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The paper offers some considerations on investment project valuation from an entity-firm perspective. Once recognised the role of firm’s complementarities, uniqueness, path-dependent decision-making, bounded-rationality and organizational processes, a different approach to investment projects valuation and selection management arises, which is different than that proposed by standard finance theory and based on CAPM. Standard finance theory, according to CAPM, identifies risk as the standard deviation of a project’s expected returns, and claims that only systematic risk must be considered. The entity-firm perspective, on the contrary, defines a different concept of risk (the Negative Whole Risk) and calls for considering the whole risk of the project and the expandability of the firm’s opportunity set. A Minimum Acceptable Rate of Return for alternative investment projects must be set, that takes into account a project’s whole risk and the expandability of the firm’s opportunity set. A role for active risk analysis and management processes is clearly recognised, and the innovative capabilities of the firm are introduced so superseding the market completeness assumption upon which is based the standard finance theory. An analysis is offered, that focuses on the main determinants of the Minimum Acceptable Rate of Return for investment project valuation. From the entity theory perspective a new interpretation emerges of some phenomena, such as the role of financial slacks, the underinvestment effect and the importance of the whole risk related to the project. In the new perspective Minimum Acceptable Rates of Return are endogenously and subjectively set, and they act more as organizational control tools than as a tool for the fair valuation of investment projects. Finally, different rates act as reference points for the investing side and the financing side.

Purpose– A recent stream of literature identifies the arising of a third stage in Intellectual Capital Accounting Research, which addresses the praxis of IC as it is implemented in organisations, rather than re-creating a static analysis of IC, as it is represented by contemporary measurement frameworks and their associated theory or theories. To such a development is also associated the necessity to abandon Grand Theory in favour of the analysis of what really happens inside the firm.Despite of the importance of deeply analysing IC in the way it is managed and valued by specific firms, some perplexities nevertheless arise in the dualism between theory and practice.The paper focuses on the ambiguities that the metaphorical use of the concept of capital can generate on both theoretical and practice-oriented research. Ambiguities here analysed refer to: 1) the understanding of IC as composed by apparently homogenous and separable units; 2) whose elements are assets; 3) which of are expected to be under the proprietorship of someone IC elements as assets; and 4) expressible in monetary terms in the balance sheet.Design/methodology/approach– The paper is a conceptual paper.Originality/value– The paper contributes to the extant literature by contributing at clarifying some of the differences between the traditional concept of capital and IC that the use of metaphor has covered. Since practice-oriented research cannot be completely theory-free, this goal is of course useful also for this kind of research.

International Accounting Standard 16 states that tangible assets’ depreciation method shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Moreover, it allows a variety of depreciation methods, including the straight-line method, the diminishing balance method and the units of production method, according to the expected pattern of consumption of the asset.While in principle the three methods are expected to generate depreciation consistent with the consumption of asset, they strongly modify accounting numbers. The choice of depreciation method is expected to influence both the managers’ decision making and financial reporting figures.This paper focuses on the units of production method (UPM) in order to highlight the effects on both financial figures and managerial decision-making. The paper shows how the UPM transforms depreciation into a quasi-variable cost, therefore affecting volume-based decisions, and finally the break-even point of the firm.Using a simulation model and comparing UPM to the common straight-line method (SLM), the paper also shows UPM’s effects on financial statements. Depending on market conditions, different return ratios, leverage, and variance in financial indicators are expected, so leading to potential differences in investors’ and financial analysts’ decisions. Also impairment test is modified by the different depreciation method used, both in magnitude and in the time of its occurrence.Finally, the paper presents the Brevini Power Transmission Group (BPT) case study, an Italy-based company operating in the power transmission industry, with plant in Italy, Germany, and China. The rationale for the analysis of the BPT case study is threefold. Firstly, BPT is a capital-intensive company, and therefore the choice of a depreciation method is of a paramount importance for the effects it can produce on the decision-making process as well as the accounting figures and results the company discloses.Secondly, BPT employs the Overall Equipment Effectiveness (OEE) as one of the most important KPIs for efficiency improvement within the lean manufacturing system BPT has implemented over the last years. It qualifies to apply UPM thought the weekly calculation the hours worked by each machine.Finally, BPT has recently adopted IAS/IFRS choosing the UPM for the depreciation of work centers where it manufactured and assembled his components and whole units. This has led to great differences with respect to the Italian GAAP previously adopted. The choice has impacted on administrative and IT process, and their link to the Manufacturing Information System.The main contribution of the paper to the extant literature is the focus on the effects that different methods of depreciation have on financial decision-making. At the same time it explores a little employed method for depreciation, comparing it to the widespread SLM.The paper is also beneficial for practitioners since it integrates a theoretical approach with both simulation and the study of a real company using UPM.

