Financial Report

Measuring and reporting intellectual capital: experience, issues, and prospects

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Table of Contents


Executive summary. 2

Aims and objectives. 2

Introduction. 3

Historical context. 4

Theoretical context. 5

Literature Review.. 11

Models for measuring and reporting intellectual capital 22

Generic models. 23

Balanced scorecard. 23

Knowledge assets map approach. 24

Performance prism.. 24

Individual company models. 25

The Skandia Navigator. 25

Celemi’s intangible assets monitor. 26

Ericsson’s cockpit communicator. 26

Bates Gruppen Company IQ measurement system.. 27

Ramboll’s holistic company model 29

Models for Valuation of Intellectual capital 29

The value creation index. 29

Value-added approach. 31

Tobin’s q method. 31

Market/value-based method. 31

Calculated intangible value (CIV). 32

Human resource accounting (HRA). 32

Baruch Lev method. 33

Value-added intellectual capital coefficient. 34

Discussion. 35

Conclusion. 38

Recommendations. 39

References. 41

Bibliography. 41

Appendices. 41

Executive summary

This research paper explores the research trends that have been pursued in the measurement and reporting of intellectual capital in terms of various experiences, issues and future prospects. The research paper addresses the concept of intellectual capital from both historical and theoretical perspectives. Focus is put on the emerging trends in the way financial reporting issues on intellectual capital are handled.


            The evolution of intellectual capital measurement is traced to its Scandinavian origin, and the Scandinavian influence is pursued in other European, and North American countries. Specifically, experiences from Canada and Australia are highlighted. In all these countries, the areas of both agreement and disagreement are addressed, particularly on the issue of the way forward in the way both generic and individual company models of IC valuation are addressed. Recommendations are then made for further research based on the existing practice trends, experiences and research trends.

Aims and objectives

Intellectual capital (IC) continues to be of substantial importance in the growth process in innovation and productivity, economic performance, and enterprise competitiveness. IC constitutes many components, including intellectual property rights, research and development, organizational and workplace structure, human resources, software, and customer and supplier networks.

However, most of these components tend to be poorly identified and measured in that the information is always collected in very varied ways way, and the financial accounting and reporting practices used rarely recognize them as assets. Whenever non-financial information is available, it tends to be difficult to verify and compare across various companies. This creates a gap in transparency, accuracy and reliability of the way in which intellectual capital is managed. This, in turn, distorts the manner in which intellectual capital resources, as well as other capital forms s, are allocated.

The main aim of this report is to determine the experiences, issues, and prospects of measurement and reporting of intellectual capital. In the pursuit of this aim, the following objectives will be sought:

  1. To determine emerging trends on how firms invest in intellectual capital and the way the resulting intellectual assets are being identified, measured and reported before being disclosed to enterprises.
  2. To highlight the benefits derived as well as costs incurred by firms through the identification, measurement, and reporting of intellectual capital.
  3. To explore the various theoretical models proposed for use in the identification, measurement, and reporting of intellectual property information.
  4. To explain the extent to which intellectual capital indicators that are developed at the enterprise level can be aggregated and replicated at the microeconomic level.
  5. To assess the level of growing awareness of the relevance of intellectual capital for government policymakers and business management can be improved even further.


The notion of intellectual capital can be traced to the emergence of a knowledge society. In the past, competitive advantage tended to be grounded on outstanding products, uniqueness of technology, aggressive pricing, and creative marketing. However, with time, this has changed. Today, all leading companies have to confront the issue of a radical overhaul of their approach to competitiveness, mainly through putting mechanisms of identifying, measuring, and reporting intellectual capital information.

Historical context

Intellectual capital is one of the indicators of enterprises that are knowledge-driven. Intellectual capital information is always of immense financial worth, yet this worth is rarely reflected in the accounting procedures of many enterprises. Just like in the case of previous shifts, a transition appears to be underway in the way issues of intellectual capital are addressed by enterprises at the management level. This change seems to be largely driven by continued convergence of technological innovations as well as changes in communication patterns that come with the market globalization and liberalization processes.

Currently, digital information and communication networks make it possible for complex information structures to be mobilized in a way that was previously thought impossible. The digital technologies make it possible for digitalized information to be coded, stocked, transmitted, processed, bought and sold anywhere independent of geographical barriers. These changes have been influential in changing the way intellectual capital information is gathered, measured and shared both within the organization and across the organization.

Over the last fifty years, the concept of intellectual capital has been conceived as having the same meaning as the term ‘intangibles’. Many axes can be spelt out from a presentation of discourse on intellectual capital during this duration. Some of the issues that have taken center stage during this period include the analysis of various sources of economic growth (productivity), analysis of investment in knowledge and education of individuals (human capital), and the analysis of research and development issues. in terms of research and development, the emphasis has continually been put on policy issues relating to technology and innovation. On this basis, a compilation of data relating to investment as well as a stock of intangibles in different national and business accounting and reporting activities has been emphasized.

The last quarter of the 20th century has been characterized by the emergence of a new order that challenges almost all established norms for creating wealth, investment return, and risk. Many dominant market players are increasingly deploying intellectual capital as a strategic tool. In the high-tech sectors such as biotechnology, software, business and media services, proper and thoughtful exploitation of intellectual capital is considered the critical factor in the sustenance of competitive advantage.

Historically, however, the rise of the knowledge society appears to have been inspired as far back as two centuries ago, when Adam Smith wrote The Wealth of Nations. In this book he enumerated the importance of the skills possessed by workers, terming them as the most fundamental engine of economic progress. More importantly, Adam Smith emphasized the notion of human capital and its impact on the structure of wages and personal incomes. For the first time, an argument on intellectual capital was made by Frank Knight (1885-1962), who pointed out that by improving the stock of intellectual capital in the economy, it was possible for the law of diminishing returns to be overcome. During the 1950s, debate on intellectual capital intensified.

Theoretical context

            Many theoretical notions on the importance of intellectual capital in an enterprise as well as the entire economy have tended to dwell largely on the analysis of the relationship between factor use and output. The limitations of the theoretical approach that emphasized the substitution between labor and capital have been pointed out by a number of researchers.


However, the analysis of the relationship between output and factor use has been a central point of reference for economic analysis in the post-World War II era. This approach led to the development of ‘growth accounting’, a branch of quantitative analysis that explains growth trends in productivity. The creation of this approach was the culmination of the derivation of findings that showed that knowledge, the energy of labor, and skills were crucial determinants of growth in the economy.

            Subsequent analysis has aimed at identifying the ways in which ‘intangible’ factors contribute to the overall growth in the enterprise’s productivity. In this context, growth in productivity is defined simply as the combination of an increase in productivity in both labor and capital, together referred to as ‘total factor productivity’.

