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11. Broadening the fixed asset boundary to include other intellectual property assets

 The issue

Innovation

The introduction of the 1993 SNA Rev. 1 is seeing the expansion of the fixed asset boundary to include expenditures on research and experimental development (R&D) as defined by the Frascati Manual (FM), namely: ‘research and experimental development to comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and use of this stock of knowledge to devise new applications.’ The FM identifies three principal components of R&D and defines them thus:  
a) Basic research, defined to be experimental or theoretical work undertaken primarily to acquire new knowledge or the underlying foundation of phenomena and observable facts without any particular application or use in view;  
b) Applied research, defined to be original investigation undertaken in order to acquire new knowledge… directed primarily towards a specific practical aim or objective;  
c) Experimental development, defined to be systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.  

It is evident that R&D captures part, but not all, of the innovation process. It excludes expenditures by the production and engineering departments of an enterprise on developing new products and the systems to produce them and staff training. These same departments may also be responsible for identifying a potential new product and referring it to the R&D department to develop the science behind it.  

In addition, an enterprise may incur other expenditures before a new product goes to market. These include market research to determine the demand for the product and marketing expenditures to promote the new product.

Marketing assets

Marketing assets include brand names, mastheads, trademarks, logos and domain names. Marketing is a key driver of brand value and big corporations invest heavily in building and supporting their brands by advertising, sponsorship and other measures to build a positive image with customers. A brand can be interpreted as far more than just a corporate name or logo. It is the overall impression a customer or potential customer gains from their experience with the company and its products. Interpreted in that wider sense it can also be seen to encompass some of the key characteristics of goodwill such as customer loyalty. Also, investment to build and support brands would seem to go hand in hand with research and development aimed at developing new or improved products. One issue that would have to be resolved is whether all marketing costs could be classified as investment or whether some is in the nature of current consumption. A detailed analysis should be made of the business accounting recommendations in this field.

Human capital

Apart from any staff training required in bringing a new product to market, innovation expenditures are disembodied from the people undertaking the innovation. Therefore they exclude to a large extent the “investment in human capital”.  

Human input is the major input in most production processes, and the value of that input is to a large extent dependent on the knowledge that humans bring to the production process.  It is well recognised that an educated population is vital to economic well-being in most countries.

The gaining of knowledge by humans entails the provision of education and training services by parents, private and public education establishments and employers, and the effort made by people to acquire knowledge. Expenditures by households and government on education and training are recorded as final expenditures (and actual final individual consumption by households) in the System, and such expenditures by enterprises are recorded as intermediate consumption. The unpaid training provided by parents, relatives, etc. and the effort made by people to acquire knowledge are outside the System



 Reasons for inclusion in the Research Agenda

Innovation

All innovation is undertaken with the expectation of recovering the costs over a number of years, or, looked at another way, it is expected to provide benefits to the enterprise over a number of years that have a present value at least equal to the costs incurred. Thus innovation expenditures have the characteristics of fixed assets.  To further this issue, a detailed analysis should be made of the business accounting recommendations in this field.

If expenditures on the innovation process should be extended beyond R&D, how should its scope be defined and how should capital formation, consumption of fixed capital and capital services be measured?

Marketing assets

Expenditure on advertising is large. For example, total advertising expenditure in Australia is currently around A$20 billion a year which is close to 3% of GDP and more than double the magnitude of expenditure on research and development. This could possibly provide a practical means of accounting for these important intangible assets as produced assets. A disadvantage is that the 'cost of creation' approach may not necessarily provide a realistic estimate of brand value, but we also have this problem for other produced intangibles in SNA including research and development (if it is adopted into SNA). Another problem is how to dissect marketing into brand building and intermediate consumption components. For those expenditures identified as being of a capital nature how should consumption of fixed capital and capital services be measured?

Human capital

It might be argued that some forms of knowledge make no contribution to future production, while other forms, such as training in numeracy and literacy, do. Also, other than the individual being educated, those incurring the expenditure of providing education and training generally have no, or only partial, control of the human capital created.

To what extent, if any, should the acquisition of knowledge by humans be recorded in the system as fixed capital formation? What should be recorded as capital formation in satellite accounts if excluded from the core accounts? How should capital formation, consumption of fixed capital and capital services be measured.



 References

Papers on the Canberra II EDG:
John R. Baldwin, Desmond Beckstead and Guy Gellatly, Canada’s Expenditures on Knowledge Capital, 11F0027 No. 0XX, ISSN: 1703-0404, Statistics Canada, February 2005
Tony Johnson, Goodwill and Other Intangible Assets in the SNA, Australian Bureau of Statistics, September 2005



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