Andrea Gasperini
Credit Manager Gruppo Banca Leonardo S.p.a., member of EFFAS Commission on Intellectual Capital
It is necessary that the enterprises start a more transparent communication of the intangible assets and the financial analysts and investors adopt evolved methods to the evaluation
Publié le 25 Août 2011
In your opinion, do intangible assets and values represent an important part of the value of companies today? Which are the strategic intangible assets (human capital, brands, innovations, reputation...)?
In today’s economy is increasingly clear that the creation of assess in a sustainable manner is attributable to the availability of intangible assets that are identifiable and carry a specific economic value but remain nonetheless invisible in the financial statements: according to the most important international sources and conventional schemes, these assets are represented by Human, Structural and Relational capital.
• Human Capital coincides with the resources of the organization, knowledge, competences, motivations, ideas and behaviors.
• Structural Capital is made up of all the cultural aspects, operating modalities, implementation of efficient and effective processes, ability to draw advantages from technology, innovative spirit and design capability.
• Relational Capital is the set of relations that any organization has with all its stakeholders: customers, suppliers, financial experts, rating agencies, trade associations and, more in general the economic and social context of its operations.
Each entity owns / has access to intangible assets that fit into all of the above three categories although one of them may often be more significant than the others, depending on the company’s business model and / or sector, and only their mutual relationship can represent a significant value driver to market competitiveness - a distinctive feature vis-à-vis other competitors - and plays a strategic role for growth. “… a three-star restaurant is successful mainly because of the human capital embodied in its chef, a franchise such as Burger King relies on the capital structure of its recipes and proceedings, a small local restaurant is successful thanks to its customer capital – the waitress calls you by name and knows that you like coffee no sugar with a dash of milk (T.A.Stewart, 2002)”.
From your experience, which perception and importance do financial partners and stakeholders attach to your intangible assets ?
A more in-depth analysis reveals a quite different situation, which is almost a paradox to the recognition of the value of intangible assets, which often remains unexpressed in traditional accounting reports. Under this scenario, in fact, the contribution of Intellectual Capital to corporate success is partially evaluated and the strategies of management are often not explained in the financial reports.
Moreover, little emphasis is placed on the risks resulting from the inability to identify intangible assets or, even if properly identified, to manage and submit them to constant accumulation and improvement.
The recent events in the financial market have shown that the intangible assets may become intangible liabilities, which cause a value erosion in terms of reputation, increase of transaction costs with stakeholders, lack of attraction from investors and decrease in terms of market penetration of products/services. Such risks can therefore be defined as the negative impact that unpredictable events have on the targets of an entity, namely the possibility of losses due to uncertainty over the achievement of corporate targets.
It is necessary that the enterprises start a more transparent communication of the intangible assets and the financial analysts and investors adopt evolved methods to the evaluation. This is a typical chicken and egg story and who must make the first step ahead ?
The opinion of the companies is: - why should we elaborating an Intellectual Capital report, if financial markets are not able to price in our intangible assets ?
The opinion of the financial markets is: - why should we devoting time and resources to evaluate corporate intangible assets, if thereafter corporate are not disclosure them to the outside world?
In the pursuit of these goals, all relevant stakeholders have started pushing ahead in recent years. Academia has developed and tested various valuation methods. Governments – especially in Europe and Japan – and supranational organisations like the European Commission and the OECD have developed guidelines on IC-reporting, promoted the development of valuation tool kits and the realisation of pilot studies. Many companies took part in these pilot studies, evaluating and publishing Intellectual Capital Reports (currently some 150 to 200 companies in the Scandinavian countries, Austria, Australia, Germany, Italy, Japan etc.). Accounting standard setters are considering if and how to integrate more information on intangibles into traditional company reporting and capital market actors are strongly committed too.
Would you consider how companies communicate the intangible assets through the Annual Report, Road Show, shareholder dialogue, web, … sufficiently considered by the markets and the stakeholders? Is there an unfavourable “value gap” in this respect?
With reference to this point we described in Aiaf white paper number 113 “Intangibles: measurement and valorisation methods” written in collaboration with the University of Ferrara two paradoxical dictates.