While the first large enthusiasm towards intangible resources drove to their complete identification as assets, therefore focusing on their positive role in value creation, some scholars later argued that also intangible liabilities were to be taken into consideration. Such an 'assets versus liabilities approach' offers some new insights for the management of intangibles, but it continues on the old tradition, since it states that some intangible resources are assets whereas some other are liabilities within the same context.This paper offers a different perspective of analysis of intangible assets based on the canons of Socio-Economics and on the role those assets play in value generation, value protection, and value distribution and appropriation processes.The paper argues that some characteristic of intangible assets that contribute to protect a firm’s value, are also responsible for strategic rigidity. Again, it also reflects on the weak property rights regime on intangible assets, arguing that if it makes difficult for the firm a full management of those assets makes nevertheless possible the coproduction of intangible assets.

This paper elaborates on the fundamental role that a theory of the firm can play in order to develop a clear and consistent proposal on accounting for and reporting on intangibles.Departing from some criticisms addressed against IAS/IFRS and SFAS, the paper analyses how intangibles could be consistently accounted for and reported on within four different theories of the firm, namely the Agency Theory, the Transaction Cost Economics, the Resource-Based View, and the Dynamic-Capabilities View of the firm.The paper focuses on some specific problems related to the definition and identification of intangibles, to their recognition and finally to their valuation and measurement, and offers a critical understanding of the different proposal on accounting for intangibles developed within the five theories of the firm.So doing, the paper helps to better understand some critical issues, such as the different importance of internally generated intangible asset, their fair-value versus cost-based valuation, and the relative importance of balance sheet and income statement.

Risk-return association is one of the major concerns for economics and business disciplines. While the standard economics and finance theory assume that the sign of the relationship should be positive (individuals are assumed to be risk adverse), since Bowman (1980) many researchers have found negative or shifting relationship.This study analyses the risk-return association for Italian non-financial firms over the period 2000-2007 and the two sub-periods 2000-2003 and 2004-2007 from the Prospect Theory perspective. The analysis is performed on accounting data. Results show that firms with return above their reference point (industry median return) are risk adverse and those with return below their reference point are risk seeking, as predicted by the Prospect Theory. The hypothesised steepness of the association for below-reference-point firms finds ambiguous evidence.

This paper elaborates on the fundamental role that a theory of the firm can play in order to enhance coherence in research on intangibles. Departing from the identification of possible inconsistencies in research on intangibles, the paper presents an analysis of intangibles-related issues within the theories of firm, namely the Agency Theory, the Property Rights Theory, the Transaction Cost Economics, the Resource-Based View and the Dynamic-Capabilities View of the firm.So doing, the paper demonstrates that defining, valuing, managing and reporting on intangibles strongly depend on the conceptualisation of the firm, and also urges more caution in performing empirical analyses, since they could unconsciously merge inconsistent approaches from different theories.

