much social research in recent years and is now a priority for academic research (in particular, through its Intellectual Property Programme as well as the Intellectual Property Forum).
2.3 Other actors
As in other countries major consulting and auditing companies based in the UK conduct researches, develop models and organise seminars and conferences. In particular, Arthur Andersen London has published two studies on on valuing intangible assets:
- "The Valuation of Intangible Assets" (1992), published jointly with the EIU,
- "The Use of Intellectual Property as Security for Debt Finance" 1998, a joint effort with the UK IPI.
Some companies are specialised in intangible assets valuation such as the Intellectual Capital Services Ltd. (ICS) or the "Technology Broker - The Intellectual Capital® Company", etc.) of Annie Brooking.
The Confederation of British Industry seems to be active in this field, in terms of awareness raising.
Specialised bodies work on categories of intangible assets, such as The Patent Office.
Finally, UK actors seem interested by the broader topic of Knowledge Management. In this field, Knowledge On Line, journals (Journal of Intellectual Capital, Journal of Knowledge Management, Knowledge Management Magazine, etc.),, newsletters and networks (such as TELEOS) are very active and refer often to intellectual capital issues. Conferences on KM are also multiplying in the UK.