Intellectual Capital Reporting

By Holmen, Jay | Management Accounting Quarterly, Summer 2005 | Go to article overview

Intellectual Capital Reporting


Holmen, Jay, Management Accounting Quarterly


TOOLS FOR REPORTING INTELLECTUAL CAPITAL ARE EMERGING. THEY HELP USERS DEVELOP AND EXECUTE BUSINESS STRATEGY, EVALUATE MERGERS AND ACQUISITIONS, GUIDE COMPENSATION PLANS, AND CONVEY A COMPANY'S WORTH TO STAKEHOLDERS MORE ACCURATELY.

When there is a large disparity between a firm's market value and book value, that diff e rence is often attributed to "intellectual capital." Market value is, of course, the company's total shares outstanding times the stock market price of each. Book value is the excess of total assets over total liabilities. But what is the value of intellectual capital?

Measuring the value of intellectual capital is difficult, but there are methods that can do it. One recent study categorized 12 different approaches to measuring intellectual capital, and another identified more than 30.1 I will discuss and illustrate several of them, including one developed by Skandia Insurance Company Ltd. and Robert Kaplan and David Norton's balanced scorecard. I will also address how intellectual capital can be included in external financial reporting and discuss how the accounting rules for reporting intangibles limits the recognition of intellectual capital. Finally, I will outline two proposed approaches for reporting intellectual capital to stakeholders.

First, however, let me define intellectual capital:

"Intellectual capital is intellectual material-knowledge, information, intellectual property, experience-that can be put to use to create wealth."2

"It has become standard to say that a company's intellectual capital is the sum of its human capital (talent), structural capital (intellectual property, methodologies, software, documents, and other knowledge artifacts), and customer capital (client relationships)."3

"Intellectual capital is a combination of human capital- the brains, skills, insights, and potential of those in an organization-and structural capital-things like the capital wrapped up in customers, processes, databases, brands, and IT systems. It is the ability to transform knowledge and intangible assets into wealth creating resources, by multiplying human capital with structural capital."4

WHY MEASURE INTELLECTUAL CAPITAL?

Companies may want to measure intellectual capital for a variety of reasons. One study identified five main reas ons.5 First, measuring intellectual capital can help an organization formulate business strategy. By identifying and developing its intellectual capital, an organization may gain a competitive advantage. Second, measuring intellectual capital may lead to the development of key performance indicators that will help evaluate the execution of strategy. Intellectual capital, even if measured properly, has little value unless it can be linked to the firm's strategy.6 Third, intellectual capital may be meas ured to assist in evaluating mergers and acquisitions, particularly to determine the prices paid by the acquiring firms. Fourth, using nonfinancial measures of intellectual capital can be linked to an organization's incentive and compensation plan. The first four reasons are all internal to the organization. A fifth reason is external: to communicate to external stakeholders what intellectual property the firm owns.

Daniel Andriessen proposes a much shorter list of the reasons companies may want to measure intellectual capital: to improve internal management, to improve external reporting, and to satisfy statutory and transactional factors.7

Intangible resources need to be managed with more attention and differently than other resources, and measuring them helps improve management of them. Effective management of intellectual property also helps measure it. Good measures of intellectual capital will complement financial measures, provide a feedback mechanism for actions, provide information to develop new strategies, assist in weighting diff e rent courses of action, and enhance the management of the business as a whole. …

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