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Intangible Assets and Related Disclosures

2 Contents Executive summary........................................................................................................3 Introduction....................................................................................................................3 1. Brief background of the companies selected......................................................5 2. The companies intangible assets and related disclosures..................................6 Conclusion......................................................................................................................9 References....................................................................................................................10 Appendices...................................................................................................................11

3 Executive summary As you know, intangible assets are one of the major components of a companys property. Experts define intangibles as assets, which cannot be measured, felt, touched or seen, but which have a value and can bring a company some benefits in the future. Intangible assets comprise patents, franchises, government licenses, brand marks, copyrights, etc. They can be also defined as assets, which directly contribute to efficiency and successful financial performance of a company. There are some rules and regulations, concerning proper disclosure of intangible assets, which must be followed by all businesses. These requirements can be seen in AASB 138 Intangible Assets. For my research, I have chosen two companies, which operate in the field of modern technologies and communication Nokia Corporation and Apple Inc. In this paper, I would like to study financial statements of both companies, outline major principles of financial information disclosure and give some recommendations.

Introduction Have you ever considered the significance of intangible assets for a business and what this notion means? Generally speaking, intangible assets can be defined as non-monetary assets, which cannot be touched, seen or measured, but they are real and created by great efforts and during a definite period of time. In my paper, I would like to study the notion of intangible assets and related disclosures, analyzing the financial performance of two companies Nokia and Apple Corporations. Intangible assets are identified as separate assets and anyone can see related information on a companys balance sheet. Experts distinguish two primary forms of intangibles legal (trademarks, copyrights, patents, etc.) and competitive intangible assets (knowledge activities, for example, know-how; leverage and collaboration activities, etc.). In

4 fact, legal intangibles are known under the term intellectual property. On the other hand, competitive intangible assets directly influence productivity, effectiveness, opportunity costs and wastage within an organization. Companies often have in their ownership things, which cannot be seen or felt and are represented by brand names, patents, trademarks, government licenses, franchises and goodwill. In its turn, goodwill comprises a block of intangible advantages over competitors such as business connections, an excellent and stable reputation, feasible strategies, strategic location, etc. Though technically goodwill is an intangible asset, it is usually present as a separate item on a companys balance sheet.

Usually companies account for intangibles as they account for natural resources and depreciable assets. The cost of these assets is systematically allocated to expenses during the assets legal life (which must not exceed forty years). This process of allocation is usually called amortization and businesses often use a straight-line method to amortize their intangibles. Some experts advise to ignore the amount assigned to intangible assets, while analyzing a companys balance sheet. These assets may worth a huge fortune in real life (for example, brand name of Coca-Cola or Pepsi), but investors or other interested people can see the real value of intangibles only in an income statement.

It is an open secret that a company owns many types of property, which is usually disclosed on a companys financial statements and on a balance sheet in particular. As a type of a companys property, intangible assets have their own value and must be accounted for. As a result, intangibles are usually considered to be fixed assets, because they can be difficult to convert to cash. As it has already been mentioned, it can be sometimes quite difficult to calculate the value of intangibles that is why managers may compute ratios to show a

5 companys health both including and excluding the intangible assets from the calculation (EHow).

Brief background of the companies selected Nokia Corporation is a Finnish multinational company, which is headquartered in Keilaniemi, Espoo. The company produces mobile electronic devices, mostly mobile phones and other electronics, related to communications, Internet and communications industries. It also offers a wide range of Internet services, such as music, maps, games, different applications, messaging and media through the companys Ovi platform, and navigation services through subsidiary Navteq. Moreover, it employs more than 132,000 employees in 120 countries; has its markets in over 150 countries and global annual revenue of over 42 billion. In 2011 it was the largest producer of mobile phones, occupying 23% of global device market share. In the first quarter of 2012 Nokia was the second (after Samsung) vendor of mobile phones and had a global market share of 22.5%. Nokia is a public limited-liability company listed on the Helsinki, Frankfurt, and New York stock exchange (Nokia). Apple Inc. is the US multinational corporation, which designs, manufactures and sells consumer electronics, personal computers and computer software. The companys famous hardware products include Macintosh line of computers, the iPad, the iPod and the iPhone. The company is the third largest mobile phone producer after Nokia and Samsung. Moreover, Apple is the biggest publicly-traded corporation in the world by market capitalization, with an estimated value of US$626 billion (September 2012); the largest technology company in the world with profits higher than in Google and Microsoft combined. In 2011, Apple had 364 retail stores in thirteen countries as well as the online iTunes Store and Apple Store (Apple). The companys major competitors are Nokia, Samsung and Motorola. Apples

6 marketing strategy includes creating innovative products and services together with a digital hub strategy, delivering exceptional experience through super user interfaces (Marketing Minds). The companies intangible assets and related disclosures Usually, financial statements should include a method for intangibles evaluation. On the balance sheet the data should be disclosed separately for negative goodwill and positive goodwill. These data should be as follows: the cost at the beginning and at the end of the period; the net carrying amount at the date of balance sheet; all movements, including transfers, additions, disposals, reevaluations, amortization, losses and amount of negative goodwill, etc. (HM Revenue & Customs). At first, lets study Nokias balance sheet and intangible assets disclosures. For this purpose, we will use consolidated financial statements of Nokia for the period of 2011. First of all, we can say that Nokia possesses $8,101 million of intangible assets, including $6,277 million of goodwill and $1,824 million of other intangible assets. Accumulated amortization is equal to ($ 5,800) million. It is obvious that in due course the amount of intangibles (their value to be precise) is increasing. We can see more detailed information and a five-year tendency on Exhibit 1 (Market Watch).