Since the end of the ’70s, many researchers have been pointing out some criticisms to the application of advanced financial techniques (e.g. Internal Rate of Return and Net Present Value) for valuing strategic investment decisions: a) their inability to take into account the value of managerial flexibility; b) their poor relationship with strategy. Real Options Theory (ROT) and Strategic Cost Management (SCM) have been proposed as the solutions for the two criticisms. The purpose of this paper is twofold. Firstly, it offers a fully-comparison between ROT and SCM articulating around a series of differentiating elements: 1) the relationship with the firm strategy; 2) the epistemological models surrounding SCM and ROT; 3) the way they focus on the risk and the uncertainty inherent in the decision; 4) their incentive towards an active management of the strategic investment; 5) the degree of formalisation of the structure of the two approaches; 6) the scope of their applicability; and 7) the most prominent difficulties linked to their implementation. Secondly, the paper examines whether ROT and SCM can be seen merely as two competing methods for firm decision-making, or if some integration between them is also possible. The underlying idea which is here purported is that ROT and SCM can be combined into a unitary and hybrid model for valuing strategic decisions, where the major advantages of the two techniques can be strengthened through their integration.

Employing Real Options Theory (ROT) for intangible assets’ valuation seems to be very promising. Nevertheless, the ROT attitude for valuing “fluid” situations, where a pre-ordinate path to follow does not exist, can easily disguise the complexity of intangible assets’ valuation. This paper develops two critical remarks on ROT-based valuation of intangible assets (IA). Firstly, IA can influence on the level of the uncertainty a firm deals with, therefore influencing on the value of the available real options. Literature on real options points out that an increase in uncertainty determines an increase in the value of the option. The intangible assets’ influence on uncertainty can produce, however, counter-intuitive effects on the value of a real option. Secondly, ROT assumes that a twin security of the real option’s underlying asset exists in order to perform the valuation. Since IA are generally firm-specific and difficult to replicate by other firms, the existence of the twin security cannot be taken for granted. The consequence is that indeterminate results can arise. The considerations just highlighted can support the development of a new approach, where the real options lens is a conceptual framework for interpreting and analysing economic phenomena while standard valuation is left on the background.

The European Union Regulation no. 1606/2002 made it mandatory for all EU listed companies to prepare consolidated financial statements in accordance with International Accounting Standards (IAS) for each financial year starting on or after 1 January 2005. As it is well known, the implementation of impairment test is emerging as one of the most debated issues. In particular, the impairment test for intangible assets is rather complex and will become even more important in consideration of the ongoing amendment of IAS 38 (Intangible Assets) and IAS 36 (Impairment Test) which is currently carried out by the IASB “Business Combination Project” in the footsteps of US’s SFAS 141 and SFAS 142. The purpose of the paper is to challenge IAS 36 Discounted Cash Flow (DCF) approach to impairment test by proposing Real Options Analysis (ROA) as a fruitful and viable methodology for giving content to this test. At present, the impairment test of intangible assets follows the general rules provided by IAS 36, as revised by Exposure Draft 3 – Business Combinations Project, and it is based on net-selling price and value-in-use. The latter is measured by “…(a) estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and (b) applying the appropriate discount rate to these future cash flows.” Unfortunately, DCF approach undervalues systematically high-risk assets since it does not account for managerial flexibility giving the firm the opportunity to take advantage of positive states of nature without suffering from bad ones. This flexibility, usually referred to as real option, is often connected with and arises from intangible assets and, if it is not incorporated in the value-in-use calculation, intangible assets could be unfairly impaired. Indeed, looking at the finance literature, ROA application to intangible investments, such as R&D investments, patents and licences, has often demonstrated the pitfalls of DCF approach in assessing their value. In spite of its theoretical fairness in measuring value-in-use, ROA should be implemented with caution. Indeed, a deep analysis of the compliance of ROA with the provisions of IASs could highlights some criticisms of ROA-based impairment test. Some numerical examples will also be provided in order to reinforce the theoretical conclusions of the paper. Despite those technical bewares, the paper nonetheless sets a case for the employment of ROA – instead of DCF approach – for the practical implementation of the impairment test for European companies.