More recently, intellectual capital theorists have focused on the classification of the various ingredients used in the production function (Kossovsky, 2002). The conventional argument has tended to be that although knowledge accumulation is an essential economic growth feature, it should never be analyzed merely in the form of an independent factor of production (Bukh, 2001). This approach is known as the endogenous growth theory. The theory identifies and analyzes the reciprocity between intangible and tangible capital formation as well as the interaction between the market and public policy.

Moreover, the part of economic growth that has not been explained through increasing use of labor and capital, known as the ‘residual factor’, has been pursued in subsequent decades, and important contributions have been made along the way. This development is associated with the creation of the framework that grounded the emergence of new growth patterns, notably after 1973 (Hussi, 2004).

The theory of human capital formation has also been used to formulate a conceptual framework for understanding intellectual capital better (Bose &Thomas, 2007). The theory has been used in parallel with the continued analysis of various sources of economic growth, one of which is intellectual capital. However, the mainstream attention in this theory is on the concept of human capital, that is, the knowledge, mobility of individuals, and the skills they possess. This research strand emphasizes a balanced distribution of investment in training and education. The core thrust of this theory was to apply various elements(nts of microeconomic theory to decision making by individuals, families as well as authorities in matters of education and training. In the second strand, comprehensive quantitative evidence was provided, and a basic conceptual framework verified.

Without the presence of a formal conceptual framework, fritz Machlup prepared, in the late 1970s as well as early 1980s, a comprehensive, unique assessment of various aspects of a knowledge economy. The three-volume assessment encompassed a review of conceptual frameworks that have been formulated by other authors.

In the realm of applied economic theory, a different strand of research can be identified, one that dwells on research and development, and technology and innovation. In this strand, patterns of technological development have been identified, activities have been classified, and various aspects of innovation processes have been assessed. For instance, during the 1960s and 1970s, many OECD countries took various measures for the formulation and implementation of policies that were in favor of research and development, particularly the way in which the results of scientific research were applied.

In the applied economic theory, the need for standardization in the way results were evaluated emerged, triggering a flurry of research activities involving all categories that commonly associated with the formation of intellectual capital (Bukh, 2003). Again, the OECD Evaluation of Research report of 1987 set the pace for the setting up of standards. Many other standardization-related reports have been prepared ever since, all of which provide an excellent opportunity for the consequences of qualitative changes in the intensity of knowledge to be identified. This intensity relates mainly to the production of goods and services as well as the role played by intangibles in every economy.

Financial reporting on intellectual capital

The growth accounting exercises that are used today have been known to leave out evidence of ‘intangibles’ in all available accounts and statistical data since the financial reporting trend was established in the 1960s (Kianto, 2007). The perceived need to distinguish expenditure on and investment in intangibles on the one hand and the resulting increase in the stock of intellectual capital on the other has stood the test of all this time.

            Moreover, the classifications that are used in both business and national accounts have traditionally tended to fail to allow investment in intangibles to be identified. Moreover, there has been a failure to make a distinction between ‘services’ and ‘intangibles’. This problem creates a fundamental problem relating to perception and taxonomy in the way economic performance is analyzed.

            It is widely recognized that the formation of intellectual capital is a decisive factor of welfare and economic growth, although the understanding of this knowledge has tended to remain somehow elusive and incoherent. This scenario can be blamed on the fact that intangibles are rarely completely revealed in all the readily available statistical data as well as company accounting and reporting. This incompleteness may be to blame for the many potential distortions that exist in the way resources are allocated and policies made.

The capital markets continue to put emphasis on fixed capital. Intellectual capital is rarely used as collateral for loans in banks. It is not surprising, therefore, that the cost of capital for companies that are heavily reliant on intellectual capital tend to be higher compared to that of other companies.

The mandatory expensing of intangibles is largely to blame for widely reported instances of underreporting of profits in companies that are in their early stages of growth. Conversely, this also leads to instances of overstatement of profits in companies that are in later phases of exploiting their intangible assets. This tends to have far-reaching negative implications in the form of volatile share prices, a situation that weakens the financial position of shareholders. The transient benefits of this scenario tend to be observed only within the enterprises. However, even here, lack of sufficient insider information on the true level to which intellectual capital has evolved risks creating a distortion of management decisions as well as a company strategy.

            When there is an overemphasis on fixed investment coupled with inadequately reported intangible intellectual property investment, this caused distortions in public policy. For instance, company profits become taxed and rules of deprecation are imposed on different forms of capital. In areas of economic analysis, the role of intangibles is increasingly being valued, particularly the new dimension that they bring about in the decision making processes.

The homogenous definition under the growth accounting tradition has had to face many changes, characterized by a move towards explicitly detailed classification into categories and vintages of labor, on the basis of the level of one’s skills, knowledge, and education (Bontis, 1998). These changes, however, have not been characterized by the modification of the traditional approaches used to analyze statistical data. Rather, it has continued to rely on the search for additional economic indicators, mainly through educational statistics and ad hoc surveys.

            Indeed, accountants in both business and national accounting are reluctant to reform all the fundamental accounting principles as they have been practiced for throughout the 20thcentury. The underlying problem here is caused by the broad consensus that has been maintained by all accounting professionals, that the purpose of any company’s balance sheets cannot be to show its market value as a going concern. Rather, they should only act as an instrument for evaluating individual, identifiable assets that are separable according to the market value that they would have if they were detached from the company.

            Intellectual capital appears to possess the attributes that are completely different from the tangibles that are reported in financial statements. New ways of reporting intellectual capital have been devised in many companies in order to disclose as much information as possible on all the knowledge resources as possible that the company possesses. The purpose of this undertaking is always to improve the basis upon which investment decisions are made as well as the strategy that is used to manage resources for purposes of future growth of the enterprise.

            Moreover, there is considerable scope for revealing the presence of intangibles within any modern enterprise, even if the fundamental accounting principles were respected, including the rules of the balance sheet. Reconsideration of all classifications of investments and costs as well as the compilation of alternative indicators of intellectual property and intangibles is necessary in order for the existing accounting principles to be of good use in today’s knowledge-based economy.

            Efforts towards encompassing intellectual capital into the existing accounting and reporting principles have been deployed extensively during the 1990s. This deployment was mainly done within the framework of capital market analysis and corporate reporting. The corporations that spearheaded these efforts reconsidered the corporate reporting approaches in use in order to come up with an indicator for various intangibles. Most of these corporations were those that were heavily reliant on intellectual capital. For these companies, the creation of a conceptual framework for assessing the contribution made by intellectual capital was necessary, if the true value of these companies was to be ascertained.

