The value of intangible assets can be much more variable than tangible assets. This variability increases the likelihood of a discrepancy between book and market values. Learn about how investors deal with the differences between the book and market values of tangible and intangible assets. Tangible vs. Intangible Assets Financial statements are historical documents that show what a company was worth at one point in time. Because of standard accounting practices, an asset must be recorded at the value for which it was purchased.
Changes in markets, currency, and economic conditions all contribute to discrepancies between book and market values. The longer an asset is held by a company, the greater the chance that discrepancies exist. One factor that affects the market value of an asset is intangibility. An intangible asset is one that does not have a physical form but provides value to the firm nevertheless. Examples of intangible assets include contracts and patents, i. e. assets that cost money to acquire but do not have easily-accessible markets through which to buy and sell them.
Unlike tangible assets like machinery and automobiles, the lack of secondary markets increases the risk that the intangible asset can not be liquidated at a reasonable price. Assets that are not very liquid, such as plants and proprietary equipment, have secondary markets in which used assets can be sold. These assets typically suffer from low liquidity because there are costs, sometimes high costs, associated with their disposal in secondary markets. Liquidity is based on the ability to sell an item for cash if the need or desire arises.
Definition of intangibles www. iprplaza. com Definitions of intangible assets from various perspectives Ads by Google An Example of the Value of an Intangible Asset Suppose a company purchases a patent from another company and for many years enjoys the right to build a product without any competition based on the design specified in the patent. Over time, the value of the patent diminishes because of changes in markets, technology, and processes. The cost of the patent as an intangible asset remains on the books at the cost that was paid for the patent.
Throughout the life of the patent, this intangible asset became more valuable because it blocked competitors from developing the same product. However, near the end of the patent’s useful life, its market value falls to nearly zero. Throughout this rise and fall of the patent’s market value, its book value remained unchanged. See the complete Bright Hub Guide to Balance Sheet Basics » Unlike automobiles which are depreciated using a regular schedule to estimate the asset’s worth, there is no real way to determine the actual worth of an intangible asset that companies investing in tangible assets enjoy.
The variability and uncertainty as to whether a company can make valuable use of an intangible asset is what gives rise to discrepancies and the inability to determine the difference between their book and market values. Investors who ignore the value of intangible assets are removing from the valuation process important pieces of information that directly contribute to a company’s value. Unfortunately, valuing intangible assets is not an exact science.
One of the best methods of valuing such as asset is to analyze what the company would look like if the asset were not owned by the company and the incremental increase in value by owning it is a reasonable estimate. However, this assumes that the company is using the intangible asset to its maximum potential. Other managers may have been able to exploit it for much more value. Identification o Tangible benefits are quantifiable: A precise amount can be placed on the benefit as a way to weigh its value. This value is almost always fiduciary.
The value of the benefit depends on a person’s skill set. For instance, doctors get higher tangible benefits than a fast-food worker. On the other hand, intangible benefits are much harder to measure because of their subjectivity. Intangible benefits derive from how a person feels about their work. Job satisfaction is a main bench marker of an intangible benefit. 3 Tangible: Financial Pay and Benefits o Tangible benefits are those listed by the company in a quantifiable form. Such benefits are usually contractual in nature: Days off, insurance costs, salary and profit sharing are a few.
Performing calculations and comparing these benefits with another business tend to be straight forward. When people first start looking for a job, they usually have a better idea of these tangible benefits than they do of the work’s intangible benefits. Steve Pogorzelski, author of the book, “Finding Keepers: The Monster Guide to Hiring and Holding the World’s Best Employees” also advises for corporations to tout tangible benefits such as gym partnerships to attract quality candidates. o Sponsored Links ? Trademark Registration Efficient trademark registration services worldwide. www. egistertrademarks. net 4 Intangible: Job Satisfaction o Intangible benefits include all of the qualitative advantages of working for an organization. For instance, friendly coworkers, flexibility and a position that matches the worker’s skill set are intangible benefits. Johanna Schlegel, editor-in-chief of Salary. com advises workers to assess how they feel about the work they performed at the end of the day. Measuring the degree of commitment and agreement with corporate culture are additional ways Schlegel recommends gauging the intangible benefits derived from the job. 5 Considerations Some workers value tangible benefits over intangible benefits and vice versa. Decisions regarding employment typically depend on a worker’s situation. A father who wishes to stay at home with his children and telecommute places a premium on intangible benefits and may be willing to forego a higher salary. Another distinction of these two benefits is that intangible benefits may increase or decrease over time, whereas tangible benefits of a job tend not to fluctuate as much. If a worker tires of performing the same task repeatedly and sees no sign of advancement, her intangible benefits decrease.
