Understanding Intellectual Capital, Property, and Assets

Introduction

Corporate businesses must adhere to many guidelines, rules and regulations with regard to their reporting of assets and gains achieved in the course of business. In addition to stating ownership in property and buildings as well as products and services, there are steps to accurately reporting accounting status throughout the lifetime of the business. 

Definition of Intellectual Capital

What is Intellectual capital?  Intellectual capital is many times confused with knowledge. Although knowledge is very important, it is only the raw material that can be measured. Changing that raw material into something with value is known as intellectual capital.  It has a value concept and if properly managed this can be an extremely valuable tool that can add growth for the company. 

There are three types of intellectual capital human, structural, and relational.  Human capital is the capabilities as well as the skills a company’s employees have.  This capital is often seen as skill sets and knowledge of the individuals associated with the organization.  This is very important as it can often sustain the wealth of the company. 

Structural capital is the organizations backbone. Structural capital includes the networks, policies, the culture of the company as well as its planning, control system and management planning.   All of this helps the organization to create value.  Rational capital is the organizations customer and suppliers connections and creates value.  This value is created through customer loyalty, quality, improved market and speed of service.  This rational capital can be measure repeat customers (loyalty) which reduces the cost to the organization by minimizing the need to go prospecting for new customers.  Also good suppliers can improve the quality as well as emphasize the speed needed to meet the organizations marketing goals. 

Intellectual capital can be a real asset to any organization because it is an intangible asset. Since it is often very hard to measure intellectual capital the knowledge as well as the value of the intellectual products are key to the organizations success.

 Definition of Intellectual Property

     What is Intellectual property?  Intellectual property is the creation of one’s mind such as inventions, designs used in commerce, literary writings as well as names, symbols and designs.   Intellectual Property is separated into two categories Copyright and Industrial Property.   The copyright category includes literary works, films, music works, architectural designs and paintings and photographs to name a few.  Industrial property includes such things as inventions also known as patents, industrial designs, geographic indication of sources, trademarks and industrial designs.

When we talk about the copyright category of Intellectual Property, it is important to understand that these are intangible property rights are granted to the originators or author giving them exclusive legal rights to reproduce and publish, and sell their works under federal statute.  For example, when an author publishes a book, this original work under the federal statute is protected for the life of the author plus seventy years.  

Patents fall under the second category of Intellectual Property: Industrial Property it is important to understand the rights both in the United States as well as Internationally.  Patents are protected in the United States under a Federal Statute that was amended in 1984 for seventeen years and may be extended in certain cases.  However, it is important to know that since patents under the amendment must undergo a review period by federal government, these products cannot be sold until they are approved. This review period does not count as part of the seventeen-year term of the patent.

Most foreign countries also have their own patent laws that are very different from the United States.  Ninety-three countries including the United States have entered in to a treaty known as the Paris Convention for the Protection of Industrial Property. Under the treaty a guarantee was made to citizens of other countries under this treaty they are guaranteed the same trademark and patent right guaranteed that countries own citizens. This treaty also gives priority rights to people who apply for patents.  The priority right means that when a patent is filed the person whole files the patent get the exclusive rights to the patent.  Another treaty in regards to Industrial Property is the Patent Cooperation Treaty, which is followed  by forty-three countries including the United States this treaty provides a centralized filling procedure and  maintains a standard  application form for all forty-three countries.

Definition of Intellectual Assets

Intellectual assets are insubstantial, primarily dissimilar from physical assets such as capital equipment, buildings and financial resources. Intellectual assets consist of patents, copyrights, trademarks, domain names, and trade secrets, as well as know-how and the related processes and protocols linked by construction as well as deliverance of goods and services.

Definition of Identifiable Intangible Assets

            In order to address the explanation on the types of assets in this section I must first discuss the meaning of the intangible assets. Intangible assets are not of a monetary nature which puts them in the realm of intangible. This type is of asset is something that we cannot actually put our hands on which also dictates that it is not of a physical measurable nature.

             When you can foresee an economic benefit from the implementation of this type of asset you are sure that you have an intangible asset. For any business acquisition it is essential to clearly determine the intangible assets in order to correctly apply them to your records of resources and assets from the onset.  For accounting purposed standards have been set by groups like the Financial  Accounting Standard Board, or FASB, International Accounting Standard Board, or IASB and standards set by the Generally Accepted Accounting Principles also known as GAAP. 

            Identifiable intangible assets are just that; assets that can be identified. This type of asset can be placed in a category of measurement and amount by number. One of the most important characteristics is the fact that it can exist independently of the business.  An example of identifiable intangible assets is a patent which is a documented privilege to have exclusive permission to produce or manufacture a creation, invention or process for a period of 17 years given by the government after proving ownership and completing the required paperwork. Although I may own the patent I can sell that patent to another company. In the music and literary realm copyrights are used by the creator. The copyrights are extended for 50 years giving the artist control over who hears or reads their work and setting up a system where the royalties and profits can be realized. Like the patent, the copyright can also be sold. In the case of selling the owner/creator would set the worth of their work and still receive the profit due them by setting the correct amount for sale

Definition of Unidentifiable Intangible Assets

            Unidentifiable intangible assets are different from identifiable in that they cannot exist alone and apart from the business. One example is goodwill.  This can be in the form of a good working relationship between two or more companies that has fostered a sense of fairness and trust in their business transactions. When this occurs and an acquisition comes into play due to unforeseen circumstances, it is very important to note that this can only be documented as an unidentifiable intangible asset when it is included in the purchase as an asset. The company that is acquiring from outside this group of goodwill beneficiaries must acknowledge this goodwill and accept whatever price it placed on its worth. This may be done by adding the extra cost to the actual costs of the assets and the purchasing company must either accept or reject the price and record the asset accordingly.