Literature Review

Different countries have tended to adopt slightly different perspectives in the measurement and reporting of intellectual capital. For instance, in the study done by Miller (1999)targeting the diverse Canadian perspective, two capital-intensive firms were studied, and the results indicated that similar indicators of intellectual capital can be used for both for-profit and non-profit organizations. One of the firms used dealt in high technology, while the other was an institution of higher learning.

Miller’s (1999) aim was to examine the perceptions that managers in the respective companies have towards the potential use of indicators of intellectual capital, and the existing opportunities for both internal and external reporting, as well as comparability within various companies. A practical point of view was adopted, whereby a survey was done on a large number of managers in the organizations, using a questionnaire. Additionally, two focus groups were used as a complementary method of data collection.

            In the Canadian experience, it appears that there is need for a more comprehensive approach to be adopted in the management of all types of intellectual capital (Guthrie & Petty, 2001). However, it is possible to distinguish one company from the other through reference to the perceived usefulness of various capital indicators. Those companies that have a customer-intensive focus tend to find customer capital indicators to be of greater importance compared to companies that do not have this focus.

Furthermore, it may be rather difficult for a meaningful set of customer capital indicators that are of great use to individual companies to be developed. Those companies that are reluctant to share the various indicators of their human capital externally risk losing their talented employees to their competitors (Miller, 1999).

Guthrie(2000)notes that the growth in interest that surrounds intellectual capital and knowledge management is commensurate with the continued rise in ‘virtual’ corporations as well as a flourishing service industry. For these companies, all book values tend to correlate poorly with their market capitalization.

For this reason, two key management missions appear to be evolving (Guthrie, 2000). First, there is a continued quest for the development of better systems for the creation, capturing and dissemination of knowledge within organizations. Second, there is a growing sense of awareness that issues of know-how are of significant value to a business, and in some instances, are a representation of the business’s entire value base.

 This realization has resulted in the emergence of an intellectual capital discourse that is accompanied by the drive to continually establish new metrics for use in recording and reporting the accurate value that is attributable to intellectual capital (Baughn, 1997). The implication here is that time has come for the traditional financial management and accounting practices to give way to the new terrain in an adaptive perspective (Guthrie, 2000).

The importance of intellectual capital has been emphasized in the rise of the ‘New Economy’, which was heralded by the information age. The new age has led to an increase in the prominence of intellectual capital as a research and business topic. The importance of IC is being emphasized in the revolution in information technology, the rising importance of knowledge in a knowledge-based economy, the continually changing patterns of interpersonal activities, and the emergence of innovation and creativity as key determinants of competitiveness.

            The beginning of the modern organization, as well as the rise of the information society, has created what is conventionally termed as ‘knowledge-based’ intangibles (Bukh, 2005). These intangibles take the form of know-how, organizational structures, and processes, intellectual and problem-solving ability. These terms are not new since they have been used in the organizational settings previously; rather, they have taken on a new sense of relevance in a corporate world that is increasingly being defined by competition, strategic adaptation, increasing customer demands and proliferation of service-based industries. In this type of world, concerns with various tangible assets such as factories and land tend to diminish drastically in importance.

            The management, disclosure, and measurement of IC has been gaining relevance that is commensurate with the continued decline in traditional industries as well as the concurrent growth of today’s knowledge-based industries. At the international level, many firms, consultants, and practitioners have already embarked in efforts to identify, to measure, and to report IC in organizations. The emergence of new versions of accounting statements within organizations, for instance, the ‘balanced scorecard’, and the ‘intangible asset monitor’ is part of this information age revolution (Guthrie, 2000).

In its current usage, the term ‘intellectual capital’ denotes two categories of a company’s intangible assets: organizational capital and human capital. In precise terms, structural capital refers to such things as proprietary software systems, supply chains, and distribution networks. On the other hand, human capital describes all the human resources that are in an organization as well as the resources that are external to the organization, that is, suppliers and customers. In most cases, this term is used in a fashion that makes it appear like a synonym of ‘intangible assets’.

Historically, the distinction between intellectual capital and intangible assets has been a vague one at best. Intangible assets have often been referred to as ‘goodwill’, and yet IC is an integral part of this goodwill. Another hurdle is presented by the traditional accounting practice, which fails to identify and measure all ‘new’ intangibles in an organization, especially modern knowledge-based organizations. The new intangibles include customer relationships, staff competencies, computer, and administrative systems and new business models (Hand, 2003). It is interesting to note that even those intangibles that are traditionally recognized like goodwill, patents, and brand equity are reported only after they have met certain stringent recognition criteria. This is why they have tended to be left out of financial statements until very recently (Guthrie, 2000).

            New ways of measuring and reporting the intellectual property of a company have been motivated largely on the limitations of the existing reporting system as used in the financial capital markets. Moreover, many stakeholders have been taking the initiative of starting a dialogue on how intellectual capital can be reflected in financial statements as one of an organization’s assets.

            The ongoing dialogue has generated a plethora of various measurement approaches whose aim is to synthesize both financial and non-financial aspects of value generation in a company into a coherent external report. Nevertheless, many crucial components of intellectual property are still poorly understood and inadequately identified and managed, owing to lack of consistency in the framework within which they are handled (Marr, 2004).

            During a symposium held in Australia on intellectual capital, the available research findings showed that the extent of intellectual capital reporting remains minimal, although the various categories of intellectual property that are often most reported include intellectual property rights, technology, human resources and workplace structure (Guthrie,2000). During the same symposium, a review of different industry clusters suggested that no single industry has gone significantly ahead of others in terms of intellectual capital reporting practices. This led company representatives to believe that intellectual capital management is a crucial factor in predicting future corporate success and competitiveness.

            Guthrie(2001) observes that there is much support to the assertion that IC will be instrumental in the new century in the determination of national economic importance and more specifically, enterprise value. This awareness has tended to be a drive for the establishment of new metrics for use in recording and reporting all the value that is attributed to organizational knowledge. This task has continually been receiving impetus, for example, in Swedish companies, because of the fact that non-financial metrics are often used and focus on intangible assets is paramount (Guthrie, 2001). Such a trend marks a significant departure from the orthodoxy of traditional financial accounting practice.

            Brennan & Connell (2000) observe that the substantial differences that exist between market values and company book values are indicators of the presence of many assets that are not recognized and measured in the balance sheets. A company’s intellectual capital assets, according to Brennan & Connell (2000), account for quite a substantial proportion of the problematic discrepancy.

            Presently, no legal requirement compels companies to report on their intellectual capital assets (Brennan & Connell, 2000). This leaves the traditional accounting system extremely ineffective in the task of measuring the exact impact that such intangibles have on the organization’s financial position.