A business owner or manager incurs costs with nearly every decision. Tangible costs are calculated up front. They are the expected and quantifiable costs of running a business. Tangible costs typically include things a business can buy directly for specific costs, such as labor, materials and space. Other costs, called intangible costs, are harder to measure, but are nonetheless real and could be crucial to a business’s success or failure. Such things as lost productivity, a drop in employee morale or a loss of goodwill in the community might count as intangible costs. Sponsored Link
Definition of intangibles Definitions of intangible assets from various perspectives www. iprplaza. com Tangible Costs Tangible costs include the types of things a business writes checks for: salaries and wages, leases, operational inputs, employee medical benefits, transportation and commercial insurance. These costs have a clear place in the general ledger. The company cannot conduct business or produce a quality product without spending on tangible costs. They are also easy to quantify, so management tends to focus on the manipulation of tangible costs. Sources of Tangible Costs
Tangible costs consume much of a typical business’s accounting efforts. The sources of tangible costs are documented with receipts, contracts or policies. The accounting department assigns tangible costs to specific cost categories, such as the cost of goods sold or overhead costs. Some tangible costs produce obvious benefits, such as the production of the company’s product. Others, such as safety training or environmental controls, may produce benefits that are less easily measured, but the costs themselves are concrete in the sense that they come straight out of the company’s bottom line. Addressing Tangible Costs
Companies manage tangible costs by negotiating contracts for services and by getting multiple quotes for inputs and supplies. The purchasing department compares costs of buying or leasing equipment. A large corporation with multiple sites can transfer some pieces of equipment from one site to another. This prevents redundant spending on equipment such as scissor lifts or pressure washers that are only used occasionally. Some companies offer a bonus to department managers who reduce their department’s spending. Companies may entice employees to cut costs by offering incentives and recognition to employees who have money-saving ideas.
Intangible Costs Intangible costs are less easily measured. Some key and common intangible costs might include a drop in employee morale, dissatisfaction with working conditions or customer disappointment with a decline in service or product quality. Intangible costs result from an identifiable source, but the costs are often not predicted. They may occur after a new practice or policy is put into effect, such as a cut in staffing levels or in employee benefits. Managers can try to estimate intangible costs as soon as they see a pattern of loss.
This estimate will be the basis of a decision to either change or continue a practice that frustrates employees or customers. If a new procedure has injured an employee, the company may need to act quickly to avoid government fines and inspections. Sources of Intangible Costs Intangible costs are not always foreseen. For example, when corporate management puts a new program or policy into place that is not appropriate for a given location, unintended intangible costs may ensue because what works well at a work site in one part of the country may clash with the employee work culture at another location.
For example, managed labor systems, which measure productivity automatically and chart it according to a preset standard, may improve productivity at one facility but harm performance at another. A site where the employees take extended lunches and unauthorized breaks could benefit from this type of automated monitoring. The new system could actually improve the morale among conscientious employees who resent their co-workers’ lack of effort. The same managed labor system could be a disaster at a site where employees work as a team and already watch their departments’ speed and productivity.
Workers may become anxious and confused over the new system and how it will affect their pay raises or continued employment. They may refuse to assist their co-workers, afraid that being off task will hurt their own productivity numbers. Addressing Intangible Costs After intangible costs are incurred, management must decide how to address the costs. In general, the company will either decide to absorb the cost or act to eliminate its source. This decision will be based on the best estimate of the intangible cost management can come up with.
The cost of training new employees after long-time employees have left for other opportunities is one variable used to estimate intangible costs. If a company decides to continue an unpopular policy, it may invite employees to informational meetings to reduce employee confusion and discontent. A change that has lowered the quality of customer service may require a public relations outreach to keep customer goodwill, or it may require the company to come up with some other customer benefit to replace what was lost. Sursa: http://smallbusiness. chron. com/tangible-costs-intangible-costs-51412. html Making Intangible Assets Tangible
Posted on December 24, 2011 by swaltersky In 2008, Paul D’Antilio, CEO of Future Point Systems called to see if I would be interested in consulting with his company about visual analytics. He had recently become the CEO and knew that we’d been successful commercializing a visual analytics product in Attenex Patterns (acquired by FTI Consulting). As it turned out when he called I was in Palo Alto, helping my daughter Elizabeth move to Stanford University to start her post doctoral research in cognitive psychology. We agreed to meet on a hot Bay Area Saturday morning at the Future Point offices in San Mateo, CA.
