Internally generated intangible assets
factor.formula
The internally generated intangible assets at the end of period t are composed of knowledge capital $KC_{i,t}$ and organizational capital $OC_{i,t}$:
Intellectual capital is estimated by adding up the company's R&D expenditures minus depreciation:
The initial knowledge capital $KC_{i0}$ is estimated by using the perpetual growth model by assuming that R&D expenditure grows steadily:
The organizational capital is estimated by adding a portion of the selling and administrative expenses (SG&A) less depreciation:
The initial organizational capital $OC_{i0}$ is estimated by using the perpetual growth model by assuming that sales and management expenses grow steadily:
in:
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The depreciation rate of knowledge capital reflects the speed at which the value of R&D investment decays due to factors such as technology iteration and product obsolescence. Usually, an empirical value is taken, such as 30%, which means that 30% of R&D investment will become invalid every year due to the above reasons, thereby reducing the value of knowledge capital. This parameter is adjusted according to industry characteristics and the nature of R&D investment.
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The depreciation rate of organizational capital reflects the speed at which the value of sales management inputs decays due to market changes, personnel turnover, and other factors. Usually, an empirical value is taken, such as 20%, which means that 20% of sales management cost investment will become invalid each year due to the above reasons, thereby reducing the value of organizational capital. This parameter is adjusted according to the characteristics of the industry and the nature of sales management inputs.
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The proportion of sales and management expenses that is considered to contribute to the formation of organizational capital. This parameter is used to distinguish which parts of sales and management expenses are investments that help the company build long-term competitive advantages, such as brand promotion and customer relationship maintenance. Usually an empirical value is taken, such as 30%. This parameter needs to be adjusted according to the specific company's business model and the composition of sales and management expenses.
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It is used to calculate the perpetual growth rate of initial knowledge capital and organizational capital, assuming that R&D expenditures and sales and management expenses grow at a constant rate after the initial year. Usually, an empirical value is taken, representing the long-term average growth rate of the industry or company, such as 10%~20%. It can also refer to the forecast value of the macroeconomic or industry growth rate. The rationality of this parameter directly affects the accuracy of the initial capital estimation.
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The total amount of internally generated intangible assets of firm i at the end of period t is the sum of intellectual capital and organizational capital.
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The intellectual capital of firm i at the end of period t is the net value of its accumulated R&D investment after depreciation.
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The initial knowledge capital of firm i, used as the starting point for the recursive calculation, is derived using the perpetual growth model assuming that the firm's R&D expenditure grows at a constant rate before the initial year.
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The organizational capital of firm i at the end of period t is the net value of part of the accumulated selling and administrative expenses after depreciation.
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The initial organizational capital of company i, used as the starting point for the recursive calculation, is derived through the perpetual growth model assuming that the company's sales and administrative expenses grow at a constant rate before the initial year.
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R&D expenditure of firm i in period t.
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Selling and administrative expenses of firm i in period t.
factor.explanation
Traditional accounting treatments for internally generated intangible assets are usually not capitalized, but directly recorded as current expenses, which may underestimate the true value of the company, especially those companies that invest heavily in R&D and brand building. This factor aims to capture the value of these underestimated assets by modeling internally generated intangible assets, thereby more accurately reflecting the company's long-term competitive advantage and value creation capabilities. This factor can be used to construct a new valuation model or combined with other factors to improve the effectiveness of investment strategies. Especially for companies with high R&D investment or brand-driven, this factor can provide a more comprehensive value measurement.