How  to Value Intellectual Property

Intellectual property (IP) refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. IP can be divided into two categories such as: Industrial and Copyright. Industrial includes: inventions (patents), trademarks, industrial designs, and geographic indications of source. Copyright includes such items as: literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. Such other rights include: those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs.  Intellectual capital is recognized as the most important asset of many of the world’s largest and most powerful companies. It is the foundation for the market dominance and continuing profitability of leading corporations.  It is often the key objective in mergers and acquisitions and knowledgeable companies are increasingly using licensing routes to transfer these assets to low tax jurisdictions.

The role of intellectual property rights (IPRs) and intangible assets in business is insufficiently understood. The normal accounting standards cannot calculate the meaningfulness of an IPR. IPR’s are generally under-valued, under-managed or under-exploited.  A key factor in a company’s success or failure could be the degree in which it utilizes intellectual capital or value risk. Exploitation of IPRs can take many forms, ranging from outright sale of an asset, a joint venture or a licensing agreement.

There are a number of methods a company can use to maximize the value of IP rights. However, not one is appropriate for all situations. Research is necessary to evaluate the details surrounding the calculation, which includes the kind of IP which is being valued, the reasoning behind the evaluation, and the accessibility of the data. There are three basic theories for valuing intellectual property: cost, market and income approaches.

The cost based theory looks at the historical and developed cost that are incurred to create the IP. These costs can be avoided by licensing or purchasing the IP from its owner. Relevant costs may include research and development (labor, materials and overheads), testing and regulatory approval costs, IP protection costs, equipment and other capital investments, a profit margin based on the usual profit the developer would expect to make on material, labor and overhead costs, plus a component for entrepreneurial incentive representing the amount of economic benefit required to motivate the developer to enter into the development process.

During the research process a company may find that there are advantages and disadvantages of the cost approach. The advantage of the cost approach is that it can have a prominent advantage in a very active market. It is also handy when calculating the bottom line. The disadvantage that stands out the most is the failure the full potential of the IP. By using the cost approach, it appears to have a direct correlation between prospective profits and cost, however that is not always the case. Another disadvantage that this can be a very lengthy process, however, for identified intangible assets, it can make it very difficult to develop a replacement, which is a positive.

The market based approach suggests that purchasers or licensees will not pay more for similar IP. The advantage to this approach is from a company stand point, is the value of IP is very unique, where there may not be another comparable transaction to refer to. However, it is credible which makes this approach attractive to competitors trying to acquire this IP asset. The disadvantage to this approach is the lack of comparable transactions. Which also makes it difficult to the public to know about the objectives.

The income based approach evaluates the cash flow that is associated with the ownership of the IP.  The parameters that determine the value include the size of the income stream, the duration of the income stream, and the risk associated with realization of the income. The advantage, and common approach to the value of the cash flow is called royalty savings approach. The price that a company is willing to pay for the IP. The value of the IP is the present value of the royalty payments saved through ownership. The disadvantage is there are assumptions in "net present value calculation" which could be lead to pointless results. There is also the discount value that result in large variances in the final value, while calculating.

The valuation process is only as good as what someone else is willing to pay for the IP at any point in time. This is mainly a tool that is used as leverage in the negotiation process.

Steps in Managing Intellectual Property

 The first step in managing intellectual property is to perform an intellectual property inspection which includes an evaluation of the company intellectual property portfolio, policies, and procedures.   Once that is done the goal is to protect the company brand by using the correct service mark “SM” trademark or registered; R symbol and consist of documentation stating where the symbols were used in the material.  Branding material gives the companies rights to utilize them.  Patent represents differentiation and consequently marketing power.   A company uses patent to protect creations that are useful. Since patent is expensive, company must review the possible expenses and worth of the patent before starting the process.  In addition, companies can investigate looking for previous work that will stop a patent and make certain that the person patent was not violated or used. The next step is copyright.  A copyright is protection for automatic published work that includes, published document, software, and website information; and frequently signify important pieces of a business single awareness foundation.  Security is reinforced after the copyright is scheduled with the copyright official.  This process is simple also less expensive. If the copy rights are registered or not; available identification must contain copyright or the C symbol, and the years the work was distributed.   

      The third step is to create a plan to manage the IP so it will support the company's business objectives. It is important for a business to aggressively manage their IP, to the company's objectives. In determining the company's objectives which were supported while gathering information from the surveys done by marketing, manufacturing, and the legal groups. Seeing as inventions, brands, and designs form a chunk of a company's assets the management is imperative to the company's success. Normally the company will categorize the different IP assets into three categories.