As our discussion ensued it turns out he’d had a very successful career in software product development and was part of the development team at State Street Bank that had developed the mortgage backed securities and received one of the first software patents. As I presented the Attenex Patterns story and did a brief demo and shared how we’d used the tool in electronic discovery and patent analytics, Paul suddenly stood up and said “this is really interesting. When we did the mortgage backed securities at State Street Bank we were essentially taking a tangible asset and making it intangible and then trading it.
What you are talking about is taking intangible assets like patents and making them tangible enough so that they can be traded. It’s the mirror image of what I’ve spent my career working on. ” I stared at Paul for a moment as the thought of making intangible things tangible rolled around in my brain. I jumped up and exclaimed “You have the other half of the knowledge I didn’t know I’d been looking for the last ten years. You understand the valuing transforms back and forth between tangible and intangible assets. ” We both knew in that moment that we’d discovered something important, but we didn’t know what to do with it.
Paul realized that while it was a potentially big idea he had more urgent topics to deal with. So I agreed to consult with him at Future Point and see what we could do with the PNNL Starlight technology. After a few months we realized that there was not enough capital at Future Point to generate new product lines so we parted ways. However, the notion of making the intangible tangible enough to be identified, valued, monetized and traded is ever present in my thoughts. Over the last two hundred years, great wealth resulted from the systematic identification and monetization of new asset classes.
The financial services industry has profited from taking tangible assets like mortgages and turning them into intangible assets that can be traded. In the music industry, David Bowie was the first artist to bundle together his future “hits” into a monetizable asset. In the wine industry, Joe Ciatti put together a REIT to invest in winemaking properties that raised a large fund, but ultimately failed at the execution level. In a different arena, Intellectual Ventures had raised billions of dollars to monetize patents rather than go through the long process of litigation.
At the micro level, fine wineries are having difficulty monetizing their customer assets due to the difficulty of marketing their authentic differences and their lack of better business models and processes. Inventors face the same difficulties of matching their inventions to customers (enterprises or consumers) who could monetize their ideas. In the electronic discovery market, no lawyers, developers or suppliers view the problem as identifying the few “assets” in the millions of documents that will prove or disprove their case.
Yet, each large scale complex matter is an exercise in systematically identifying the key document assets and then “monetizing” them by winning the case. The central observations about large scale customer problems are: • The difficulty of recognizing a new asset class soon enough to create a market for it • The focus of asset developers are to create an asset rather than on how that asset can be marketed and sold • Few industries create “brokers” to trade bundles of assets until the industry matures.
The experiences of using clustering and classifying mathematics in problems as diverse as mortgage backed securities, legal electronic discovery, patent brokering and licensing, and creating customers for life with biodynamic wineries suggests that there is a common solution to a diverse range of market problems that asset class monetization technology proposes to solve. The following diagram captures my current thinking on Asset Class Monetization. [pic] Asset Class Identification
At the core of the model is identifying new asset classes that are not yet recognized as being tradable and for which no “market” exists and no transparent information about the market exists. Clues to these asset classes are the difficulty in selling the asset or placing a value on the asset. Broad examples of difficult asset classes to value and sell are: patents, enterprise software from new startups, and the selling of a startup for an exit opportunity. An example is the valuation and selling rocess for a biodynamic winery. Recently, a Southern Oregon Winery went through an assessment process to value their holdings after four years as a precursor to taking investment for expansion or sale. They required four different types of assessors (property, equipment valuation, agricultural value assessment, and quality and volume of the wine inventory) and financial experts. This assessment was time consuming (six months from start to finish), expensive, and not very accurate.
The above assessment is further complicated by trying to assess the value add (or lack thereof) of the certified biodynamic component of the property. Is this a short term cachet or with the advent of a growing appreciation for authentic fine wine growing that represents the specificity of the place (terroir) and the accompanying slow food movement is this a long term trend? While a little more advanced in its evolution, the patent market appears to be moving from a very difficult arena to monetize using litigation or the very expensive sale process of licensing to the attempt to create a market.
