Conceptual Framework for Understanding Intangible Assets and Problems Concerning Information Disclosure

From the perspective of the relationship between knowledge and risk in value creation, in this paper we aim: 1) to sort out a basic framework for discussions on the development of methods to identify and valuate intangible assets in corporations and to discuss information disclosure policies; 2) to understand the processes by which companies create value using such intangible assets; and 3) with on this understanding, to give some ideas concerning desirable forms of information disclosure. In other words, the paper seeks: 1) to develop a means of understanding the relationship between uncertainties concerning corporate value-creation capabilities (risks and opportunities) and intangible assets; 2) to develop a conceptual framework for measuring and valuating intangible assets; and 3) to discuss policies for information disclosure on intangible assets held by companies. The keywords are "knowledge" and "risk," respectively, as value-creating and value-destroying factors, which interact and promote evolution in the environment of corporations.



Corporate value, as referred to here, means the net present value (NPV) of future benefit cash flows, in a narrow sense, and the NPV of total future values for stakeholders in a broad sense. An asset is defined as anything that contributes to or is recognized as contributing to value-creation. Risk is defined as any contingency that may affect a company's ability to achieve its goals, or cause changes to value flows or income cash flows in the future. Value is here viewed as a random variable subject to the uncertainty of future events and variations, whereas risk is measured as the magnitude of possible downside movements of value thus defined. Therefore, it should be noted that both value and risk are not only an ex-ante concept in forward-looking perspectives, but also they are the "two sides of the same coin"(random variables) so long as the value-creation usually referred to is an addition to the mean of the distribution of the random variable. The approach taken in the European Union document "Study on the Measurement of Intangible Assets and Associated Reporting Practices," which illustrates a series of new approaches to the measurement and reporting of intangibles, is characterized as a knowledge- and resources-oriented approach. In contrast, this research project generally aims to develop arguments based on a risk- and process-oriented approach. This paper, the first of the three parts of the project, discusses the basic foundation of these arguments.