Intangible Liabilities: a New Key in SCM

Abstract

Intangible assets are receiving constant attention from researchers through the concept of intellectual capital. These assets are important for the creation of value within an organization. Accounting and financial institutions are responsible for policy in relation to presenting reports on intellectual capital. However, researchers have not studied the origin of these assets and the possible obligations they may generate to the same extent. In this sense, most of the literature that includes the concept of intangible liabilities treats them as a mere reduction in intangible assets and only on a few occasions as a "future" obligation. Therefore, they could be reported, in accounting terms, as debt, obligations or future contingencies that may arise. As such, when they are cancelled, the firm would have to eliminate resources that include economic profits. One of the primary challenges faced by the specialized literature is to start measuring intangible liabilities in a similar way to intellectual capital, in order for their value to aid organizations to manage them. This paper aims to show the importance of intangible liabilities by analyzing the different definitions of this concept in order to establish a classification that also serves as a model for measuring contributions in SCM. In order to achieve this, we must establish a series of premises and analyze accounting and strategic frameworks. [PUBLICATION ABSTRACT]

Headnote

Abstract

Intangible assets are receiving constant attention from researchers through the concept of intellectual capital. These assets are important for the creation of value within an organization. Accounting and financial institutions are responsible for policy in relation to presenting reports on intellectual capital.

However, researchers have not studied the origin of these assets and the possible obligations they may generate to the same extent. In this sense, most of the literature that includes the concept of intangible liabilities treats them as a mere reduction in intangible assets and only on a few occasions as a "future" obligation. Therefore, they could be reported, in accounting terms, as debt, obligations or future contingencies that may arise. As such, when they are cancelled, the firm would have to eliminate resources that include economic profits. One of the primary challenges faced by the specialized literature is to start measuring intangible liabilities in a similar way to intellectual capital, in order for their value to aid organizations to manage them.

This paper aims to show the importance of intangible liabilities by analyzing the different definitions of this concept in order to establish a classification that also serves as a model for measuring contributions in SCM. In order to achieve this, we must establish a series of premises and analyze accounting and strategic frameworks.

Keywords: intellectual capital, intangibles liabilities, assets, indicators, management, models, SCM

JEL Classification: G32

(ProQuest: ... denotes formula omitted.)

Introduction

In recent years, intangible assets have been considered largely responsible for the competitive advantages of both companies and also countries. Authors such as Nonaka and Takeuchi (1995), Davenport and Prusak (1998) and Drucker (2003) postulate that the future competitiveness of enterprises will depend on their ability to create and use knowledge in an environment where key resources are information and knowledge. For this reason, many papers have studied the different variants and designations of intangibles.

For example, the Resources and Capacities Theory (Teece, Pisano and Shuen, 1997; Itami, 1987) and later studies focused on the effective use of that knowledge, acquiring the nomenclature known as Intellectual Capital. Different concepts, models and studies have been developed under the Intellectual Capital. However, another variant that is closely related to Intellectual Capital, namely Intangible liabilities, is receiving little attention from the literature. In addition, there are discrepancies over the concept itself and how to treat it.

In this paper we aim to measure these liabilities and analyze their relationship with the supply chain, aspects that have not been addressed by the literature to date. Knowing the value of these liabilities would make it easier for companies to manage them. Section 2 of the paper addresses the concept of intangible liabilities.

In Section 3, we analyze the main models used to measure them and propose a new model based on Nevado and Lopez (2002). Section 4 considers the relationship between the intangible liabilities and Supply Chain Management (SCM) and, finally, section 5 presents the main conclusions obtained in this paper.

1. Intangible liabilities

As emphasized in the introduction, many pages have been written about intellectual capital, proposing different models to measure it. However, there has been little concern for studying the origin of intangible assets and the obligations they entail.

This may be due to the absence of a link between intangible liabilities and intangible assets or, if a link does exist, to the fact that it is not easy to demonstrate or explain due to the intangible nature of these assets and liabilities. There are few studies on intangible liabilities (Harvey and Lusch, 1999; Caddy, 2000; Garcia-Ayuso and Larrinaga, 2004; Garcia Parra, M, 2006). After analyzing these papers, we can conclude that most of them consider intangible liabilities as a mere reduction in intangible assets. Only in some cases are they treated as a "future" obligation of the company (Harvey and Lusch, 1999).

