VARIOUS APPROACHES TO INTANGIBLE ASSETS AND THEIR SIGNIFICANCE BASED ON THE EXAMPLE OF GLOBAL COMPANIES

Piotr Senkus
Department of Agri-Food Economics, Agricultural University of Poznan, Poland

ABSTRACT

The paper presents various approaches towards the classification, valuation and definition of intangible assets. In the opinion of analysts, these are factors decisive in financial results and the assets of a corporation.

Key words: intangible, goodwill, evaluation.

INTRODUCTION

At this time, the amount of corporate sales in the food industry sector is comparable to the gross national product (GNP) of many national states. Table 1 presents selected corporate entities of the food industry with those of certain national states. The amount taken for comparison is the annual sales volume of corporations and the GNP of respective countries.

In annual sales valued for corporations – the Wall-Mart supermarket chain – in 2002 amounted to 217 799 million USD, which ranked it 32^nd in its respective order. Wall-Mart Annual sales were valued at amounts higher than the GNP of Switzerland or Austria. Subsequent corporations presented respectively were: Carrefour – 63^rd place, with annual sales 61 565 million USD, Royal Ahold – 65^th place, annual sales valued at 57 976 million USD, ahead of the United Arab Emirates and Syria; Kroger ranked 70^th with annual sales of 50 098 million USD, with Nestle, as first among the food producers in 73^rd place, with annual sales valued at 46 628 million USD. Behind there were such countries as the Dominican Republic and Bulgaria. So, what does allow global corporations to compete with national economies?

INTANGIBLE ASSETS – TYPOLOGY, DEFINITIONS AND VALUATION

The common practice of the contemporary economy (knowledge-based economy) [9], proves that it is not only capital (in its classical sense) that determines the success of an enterprise, since corporations with similar ratings presented by stock markets are valued quite differently by the market itself. Investors are prepared to pay much higher prices for their stock than it would be expected only on the basis of its book value.

The decisive factor, to the greatest extent, in the value of an enterprise concerns the matter of intangible assets. Intangible “non material” values, about which controversy abounds, concerning those elements that should be included when evaluating them. Table 2 presents classification proposals for intangible values according to the Financial Accounting Standard Board (FASB), “The Intangible Assets Monitor” as well as in the common understanding [15].

It should be noted, that in the interpretation used by corporations registered on world stock markets [4], the intangible assets generated by consumers – e.g. the increased number of loyal customers or large volume consumers or assets generated by financial means, through staff specialists employed by the company, insofar as they are not contract employees, should not be included in financial statements. This is much the case where, due to an unequivocal classification of intangible assets, there is no unequivocal definition of their functioning, which is why for the purposes of this paper, it has thus been formulated:

Intangible assets – these are values generated within the organization in cooperation with external agents – customer related factors, market related factors; internal and quantifiable agents – marketing factors, “software” connected factors connected to users with the organization by means of computer based systems, organizational factors;¹ internal factors that are unquantifiable or difficult to quantify) – factors connected with professionalism, creativity and effectiveness among the management staff, i.e. so-called conceptual assets [9] as well as “knowledge-based” factors, such as database systems and systems assisting the decision-making processes of the organization. Basically, intangible assets may be divided into two groups: Enduring intangible assets – Goodwill – cannot be submitted for depreciation purposes, but may be subjected to impairment testing [1]; Perishable intangible assets – residual value generated by factors with a limited time of utility, are most often linearly amortized according to the amortization time of those factors related to them [11].

A significant impairment here is assessment of intangible assets; towards this assessment, the following approaches are recommended:

• Approach I – the accounting approach assumes that intangible assets are a surplus of the cost to the company beyond its value resulting from the accounting records, according to their state on the day of the transaction.

• Approach II – is based on investments for research and development (R&D) by the company; software and data; development of a brand name and other intangible assets.

• Approach III – is based on wages paid out to “creative employees”: the key management level as well as research teams, hence, those generating the added value of intangible assets.

• Approach IV – is based on the operational profit margin of the company, i.e. the difference between the result of sales and the cost of sales. The gross profit margin is influenced, for example, on the example of the part saved on the cost resulting from introducing electronic supply management systems [12, 13].

• Approach VI – “nonfiscal” – assumes that one cannot measure the “new” by means of universally applied accounting procedures; monetary values should also not be assigned to given factors of non-monetary value, just as there is no fiscal assessment for the utility of goods. Intangible assets, however, should be subjected to evaluation, assigning the appropriate indicators, and only then should there be an assessment of the value of the enterprise, the amount of income or a growth in the amount of income, in order to assess the value of intangibles in creating given assets.

• Approach VII – assumes that intangible assets are the difference between the value of the organized economic unit, evaluated on the basis of a precisely conducted accounting (an accounting of the company itself), and this value minus the value of net assets based on the data from invoice statements, according to their state on the day of conducting the said evaluation.

In the author’s opinion, the best approach towards evaluating intangible assets is approach VI – the “non-fiscal” one, which takes into account the factors that con influence the creation of intangible assets. Due to the fact that the evaluation of intangible assets by means of this approach requires much detailed data, that are the internal secret of the corporation; in the latter part of the paper, the author makes use of the evaluation proposed in Approach VII – which is in accord with the recommendation of the Financial Accounting Standards Board.

COCA COLA CO.