The first, which takes on the features of a “reporting gap”, which may be summed up as follows: the market, operators, analysts, ratings agencies, and managers themselves increasingly need information and valuations in respect of a business’s intangible assets, which however they either do not have or do not manage to obtain or organise, due not least to the lack of measurement and reporting criteria and methodologies that are generally accepted and agreed.
The second paradox is based on the first: the financial markets generally assign a value to a business that is greater (and often several times greater) than the level of its net capital, thereby generating a notably positive “market to book value” ratio.
Commentators often attribute this phenomenon to the presence of intangible assets that have not been valued, to which the market would assign a value and consequently provide us with an overall valuation for the business being considered, which would then be reflected in stockmarket prices. The circularity of this reasoning is clear though. Commentators rarely fail to refer to the “market to book ratio” for supporting evidence and the first rough valuation of a business’s intangible assets, while it is a known fact that investors and analysts have yet to reach an agreement as to the methodologies that are most appropriate for the measurement and valorisation of such assets.
A potentially vicious circle is thus triggered, where a lack of information and reliable, accepted valuation methods for intangible assets may trigger “valuation leverage” related to the multiplication of the partial ignorance (see Herbert Simon) of operators in respect of this lack of ability to value intangibles, which risks forcing the rise or fall of stock prices, while presumably encouraging speculation-driven phenomena to appear.
It is just about appropriate to point out that systematic measurement of intangible assets (apart from the issuing of reporting the value of implicit assets) plays an important role for the company as well, forcing it to return to rethink the organisational set-up that transforms capital, responsibilities and work into productive activities that incorporate knowledge and awareness. The development of valuation and reporting systems suitable for this particular function is important not only for outside stakeholders but also for management itself, which thus undertakes to take on the role of leader in bringing together in an original and innovative manner “latent capabilities” and “internal competencies” with intangible and tangible assets.
As senior member of EFFAS CIC, you are a specialist on intangible assets. Would you prefer a more marked general evolution towards a new Business Reporting that would aggregate financial and extra financial elements (sustainable development, intangibles...)?
A Business Reporting, which includes, further to quantitative financial information, also qualitative (non financial) information about the ability of the enterprises to produce a sustainable value and the related risks is a theme that in the last months is conquering an elevated position in the agenda of the CEO and CFO and all of whom are professionally interested in business management and financial analysis in how much this is an open problem and is evidently still not resolved to which the actual reporting tools are not yet able to provide a definitive or a convincing answer.
When such informative demand is warned, it is natural and inevitable that begin an increasing search activity of practical solutions and progressively answer best and more suitable, that deal the elaboration of new method and tools of reporting, that include non financial Key Performance Indicators (KPIs) with the objective to provide an answer at least partly to the warned demand.
Such run sees involved on a theme so core business for the financial analysts, over obviously to a standard setter like Aiaf, that is already since the year 2000 involved in such themes with two work teams denominated “Mission Intangibles®” and “Analysis of the investments SRI”, also authoritative exponents of the academy, consultants and professional organisation. Among the most important organizations in October 2007 has begun the own activity the "World Intellectual Capital Initiative" (WICI) network (www.wici-global.com), that objective is to propose a new conceptual framework for the Business Reporting, useful to represent in more satisfactory and exhaustive way the various dimensions of the enterprise results, included that “intangible”, and to provide an ampler framework of non financial information, in the form of sectorial standard KPIs, directs to propose a more pregnant indications on the business values and on the future financial and competitive performance of the organization (lead indicators).
How would you analyse the advantages and the constraints or risks of this method?
The WICI reflections start from the recognition that the actual financial reporting don't satisfy completely the expectations, don’t provide enough information to optimize the ability of the users of such information to appraise the potential of value creation of an enterprise through the intangible assets, and to foresee the sustainability of the cash flows. This challenge of great understanding of the context and the business perspectives can be realized through an improved non financial disclosure that includes the most remarkable KPIs especially those connected to value generation and the sectorial drivers to the intangibles, a forward-looking information, as well as more articulated and penetrating managerial comments (a narrative disclosure) on such non financial quantities, on the strategy and on the business performance and on the processes of value creation linked with the non financial information.
