Consequence of an IC-index Approach

Connecting IC to Shareholder Value

• Shareholder value = market value

• The impact of IC is stronger in opportunities than in operations.

• The best : Balance the IC & Financial Capital

Connecting IC to Shareholder Value

The impact of IC is stronger in opportunities: rule of increasing return

The impact of FC is stronger in operations: rule of diminishing return

• The best : Balance the IC & Financial Capital

FC & ICE

ffici

ency

Accumulate Investment

Financial

IC

Diminishing return

increasing return

Yankee case FC & ICE

ffici

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Accumulate Investment

Financial

IC

MV

Yankee Finance [Adjust]In

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e

Time

Financial

IC

MV

Manage IC

Machine ple Inc.,In

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Time

Financial

IC

MV

Manage IC •Develop new product (human capital => structural capital•Develop new business (structural capital => Financial capital

THE REPORTING OF ICTRADITIONAL ACOUNTING VIEW &

Conceptual roots of IC

ICCore

CompetenciesKnowledge

leverage

Management

KnowledgeDevelopment

KM

Innovation

Conversation management

LO

Invisible assets

Measurement

Report

scorecardsFinancial

indicator

Narrative

How much?

Hidden Value

Monetary value for its IC

Three approaches to calculate a monetary value for a company IC:

(1) the cost-based approach – determining the value of an asset by ascertaining its replacement costs.

(2) the market-based approach – determining the value of an asset by obtaining a consensus of what others in the market have valued the asset at.

(3) the income-based approach – determining the value of an asset by looking at the income-producing capability of the asset.

Marr, Schiuma, and Neely, 2004

International Accounting Standards Board

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– Asset: a resource controlled by an enterprise as a result of past events and from which future future economic benefit are expected to floe to the enterprise

– Intangible asset: “an identifiable non-monetary assets without physical substance held for use in the production or supply of good and service, for rental to others, or for administrative purpose

IC

• Most IC resources do not fulfill all of the IASC requirements– Company do not own employee – Company do not have full control over employee– Research may not be certain that a piece of technology

will generate future economic benefits– Company do not have a full control of its reputation

• Intangible assets [IASC]: is part of Structure Capital and exclude Relational Capital & Human Capital

Goodwill

• The excess of the cost of an acquired company over the sum of identifiable net assets– Goodwill occurs when an acquisition takes

place [the price is determined, it can be recognized as an asset in the transaction-based accounting system]

The need to start measuring and valuing IC

Valuation methods

1.Financial valuation of IC

2.Indicator approach valuation of IC

3.Narrative approach valuation of IC

1. Financial valuation of IC

1.1 Cost approach

1.2 Market approach

1.3 Income approach

can be used in combination bandwidth to develop value of IC

IC financial valuation: 1.1 Cost approach

• Principle: Substitution & Price equilibrium – the investor will pay no more for an

investment than the cost to obtain an investment of equal utility

– IC price = cost to obtain that resource – Appropriate for setting transfer price, royalty

rates, or estimate the amount of damages suffered by infringement

IC financial valuation: 1.1 Cost approach

Flaws – Many important factors that drive value are

not reflected in the cost approach• The amount of benefits associate with IC• The trend of the economic benefits• The duration over which the economic benefits will

be enjoyed

IC financial valuation: 1.2 Market approach

• Principle: competition and equilibrium – Free and unrestricted market– Supply and Demand factor will drive the price

of any goods to a point of equilibrium

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IC financial valuation: 1.2 Market approach

• Flaw– Can be used only if data is available

regarding the transaction of IC resources are similar to the subject resources .

– When the resources are unique, this approach is not appropriate

IC financial valuation: 1.3 Income approach

• Principle: anticipation – The value of IC resources = the expected

economic income generate by the IC resources

– Requires assumptions about the future income that will be produced

IC financial valuation: 1.3 Income approach

• Flaw– Require good and validly assumption about

the future income

2: Indicator valuation

• Indicator valuation can be used when financial value of IC can not be determined and no other direct measurement can be found

• Indicator: a reasonably trustworthy estimate of an unknown value [Stam, 2002]

• Using of proxy for valuation

2: Indicator valuation

Proxy valuation – Need several indicators to cover the

usefulness of and IC resources– Need a criteria to measure – Difficult to judge whether the level of a

particular indicator can be considered “good” or “bad”

3: Narrative valuation

Most annual reports contain section about the strategy and resources of the company [tell the stories about the intellectual capital of the firm]

Topics are IC related– Employee– Process – Best practice– QA– IT & ICT

3: Narrative valuation

example: the Intellectual Capital Statement

For the Danish government– Explicit contains a narrative section called

“the knowledge narrative” – The section tells the story of how IC helps to

create value for companies.

REPORTING OF IC

IC reporting

• The process of creating a story that shows how a company uses its intellectual capital to create value for its customers

• Involves Identify, Measuring & Reporting of IC as well as constructing a coherent presentation of how the company uses its knowledge resources

IC reporting

• IC statement which combines numbers, narrative and visualization of the company intellectual capital

• IC statement can fulfill two functions1. Internal management function

2. External reporting function

1. Internal management function

• IC statements are a part of a company’s knowledge management strategy– IC can systemize KM [a coherent and

systematic approach to managing and sharing knowledge which support general strategy]

• IC statement can develop specifically management of knowledge resource for a company

1. Internal management function

• IC statement helps develop the firm’s strategy and focuses on its innovative capabilities– Develop customer relation – Develop innovation – Develop effective processes – Develop new business model

1. Internal management function • IC statement is a monitoring system that helps

firms to account for their intangible resources and relate them to innovation – Survey the composition of intangibles and explain

their development – Survey the investments made in developing

intangible resources and highlight the firm’s effort to make greater use of intangibles

– Monitor the effect of intangible resources and throw light on the results gained from intangible resources

1. Internal management function • IC statement benefits the firm’s innovation

ambition by linking efforts and objective to make the firm a more innovative one.

IC Statement

2. External reporting function

• IC statement can be used to communicate to various stakeholder groups– To the company itself [identity]– To potential employees– To customers– To co-operative partners– To investors– To citizens– To political system

IC Statement

IC report

Intellectual Capital Reporting

1. Improving internal management

2. Improving external communication

3. Statutory and transaction issues