            Brennan (2001) examined the intellectual capital reporting methodologies of11 knowledge-based Irish companies. A comparison was made on the listed companies’ book and market values and the contents of the annual reports. Significant differences in the book values and market values were established, creating the suggestion that knowledge-based Irish companies that are listed possess a substantive level of intangible, intellectual capital assets, all of which are non-physical in nature. In all these companies, the level of disclosure of attributes of intellectual property was considerably low.

            Nerdrum (2001) views intellectual capital as constituting complementary capacities of commitment and competence. On the basis of empirically and theoretically robust human capital theory, Nedrum defines intellectual capital as the complementary capacity by individuals to generate, continually add value, and eventually create wealth. From this perspective, these resources tend to be perceived as both tangible and intangible. Moreover, this view necessitates the extension of human capital theory in order to include people’s intangible capacities.

The debate on intellectual capital has been taken a notch higher through the inclusion of the perspective of best practices (de Pablos, 2002). From this viewpoint, intellectual capital tends to be assessed in terms of the trans-disciplinary traits that it possesses, particularly with regard to issues of management and measurement. All these issues can best be identified after a detailed conceptual analysis of intellectual capital. Moreover, de Pablos (2002) finds out interesting factors that govern the dynamics of how IC is measured in many pioneer firms in Europe, Asia and in the Middle East.

The characteristics of intangible assets are always such that the financial and non-financial methods used to value them are different from the ones used to value tangible assets (Leitner, 2002). Today, the majority of non-financial methods appear to be dominating various concerted efforts to measure intangible assets (Leitner, 2002). Some dichotomies can be revealed in the way new approaches are being integrated into established accounting and reporting systems, leading to the adoption of new procedures.

Leitner (2002) draws on the experience gained from Australian research organizations, whereby the Intellectual Capital Reporting System is currently being used. This system facilitates the focus of attention on the various problematic issues that arise whenever financial methods are being used to value intangible assets such as intellectual property. The main problems that arise relate to methodology, target group, level of disclosure, and usefulness of all new information.

            A study was done by April (2003) on the South African mining industry showed that these companies tend to report much fewer attributes of intellectual capital companies and that they tend to put more focus on various external attributes such as favorable contracts and business collaborations. The study also revealed that intellectual capital is rated highly by mining companies, although it appears that there is a lack of an effective way of measuring and reporting this intellectual capital. Although South African mining companies value intellectually a lot, they lack the appropriate structures and systems for managing it in a meaningful manner. This is a worrying trend, considering that the study was done on 20 largest listed mining companies in South Africa.

It is common for an emerging trend to be handled first and foremost from the viewpoint of specific industry aspects. This explains the basis for various individual company models for measuring intellectual capital. Engström (2003)for example, expresses the view that in the hotel industry, it is very useful for intellectual capital to be evaluated on the basis of its potential relationship with the performance of the business. Engström used the multiple-source data to investigate the data and knowledge produced during an evaluation of intellectual capital. He explored the potential relationship that exists between intellectual capital and hotel business performance. From this study, it was clear that intellectual capital in a hotel chain can be evaluated, and that the information provided is always useful in the identification of focal areas, benchmarking, resource allocation, and future management.

In recent times, academics and practitioners are being attracted into the groundwork on intellectual property, particularly areas of IC measurement and management (Chen, 2004). On the basis of a review of different IC measurement models that have been proposed by western researchers, IC has been classified into structural capital, human capital, customer capital, and innovation capital (Marr, 2005). From this classification, it becomes easy for a qualitative index system to be derived through the analysis of the contents of each of the four elements and the relationships between them. 

In an empirical study, Chen (2004) found out that a significant relationship exists between the scores of all the four elements in a company and its performance in business. This provided the rationality and validity of both the qualitative index system and the IC measurement model. The study also proved that a remarkable relationship exists between all the four elements of IC, meaning that an integrative perspective is needed in the management and improvement of IC (Boedker &Guthrie, 2005).

A study done by Goh (2004) on 20 public, profitable, listed Malaysian companies to assess their level of IC disclosure revealed that voluntary disclosure is high when viewed from the qualitative perspective but low quantitatively. The aspects of IC that were assessed in the study’s content analysis were external capital, internal capital, and employee competence. In this study, the need for regulation of accounting frameworks emerged, with the emphasis being put on the need for standards to be put in place for the purpose of accounting for IC.

Roslender & Fincham(2004) indicate that today, some of the most instructive advances on IC have emanated from Scandinavia, a reflection of the interest that these societies have in determining the true worth of their enterprises. In this region, the worth of employees is considered a principal progenitor in intellectual capital accounting.

Reports gathered from many Canadian, Australian, and European inquiries have played a critical role in increasing the momentum of the accounting project that focuses in intellectual capital (Roslender & Fincham, 2004).

In Canada, for instance, many companies emphasize heavily on the use of indicators of human capital in spite of their industry type or even the degree of capital intensity. It appears as if managers of many enterprises agree most on human and customer indicators as opposed to structural capital indicators. Although it can be argued that people are the most important asset in a company, the relationship that exists between structural, human, and customer capital should never be ignored.

It is ironic that although many managers value human capital most, they have not invested in this form of capital in a manner that reflects how highly they regard it and its contribution to the company’s growth. They fail to do this because of the failure to plan well for human capital. Without a coherent, standard way of measuring the effectiveness of this form of capital, such managers feel helpless in their quest to derive the greatest benefits out of human capital. Optimization of human capital needs to be a conscious part of every company’s business strategy. On the overall, it would appear as if many of today’s knowledge-based companies put more emphasis on intellectual capital indicators compared to capital-intensive companies.

However, what primarily distinguishes the way companies’ view of IC is the perceived usefulness that they attach to various customer capital indicators. Companies that have a customer-intensive focus tend to find customer capital indicators much more useful than those that do not have this focus. This brings about the issue of the feasibility of development initiatives involving setting up of customer capital indicators that are of use to individual companies while still maintaining cross-company comparability.

            There is a need for increased attention to be put on the development of industry indicators that are of meaning to managers, and which are of use to companies. For instance, some researchers have recommended the expansion of the list of structural indicators to include work procedures and processes(Roslender & Fincham, 2004). In efforts to do this, many barriers are likely to be posed by the existing corporate culture, particularly in the way intellectual capital is measured and managed.

Marr (2004) agrees with the popular contention that ‘IC is at the crossroads’. Incidentally, this contention has been expressed within a body of several types of research that highlight various theoretical issues in IC research. In supporting his assertion, Marr points out that awareness on IC’s importance has already been created; all that remains now is for researchers and practitioners to think of how to integrate IC into the historical accounting and financial management practices.

