Assignment Overview

1. Chapter 1: Introduction

1.1 Definition of Intangible Assets

There are various definitions of intangible assets in taxation laws as well the accounting standards. According to Daman an asset can be defined as everything owned by a company economically that has a monitory value. Assets can be classified under 4 categories namely

• Current Asset can be defined as the asset which would be used or sold by the firm within a period of a one year
• Fixed Assets such as property plant and equipment has a longer life, and are likely to last for a longer time span for the company.
• Investments can be defined as the holdings of the company in shares and bonds and other financial instruments.
• An In tangible asset can be defined as anything that may not be physical but may have value to the company.

(Jarboe and Furrow, 2008, Robert F et al 1999)

Therefore an Intangible Asset is the claim to the future benefits that may arise to a firm, from something that may not be physical in nature. Thus, intangible assets are the sources of values that can be generated through innovation, different organizational designs or the human resource practices. In tangible assets are called intellectual property like patents, brand, and copyrights. Many analysts believe that the valuation of the intangible assets is the most important for a corporation and Brand as the intangible asset is the most important asset valuation to a corporation (Jarboe and Furrow, 2008, Soto,2011)

Thus to understand the importance of Brand Valuation to the financials of a corporation we undertake the study of corporations Bioquell Plc. and Corin Group Plc. The Bio quell Corporation is a research corporation which offers technical expertise to remove bio contaminations likewise Corin Group Plc. founded in 1985 is a market leader in providing orthopaedic innovation , thus the corporations  develops  highly innovative products , along with uses intellectual capital , thus intangible assets are an integral part of the firms valuation. Therefore the Brand Value is a key element to understand the firms actual financial position, thus the study has been undertaken.

(Annual Report Bioquell Plc. and Corin Group Plc, 2011)

1.2 Objective of the Study

The importance of in tangible assets to analyse the final the financial position of the firm cannot be ignored. Thus, the main objective and the purpose of the study is to understand the importance of the correct and appropriate valuation of the in- tangible Assets to the actual financial position of the firm. As the corporations under the subject of study use a high degree of intellectual capital and are involved providing high technological solutions to consumers. With the huge expenditures being incurred by corporations on the research and developments and in tangible assets like human resources as well as innovations , The In tangible Assets form the most important part of the firms financials therefore it is important to understand their actual valuation and the contribution to the corporation.

1.3 Methodology

The Research Methodology adopted for this research is ‘Qualitative’. Qualitative Research can be defined as the collection of data that cannot be quantified (Saunders, 2003). The project will involve a detailed analysis of the various qualitative data collected through journals, academic papers, annual reports as well as case studies. The data will be categorised and standardised keeping the research perspective in focus. Qualitative Research is ideal for the project as it would enable to understand the research focus, the company’s business strategy and the importance of intangible assets to the corporation. It would also enable the understanding of the clear methods of valuation and accounting undertaken to value intangibles like Brands.

1.4 Layout

For the purpose of the Research first the qualitative data will be collected, synthesised and standardised keeping the research in focus. Then the data would be plugged in the theoretical framework of the research to facilitate a clear understanding of the importance of brand valuation.

2. Chapter2: Critical Literature Review

2.1 Research Question

The importance of in tangible assets to analyse the final the financial position of the firm cannot be ignored. Thus, the main objective and the purpose of the study is to understand the importance of the correct and appropriate valuation of the in- tangible Assets to the actual financial position of the firm.

Thus, as the objective of the research has been described above the research question can be framed as follows. What is the importance on intangible assets particularly to the actual financial position of the firm? Or what is the purpose of appropriate evaluation intangible assets like ‘Intangible Asset Valuation’ to the value of an organization?