In relation to the concept of intangible liabilities, García (2006) suggested the following definition after conducting a study in this field of research: "Debts and obligations of the company due to the tacit knowledge associated with business agents. These debts and obligations emerge as a result of perceptions and interpretations of the rights and obligations of these".

Now, the above definition suggests that the origin of these intangible liabilities is associated with the tacit knowledge of business agents. Furthermore, they are also considered present and non-monetary debts and obligations. From our point of view, this should refer to the entire spectrum of Intellectual Capital and we think that they are monetary and it is possible to establish a model to measure them.

Therefore, taking into account the review of the literature review and on the basis of our proposal, we consider intangible liabilities to be debts, obligations, contingencies and shares of the company stemming from its intellectual capital and which at maturity, the company will have to get rid of resources, leading to a decrease in future profits.

That is, intangible liabilities could be considered the origin or financing of intangible assets, or actions for their empowerment. Hence, intangible liabilities would be either a debt to fund intangible assets or contingencies that originate them. That is, obligations that are indeterminate as to the amount or when they are cancelled or actions to be taken to increase intellectual capital.

Therefore, intangible liabilities stem from the existence of intellectual capital in its different facets; human and structural (processes, relational, communicational, R&D+i), as considered in the intellectual capital model by Alfaro, López and Nevado (2011).

2. Proposal for the measurement of intangible liabilities

One of the greatest challenges faced by researchers in this field is to ascertain how to measure intangible liabilities in a similar way to intellectual capital in order to manage them and explain the relationships between them.

Several premises and existing frameworks must consider in order to measure intangible liabilities:

1) Accounting framework: international standards: IAS 38 (intangible assets), IAS 37 (provisions, contingent assets and contingent liabilities) and IAS 22 (business combinations).

a. IAS 38. Intangible liabilities are practically not mentioned.

b. IAS 37. Provisions would be current and probable obligations of the company as a result of past events. They are clearly specified in nature to the date that financial statements refer to, but are indeterminate as to their amount or maturity date, when the company is expected to get rid of resources embodying economic benefits. Provisions may be determined by a legal or contractual disposition or an implicit or tacit obligation. Standard 15 of the Spanish General Accounting Plan stipulates that in financial statements will report any contingencies in relation to obligations other than those referred to in the preceding paragraph. Similarly, the International Financial Reporting Standards (IFRS) for banking institutions establishes that contingent obligations must be recognized in the balance as liabilities when it is probable that the Bank has incurred in a liability.

According to international standards, valuation establishes that provisions will be measured on the last day of the financial year at the present value of the best estimate of the amount needed to cancel or transfer the obligation to a third party, registering the adjustments due to updating the allowance as financial expenses as they accrue.

Initially, the accounting rules in this area do not refer to intangible liabilities, although the idea of generic contingency could include some nuances of intangible liabilities that could serve for measuring them.

c. Goodwill. Accounting regulations refer to positive and negative goodwill. The most common is positive goodwill, which is often associated to intellectual capital. However, negative goodwill, which occurs when the value of acquired identifiable assets less liabilities exceeds the cost of the business combination. It is reported as income in the profit and loss account. In this case, a company is purchased for a price below its book value. As a result, the acquired company would not have intangibles, or they would have no value to appear on the balance sheet. In this case, it could be considered an intangible liability. But in our opinion, this is not accurate. Furthermore, it must be said that both positive and negative goodwill would only be present when one company buys another. Meanwhile, it is assumed that it would not be possible to register any goodwill.

2) Management and strategic framework. There are no studies on intangible liabilities for the purpose of their management. There are only mentions of actions required to enhance intangible assets, without addressing the causes behind their strengthening, which are often motivated by intangible liabilities.

Taking into account the above, researchers face great difficulties to ascertain how to understand and measure intangible liabilities. In our opinion, intangible liabilities involve three aspects:

1) Impairment of intangible assets and wealth.

2) Debts, obligations and contingencies of the company due to tacit knowledge.

3) Actions to strengthen or enhance intangible assets.

The impairment of intangible assets would be covered by the same model that measures intellectual capital by way of a decrease..

Therefore, conceptually, intangible liabilities do exist, because they have reduced wealth or intellectual capital. That is, for the assessment or measurement purposes, they would be captured by the intellectual capital model, decreasing it, providing the model is well defined and grounded.