The next level in IC research needs to dwell on taxonomies and research methodologies. There is as much need for precise definitions of various IC-related definitions to be conceived as there is for justifications of the need for organizations to measure and manage IC accurately. On this basis, it is necessary for increased clarity to be focused on various terms, including assessment, measurement, and valuation. This translates into a need for more rigorous research methods in order for the existing theories in the field to be tested and validated.

The modern society is being bombarded with new information at an exponential velocity, owing to improvement in technology. The state of affairs today was predicted by Dr. Nick Bontis when he said during a keynote presentation: ‘by the year 2010, all the codified knowledge in the world will be doubling every 11 hours’, a quote that caused a stir during the presentation. Meanwhile, the point that Bontis was trying to draw people’s attention to was that the world increasingly became knowledge-intensive.

One of the implications of this knowledge bombardment is that knowledge assets have a unique meaning in today’s organizations (Moon, 2006). This is clear in the continued increase in the popularity of terms such as knowledge capital, intellectual capital, organizational learning, information assets, intangible management, hidden value, intangible assets, and human capital. All these terms and many others form an integral part of the new lexicon that describes emerging forms of economic value. The descriptors belong to a paradigm where competitive advantage is increasingly tied to organizational knowledge as well as that of individual workers in order for sustainability to be achieved. It is for this very reason that reliance on just the productive tangible assets such as fixed capital, managerial knowledge, and raw materials can no longer account for the wealth being created by many new and prospering companies. Instead, the key reason that is attributed to corporate success stories in the high-tech and internet world is leveraging knowledge (Bontis, 2001).

The information-age technology, communication systems, and the media have created many tools that have intangible benefits to organizations. The obvious impact of such intangibles as intellectual property and knowledge technology makes executives feel that the intangibles should be factored measuring their companies’ worth. The intangibles also make the executives lose confidence in the decision-making ability that is based on the traditional tangible data. However, these executives agree that engineering a transition from the historical understanding of economic value on the basis of accepted assumptions developed over hundreds of years to a new structure of asset assessment is a really challenging task. Some scholars and practitioners refer to this transition process a paradigm shift (Marr, 2004).

In order for this paradigm shift to be said to be underway, it is inevitable that old methods will be needed to explain the new ways of measuring and reporting intangible assets. This necessitates the creation of general dissatisfaction with the flaws that exist in the current procedures and explanations.

However, the paradigm shift in IC measurement is far from complete. A new way of doing things is yet to be put in place. Moreover, the solutions that are thought to be superior are yet to be fully supported. Furthermore, the traditional ones are yet to be discarded. Meanwhile, there is ample evidence to show that the first few stages of valuing new forms of economic wealth are occurring. Moreover, opinion leaders in the world of accounting are standing up to support the contention of the inadequacy of the traditional accounting and financial reporting practice, at least in light of today’s organizational changes.

Currently, measurement of knowledge assets is being done on an experimental basis, where many possible solutions are being tried and promoted (Roslender & Fincham, 2004). The solutions being sought indicate the preliminary nature of the exploratory work, mainly because of the emphasis being put on new concepts, criteria, definitions, and operational mechanisms (Marr, 2004). Trends in research indicate the need for a multi-layered approach in structuring of ideas (Tayles, 2002). Out of all the business models that have been advanced to date, it would appear truly ironic if any IC model proposed is not testable using a multilayered approach for its suitability in the new paradigm to be established.

According to Bontis (2001), Skandia is the first large company to have undertaken a truly coherent effort in the measurement of knowledge assets. At Skandia, the first IC report was produced internally in 1985. The company also became the first to issue a complete IC addendum to accompany its traditional financial accounting report in 1994.

Since then, other companies have adopted the strategy that Skandia used to multi-dimensionally conceptualize organizational value. This multi-dimensional approach, known as the Navigator, focused on five areas: customer process, financial, human capital, and renewal and development (Snyder, 2002). The new accounting taxonomy was geared towards the identification of all roots of the company value through the measurement of all hidden dynamic factors underlying the ‘visible company of products and buildings’ (April, 2003). Within the perspective of this model, intellectual capital is comprised of a combination of all hidden factors relating to human and structural capital.

As more and more companies started using Skandia’s approach in the measurement of their knowledge assets, clearer relationships between intellectual capital and the financial performance of firms started emerging. For instance, Tan (2007) found out that there is a positive relationship between IC and the performance of companies. This level of contribution to company performance tends to vary from one industry to the other.

Tan’s 2007 study had involved 150 companies that are publicly listed in the Singaporean Stock Exchange. In the empirical study, Partial least squares (PLS) were used for the data analysis.

Models for measuring and reporting intellectual capital

The models for measuring and reporting intellectual capital fall into two categories: generic models and individual company models. The three most commonly explored generic models are the balanced scorecard, knowledge assets map approach, and the performance prism approach. On the other hand, here are five main individual company models that have recently been used in the management and reporting of intellectual capital. They include the Skandia Navigator, Celemi’s intangible assets monitor, Ericsson’s cockpit communicator, Bates Gruppen Company IQ measurement system, and Ramboll’s holistic company model.

Out of all these methods, only the balanced scorecards widely used, whereas the rest appear too theoretical to be used in practical spheres. Others appear too undeveloped, raising problems of universal acceptability. The best solution appears to derive a combination of these methods in order to bring various aspects of intellectual capital into perspective.

Generic models

Balanced scorecard

The balanced scorecard (BSC) approach was pioneered by Robert Kaplan and David Norton in 1992. Since its conception, the model has been used in many reporting systems that require reference to nonfinancial measures. The balanced scorecard has evolved a lot over the decades, whereby it has changed from a mere measurement framework to a tool for strategy implementation.

 The balanced scorecard works in an excellent way by representing cause-and-effect relationships among various performance drivers and output measures on the basis of four perspectives: customer measures, financial measures, internal process measures, and learning and growth measures. Customer measures dwell on how the organization is perceived by its customers while financial measures dwell on the way the company is viewed by shareholders in terms of profitability and cash flow. Internal process measures are used to address the areas at which the company needs to excel in, for instance, the length of cycle times. Learning and growth measures deal with ways of improving and creating value, for instance, the percentage of sales that is derived from new products.

Today, Kaplan and Norton emphasize the need for causal relationships of objectives and measures to be visualized in the so-called strategy maps. Strategy maps are communication maps for visualizing the strategy of an organization and the systems and processes that are required in its implementation.