In order to show how important to a corporation intangible assets are, the example of the leader in the production of non-alcoholic beverages – the Coca Cola Co. – was used. Table III presents a simplified balance sheet for December 31, 2003.

One might assume that what the simplified balance sheet shows is that the Coca Cola Company owns intangible assets valued at approximately 3.5 billion USD, and that the whole corporation is worth 25.3 billion USD. It is simple to calculate, the 2.45 billion in shares emitted by the corporation, multiplied by the market value of stock at 46.04 USD (12.2002), gives a sum of 112.8 billion USD, hence approximately 4.5 times more than would be shown from the balance sheet. How much, then, are the intangible assets really worth?

In evaluating intangible assets, in the case of a corporation noted on the stock market, one should begin with an evaluation proposed by market analysts. In the case of the Coca Cola Co., this value amounts to 144.47 billion USD. From this value, one should then subtract the net value of all assets – 11.61 billion USD, which leaves 132.86 USD. Only then does this sum show the factual value of Goodwill and other intangible assets of the corporation. The factual role of intangibles can be seen in a graphic presentation of the “complete” balance of the Coca Cola Co., including the intangible assets, as well.

LEADERS IN THE FOOD SECTOR

Ten global corporations noted on the NYSE² have been specifically chosen to represent the situation of leading corporations in the food sector presented in Table 1. Two of them represent producers of non-alcoholic beverages: Pepsi Co. and Coca Cola Co.; three of them represent distributors: Wal-Mart Stores, Inc., J.C. Penney Company, Inc., and Target Corporation; five represent food producers: Kraft Foods Inc., Kellogg Company, Dean Foods Company, DANONE Group as well as one corporation that is the representative of alcoholic beverage producers – Anheuser-Busch Companies.

The table below presents the value of assets, Goodwill and other intangible assets valued according to FASB recommendations including two variables are taken as the value of the enterprise. The first of these variables assumes the value of the company according to its valuation by stock market analysts – EV₁, whereas in the second case, it includes the capitalization value of the corporation at the end of the fiscal year 2002 – EV₂. Making use of the value EV₂ by the author is justifiable, insofar as it assumes a sudden drop in the value of the corporation due to market conditions as a result of exposure to irregularities within the corporation itself, which might have an influence on the value of the enterprise.

Analysis of intangible assets, particularly Goodwill, contained in annual statements of selected corporations, as compared to estimated Goodwill values (EV₁), shows that intangible assets presented in accounting ledgers have not been estimated in all the cases or, as in the case of Target Co., they were not included at all. The difference between Goodwill (EV₁) and the value of Goodwill in the balance constitutes not estimated quota of these assets.

In the case of valuating Goodwill assets based on the EV₂ corporate assets, in some cases, there is a negative value obtained from the difference between intangible assets recorded in accounting ledgers and estimated intangible assets: Kraft Foods Inc. – 0.2 billion USD; J.C. Penney Company, Inc. – 2.0 billion USD; Dean Foods Company – 0.8 billion USD; and Kellogg Company – 2.6 billion USD. This difference is a value, whose accounting records of intangible assets are greater than their factual state. In order to allow for Goodwill assets and other intangible assets, according to FASBS No. 142, this difference should be subtracted from the operational cost increased by the value of depreciation (EBITDA).

GOODWILL AND SELECTED VALUES CHARACTERISTIC OF CORPORATIONS

An analysis was conducted on the relationship between the amount of estimated intangible assets and annual sales, the operational result increased by the depreciation (EBITDA) and the number of employees.

In analyzing the relationship between the estimated goodwill assets and other intangible assets, and the operational result increased by the rate of depreciation (EBITDA), a statistically significant relationship was found, expressed as χ2d=66.5 when χ2α=27.88, at a reliability level of 0.001, with 9 levels of freedom. The above relationship is expressed graphically in Fig. 2.

In the cases analysed, it was also found that there exists a statistically significant relationship between the value of Goodwill and other intangible assets and the amount of income χ²_d=64.8, when χ²_α=27.88, at a reliability level of 0.001 and 9 degrees of freedom.

A strong relationship of Goodwill and other intangible assets was observed between the price of corporate stock. The value χ²_d was 303.5 when χ²_α=27.88 at a reliability level of 0.001 and 9 degrees of freedom.

A statistically significant relationship was observed between the number of corporate employees and goodwill and other intangible assets, χ²_d=103.5, when χ²_α=27.88, at a level of reliability 0.001 and 9 degrees of freedom.

CONCLUSIONS

On the basis of the literature reviewed, a study of cases and analyses conducted, the following conclusions may be drawn:

1. Up to the present, no unequivocal classification of intangible assets has been developed. Neither has there been an unequivocal definition formulated nor a standard valuation method.

2. In their financial statements, none of the investigated corporations showed the whole value of Goodwill and other intangible values.

3. The Financial Accounting Standards Board through its published accounting norms has attempted to force those corporations registered on stock markets a re-evaluation of estimated Goodwill assets. As well as to show a full disclosure of intangible values in accounting ledgers.

4. There exist statistically significant relationships between Goodwill and other intangible assets and the amount of annual corporate sales, the operational result increased by the depreciation, as well as the price of stock.

5. There is a statistically significant relationship between the number of workers and Goodwill and other intangible assets.

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