VideoDiFrancesco gets involved in the nitty-gritty of intangible asset management with clients. A large part of her job is to classify an operation's assets--both tangible and intangible--in order to determine the returns they generate and the impact they have on corporate performance. To rationalize the process, DiFrancesco uses three "buckets": physical capital, technology capital, and human capital. She then calculates returns on the three sources of capital, with the aim of optimizing a company's mix of tangible and intangible assets.
James O'Shaughnessy, chief intellectual property counsel at Rockwell International, uses slightly different language. His buckets are organizational capital, intellectual capital, human capital, and a fourth category he calls complementary business assets, which includes such things as the leadership qualities of management as well as unique distribution and sales channels that help companies convert intangible capital to revenue. "There's no point generating intangible assets if you can't convert them to revenue," says O'Shaughnessy.
For CFOs, just keeping track of the language is a major effort. The trick, says O'Shaughnessy, is to get executives to understand that value is a function of financial and intangible capital. "The more intangible capital you have," he says, "the less financial capital you need."
Simple enough in any language. -- A.O.
GOODWILL REDUX
ON FEBRUARY14, the Financial Accounting Standards Board issued new accounting rules for business combinations. The pooling-of-interests method remains headed for the scrap heap when a final statement is issued, most likely in June. But, as a compromise, FASB radically altered the rules for the purchase method of accounting. Rather than amortizing goodwill to income, companies will now periodically review the asset for impairment.
The issues of how and when to conduct such reviews have given FASB fits since it took up the topic of business combinations accounting in August 1996. "The treatment for purchased goodwill has been the most challenging issue in our project," conceded chairman Edmund Jenkins in a FASB press release last December. Nevertheless, the accounting standards body has finally proposed details.
The circumstances that will trigger impairment reviews of goodwill include, but are not limited to, cash-flow losses at reporting units carrying goodwill assets, adverse technology changes, increased competition, and loss of key customers or employees. The trigger could be a negative change in the legal or regulatory environment, a credit- rating downgrade, or even an "other than temporary" decline in the company's stock price. In other words, any significant bad news could prompt the call for an impairment review.
Once a decision to review is reached--sure to be a new political football among regulators, auditors, and companies--there remains the tricky issue of how to determine the "fair value" of a reporting unit and its associated goodwill. FASB favors the use of market prices if transactions involving similar assets have recently been completed. But more often, firms will have to rely on valuation metrics such as discounted future cash flows, option pricing models, or fundamental analysis. The decisions about which method to use and how to apply it will be left up to companies, their auditors, and the SEC. "It's going to be a very political process," says Applied Materials CFO Joseph Bronson, "and a big source of revenue for the Big Five [accounting firms]." -- A.O.
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