2.2 Importance of Intangible Asset Valuation

Corporations continuously expand their resources as well as incur liabilities on the acquisition, development and the maintenance of intangible assets. These intangible assets may be intellectual properties related to the design and development of the product and market research like trademarks brand names, certain innovations associated with the product or the services. These assets may be realised as the important sources of revenue and value that may accrue to the firm at a future date. According to Aker the intangible assets are the most important assets of a business; these may not be capitalized and may not appear on the balance sheet of the firm. These assets are therefore directly maintained out of the firm’s profits and the cash flows of the firm. These assets are not subject to depreciation and often are ignored by the mangers. The market has always been aware of the intangible assets but has often been ignored as the valuation has been ignored as the quantification of these assets is difficult. The importance of the intangible assets has increased over the years because of the constant gap in the book values in the accounts of the firm valuation rising in stock markets (Soto, 2011). Thus the valuation of intangibles is indispensable to the corporation to enable the creation of a clear picture of the performance and the financial status of the corporation (Jarboe and Furrow, 2008).

An intangible asset gaining increasing in importance to evaluate the performance of the business is the valuation of the Brand Names and the creation of the Brand by the corporation.

2.3 Brand Name as In Tangible Asset

According to the Oxford American dictionary a brand name can be defined as trade mark of a particular good or service. A brand is the identification of a product of company; successful brand delivers the promised product which fulfils the expectations of the consumers. The value of a brand for a particular business is seen to be growing over the years, which enables the business to attract loyal customers over a period of time. This enables the mangers to predict the future cash flows and formulate other business strategies. Thus, brand to guarantee a certain safety and security of business, therefore are now being looked at serious contributors to the corporations business as in tangible assets (Blackett, 2004).

Brand is evolved a long way over the years, the brands have emerged from just being a logo and are now associated with the identity of the company. They now are associated with the product recognition, images and have a distinctive importance for the various stakeholders of the business. The brand name has a certain economic value and accrues certain economic benefits to the corporation. The recognition of a brand as an intangible asset has increasingly gaining importance in the in the eyes of the analysts as the intangible assets are being identified sources of high values , and thus its effective evaluation is critical to evaluate the performance of a corporation . A brand is valued for a variety of reasons which may be more than purely financial; a brand is valued for the purpose of the branding strategies, financial reporting and mergers and acquisitions. The brand Valuation is done for a specific purpose as it is an expensive and a time consuming process, thus the purpose of valuation should be clearly specified before the process is undertaken as it involves high costs (Roberts, 2011 and Blackett, 2004). The importance of Brand valuation thus cannot be ignored let us consider the example of Coca Cola: The Stock Market value of the firm in 2002 was $136 billion of which the total value of the business was $10.5 billion, the rest of the value can be attributed to the shareholders confidence intangible assets comprising of the “secret recipe”, brand value, and the vast global network of the corporation. In 2012 the value of the Coca Cola brand name was $74.3 billion which is greater than the half of the total value of the intangible assets (www.rediff.com – accessed on 6/6/2012, Blackett 2004). Similarly Apple today is the world’s no 1 global brand valued at nearly $183.0 billion the value of the brand has increased by over 19% from the last year, thus the increase in the brand valuation is an indirect indicator of the high value and performance of the firm thus cannot be ignored and room for effective valuation has to be made (www.rediff.com – accessed on 6/6/2012).

2.4 Methods to Value an Intangible Asset

In 2005 the new European legislation required all the listed European companies to value and reports all the acquired in tangible assets like brands, on the balance sheets. The mandatory legislation introduced also lead to the action by the International Financial Reporting Standards (IFRS) which has introduced new accounting standards and has forced action for the brand evaluators. ISFAS 141 in 2001 and IFRS 3 in 2005 have changed the position of brands in the accounting for mergers and acquisition. Thus the main reasons being given by the accountants to appropriately value the brand are brands form a major proportion of the intangible assets of the corporation, which is a major contributor to the market value of the corporation. For example for Disney 70% of the value is generated by the Disney brand and likewise 85% for Nike. Earlier the Intangible assets were all clubbed together as Good will in the balance sheets, but with the introduction of the mandatory legislation separation of the intangible assets are being done, with suitable accounting standards being set by the IFRS. (Stuart Whitwell, 2005 Sinclair et al, 2006).

