Accounting for Managers: Interpreting Accounting Information for Decision-Making, Canadian Edition

READING 3

Intellectual Capital Reporting

By Jay Holmen, Ph.D., CMA, CFM, CPA

When there is a large disparity between a firm's market value and book value, that difference 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, ...