Nevertheless, these information, to be useful, must be the result of a standardized measure and normally held fundamental for the enterprise value creation (don't be therefore vague or subjective), and to be auditable and comparable in the time and in the space.
With the purpose to answer to such complex challenge and to improve the importance and the transparency of the business disclosure, WICI has developed. a first version of a business reporting framework that includes the following elements:
• a general structure to order also temporally (past, present, future). the informative elements included in the new business reporting;
• the individualization of the necessary informative elements and the connected definitions, the descriptions of narrative character from the management and the definitions of the KPIs / Key value drivers of general and sectorial nature;
• the XBRL taxonomies to facilitate both to the preparers, and the users the predisposition, the access, the fruition and the analysis of the information included in the new business reporting framework.
The WICI Framework is established to be sufficiently flexible to be arranged the informative demands of the different stakeholders and aim to contribute to the fixation the best practices for the disclosure of the narrative information, how much of standard definitions and common metrics of the most remarkable KPIs for every sector, with the purpose to maximize the value of such non financial information when made public in conjunction to the traditional economic-financial measures.
Is an international frame of reference (“integrated reporting“) necessary?
Should it be general or defined by sectors? What should be its source (soft law / recommendations on a voluntary basis or hard law/norms)?
A standard international frame of reference is obviously absolutely necessary but not sufficient and the virtuous circle that we financial analysts hope can be started on a voluntary basis foresees:
1. the companies get used to efficiently measuring and managing its intangible value drivers (thereby boosting the efficiency of internal resource allocation);
2. by subsequently disclosing such drivers to the market, the companies raises their external visibility;
3. which yields a more adequate external recognition of its true potential for future value creation;
4. if the company is rich in intellectual capital compared to its peers, this enhances the company’s overall external valuation and reduces its cost of capital relative to its competitors;
5. this in turn (a) creates further incentives for the company to invest in the analysis and disclosure of its intellectual capital; (b) serves as a role model for other companies similarly well equipped with intellectual capital; and (c) drives those companies less well positioned regarding intangibles to catch up.
Which role is EFFAS CIC playing in this debate on intangible assets?
EFFAS CIC is the Commission on Intellectual Capital of the European Federation of Financial Analysts Societies and was founded in 2006. It is a standing commission of experts under the aegis of EFFAS whose goals and objectives in this debate on the intangible assets are following described:
• establishment and coordination of a consistent position by EFFAS on all relevant questions regarding Intellectual Capital valuation, measurement and disclosure
• identification and bundling of expertise regarding the issue of Intellectual Capital within the community of European financial analysts
• development of an overview of the current initiatives and experiences in US, Europe and Asia, and establishment of good contacts and a network of excellence with major experts world-wide
• institutionalise CIC as a global hub and a single point of contact of EFFAS for the discussion and development of new approaches regarding Intellectual Capital, based on the rich specific knowledge and experience of the community of financial analysts in Europe
• support of relevant task forces and working groups of the EU, OECD and other institutional initiatives on the issue by providing expertise and contributing to the development of a European and global framework
• represent EFFAS at international conferences dealing with Intellectual Capital and organising EFFAS-events on the topic together with international partners
• provision of information on the milestones in CIC activities on the EFFAS-website http://www.effas.com/en/commissions.htm.
Interview réalisée dans le cadre de la Tribune Sciences Po de l’immatériel, dirigée par Marie-Ange Andrieux, Deloitte.
Biography: Credit Manager Gruppo Banca Leonardo S.p.a., member of EFFAS Commission on Intellectual Capital and WICI Europe and responsible of Aiaf work team “Mission Intangibles®”.
After his degree in Economics, obtained with the highest honours in Italy at the University of Verona and the qualification of chartered accountant, he began his professional career in 1987.