The International Organization for Standardization (ISO) has revealed certain brand evaluation standards have spelled out certain approaches for monitory brand valuation as a large number of complex issues arise in the valuation of the brands. These are as follows

1. Legal Analysis- The standard BSI ISSO 10668 standards set the tone for the legal standard in place for the evaluation of the brand. The standard specifies that there should be certain legal protection offered to a particular brand, the legal protection for a brand is essential as it helps in the maintenance of the exclusivity of the brand.

2. Behavioural Analysis -To determine the actual value of the brand it is essential to determine the brand strength.  The brand strength can be determined with effective bench marking and following various strategically and theoretical framework. Strategic tools like the Porters 5 force analysis, BCG matrix can be effective to determine the strategic behaviours of the companies

3. The Market Approach – The market approach refers to the facilitating comparisons with the other products of the similar nature in the market. The market approach is a difficult strategy to determine the value of the brand according to D’Souza (2005) as it difficult to predict the nature and the redaction of the market. The market approach is a supportive strategy and can be used alongside the income approach to determine the brand value.

5. Income Approach – The income approach is the most effective criteria to determine the value of the brand for a particular corporation, and thus is based on the expected cash flows, and the economic benefits that can be expected by the firm owning to the brand name. The income approach is purely financial and therefore can effectively be quantified and evaluated, the business can effectively determine its brand value with the income expectations from the brand. (Roberts,2011)

Thus, thus effective brand management is essential to determine the real value of the brand; this implies that the brand management should be treated as an investment rather than an expense. Brands are one of the most important assets that a business can own, and ensure continuity of a business in the times of a crisis. The consumers also develop a certain affiliation with a particular brand which ensures business continuity in the long run. The periodic and time to evaluation of the business is essential to ensure effective management of the brand strategy and ensuring the creation of maximum asset value from them (Blackett, 2004)

2.5 The Blue Ocean Strategy and Product Development

The Blue Ocean Strategy involves the systematic line of attack making the competition immaterial in the long run .According to the Blue Ocean Strategy the overcrowded industries are referred to as the red ocean, with the objective of each of the industries being to enter into a low competition zone (Chan Kim and Maubrongne 2004). As per the definition of the blue oceans are defined as the market spaces or industries which are not in the existence. In, contrast to the red oceans where the rules of the game have been clearly defined. Most industries become red oceans with the overcrowding in the industry. The blue oceans can be created in the industries offering highly innovative products or products with high intellectual capabilities.  The aim of each of the corporation is to aim at the development of a highly innovative product keeping in line with the research costs and the other costs associated with it .The strategy is universal and therefore can be applied to any industry. This has also been emphasised by M Porter at a lecture at the Harvard Business School. The Blue ocean strategy would provide the theoretical framework to evaluate the performance of a particular brand by determining if the operations of the corporation are in a blue ocean or a red ocean. (Harvard Business School, Chan Kim and Maubrongne 2004)

Thus applying the above theoretical framework in the research the value of the intangibles can be effectively determined for the corporations under the study Bioquell Plc. and Corin Group Plc. the importance of the intangible assets for the corporations can be analysed using the framework.

3. Chapter 3: Practice

Before undertaking the research it is essential to understand the in tangible assets especially brand name for the Corporations chosen for the purpose of the study.

3.1 Bioquell Plc.

The Bioquell group is involved in the design, manufacture and the supply of bio decontamination equipment and services for life sciences, health care and defence sector in the UK. The company has two main divisions Bio decontamination and TRAC, thus the company uses high intellectual property with extensive expenditures in research and development of the products. Therefore most of the revenues of the corporations are generated from in tangible assets. The intangible assets of the firm are valued at £ 9148(000’s) in comparison to £8014 (000’s) in 2010, which is an increase of 1 million over the one year period. These assets account for about 30 %( approximately) of the firms total non -current assets , thus the contribution of the assets to the revenue generation  and ensuring long term continuity in business cannot be ignored. The group incurs and expenditure of £2,220 in 2011 and £2,512 on the research and development of the asset. It identifies this as an expense but does not ignore the possibility of future economic benefit arising from the creation of the asset. The classification of the amount as an expense enables the organization to identify the amount required for ensures the development of the Asset that would accrue economic benefits in the future.