Exhibit 1.

7 Having studied the annual report of Nokia, we can state that the company has followed all necessary rules and regulations, concerning the proper representation of financial data and disclosure of intangible assets. According to AASB 138 Intangible Assets, an organization should differentiate between internally generated and other intangible assets; if useful lives are finite, a company should state a method of amortization and related rates; if an asset has an indefinite life, a company should disclose the carrying amount of that asset; moreover, a company should state the aggregate amount of research and development expenditure during the period (ComLaw). Nokias other intangible assets, net book value declined from 2009 to 2011 and, at the same time, goodwill increased from 2009 to 2010, but then declined significantly from 2010 to 2011; the total amount of intangible assets declined from 2009 to 2011. The company evaluates the carrying amount of identifiable intangible assets and goodwill annually, taking into consideration different factors, which may cause the impairment (for instance, negative economic trends, changes in the companys strategy or significant underperformance) (Stock Analysis on Net).

In 2011 annual report of Nokia, we can find capitalized development costs - 1,035 million; goodwill - 6, 631 million; other intangible assets - 5, 437 million. It should be also mentioned that we can find there the information about acquisitions, additions and disposals of intangibles; furthermore, the amount of amortization for the period, accumulated amortization and net book value. You can find more detailed information in the Appendix 1.

Lets proceed to Apple Inc. The company is currently amortizing acquired intangible assets with definite lives (usually from three to seven years). In September 2011, total amount of acquired intangible assets was $3,536 million (net carrying amount). During 2010 and

8 2011, Apple completed a range of different acquisitions (Exhibit 2). In 2011, the aggregate cash consideration, net of cash acquired, was $244 million, of which $167 million was allocated to goodwill and $77 million to acquired intangible assets. Indefinite lived and nonamortizable trademarks were in the amount of $100 million (Wikiinvest). As of September, 2011, Apples gross carrying amount of goodwill was $896 million and in recent years the company did not have any impairments of goodwill, which was primarily allocated to the US and Europe reportable operating segments. In 2011, amortization expense related to intangibles was $192 million and the average amortization period for acquired intangible assets was 6.2 years. In 2012 and 2013, the expected annual amortization expense is $520 million and $596 million respectively (SEC).

Exhibit 2. Having studied the financial statements and intangible assets disclosures of Nokia and Apple, we can state that there is some difference between them. At first, we should say that, generally, the disclosures made by each company are consistent with the requirements of AASB 138 Intangible Assets. Each company differentiates between finite and indefinite intangibles, as well as between internally generated and acquired ones; they also disclose the amounts of intangibles and amortization expense at the beginning and at the end of the period. As it has already been mentioned, there is a difference between companies in the representation of intangible assets and related disclosures. Nokias financial information is more detailed; we can find there facts about additions, disposals, retirements, acquisitions, net

9 book values and accumulated amounts of intangibles and amortization, etc. On the contrary, Apple provides us with more general information, concerning acquired intangible assets, disclosing only gross and net carrying amounts of the assets and accumulated amortization. To my mind, Nokia provides the most proper and full information about its assets, while Apple discloses only information for general use.

Conclusion To sum up, I would like to say that proper representation of financial data is extremely important, because there are many interested users, such as shareholders, customers and potential investors, who are eager to know the real picture of the companys financial health. Nowadays, intangible assets have become more common and are used by a great number of businesses all over the world. Intangible assets mean non-monetary assets of the company, which cannot be seen or measured, but which will bring real benefits in the future. The information about a value of intangible assets on a balance sheet may be quite deceptive, that is why we should pay more attention to income statements of the company. There are some requirements for proper disclosure of intangibles that must be followed by every business. In my paper, I have studied the financial statements of two resembling companies Nokia Corporation and Apple Inc. Generally, both companies follow the requirements for intangible assets disclosures, but Apple Inc. does not show all the necessary details, such as additions, disposals, acquisitions and other movements of intangibles during the period. That is why I would like to recommend this company to disclose its intangible assets more precisely, using the governmental requirements as a guideline. Apple should disclose all impairments and acquisitions in order to improve the present situation and make up feasible planning for the future.

10 References Apple (official site), accessed 23 September 2012, < http://investor.apple.com/> ComLaw, accessed 23 September 2012,

<http://www.comlaw.gov.au/Details/F2009C01116> EHow, accessed 23 September 2012, <http://www.ehow.com/info_8609855_shouldassets-disclosed-balance-sheet.html> HM Revenue & Customs, accessed 23 September 2012,

<http://www.hmrc.gov.uk/manuals/cirdmanual/cird30600.htm> Market Watch, accessed 23 September 2012,

<http://www.marketwatch.com/investing/stock/nok/financials/balance-sheet> Marketing Minds, accessed 23 September 2012,

<http://www.marketingminds.com.au/branding/apple_branding_strategy.html> Nokia (official site), accessed 23 September 2012, <

http://www.nokia.com/global/about-nokia/investors/financials/reports/results---reports/> SEC, accessed 23 September 2012,

<http://www.sec.gov/Archives/edgar/data/320193/000119312511282113/d220209d10k.htm> Stock Analysis on Net, accessed 23 September 2012, < http://www.stock-analysison.net/NYSE/Company/Nokia-Corp/Analysis/Goodwill-and-Intangible-Assets#Disclosure> Wikiinvest, accessed 23 September 2012, <

http://www.wikinvest.com/stock/Apple_(AAPL)/Goodwill_Other_Intangible_Assets>

11 Appendices Appendix 1.