Since 1993 is AIAF (Italian Association of Financial Analysts) member in charge of research projects and study of the working group “Mission Intangibles?” whose role is to guide, motivate and critical compare analysis on methods for measuring and communicate intangible assets and enhancement of intellectual capital. Since 2006 he is member for Italy of the EFFAS Commission on Intellectual Capital and member of WICI Europe.
In today’s economy is increasingly clear that the creation of assess in a sustainable manner is attributable to the availability of intangible assets that are identifiable and carry a specific economic value but remain nonetheless invisible in the financial statements: according to the most important international sources and conventional schemes, these assets are represented by Human, Structural and Relational capital.
• Human Capital coincides with the resources of the organization, knowledge, competences, motivations, ideas and behaviors.
• Structural Capital is made up of all the cultural aspects, operating modalities, implementation of efficient and effective processes, ability to draw advantages from technology, innovative spirit and design capability.
• Relational Capital is the set of relations that any organization has with all its stakeholders: customers, suppliers, financial experts, rating agencies, trade associations and, more in general the economic and social context of its operations.
Each entity owns / has access to intangible assets that fit into all of the above three categories although one of them may often be more significant than the others, depending on the company’s business model and / or sector, and only their mutual relationship can represent a significant value driver to market competitiveness - a distinctive feature vis-à-vis other competitors - and plays a strategic role for growth. “… a three-star restaurant is successful mainly because of the human capital embodied in its chef, a franchise such as Burger King relies on the capital structure of its recipes and proceedings, a small local restaurant is successful thanks to its customer capital – the waitress calls you by name and knows that you like coffee no sugar with a dash of milk (T.A.Stewart, 2002)”.
From your experience, which perception and importance do financial partners and stakeholders attach to your intangible assets ?
A more in-depth analysis reveals a quite different situation, which is almost a paradox to the recognition of the value of intangible assets, which often remains unexpressed in traditional accounting reports. Under this scenario, in fact, the contribution of Intellectual Capital to corporate success is partially evaluated and the strategies of management are often not explained in the financial reports.
Moreover, little emphasis is placed on the risks resulting from the inability to identify intangible assets or, even if properly identified, to manage and submit them to constant accumulation and improvement.
The recent events in the financial market have shown that the intangible assets may become intangible liabilities, which cause a value erosion in terms of reputation, increase of transaction costs with stakeholders, lack of attraction from investors and decrease in terms of market penetration of products/services. Such risks can therefore be defined as the negative impact that unpredictable events have on the targets of an entity, namely the possibility of losses due to uncertainty over the achievement of corporate targets.
It is necessary that the enterprises start a more transparent communication of the intangible assets and the financial analysts and investors adopt evolved methods to the evaluation. This is a typical chicken and egg story and who must make the first step ahead ?
The opinion of the companies is: - why should we elaborating an Intellectual Capital report, if financial markets are not able to price in our intangible assets ?
The opinion of the financial markets is: - why should we devoting time and resources to evaluate corporate intangible assets, if thereafter corporate are not disclosure them to the outside world?
In the pursuit of these goals, all relevant stakeholders have started pushing ahead in recent years. Academia has developed and tested various valuation methods. Governments – especially in Europe and Japan – and supranational organisations like the European Commission and the OECD have developed guidelines on IC-reporting, promoted the development of valuation tool kits and the realisation of pilot studies. Many companies took part in these pilot studies, evaluating and publishing Intellectual Capital Reports (currently some 150 to 200 companies in the Scandinavian countries, Austria, Australia, Germany, Italy, Japan etc.). Accounting standard setters are considering if and how to integrate more information on intangibles into traditional company reporting and capital market actors are strongly committed too.
Would you consider how companies communicate the intangible assets through the Annual Report, Road Show, shareholder dialogue, web, … sufficiently considered by the markets and the stakeholders? Is there an unfavourable “value gap” in this respect?
With reference to this point we described in Aiaf white paper number 113 “Intangibles: measurement and valorisation methods” written in collaboration with the University of Ferrara two paradoxical dictates.