(Annual Report Bioquell Group 2011, www.bioquellplc.com – accessed on 6/6/2012)

3.2 Corin Group Plc.

The Corin Group founded in 1985 in the UK is a pioneer in the manufacture of orthopaedic devices worldwide. The company is recognised globally and aims at providing orthopaedic solutions and equipment to health care facilities globally. The company again makes use of high intellectual capital and is able to generate most of its future revenues based on the development of highly innovative products or generates most of the revenues and cash flows through the sale of these products. Therefore again the valuation of the in tangible asset in the contribution to the overall asset capacity of the company cannot be ignored.  The intangibles of the firm have faced a beating over the past year with firm facing a decline in its goodwill and other intangible asset valuation, owning to high expenses and the low profits generated by the corporation between 2010-2011 As the intangible asset are largely responsible for the revenue generation n the corporation a decline in the valuation implies a decline in the overall value of the firm; Also resulting in the poor stock market valuation of the corporation.

(www.coringroup.com – accessed on 6/6/2012 and Annual Report Corin Group 2011)

3.3 Empirical Examples

According to Price Water House Coopers the most important in tangible asset is human capital (68%), and then customer relationship management (43%), the brand valuation is at 4^th position at 42%. Most of the firms have agreed that brand is the one of the most important in tangible asset, and a successful brand determines the success of the business in the long run. This trend is visible in the business strategies of the companies; For Instance Ford Corporation has acquired brand names like Aston Martin, Jaguar, Land Rover and Volvo clearly indicating their preference in the investment intangible assets like Brand names.  Though the concept of brand emerged in the 1980’’ as a marketing concept but it has fast gained importance as a financial concept , with the brand names being valued and represented in the balance sheets of the corporation. The finance mangers have developed a concept of brand equity from the Brand, which implies the assignment of specific values to the companies.

(Soto, 2011)

The importance of Brand valuation thus cannot be ignored let us consider the example of Coca Cola: The Stock Market value of the firm in 2002 was $136 billion of which the total value of the business was $10.5 billion, the rest of the value can be attributed to the shareholders confidence intangible assets comprising of the “secret recipe”, brand value, and the vast global network of the corporation. In 2012 the value of the Coca Cola brand name was $74.3 billion which is greater than the half of the total value of the intangible assets (www.rediff.com – accessed on 6/6/2012, Blackett 2004). Similarly Apple today is the world’s no 1 global brand valued at nearly $183.0 billion the value of the brand has increased by over 19% from the last year, thus the increase in the brand valuation is an indirect indicator of the high value and performance of the firm thus cannot be ignored and room for effective valuation has to be made (www.rediff.com – accessed on 6/6/2012).

The brands can be valued using the ‘Economic use model’ which has also been used by the Rolta Corporation. This model effectively values the brand at a particular value; the method is a combination of various market and financial parameters that can be used to value a brand. The Brand Strength model can be used to effectively evaluate the value of Bioquell Group and Corin Group Plc.

Quantification and the use of the brand strength model is a subjective entity of the corporations. Valuation of a brand is particularly difficult if various subjective parameters are used. However, standardization of certain parameters enables to facilitate comparisons between the two corporations and the analysis of brand strength. Thus the brand strength model effectively evaluates the brand standing in the market but is subject to a certain limitations.