Therefore, we believe that an increase or decrease in intangible assets is due to the debts, obligations and contingencies stemming from the tacit knowledge associated with all business operators and organizational structure, that is, its intellectual capital. Bearing in mind that cancelling such debt, obligations and contingencies entails removing resources that would include economic profits.

In this line, from a strategic perspective, intangible liabilities would be all the actions to be taken to achieve intangible assets. On the basis of the above, we could classify intangible liabilities using the same criteria as intangible assets, namely human and structural. As a result, we could establish, in line with the model by Nevado and López (2002) for intellectual capital, that:

Intellectual liabilities = Human + Structural + Non explicit ec.1

1) Human liabilities would be debts, obligations, contingencies and actions that stem from the tacit knowledge of individuals, their skills, training and motivation.

- Structural liabilities would be debts, obligations, contingencies and actions that stem from the tacit knowledge that is embodied in the structure of any organization. Thus, following a more disaggregated perspective, we have: process liabilities: concerning the quality of processes, products and services; relational or commercial liabilities: in relations with clients and suppliers; communications liabilities: in marketing, advertising, promotion, image; R&D+i liabilities: to achieve innovation and development potential.

2) Non explicit liabilities: any liabilities not included in the previous items.

In order to measure intellectual liabilities, we must therefore, firstly establish what the intangible asset is and hence be able to relate it to its possible origin, debt, obligations, contingencies and actions being responsible for the creation of that intangible asset.

Secondly, it would be necessary to establish indicators capable of measuring this intangible liability. There are two types of possible indicators:

1) Absolute indicators (AI): valued in monetary units and used in the composition of the indicator, as well as in the accounting model to be developed. Unrelated to other variables.

2) Relative or efficiency indicators (EI): percentage rates that fluctuate between 0 and 100 (0 and 1 at unitary level), 0 being the value that indicates the least favorable situation and 100 the most favorable.

Based on the above, intangible liabilities (IL) could be measured in the following way with k efficient indicators weighted (w), to each m liability (human and structural):

... ec.2

3. The relationship between intangible liabilities and SCM

Supply Chain Management (SCM) is responsible for carrying out the planning, organization and control of all activities that are part of the supply chain. Such activities are related to the management of: monetary flows and information services in a company's own supply chain.

The main aim is to maximize the product value handed over to the final consumer and, at the same time, to seek a reduction in company costs. In short, supply chain management is primarily responsible for providing customers with adequate products and delivering them on time and to the correct place at the required price and applying the lowest costs.

The supply chain brings together the business processes of multiple companies, as well as the different divisions and departments of the company. Defined in a simple way, SCM encompasses those activities associated with the movement of goods from the supply of raw materials to the final consumer. This includes selection, purchasing, production programming, order processing, inventory control, transport, storage and service to the client. But the most important thing is that SCM also includes the information systems required to control these activities.

SCM plays a key role in company competitiveness. It is a basic intangible asset because it contributes to the improvement of business results both in terms of profit margin and also in terms of improving deadlines, product quality and service and customer satisfaction.

In this sense, good SCM is fundamental and various tools related to information systems will help to improve it. For example, new technologies, and in particular the Internet, help to decrease the costs stemming from interaction with suppliers. We can therefore deduce from the above that good management of the supply chain is a fundamental intangible asset. However, this is on many occasions impossible due to the existence of intangible liabilities associated with the chain that limit appropriate management. In this case, we should try to avoid them, which require determining and managing them with an information and measurement system using indicators.

Conclusions

Knowledge of intangible liabilities and their measurement can help to improve the intellectual capital of an organization. This paper proposes a model for identifying and valuing intangible liabilities. SCM plays a role in intellectual capital, more specifically in process capital, and is becoming a key aspect of organization competitiveness. In short, SCM generates more value for the company, contributing to improve business results in terms of profit and also deadlines, product quality and service and customer satisfaction. In order to manage the supply chain correctly, it is essential to determine the intangible liabilities that limit it. In this sense, we propose indicators to measure them and also solutions to improve them. This research could be further extended by a practical application of the proposed model, greater detail of the process of generating indicators and even a practical connection between intellectual capital and intellectual liabilities.

References

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