The first, which takes on the features of a “reporting gap”, which may be summed up as follows: the market, operators, analysts, ratings agencies, and managers themselves increasingly need information and valuations in respect of a business’s intangible assets, which however they either do not have or do not manage to obtain or organise, due not least to the lack of measurement and reporting criteria and methodologies that are generally accepted and agreed.
The second paradox is based on the first: the financial markets generally assign a value to a business that is greater (and often several times greater) than the level of its net capital, thereby generating a notably positive “market to book value” ratio.
Commentators often attribute this phenomenon to the presence of intangible assets that have not been valued, to which the market would assign a value and consequently provide us with an overall valuation for the business being considered, which would then be reflected in stockmarket prices. The circularity of this reasoning is clear though. Commentators rarely fail to refer to the “market to book ratio” for supporting evidence and the first rough valuation of a business’s intangible assets, while it is a known fact that investors and analysts have yet to reach an agreement as to the methodologies that are most appropriate for the measurement and valorisation of such assets.
A potentially vicious circle is thus triggered, where a lack of information and reliable, accepted valuation methods for intangible assets may trigger “valuation leverage” related to the multiplication of the partial ignorance (see Herbert Simon) of operators in respect of this lack of ability to value intangibles, which risks forcing the rise or fall of stock prices, while presumably encouraging speculation-driven phenomena to appear.
It is just about appropriate to point out that systematic measurement of intangible assets (apart from the issuing of reporting the value of implicit assets) plays an important role for the company as well, forcing it to return to rethink the organisational set-up that transforms capital, responsibilities and work into productive activities that incorporate knowledge and awareness. The development of valuation and reporting systems suitable for this particular function is important not only for outside stakeholders but also for management itself, which thus undertakes to take on the role of leader in bringing together in an original and innovative manner “latent capabilities” and “internal competencies” with intangible and tangible assets.
As senior member of EFFAS CIC, you are a specialist on intangible assets. Would you prefer a more marked general evolution towards a new Business Reporting that would aggregate financial and extra financial elements (sustainable development, intangibles...)?
A Business Reporting, which includes, further to quantitative financial information, also qualitative (non financial) information about the ability of the enterprises to produce a sustainable value and the related risks is a theme that in the last months is conquering an elevated position in the agenda of the CEO and CFO and all of whom are professionally interested in business management and financial analysis in how much this is an open problem and is evidently still not resolved to which the actual reporting tools are not yet able to provide a definitive or a convincing answer.
When such informative demand is warned, it is natural and inevitable that begin an increasing search activity of practical solutions and progressively answer best and more suitable, that deal the elaboration of new method and tools of reporting, that include non financial Key Performance Indicators (KPIs) with the objective to provide an answer at least partly to the warned demand.
Such run sees involved on a theme so core business for the financial analysts, over obviously to a standard setter like Aiaf, that is already since the year 2000 involved in such themes with two work teams denominated “Mission Intangibles®” and “Analysis of the investments SRI”, also authoritative exponents of the academy, consultants and professional organisation. Among the most important organizations in October 2007 has begun the own activity the "World Intellectual Capital Initiative" (WICI) network (www.wici-global.com), that objective is to propose a new conceptual framework for the Business Reporting, useful to represent in more satisfactory and exhaustive way the various dimensions of the enterprise results, included that “intangible”, and to provide an ampler framework of non financial information, in the form of sectorial standard KPIs, directs to propose a more pregnant indications on the business values and on the future financial and competitive performance of the organization (lead indicators).
How would you analyse the advantages and the constraints or risks of this method?
The WICI reflections start from the recognition that the actual financial reporting don't satisfy completely the expectations, don’t provide enough information to optimize the ability of the users of such information to appraise the potential of value creation of an enterprise through the intangible assets, and to foresee the sustainability of the cash flows. This challenge of great understanding of the context and the business perspectives can be realized through an improved non financial disclosure that includes the most remarkable KPIs especially those connected to value generation and the sectorial drivers to the intangibles, a forward-looking information, as well as more articulated and penetrating managerial comments (a narrative disclosure) on such non financial quantities, on the strategy and on the business performance and on the processes of value creation linked with the non financial information.