(Dhillion et al , 2004)

4. Chapter 4: Application of Theory

4.1 Income Approach to Accessing Intangible Asset Value

The income approach is the most effective criteria to determine the value of the intangibles such as a brand or goodwill etc. for a particular corporation, and thus is based on the expected cash flows, and the economic benefits that can be expected by the firm owning to the brand name. The income approach is purely financial and therefore can effectively be quantified and evaluated, the business can effectively determine its intangibles  with the income expectations from the brand. The intangible asset value of Bioquell and Corin Plc has can be effectively determined using the income approach. (Roberts, 2011)

The income approach to evaluate the value of a particular intangibles is most appropriate as it is based on the real figures based in the balance sheets of the firms. Based on the actual performance of the firm the brand value can be evaluated, this proves to be a fairer method of evaluation and is more indicative to the actual market value. The income approach also justifies the fair value method of accounting already in place and effectively being practiced by the organizations. The main aim of the fair value accounting system is to evaluate the maximum possible value of their assets when the asset would change hands under the current financial circumstances. The fair value system determines the value and profitability of a project or an asset based on the discounted cash flow method to predict future cash flows. The main rationale behind the system is that fair values reflect market prices from the publically available information on the cash flows of the firm. When the fair values are estimated including the market prices it is called market-market values and when the valuation is done on the basis of valuation models it is called mark-to-model values (Ryan, 2008). The income approach to some extent would also discount some of the limitations of the fair value system and enable the correct value determination of the brand.

4.2 The Blue Ocean Strategy

Both Bioquell and Corin limited are the blue oceans in their respective industry and therefore these firms would like to avoid the creation of red oceans in their industries and market spaces. To remain effectively in the blue ocean zone both firms would have to focus on increasing the value of their in tangibles particularly their brand values. The Balance sheet position of the in tangibles of Corin limited has taken a beating over the past year, thus Corin needs to focus on its Intangible asset management strategy and form strategies which contribute to increasing revenues and the profitability of the Corporations.

A decline in the in tangibles of the firm may also be an indicator of the firm entering into a potential red ocean, which is over crowed. Thus to regain the blue ocean effectively it is important for the corporation to incur expenses on research and development to create assets which would create economic benefit in the future.

(Chan Kim and Maubrongne 2004)

5. Conclusion

The importance of the valuation of intangible asset cannot be ignored as an indicator of the firm’s valuation as well a potential measure of the firm’s performance. Enterprises globally incur expenditures on the development of in tangible assets through research development; design as well the creation and the management of an effective Brand Strategy as well as Product Startegy. As the corporations under the subject of study Bioquell and Corin use a high degree of intellectual capital and are involved providing high technological solutions to consumers. With the huge expenditures being incurred by corporations on the research and developments and in tangible assets like human resources as well as innovations , The intangible Assets form the most important part of the firms financials therefore it is important to understand their actual valuation and the contribution to the corporation. The Brand name has been identified as 4^th most important intangible Asset; therefore its clear and effective valuation is important for all the stakeholders as it is an indicator of the performance of the firm. The Corin Group has experienced a decline in the valuation of its intangible assets which a clear indicator of downsizing of the value of the firm, this phenomenon is likely shake investor confidence in the firm. A decline in the intangibles in an indicator of poor performance of the corporations as the in tangibles is not subject to depreciation even. There appears to be a clear problem in the firm. Thus it is important for Corin Plc to focus effectively on the creation of new assets, which would yield economic benefits in the future as well as focus its attention on the effective management of  Intangible Asset Management Strategy that would enable the improvement in the value of the corporation and the assets.

It is important that the effective intangible asset evaluation techniques are used for purposes both internal and external to the corporation. Intangible Asset Management is effective for planning, steering as well controlling the organization. Moreover and effective valuation strategy can be used to determine the allocation of resources through the budgets. This is true for firms with a brand portfolio, as brand valuation would determine the strength and the weakness of each brand and therefore provide effective budgetary allocation. For the external stakeholders of the business the intangible asset valuation is important as it enables creation and the building of investor confidence in the business. A good intangible asset value is reflected in the share price of the corporation, and this acts a trigger to invite investments in the business. Increase investments in the business enable the growth and expansion of the business and creation of value for all the stakeholders.

Thus, the intangibles like Brand form an integral part of the corporation’s value and with the mandatory legislation to value the intangibles passed in 2005 they certainly cannot be ignored. Thus the firms should effectively focus on development of assets which would yield them long term economic benefits and increase value of the corporation.

 6. References

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