Knowledge assets map approach

In this approach, a knowledge-based view of an enterprise is adopted. The approach was designed to assist companies in identifying and measuring various knowledge-based assets and the amount of value that they contribute to the organization. The approach identifies knowledge assets as the sum of stakeholder and structural organizational resources. The distinction is a reflection of the company’s actors as well as its constituent parts. Stakeholder resources take the form of either human resources or stakeholder relationships, while structural resources take the form of either physical or virtual infrastructure (Mouritsen, 2001). Virtual infrastructure, on the other hand, takes the form of routines, culture, and practices. Stakeholder relationships take the form of all the agreements that the company has entered into with stakeholders, including financial relationships, licensing agreements, and arrangements on distribution channels.

Performance prism

The performance prism recognizes the importance that companies attach to the holistic approach to stakeholder management in the modern culture of increased organizational involvement(Zhou, 2003). The main advantage of this approach is that it addresses the needs of all stakeholders: investors, suppliers, employees, communities, and regulators. This it does by putting the requirements of the stakeholders as well as what the organization requires from its stakeholders. This reciprocal relationship is examined in terms of the way the exchange process is carried out.

The performance prism is designed in such a way that it addresses all the processes, strategies, and capabilities that are required in order to satisfy the two critical sets of needs and wants (Wexler, 2002). This makes the approach flexible, facilitating its applicability in many organizational settings. Through a focus on intangible performance, the approach makes it possible for companies to determine their intellectual capital with a reasonable measure of accuracy. Moreover, it is an excellent tool for creating a visual map of the way different performance components relate with each other. It acknowledges that all facets of the performance prism need to be covered within the so-called success map (Mouritsen, 2004). In this regard, the approach appears to address the problem of narrowness, which is often pointed out in the balanced scorecard.

Individual company models

The Skandia Navigator

Skandia’s Navigator model is perhaps the best-known system for measuring IC, although it is only widely used in Skandia’s operations in Sweden alone. At the heart of the model’s four dimensions is the human to focus, which is the driver of the whole model. The similarity between this model and the balanced scorecard is apparent.

            An analogy can be drawn between the Navigator and a house, whereby the financial focus is the roof while process focus and customer focus constitutes the walls. The renewal and development focus makes up the platform. Within such a metaphorical understanding, the renewal and development aspects become the critical bottom line for purposes of sustainability. Each of the five areas of focus that make up this model has a critical success factor that is quantified for purposes of measuring change.

The indicators that are used for maintaining financial focus are represented largely in monetary terms. Customer focus is directed on the assessment of the organizational value of customer capital and both financial and non-financial indicators are used (Petty, 1999). The process focus measures emphasize on the effective use of technology and they monitor various quality management systems and processes, though they also incorporate some financial ratios.

In the renewal and development focus, the aim is to capture an organization’s innovative capabilities and measuring the effectiveness of investment in training as well as expenditure in research and development (Branstetter, 2006). The human focus encompasses measurements that reflect the organization’s human capital as well as the resources are being harnessed and developed. The measurements from all the focuses are then recorded for purposes of, among other things, year-to-year comparison.

Celemi’s intangible assets monitor

This model was developed by Celemi, an international training consultancy firm. The model contains three elements: people (competence), customers (external structure) and organization (internal structure) (Boudreau, 1997). These three elements are interdependent, such that it is easy for areas of growth, efficiency and stability to be tracked, each possessing its own unique performance indicators. Celemi is also known for the production of a management training game popularly known as Tango. This game uses intangible assets to monitor thinking and accounting strategies.

Ericsson’s cockpit communicator

            Ericsson is a Swedish telecommunications company. The company’s approach to IC measurement is outlined in a product known as Ericsson’s cockpit communicator, which is based on the balanced scorecard.  It is based on five perspectives: customer, financial, process, employee, and innovation. Each of these perspectives is represented using the aircraft cockpit metaphor, each possessing its own peculiar indicators. Inputs that are relevant to each indicator are used by the communicator to suggest the actions that best match the strategies of the organization. It becomes easy to determine whether the company is on target on each of the perspectives being monitored.

            Ericsson made the product with the aim of making the organization vision-driven, whereby actions that are compatible with the strategies of the company are accorded priority status. The company also hoped that this product would bring about a communicated strategy that links indicators and actions in order to maintain a balanced focus on past, present, and future performance. The tool facilitates the balancing between short-term and long-term strategies, creates the ability for evaluation and change of organization strategy, and facilitates the management, measurement, and communication of future values.

Bates Gruppen Company IQ measurement system

            Bates Gruppen is the arm of Bates worldwide whose operations are in Norway. Recently, the company proposed a method for measuring and reporting non-financial measures, known as Company IQ. This system enables a company to measure, through various stages, its knowledge assets in comparison to those that are in possession of a similar organization.

            In the first stage, one needs to identify why customers opt to buy from one company and not a rival company (Acs, 2002). This has to be done in a day workshop, whereby the management needs to select up to 12 attributes, for instance, good design, friendliness to customers, and rapid response. This list is then sent to employees and customers for a rating of each attribute twice, one for its uniqueness and the other for its value to customers. Rating is done on a scale of one to seven, and the results plotted using a two-by-two matrix. All the attributes in the upper-right quadrant, which are those that are high on uniqueness and value, require further exploration.

In the second stage, all intellectual assets that bring about star attributes are identified. The ideal process is to divide them as equally as possible between customer, human and structural IC assets (Peppard, 2001). All these assets need to be measurable either in absolute terms or capable of measurement with the use of scales. At least 60% of all the assets identified should be comparable to data from various reputable benchmarking studies within the PIMS database. PIMS is a huge repository of items relating to quality for various companies.

The third stage entails the actual process of calculating the company IQ. This is done by weighting the 100 selected assets for their relative impact on profitability. The weighting standards are available from PIMs. Then, a comparison is made with similar companies on the selected database. Bates Gruppen opts to use the median score of 100.

            As with any system of measuring standards, some of the feedback that is obtained needs to be built into the system in order to maintain corporate competitiveness. For instance, in the case of Bates Gruppen, the strength of the assets that are within the 100-median scale can be identified so that the weaker ones are improved.

            Other than just measuring IC, the method appears to be useful for the identification of valuable, unique capabilities as well as the intellectual capital assets that are behind them. For instance, in the process of calculation of company IQ, a company may realize that the services and goods that it is producing are similar ones that a competitor is producing. The company may realize that the features contained in these services do not appear to add much value to customers. Such information provides pointers on the best causes of action for the company to take. This enables companies to be making only those changes that have the greatest impact on its profit-making capabilities.