Nevertheless, these information, to be useful, must be the result of a standardized measure and normally held fundamental for the enterprise value creation (don't be therefore vague or subjective), and to be auditable and comparable in the time and in the space.
With the purpose to answer to such complex challenge and to improve the importance and the transparency of the business disclosure, WICI has developed. a first version of a business reporting framework that includes the following elements:
• a general structure to order also temporally (past, present, future). the informative elements included in the new business reporting;
• the individualization of the necessary informative elements and the connected definitions, the descriptions of narrative character from the management and the definitions of the KPIs / Key value drivers of general and sectorial nature;
• the XBRL taxonomies to facilitate both to the preparers, and the users the predisposition, the access, the fruition and the analysis of the information included in the new business reporting framework.
The WICI Framework is established to be sufficiently flexible to be arranged the informative demands of the different stakeholders and aim to contribute to the fixation the best practices for the disclosure of the narrative information, how much of standard definitions and common metrics of the most remarkable KPIs for every sector, with the purpose to maximize the value of such non financial information when made public in conjunction to the traditional economic-financial measures.
Is an international frame of reference (“integrated reporting“) necessary?
Should it be general or defined by sectors? What should be its source (soft law / recommendations on a voluntary basis or hard law/norms)?
A standard international frame of reference is obviously absolutely necessary but not sufficient and the virtuous circle that we financial analysts hope can be started on a voluntary basis foresees:
1. the companies get used to efficiently measuring and managing its intangible value drivers (thereby boosting the efficiency of internal resource allocation);
2. by subsequently disclosing such drivers to the market, the companies raises their external visibility;
3. which yields a more adequate external recognition of its true potential for future value creation;
4. if the company is rich in intellectual capital compared to its peers, this enhances the company’s overall external valuation and reduces its cost of capital relative to its competitors;
5. this in turn (a) creates further incentives for the company to invest in the analysis and disclosure of its intellectual capital; (b) serves as a role model for other companies similarly well equipped with intellectual capital; and (c) drives those companies less well positioned regarding intangibles to catch up.
Which role is EFFAS CIC playing in this debate on intangible assets?
EFFAS CIC is the Commission on Intellectual Capital of the European Federation of Financial Analysts Societies and was founded in 2006. It is a standing commission of experts under the aegis of EFFAS whose goals and objectives in this debate on the intangible assets are following described:
• establishment and coordination of a consistent position by EFFAS on all relevant questions regarding Intellectual Capital valuation, measurement and disclosure
• identification and bundling of expertise regarding the issue of Intellectual Capital within the community of European financial analysts
• development of an overview of the current initiatives and experiences in US, Europe and Asia, and establishment of good contacts and a network of excellence with major experts world-wide
• institutionalise CIC as a global hub and a single point of contact of EFFAS for the discussion and development of new approaches regarding Intellectual Capital, based on the rich specific knowledge and experience of the community of financial analysts in Europe
• support of relevant task forces and working groups of the EU, OECD and other institutional initiatives on the issue by providing expertise and contributing to the development of a European and global framework
• represent EFFAS at international conferences dealing with Intellectual Capital and organising EFFAS-events on the topic together with international partners
• provision of information on the milestones in CIC activities on the EFFAS-website http://www.effas.com/en/commissions.htm.
Interview réalisée dans le cadre de la Tribune Sciences Po de l’immatériel, dirigée par Marie-Ange Andrieux, Deloitte.
Biography: Credit Manager Gruppo Banca Leonardo S.p.a., member of EFFAS Commission on Intellectual Capital and WICI Europe and responsible of Aiaf work team “Mission Intangibles®”.
After his degree in Economics, obtained with the highest honours in Italy at the University of Verona and the qualification of chartered accountant, he began his professional career in 1987.
Since 1993 is AIAF (Italian Association of Financial Analysts) member in charge of research projects and study of the working group “Mission Intangibles?” whose role is to guide, motivate and critical compare analysis on methods for measuring and communicate intangible assets and enhancement of intellectual capital. Since 2006 he is member for Italy of the EFFAS Commission on Intellectual Capital and member of WICI Europe.
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