Intellectual Ventures and Ocean Tomo are at the forefront of trying to create a market, but their efforts have been primarily aimed at acquiring patent assets or creating an auction for those assets. Little effort is spent at understanding how to value the assets and create a transparent information structure around those assets (like a Morningstar for patents). As a result, Intellectual Ventures is having a far harder time in licensing their patents than in acquiring them. Classification, Clustering, Segmentation and Matching
Once an asset class is identified, sense must be made of the collection of assets. In most cases with complex assets, this process is expensive and highly dependent on experts. With the large scale adoption of the Internet, this process is now becoming routine, mathematical, automatic and highly scalable. Google Adwords and Adsense are great examples of both the power of the mathematics and on the ability to monetize the mathematics. Wired Magazine had an excellent article on “Googlenomics” showing how Google monetizes content through massive mathematics. [pic]
Recent book length treatments of the processes, techniques and tools for classification, clustering, segmentation and matching are: • Malcolm Gladwell, Tipping Point • Winslow Farrell, How Hits Happen: Forecasting Predictability in a Chaotic Marketplace • Steven Levitt, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything • John Battelle, Search: How Google and Its Rivals Rwearote the Rules of Business and Transformed our Culture • Ian Ayres, Super Crunchers: Why Thinking-By-Numbers is the New Way to be Smart • Stephen Baker, The Numerati Bill Tancer, Click: What Millions of People are Doing Online and Why it Matters • Jeff Hawkins, On Intelligence o Numenta is creating a new type of computing technology modeled on the structure and operation of the neocortex. The technology is called Hierarchical Temporal Memory, or HTM, and is applicable to a broad class of problems from machine vision, to fraud detection, to semantic analysis of text. HTM is based on a theory of neocortex first described in the book On Intelligence by Numenta co-founder Jeff Hawkins, and subsequently turned into a mathematical form by Numenta co-founder Dileep George. HTM technology has the potential to solve many difficult problems in machine learning, inference, and prediction. Some of the application areas Numenta is exploring with their customers include recognizing objects in images, recognizing behaviors in videos, identifying the gender of a speaker, predicting traffic patterns, doing optical character recognition on messy text, evaluating medical images, and predicting click through patterns on the web. The world is becoming awash with data of all types, whether numeric, video, text, images or audio, making it challenging for humans to sort through it and find what’s important.
HTM technology offers the promise of making sense of all that data. o Thomas Redman, Data Driven: Profiting from Your Most Important Business Asset Redman describes the power of being data driven: “I find looking at an organization through the data and information lens to be extremely powerful. To do so, one examines the movement and management of data and information as they wind their way across the organization. The lens reveals who touches them, how people and processes use them to add value, how they change, the politics surrounding seemingly mundane issues uch as data sharing, how the data come to be fouled up, what happens when they are wrong and so forth. ” “Data and information are most valuable when they are flying from place to place. ” Ayres described how he used Google’s Adwords to come up with the book title Super Crunchers. For a fee of $100 in Adwords he saved himself the $50,000 of consulting fees to name the book: [pic] Connections The value of an asset grows as there are more connections to that asset.
Whether we are talking about a product with a high sales volume, or a webpage on the Internet (Google Page Rank algorithm), the number of connections to an asset grows the value of that asset exponentially (see Metcalfe’s Law as described in Unleashing the Killer App: Digital Strategies for Market Dominance by Larry Downes and Chunka Mui). 1. Introduction: In present scenario, despite the global change, Human Resource Accounting is major issue for research & analysis in management. Human resource has always been taken as a ‘soft & light issue’ whose contribution generally can not be measured in monetary terms.
There is no role of recording investments, benefits rendered by employees, valuation & accounting of human resource in conventional financial accounting. human resources is not considered in the different balance sheet models, and only in the profit and loss statement human resource costs / expenditure are taken in account, such as salaries and staff welfare expenses (including pensions). The number of employees classified in categories is mentioned only in the explanatory report, the same as the board of directors’ payment.
Recent literature has focused on a broader measurement, namely that of “intellectual capital. ” Despite those who consider intellectual capital a new approach, it is really an extension of HR accounting since without the underlying concept of HR investment there can be no intellectual capital development. As human resource is being taken as intellectual asset of the organization and worth three or four times the tangible book value. Human capital also provides expert services such as consulting, financial planning nd assurance services, which are valuable, and very much in demand. As it is the combination of HR & Accounting, joint efforts of behavioral scientists, accountants and managements are needed for the working and development of HRA. Figure 1. 1 [pic] There are two reasons for including human resources in accounting [Ripoll and Labatut, 1994]. First, people are a valuable resource to a firm so long as they perform services that can be quantified. Second, the value of a person as a resource depends on how he is employed. So management… [continues]
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