            On the negative side, the company IQ method tends to be time-consuming, since a great deal of work has to be done in the initial stages, particularly the collection of data from customers and employees. Many corporate players tend to shy away from IC measurement processes and procedures that appear to eat too much into the previous time of the company. The problem of unwillingness by these people to participate may sometimes be encountered. Sometimes, participants may tend to give hurriedly gathered statistics that give accurate information on the company’s intellectual capital just to make up the required numbers. Moreover, the suggestion about at least 60% of all the indicators being comparable to those gathered from other companies raises concerns relating to the method’s level of subjectivity.

Ramboll’s holistic company model

Ramboll’s holistic company model puts focus on various key areas for managing certain performance indicators. The key areas assessed bring about three sets of results: employee, customer and societal, all of which combine to bring about financial results. The key areas that are managed include human resources, strategic processes, structural resources, and consulting services (Wu, 2005). The performance indicators that are used in human resources, for example, include staff turnover, staff composition, and competence building. Further subdivisions of key performance indicators (KPIs) are then made (Roos,2008). For example, the ones that deal with competence building are subcategorized into supplementary training expenses with the exception of salary, and the hours off that are contributed by employees.

Models for Valuation of Intellectual capital

Valuation is one of the most challenging undertakings in the measurement and reporting of intellectual capital. Although many models have been proposed, it appears difficult to determine how some of them can be put into practice in their current state. The aim of creating them, though, was to allow external stakeholders and other parties to attach an economic value to an enterprise (Machlup, 1962). This has not been a mean task, particularly considering the disagreements that such undertakings are currently shroud in. They are often based on data that is publicly available to finance professionals. The eight most commonly known IC valuation approaches include the value creation index, value-added, Tobin’s q, market/value-based, calculated intangible value, human resource accounting, Baruch Lev method, and value-added intellectual capital coefficient.

The value creation index

This IC valuation approach measures the relative importance of various non-financial metrics in the explanation of the market value of companies. This approach was born out of the survey that was made on Forbes ASAP, a technology supplement of Forbes, a U.S business journal. In this survey, participants were requested to rank different key corporate value drivers in their respective industries. Information that was publicly available was then used in the development of various metrics relating to those value drivers and a test was carried out to determine the correlation between those metrics and share prices. The main aim was the discovery of the factors that the market regards as important as opposed to just whatever the managers keep saying is important.

            The key drivers of corporate value that were revealed in the survey include innovation, customer satisfaction, brand investment, alliances, brand investment, ability to attract the most talented employees, environmental performance, and quality of major products and processes (Low, 2000). In durable manufacturing, the four main drivers of corporate value in rank order include innovation, the ability to attract various talented employees, alliances, and the quality of major products and processes.

            The main problem with this approach is the rigorous analysis required in the process of correlating metrics with capital markets (Rodgers, 2003). This difficulty contrasts unfavorably with other simple IC measurement techniques. Moreover, few corporate players have the time and inclination to keep incurring the costs of the statistical and data-gathering techniques involved. However, this strategy is unique in the way it spells out the observation that what the management considers important does not necessarily coincide with marketplace behavior. For example, managers often insist that customer satisfaction leaves an impact in the marketplace although in fact, it does not. Such findings spark heated debates among practitioners in the accounting field, as they ponder their implications in their profession and ultimately, in the corporate world. 

The value creation index is also widely recognized for endeavoring to create different indices for use in different industries. This goes a long way in supporting the widely held view by IC valuation practitioners that all non-financial performance metrics should always be industry or company-specific.

Value-added approach

The value-based technique values intellectual capital as a concept that concepts on intellectual property, such as licenses and patents (Robinson & Kleiner, 1996). It also includes assets that are less tangible like skills, information systems, and know-how. Porter’s value chain concept is used in the first part of the technique’s framework. From an industrial perspective, the basic premise is that raw materials always enter through the first end of the value chain, and as they move through the various processes that eventually transform them into finished products, some value is added to them. This process has to be administered and managed, such that the internal function of the organization becomes the creation of value for customers.

Tobin’s q method

The Tobin q method was developed by James Tobin, an economist, in an attempt to value the relevance of human capital and technology in a company’s rate of return on investment. The letter ‘q’ in the model represents the ratio of a firm’s market value to the replacement of the firm’s cost of assets. A lower value of the latter variable indicates that the company’s rate of return on investment is higher than normal. Traditionally, human capital and technology became associated with extraordinarily high q values.

The level of accuracy of this approach can be argued to be much higher than that of the market-to-book because of its use of replacement as opposed to historic costs. However, it is more difficult to find all the replacement costs than to simply refer to the balance sheet. Moreover, the method is not an accurate option for economists who want to get an accurate figure of various individual intellectual assets.

Market/value-based method

The market/value-based method is one of the easiest ways of calculating intellectual capital in organizations. It simply involves taking the difference between the organization’s market value and the net value of all its assets. The market value is determined by multiplying the number of shares that are in issue with the share’s market value.

The most obvious drawback of this method is that IC is valued as one asset and no attempt is made to separate the various items that may comprise it. Moreover, the market value of any company is always subject to several external variables, including rumors, political and media influence, and deregulation (Seetharaman, 2002). The problem of failure by this approach to value the firm in its entirety is also encountered. Instead, only each of the severable assets is recorded at an amount that is in accordance with the prevailing financial accounting standards and legislation.

Calculated intangible value (CIV)

This CIV method resembles the super-profits method of IC valuation in terms of the difference between the company’s maintainable profit and its expected return on all tangible assets employed. The method was explained by Kennedy (1998) using data gathered from Merck, a US pharmaceutical company. First, the average pre-tax earnings for three consecutive years were determined, followed by average year-end tangible assets for the same three years. The return on assets was determined by dividing the earnings by assets. The industry’s average returns on assets were determined for three years. The next step involved the calculation of the excess return, through the multiplication of the industry’s average return on assets by the average tangible assets of the company. The calculations went on and on until the net value of the company’s intangible assets was determined. Using this method, it seemed that it is possible to separate goodwill from the IC with the use of the resulting value. However, the method fails to evaluate each component of IC individually.

Human resource accounting (HRA)

Human resource accounting quantifies the economic value of all the people within an organization in order to make a contribution to decision making, control processes, and planning (Tan, 2007). Various models have been suggested in an attempt to calculate each employee’s contribution to the organization.

Bontis (2001) indicates that HRA is an ideal provider of external information to various account users although it possesses other associated benefits. For instance, it facilitates the sharing of internal feedback among organizational members on how strategic goals are being accomplished. It also serves as a starting point for the development of future plans and strategies through the recognition of core competencies that are inherent in an enterprise’s unique IC.

The main problem with HRA is that it is dependent on human capital alone (Abdolmohammadi, 2005). Although it is easy to measure salaries, costs of recruitment, and wages, it is difficult to put a value on the continued growth and accumulation of knowledge and experience among these employees.

