Intangible Assets - Definition by QEg9iD

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									  Intangible Assets - Definition
Intangible Assets are not physical in nature
Intangible Assets comprise:
• goodwill and
• other intangibles such as brand, trademarks,
  patents, and intellectual capital
       Tangibles vs. Intangibles
                    Tangibles          Intangibles
Examples            Plant, equipment   R&D, brand

Certainty of    high                   low
future benefits
Company control high                   low

Possibility to      high               low
estimate value
Estimate of value   objective          subjective
 The Importance of Intangible Assets
In the high tech industry intangibles have supplanted
the tangibles as key value drivers.
They are extremely important in pharmaceutical
industry but due to accounting rules aren’t adequate
represented in BS.
Altana 2005: Intangible assets 8,8% in BS.
The stock value of companies with high intangibles
exceeds by far their book value shown in the BS.
    Expensing vs. Capitalization
Major difference between expense and asset:
 Assets generate future benefits (Balance sheet,
  amortization).
 Expenses have been necessary to obtain the performance in
  the past (P&L).

R&D activities are expected to generate future benefits, but
  are associated with a very high uncertainty.
Due to accounting conservatism R&D is traditionally treated
  as an expense and income is immediately reduced by R&D
  expenditure.
 Expensing vs. Capitalization: The steady state
                             Capitalizing R & D expenses


all numbers in million €   1999 2000      2001    2002    2003    2004    2005
                                                                                      Expenditure as
R & D expenses p.a.        400 € 400 € 400 € 400 € 400 € 400 € 400 €                  shown in the P&L
                                                                                      Statement
depreciation (5a)           80 €   80 €    80 €    80 €    80 €
                     20%           80 €    80 €    80 €    80 €    80 €
                                           80 €    80 €    80 € 80 €
                                                                   80 €
                                                   80 €    80 € 80 €
                                                                   80 €          80 €
                                                           80 € 80 €
                                                                   80 €          80 € 80 €
                                                                80 €
                                                                   80 €          80 € 80 € 80 €
                                                                80 €             80 € 80 € 80 €   80 €
depreciation Total          80 € 160 € 240 € 320 € 400 € 400 € 400 €


                                                                                      Increase of
capitalised R&D (IC)       320 € 560 € 720 € 800 € 800 € 800 € 800 €                  Corporate assets
                                                                                      and equity values


diff exp. Vs. Cap          320 € 240 € 160 €       80 €     0€      0€      0€
Steady State: Annual expenditure equals annual amortization
    Expensing vs. Capitalization: Increasing R&D
                     Capitalizing R & D expenses: The Altana Situation


all numbers in million € 1999      2000    2001    2002    2003     2004    2005
                                                                                           Expenditure as
R & D expenses p.a.        144 €   190 €   252 €   335 €   376 €    410 €   418 €          shown in the P&L
                                                                                           Statement
depreciation (5a)           29 €    29 €    29 €    29 €     29 €
                     20%            38 €    38 €    38 €     38 €    38 €
                                            50 €    50 €     50 €    50 €    50 €
                                                    67 €     67 €    67 €    67 €   67 €
                                                             75 €    75 €    75 €   75 € 75 €
                                                                     82 €    82 €   82 € 82 € 82 €
                                                                             84 €   84 € 84 € 84 € 84 €
depreciation Total          29 €    67 €   117 €   184 €   259 €    313 €   358 €


                                                                                            Increase of
capitalised R&D (IC)       115 €   338 €   373 €   524 €   641 €    738 €   798 €           Corporate assets
                                                                                            and equity values


diff exp. Vs. Cap          115 €   123 €   135 €   151 €   117 €     97 €    60 €
 R&D expenditures are higher than R&D amortization, thus earnings under R&D
 capitalization being higher than earnings under expensing
  Regulation for R&D Capitalization

Accounting systems distinguish three kind of
  intangibles, which are treated by different
  methods:

   1. Purchased within business combination
   2. Separately purchased
   3. Internally generated intangibles
        Regulation for R&D Capitalization:
                      IAS 38

Definition of intangibles (separately from goodwill):
Intangibles must be “identifiable,” (contractual or other legal
rights) and “separable,” (capable of being separated or
divided from the entity and sold, transferred, licensed, …)
Fair value of the recognized intangible should also be subject
to a reliable measurement.
Capitalization of internally generated research is not accepted,
while development cost must be capitalized.
R&D separately purchased or purchased within a business
combination may be capitalized.
    Regulation for R&D Capitalization:
                US GAAP
Internally generated R&D is not allowed to
capitalize and must be expensed immediately.
R&D purchased within a business combination and
separately purchased may be capitalized (separately
& contractual legally).
Recognition at fair value of all acquired assets,
including intangibles and separation from goodwill
of identifiable intangible assets.
 Regulation for R&D Capitalization: HGB


The capitalization of self generated R& D is
not accepted.
Separately purchased R&D or R&D
purchased within a business combination
could be capitalized.
 Manipulation through R&D Capitalization?
Amount of R&D to be capitalized is subjective,
managers could play with the capitalized amount to
report earnings figures that fit their purposes.
When capitalization is increased, reported earnings
will generally rise.
Capitalization provides information relevant to
investors (reality better reflected by book values).
 Manipulation through R&D Capitalization?
Expensing of R&D also affords a potent manipulation tool.

Cutting off the actual R&D expenditure increases reported
earnings substantially.

This will adversely affect future growth. When capitalized a
real cut in R&D expenditures has smaller immediate effect on
earnings (amortization over several years).

R&D capitalization provides a certain safeguard against short-
sighted decreases in the level of R&D activities aimed at
inflating reported earnings.
                  Evaluating R&D
Altana present Rolling Forecast System which monthly shows
R&D real & planned costs for each research and development
project is a good option for controlling, but can’t solve
problem of front loaded projects and the comparison of self
generated with purchased R&D.
Altana has to accept accounting rules and capitalization of self
generated R&D are not allowed.
For internal control & investors information application of
(Return on R&D Investment Ratio) NPV per capitalized R&D
expense might be an interesting tool for Altana.
            Net Present Value / Capitalized
                       Pipeline
  Product                                                  2006            2007            2008            2009
                       Capitalization NPV   Ratio Profit          Profit          Profit          Profit
  A (self generated)                        0,9
  B (self generated)                        1,2
  C (self generated)                        1,5
  D (purchased)                             1,1              Discounted Cash Flow
  E (purchased)                             0,8
  etc.



                                                              if
  Return on R&D                       Net Present Value
                                                            >1
Investment Ratio                  Capitalized R&D Expenses
                                                           R&D is
                                                           profitable

								
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