Chapter 6 Intangible Assets and Nonfinancial information

Question 1

Intangible assets:

Answer 1

ie people, processes and systems, environmental/social/governance policies/stakeholder relationships/reputations/patents/brand names/other intellectual property. These can allow organizations to outperform competitors through the strategic ownership, management/growth of these assets

Question 2

Commoditization of Physical assets:

Answer 2

traditional physical assets (ie factories, equipment) are commoditized due to globalization/greater competition requiring faster pace of innovation and that many physical assets are now available to a large number of companies at a low cost.

Question 3

Electronic brands:

Answer 3

used to focus on owning/operating manufacturing equipment/factories, now outsource and focus on innovation and creating value through research and development, gaining good employees, building unique brands/reputations

Question 4

Intangibles:

Answer 4

those sources of future benefits that lack a direct physical embodiment. These are often undervalued by stakeholders. Also, not reported in the way that tangible assets are, so are murky to stakeholders

Question 5

Strategic comms:

Answer 5

must advise business managers on which nonfinancial info should be shared with stakeholder groups, how to best present/interpret this info. Need knowledge of traditional accounting/financial reporting as well as understanding intangibles and nonfinancial information.

Question 6

Hard:

Answer 6

tangible asset

Question 7

Soft:

Answer 7

intangible asset, ie patents, trademarks, copyrights, brands and reputations, organizatioal strategies, unique processes/procedures/cultures, also management and employees (human capital). Aka knowledge or intellectual assets

Question 8

Financial assets:

Answer 8

ie stocks, bonds, cash - don’t have physical embodiment but are not intangibles - they represent claims on organizational assets both tangible and intangible.

Question 9

Company culture:

Answer 9

draws on organizations character, mission, values. Intangible asset

Question 10

GAAP standards:

Answer 10

inadequate fro informing stakeholders about corporate investment and performance of intangibles - is better internationally but not perfect

Question 11

Research & Development:

Answer 11

an intangible that is included on GAAP financial reports, but it is expensed (treated as a cost) rather than capitalized (treated as an asset on the balance sheet)

Question 12

Capital expenditures:

Answer 12

assets that are expensed over time rather than all at once. Intangible assets should be included in this, but GAAP standards don’t treat them as such.

Question 13

Investments in to intangible assets:

Answer 13

in US alone, companies invest over a trillion dollars annually into intangible assets, comparable to tangible assets - account for well over half of market value of public companies

Question 14

Market-to-book ratio (M/B):

Answer 14

calculated by taking company’s total market capitalization (stock market value) and dividing it by the company’s book value (stated net value of company’s assets on its balance sheet).

Question 15

Balanced scorecard (kaplan & Norton):

Answer 15

judged organizational performance on four broad categories 1. Financial 2. Customers 3. Internal business processes 4. Learning and growth. One of the most widely used tools by business managers around the world to gauge performance

Question 16

Major categories of intangibles:

Answer 16

these collectively contribute to net intangible asset value - Vision/strategy, management, employees, reputation/brands/relationships, research and development, environmental/social/governance performance.

Question 17

Vision and strategy:

Answer 17

high level of importance of this and the company’s perceived ability to execute it. Should be straightforward and simple to articulate. Tracking efficacy of strated can include customer-centric data points, sale order figures, market share measures, customer adoption/loyalty rates

Question 18

Management:

Answer 18

Ceo and executive team can create or destroy value for organization and its stakeholders. KPIs include seeing how they grow, maintain, lose credibility among financial stakeholders

Question 19

KPI:

Answer 19

key performance indicators

Question 20

Employees:

Answer 20

greater morale/satisfaction/engagement means greater productivity/innovation leading to superior performance. KPIs include “best places to work” lists, awards for employee/organizational culture, employee retention/engagement/diversity.

Question 21

Reputation, brands, relationships:

Answer 21

strength of these corresponds to superior organizational performance. Built on demonstrated ability to deliver on promises/consistency in words and deeds. KPIs include appearing on top reputation/brand lists, values calculated by third parties. Also stakeholder indicators of brand/reputation/relationship strength.

Question 22

Research and Development:

Answer 22

core driver of organizations innovation. Innovations and intellectual property (IP) are key source of competitive advantage. KPIs include tracking/updating stakeholders on issuance of IP and income generated by IP, third party estimations of IP values, industry awards in R&D and innovations.

Question 23

Intellectual property (IP):

Answer 23

patents, trademarks, copyrights, trade secrets

Question 24

Environmental, social, governance performance:

Answer 24

poor ESG performers are greater targets for activism, regulations, lawsuits. KPIs – appearances on indexes and rankings, governance scores by third parties, awards and recognition.

Question 25

Intangible assets:

Answer 25

non-monetary, non-physical, source of future benefit, “soft” asset, considered non-financial information, providing insights into management & potential performance

Question 26

Financial Assets:

Answer 26

stocks, bonds, cash, lacking physical embodiment but not intangible - represent claims on organizational assets

Question 27

Tangible assets:

Answer 27

has direct physical embodiment, “hard” assets, eg real estate, equipment, inventory

Question 28

Intangibles:

Answer 28

patents, processes/policies, trademarks, logos, relationships, reputation, commercial secrets, strategies/plans

Question 29

Intellectual property:

Answer 29

in business, a class of intangible asset that is generally the result of research and development activities ie patents, trademarks, copyrights, trade secrets

Question 30

Why intangible important:

Answer 30

performance not seen on profit/loss statement, leading indicator of financial performance, stakeholders expect access to non-financial information to assess performance potential, professional investor decisions influenced by non-financial information.

Question 31

Intangible asset reporting:

Answer 31

on financial statements, listed as expenses not assets - in r&D, and marketing advertising public relations

Question 32

Balanced scorecard (Kaplan/Norton):

Answer 32

four categories of performance data - financial, customers, internal business processes, learning and growth

Question 33

Vision and Strategy KPI:

Answer 33

customer centric data, sales order backlogs, customer attraction, market share, customer loyalty

Question 34

KPI management:

Answer 34

CEO & executive leadership credibility, meeting/exceeding financial targets

Question 35

KPI employees:

Answer 35

culture awards, retention, engagement, diversity

Question 36

KPI rep/brand/relationships:

Answer 36

recognition on top brand lists, third party value calculations, earned media sentiment

Question 37

KPI environment/governance/social performance:

Answer 37

appearances on recognized ESG or CSR lists, awards or external recognition related to ESG performance

Question 38

KPI for R&D:

Answer 38

IP tracking and issuing, third party estimates of IP value, awards related to R&D/innovation

Question 39

Importance of intangible assets and strategic comms:

Answer 39

building trust through transparency, awareness of info stakeholders don’t have access to, easy to understand/rally behind rather than financial statements, non-financial stakeholders base loyalty on non-financial information.

Question 40

Stategic comms and intangibles - how:

Answer 40

engage with stakeholders to understand which categories are important to them, identify areas of opportunity to share info, improve stakeholder relationships and business performance, committing to regular updates to maintain trust and credibility.