The first category is intended to protect the company's core assets. These are the patents,

trademarks, copyrights, and trade secrets that distinguish the company’s products or services in the market. The next category will relate to the company's business, however, it is possible it will not give the company an advantage.  These IP assets would be prime candidates for cross licenses to support revenue generation and freedom to operate objectives. The final category is to protect the company's technology. It is possible these assets are not related to the company's business, but they could have been acquired with the purchase of another company. These assets may provide the basis by which the company enters a new field directly or becomes part of a joint venture with a company already in the field.

    The next step is to actively manage the plan. Now that the company has a plan in place as to the IP assets support the company's goals, it is time put the plan in place and monitor the results. The supporting the IP's assets and the business objectives include enforcement, licensing, and business relationships. Under the title of enforcement, litigation, which can have many positive effects in terms of supporting the company's objective.

     The most direct is the enforcement of the IP rights when going against a competitor and in hopes to force them from the market. Litigation can also produce an income, it should be considered when a company is looking to advance its business objectives. Licensing is another support to the IP assets, is to identifying potential target companies. Assignments can also generate an income, and also support the company's objective. Assignments may provide capital gains by outright selling of assets. It could also present a way to eliminate maintenance fees, which are required to keep patents in effect. Joint Ventures is if one of the business objectives, joins another company. This could open doors into different markets. The IP assets could act as bait for other companies to become attracted to this company. Standards setting, if a decision is made to participate in this process, it may have the opportunity to guide that industry toward its own technology. The standards setting could require licensing of part of the company's patents. Notably, the markets will not stay static and neither should the company's objectives.

      Acquiring additional IP that would be useful in carrying out the objectives.  Once the plan is in place there may be room for more assets, assets which could fill in the holes. This may acquire IP assets from a third party. The company will have to do extensive research and develop a new plan. Other than doing the internal development plan it is important to look at external resources as well. The company may purchase or license additional assets from unrelated individuals and companies. Just as the company may seek to license or assign patent rights to generate income or to prune assets lacking value to save money, other companies may be doing the same. Again it is a long process, to get to the decision making on what fits the company best, it is also a big decision to select different industrialized countries. Although it can be an expensive project, it can be beneficial because the company will continue to move forward with its assets and will not remain stagnant. Going into foreign markets, can be beneficial as long as proper licensing is obtained. If a company does go into a foreign country and forgoes the patent licensing it gives competitors the opportunity to enter that market and seek that patent.

      Intellectual Property (IP) management, of copyrights, trade secrets, trademarks, or patents, can have profound affects on a company’s bottom- line; hence, directors should take proper measures to ensure that management is protecting and cultivating the company’s intellectual assets on shareholders behalf.  Although directors cannot and should not delve into everyday management of IP, but should discuss issues with management to ensure that the company’s assets are protected.  To gain a better hold on IP of the organization, there are certain areas that directors can focus on that is essential:

          The board should examine an overview of the organization’s IP position, and ask several questions, such as, what do we have in terms of patents, trademarks, trade secrets, and copyrights?  What strategy do we have for cultivating and leveraging our IP?  Are we getting any return on our investments in IP?

            The financial benefits, like profits from patented products and/or licensing profits should be assessed, as well as the strategic benefits, for example, the power to forbid the patented technology to be used by competitors, to use patents for defensive cross licensing or as a bargaining tool in settlement negotiations, and the ability to form crucial alliances.

     It is important that directors know how the organization manages its IP, from who is in charge in senior management for managing and protecting IP and how they make investing decisions, to determining which patents to renew, sell, or license, and measuring performance of IP assets. 

         Not only do organizations need to protect its IP, but also when they bring new products to market they need to reduce risk of patent infringement.  New product research efforts should have a focus, therefore a company must decide what the focus should be, as well as assess IP risks early in the process, by obtaining legal opinions to aid in investment decisions.  Other factors to consider during risk assessment may include factoring in the amount of time it will take to launch a new technology, and how other companies IP will develop during that time; to avoid trademark violations a company needs to decide at what stage to clear possible product names.  In addition to, a viable plan should be detailed by management, along with a timeline, for analysis and approval of all IP approaches of new products.

         Companies should observe the IP environment, for it is constantly changing when it comes to competitive and legal changes.   The global environment’s increase in offshoring could have an impact on IP through increased risk, for example, companies may share technologies with partners in foreign countries where there is a lack of or weak IP protection.

          Moreover, directors should keep track of their organization’s IP management by asking the appropriate questions and understanding the basics of IP, as well as promote the importance of resources and time devoted to IP management to their senior management.  By assessing the environment, risks, management processes, and the overview of the company’s IP will provide effective management of IP.  

Conclusion

Since it is very important for corporate businesses to adhere to guidelines, rules and regulations with regard to their reporting of assets and gains they receive in the course of their business. It is very import for these companies to understand the meaning and the steps. This will allow them to keep accurate records on not only profits and losses but allow help them to properly identify and manage all these assets throughout the life of their business.