Penalties For Plagiarism And Collusion: A Case Study
Executive Summary
Creative Technology Ltd is a Singapore-based company founded in 1981 and today, Creative is a worldwide leader in the digital entertainment product market. This report was commissioned to evaluate the two most important intangible assets that are not currently reflected in their financial statements. It is necessary to include intangible assets in the financial statements as they are crucial components in the valuation of a business. Hence, a critical evaluation of the two intangible assets which are not recognised in the financial statements; namely Copyright and Non-compete agreement, was conducted to justify why the aforementioned should be included in the financial statements. Finally, a stakeholder of the company, specifically the Chief Financial Officer, was identified who may possibly share differing views on whether the aforementioned intangible assets should be recognised.
Background of Company
Creative Technology Ltd (Creative) was founded in Singapore in 1981. Creative was credited for launching the multimedia revolution after developing the Sound Blaster sound card which set the standard for sound cards in PCs for many years. Today, the company is known globally, with regional headquarters in America, Europe and Asia, as a manufacturer and a leader in innovation of audio-based technology. Leveraging on their success with the Sound Blaster sound card, Creative has been manufacturing and spearheading innovation on audio and Personal Digital Entertainment (PDE) devices through their hardware, software applications as well as their services. With their mission of expanding their leadership role in the PDE market, Creative has recently launched their latest product, the Super X-Fi, which puts them back in the spotlight.
Intangible Assets
According to the IAS 38, an intangible asset is an asset that is identifiable, meaning that it is separable or arises from contractual or legal rights. It is also required to meet the definition of an intangible asset, where it is able to bring about future economic benefits and the cost can be reliably measured. In this case, the two intangible assets that Creative should possess are copyright and non-compete agreements.
Copyright
Copyright is an exclusive right to reproduce, publish and sell audio-based technology. It protects works such as digital software, computer programmes, music, film and photography, which in turn protects the company’s revenue earning ability and will bring future economic benefits. When you own the copyright of a work, you control the use and commercial exploitation of it. Therefore, if someone attempts to reproduce the works of Creative, the company has the right to sue the other party for damages in the event of a copyright infringement. The company can also generate income via royalty fees received from licensing the copyright. Creative has copyrighted its digital softwares and downloads. In addition, Creative features copyright for their contents on their website.
Evaluation of Copyright
Creative has been constantly innovating new products on a regular basis with products such as the Aurvana Trio (Audiophile grade in-ear headphones), the Sound Blaster K3+ (Portable Book-Sized Mixer Board) and the SXFI Amp (Super X-Fi Headphone Holography Technology) being launched this year in 2018. They have won various awards for their products such as the Best of CEDIA Award in 2017 and the Best of CES Innovation Award in 2018. Recently, Creative also bagged multiple awards with its milestone technology, Super X-Fi, at the 6th Annual WIPO-IPOS IP Awards, which honours the best and most active IP champions. These awards reaffirm Creative’s ability to constantly innovate new products in the market and since the awards are identifiable, the royalty fees for their digital software copyright are highly-valued. Apart from this, there is high demand for their products, evident in their latest sxfi. com online shop selling 600 units of the newly-launched Super-Xi amp headphone amplifier in the first 20 minutes. In addition, Creative has acquired ZiiLabs (previously 3DLabs) for $103. 7 million in 2002 where it possesses copyright for the software of its processors and graphic cards. Since Creative has acquired ZiiLabs, it means that they would have also acquired ZiiLabs’ intangible assets. Furthermore, when a parent company acquires another subsidiary company, it needs to consolidate the accounts in its financial statements. Hence, Creative possesses copyright as an intangible asset and it should be recognised in the financial statements.
Creative’s copyright should be valued using the Income Method, which analyses the income generating capacity of the property, in this case, the digital software for Creative’s individual products. Copyright generally lasts for 70 years plus the duration of the creator’s life. However, according to a study by Statistics Canada, the useful life of a software is estimated to be only about 3 to 5 years, which does not represent its entire lifespan. Therefore, the copyright value of Creative should be added every time a new product is developed, and amortised on a 3 to 5 year basis.
2. Non-Compete Agreement
Non-compete agreement is a contract between an employee and an employer, based on the idea that the employee agrees not to compete with the employer for a certain time period and within a specified geographic area. A non-compete agreement would help businesses retain valuable employees, safeguard inside information and prevent unfair competition. Non-compete agreement is an identifiable intangible asset (per ASC 805) and may require a fair value measurement along with other intangible assets.
Evaluation of Non-Compete Agreement
Creative is proven to be innovative in the products they won, clinching the IPOS Award for IP Champions - Most innovative. Thus, the ability to produce such highly innovative products would mean that there are trade secrets. Therefore, it is necessary to sign a non-compete agreement to deter replication and other companies from making use of the same technology and software to duplicate similar products. Creative has also acquired and reported non-compete agreement in their financial statement as an intangible asset from ZiiLabs from 2002 to 2004. However, the company has not been reporting non-compete agreement since 2005. Thus, Creative possess non-compete agreement as an intangible asset and should recognise it in the financial statements. In valuing non-compete agreement, on top of those acquired from ZiiLabs, Creative should also account for the value of the business’ products and the probable damage if there is a breach of agreement. It should also account for the likelihood of competition to the company.
Differing Views of Stakeholders
A potential stakeholder that might have a differing view as to whether copyright and non-compete agreement should be recognised as intangible assets is Mr Ng Keh Long. He is the incumbent Chief Financial Officer (CFO) of Creative. Prior to joining Creative, he was a senior manager at PricewaterhouseCoopers (PWC). He also holds a Bachelor of Accountancy from the National University of Singapore and is a member of the Institute of Certified Public Accountants in Singapore.
Copyright
Creative was established on the 1st of July, 1981. The CFO might not decide to recognise copyright as an intangible asset as the company innovated a multitude of products and conducted extensive research for many years. This translates to the associated costs being charged as expense in the Profit and Loss statement, resulting in no intangible asset being capitalised. The result of this accounting treatment is that many corporations who have spent inordinate amounts of cash over the years to develop valuable brands and copyright have not capitalized any of the associated costs; hence, their balance sheets do not reflect the real value of their intangible assets. This can be misleading for potential investors. Not recognising copyright as an intangible asset can also work in the favour of Creative. The entity does not have to absorb the amortization costs to reflect the ongoing consumption of the value of this asset since the entire cost was charged to expense. In addition, according to the FRS, a sudden loss in the value of an asset can trigger an impairment, which would adversely impact net profits.
Non-Compete Agreement
Although non-compete agreement is recognised in Singapore, the Singapore courts are quite reluctant to enforce the contractual clause as it restrict an individual’s ability to make a living. As such, non-compete agreement also usually have to be limited to be enforceable. Since non-compete can only go so far, garden leave (whereby an employee leaving a job – having resigned or otherwise had their employment terminated – is instructed to stay away from work during the notice period, while still remaining on the payroll) is sometimes used to effectively “extend” this period. The valuation of non-compete agreement as an intangible asset can be done through two methods; Differential Valuation Approach and Direct Valuation of Economic Damages Approach. However, the process of valuation is subjected to factors such as geographical and durational restrictions which are subjective and thus cannot be measured reliably. Additionally, the CFO might perceive that since the non-compete agreement was not an asset before the sale and as it was through the sale that it was brought into existence, it is not recognised.
