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As we proved in the last articles on intellectual capital accounting for IC follows the same conceptual framework and double-entry bookkeeping as required for financial reporting under IFRS. We will from time to time introduce more articles such as the one below that continues the discussion on IC and knowledge management. As we referenced before, IC will not necessarily be readily accepted and will take a leap of faith by management to even discuss let alone entertain implementation. The biggest issues are not necessarily in identifying what constitutes IC but in the issue of determining a valuation i.e. assets and liabilities. It certainly goes without saying that any management would like to increase its assets, i.e. is balance sheet especially if that would result in obtaining additional funding pertaining to these newly reported IC assets. Relative to this issue, this article should prove to be an interesting continuation in our discussions. Others will follow in time.
INTRODUCTION
The change of the industry in knowledge-based capital (KBC) has been rising significantly in the past decades. Empirical research has shown that investments in knowledge-based capital, i.e. intangible assets, have become key drivers of economic growth across Western economies [1]. The need for creating a good financial foundation for all innovative knowledge companies becomes imperative.
The crucial actors in this process are the small and medium-sized enterprises (SMEs), especially start-ups and small innovative companies, who develop knowledge assets and exploit their increasing returns to scale. Nonetheless, young SMEs may face a number of difficulties in raising the capital or loans, necessary to grow, essentially because they are subject to high risks of failure and they have a very small or not existing amount on tangible assets.
In this context, intellectual assets (IA) have two attractive features that may help firms to unlock new investment or obtain more favourable financing conditions. Because of this challenge, the Intellectual Assets Bank [IAB] intend to provide commercial financial institutions (such as commercial banks, credit unions, VC’s, crowd lending companies etc.) a concept of guarantee based on the companies actual and future intangible assets.
The IA bank developed a series of audit and management methods in order to disrupt the concept of guarantee and increase the not only the financial basis of the SME’s but also their ability to manage their intangible assets in the future and create multiple money streams from these assets. The IA bank will help the innovative SME’s , to reveal to financiers, the quality of the firm’s management and of its technological capabilities Notwithstanding these view on the intangible assets of an organization, IA-based finance is actual under-exploited across Western economies, especially with respect to those young SMEs who need to open new financing channels. To create more efficient use of IA-based finance, the most experienced organizations in auditing and managing the intangible assets are creating a consortium that is capable of creating an Intellectual Assets Bank [IAB].
BUSINESS PROCESS
It is planned that JRC Capital will give to IAB the legal base for all operations. During the operations of IAB JRC will be responsible for all regulations, compliance, reporting etc.
InTraCoM will be responsible for the intellectual property valuation and securitization as collateral. Parallel to this InTraCoM will support the patent-giving clients in infringement research and licensing activities. Both services will be agreed with the client.
Entity IC will value the intellectual capital of the company and help to increase the value in intellectual assets against equity.
It is planned that IAB will give only guarantees to loan giving banks, up to max. 50% of the total loan which the bank gives to the debtor. IAB will backup the own guarantee of 50-80% by EIF or EIB.
IAB will have therefore 2 products: equity product and debt product.
The process for setting up the IAB is as follows:
The different investor types for IAB are illustrated in the following graph:
Market perspective
In the Eurozone, in the year 2017 loans volume was +/- of 560,000 b€ given to the European industry by Banks. In the Eurozone, there are +/- 59,000,000 companies (SMEs) registered [4]
Among them, total amount companies having more than 500K€ patent value are: 34,100 (=0,06 %) [1] 27% of SMEs in Europe are seeking for a loan [5] The rejection rate for SMEs is in average around 6%, but with high differences in Europe (i.e. Italy around 40%)
We assume that 9,000 of SMEs in Europe (27% of 34,000) with high IP value (>500K) with an average loan amount of 2 m€ generate the total market size for bank guarantees on collaterals to: 18.4 b€
With an average interest rate of 1.5% on guarantees and 0.5% of non-performing-loans the revenues generated out of 100m€ funds (leverage factor: 10) are 10 m€/ year. The expected R.O.I for investors is 10%/a.
These figures don‘t take into account the rest of the intangible assets of the companies.
Let’s now view a graphical PowerPoint perspective:
OVERALL CONCEPT
Based on the existing experiences and proven methodologies from Intracom & Entity IC from the one side and the need that exist on the SME market from the other side. In order to have a clearer view of the market and in order to structure our value proposition in a better way, based on the available expertise with Intracom & Entity IC. I suggest we use the concept of the 6 stages in the life circle of an SME. In there we will use the following criteria :
- Company growth in manpower and complexity, based on the crisis moments in the growth of an organization
- Having a knowledge mgt strategy ( explicit versus tacit )
Having an IP strategy & tactics
OVERALL CONCEPT continued next week
References
[1] OECD (2013), „knowledge-based capital, innovation and resource allocation”, in Supporting Investment in Knowledge Capital, Growth and Innovation, OECD Publishing. [2] http://www.economist.com/node/7068382 [3] Intangible Asset Market Value Study, Cate M. Elsten and Nick Hill [4] Research at Orbis Business data [http://orbis.bvdinfo.com] [5] http://www.ecb.europa.eu/Accounting Series – Article No: 34 (Published Feb 1st, 2019)
Accounting Theory – Advanced Part 24
Picture on the top: Pixaby
Categories: Accounting, Law
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