7.1.2 Valuing knowledge as an intangible asset
Approaches for measuring and therefore valuing intangibles knowledge assets falls into at least four categories of measurement approaches (Sveiby, 2004).
- Direct Intellectual Capital methods (DIC). Estimate the $-value of intangible assets by identifying its various components. Once these components are identified, they can be directly evaluated, either individually or as an aggregated coefficient.
- Market Capitalization Methods (MCM). Calculate the difference between a company's market capitalization and its stockholders' equity as the value of its intellectual capital or intangible assets.
- Return on Assets methods (ROA). Average pre-tax earnings of a company for a period of time are divided by the average tangible assets of the company. The result is a company ROA that is then compared with its industry average. The difference is multiplied by the company's average tangible assets to calculate an average annual earning from the Intangibles. Dividing the above-average earnings by the company's average cost of capital or an interest rate, one can derive an estimate of the value of its intangible assets or intellectual capital.
- Scorecard Methods (SC). The various components of intangible assets or intellectual capital are identified and indicators and indices are generated and reported in scorecards or as graphs. SC methods are similar to DIS methods, expect that no estimate is made of the $-value of the Intangible assets. A composite index may or may not be produced.
The challenge facing knowledge managers is the fact that traditional accounting and economic measurement systems focus on tangible assets such as the cost of labour, plant, and materials, not intangibles like knowledge.
Since the 1990s significant effort has been made to find ways to not only value intangible assets, but also specifically knowledge capital. Progress was initially promoted through work of companies such as Sweden's Skandia Insurance Company which publishes supplemental financial reports on its intangible assets. As such intangible assets make it into financial reports. It accounts for its intellectual capital by documenting assets not recognized by generally accepted accounting practices. This is accomplished by issuing a supplementary report unconnected with the official financial statement. The supplement includes a valuation of its technology, IT networks, procedures and manuals, trademarks, patents and customer lists, and employee competence (Strassmann, 1999) .
As reported by Paul Strassmann this approach had limitations.
Unfortunately, the attempts to assign a valuation to software assets, trademarks, experience and employee know-how have run so far into the difficult problem of pricing such assets. It is now widely understood that the costs of acquiring knowledge and the profit-generation potentials of such knowledge are unrelated. The value of intellectual property is in its use, not in its costs. This means that they are only worth what a customer is willing to pay for.
Two movies made with the identical actors, for the same $50 million budget, will have totally different valuations depending on whether the audiences like one but not the other. The same applies to software, new ventures, inventions and employee training. This is why numerous attempts that have been made to report the intellectual properties of a firm on its balance sheet have faltered.
Knowledge assets become reflected in the financial accounts only after there is a merger or acquisition at substantial premiums over book value. (Strassmann, 1999)
Improved approaches to valuing intangible assets are defined and examined in the following reading from Juergen Daum.
Reading 1
Daum, JD (January, 2002), ‘Value Drivers Intangible Assets – Do We Need a New Approach to Financial and Management Accounting?: A Blueprint for an Improved Management System’, Controlling, 24 Pages. Sourced March 2005, at www.juergendaum.com/articles/IA_Controlling__e.pdf.
Activity 2
- What relationship does Juergen Daum believe intangible knowledge assets have with intellectual assets or an organisations overall intellectual or knowledge capital?
- Why does Daum believe intangible assets are value drivers in the New Economy?
- How does structural capital affect the value of intangible assets?
- Does structural capital contain elements of intangible knowledge assets a company can own? How does this relate to things such as culture, supply chain relationships and such like?
Back Page