Baruch Lev method

This approach is named after New York University’s Stern School of Business professor who proposed it. Prof. Baruch propounded a way of matching company earnings with the assets that are used to generate them, which is very similar to the CIV approach. The calculation makes the use of after-tax, that is, two averages, one of which is for IC assets are formulated with the use of correlations between the return on equity, traditional earnings, and cash flow (Goh, 2004).

The method requires the use of returns for three previous years, balance sheet, as well as information on the physical assets of a company. Lev uses terms such as knowledge-capital, expected rate of return on knowledge assets, knowledge capital discount rate, and knowledge capital earnings in his explanation of this method. His main aim in devising this method was to determine whether traditional earnings, cash flow, or knowledge earnings correlate most with return on equity. His findings revealed that there was only a 0.11 correlation between very strong returns on equity and cash flow and a .029 correlation with various traditional earnings. The correlation with knowledge earnings was 0.53. This seemed to justify the 10.5% rate that compares with the 4.5% for financial assets and 7% for physical assets.

Just like the CIV, Lev’s method makes use of both assets and earnings as sources of data instead of relying purely on assets. By matching their assets to earnings, it is obvious that organizations would simply be left without a figure for use in the comparison with many other companies, or for determining whether their IC earnings are going down or up. Meanwhile, just like some of the other previously discussed methods, this approach generates a single figure to stand for the financial worth of IC without attaching any value to any individual components of the IC. Additionally, it is possible for empirical objections to be raised on the way the figure of 10.5% was derived to represent the expected rate of return on any company’s return on knowledge assets. Apart from this empirical challenge, the method has not escaped criticism for being too complex.

Value-added intellectual capital coefficient

The method entails the calculation of the difference between all sales and all inputs (with the exception of labor expenses), which are divided by intellectual capital, estimated by a company’s total labor expenses. A high ratio indicates increased corporate efficiency in the use of IC assets. The simplicity of this method makes the work of deriving figures less tedious as the practitioners has access to a company’s annual report. Moreover, once the calculations have been made for a whole year, they can be used for comparisons both within the company and with trends in other companies.

The main objection that arises from the use of this approach is the undervaluation of IC, a scenario that arises when one compares the labor expenses of an organization to its IC. In this regard, market-based approaches appear more accurate for the purpose of ascertaining the value of intellectual capital. There could also be a scenario whereby a company does not use its labor resources efficiently, instead opting to mask it with more efficient use of all other inputs, thereby resulting in a similar ratio.


There is no consensus on the best approach to use in the measurement and reporting of intellectual capital. Although many attempts have been made to account for the role of intellectual capital in companies, few strides have been made in deriving a standard way of calculating intellectual capital. It is clear, though, that this form of capital continues to bring about new perspectives in the way modern companies compete both locally and internationally. As Lev (2001) points out, dominant competitive positions, abnormal profits, and even temporary monopolies tend to be achieved through the sound deployment of various intangibles as well as other types of assets.

Lev (2001) adds that in recent years, intangibles are occupying an increasingly large niche within management literature, both in popular realms and in academic circles. Central among the issues that are being debated is the optimal utilization of intangible resources, with the emphasis being put on timely information about all these assets as well as quality issues.


The main problem that is raised in the methods and approaches used to measure and report on intellectual capital is the difficulty in determining the value of the various components that form the intellectual capital in any given organization. The twenty-first-century corporation not just more connected compared to its industrial-era predecessor, it is also becoming increasingly dependent on its talented employees. In an era where economic developments have weakened firms’ control over their human resources, there will always be an urgent need to determine the exact amount of contribution made by every employee.

The weakening of the firm’s grip on intellectual capital can be attributed to two main reasons. First, nowadays, employees tend to access financing more easily in order to participate in activities that would conventionally constitute a start-up company business. This poses a great challenge to employers, who risk facing off with their existing workforce in the world of competition. Secondly, through the opening up of world trade, many instances of interdependence have emerged. This has created a myriad of employment opportunities that make intellectual capital to less specific to any individual employer. This explains the increase in the rate of employee turnover in many economic sectors.

There is a need for innovation in response to the changing trends in the use and reliance on intellectual capital. Today, there are many incentives for companies to innovate. Enterprises strongly feel the need to create patents in order to have a competitive edge in increasingly crowded markets.

Bontis (1999) observes that innovative ideas are needed as a matter of urgency if the huge potential of intellectual capital is to be exploited maximally. Organization knowledge, observes Bontis, remains at the crux of the modern organization’s competitive advantage. This makes the burgeoning field of intellectual capital to be an exciting field for both practitioners and researchers. From this perspective, intellectual capital is conceptualized from many different fields, creating a mosaic of perspectives (Bontis, 1999). For instance, the interest of accountants is to measure it, the focus of information technologists is to codify it within their systems, and that of human resource managers is to use it in the calculation of the return on assets.

A key unfortunate development that is observable in the current literature on the measurement of intellectual capital is the reluctance by accountants to abandon the traditional accounting principles in order to create room for intangibles. This results in a situation where strict requirements are put in place before an intangible can make it into the company’s balance sheet. In this scenario, it becomes impossible to determine the real worth of a company in the current market.

The resistance to the adoption of intellectual capital measures can be traced back to the causes of the market scenario that necessitates the use of intellectual capital. The current interest in intangibles arises from the intensification of competition in all business sectors. This scenario is being brought about by far-reaching deregulation, globalization of trade, and technological changes. These changes force companies to transforms the models within which they operate. However, the pro-establishment elements within these companies always resist such changes. Such elements constitute one of the main stumbling blocks in the standardization of intellectual capital measures.

Current experience shows that intangible capital is already large and it is growing fast, and so do is physical and financial (bonds and stocks) investment within the corporate sector. There is a need for the methods that are used to measure intellectual capital to be such that they are easy to use, standardize, as well as indicate the value of all components that make up a company’s stock of intellectual capital. Moreover, the methods used in the microeconomic level should be easy to aggregate and replicate at the macroeconomic level.

Although the cost of measuring intellectual capital is high, the risk of not measuring it is even higher. Companies that have adopted effective (albeit time-consuming and expensive) methods of measuring intellectual capital, especially in Scandinavian countries, have emerged as pacesetters in the modern corporate world. Such firms are revered in both popular and academic circles for setting the pace in efforts to obtain a universal standard for measurement of intangibles.

The prospects for the adoption of accounting standards for intellectual capital are bright since there is an increased awareness of the need for intangible assets to be incorporated into companies’ books of accounts. The distortions in public policy that used to be caused by an overemphasis on fixed assets appear to have drastically reduced. This indicates a future trend whereby emphasis will be on increase in the extent to which the role of intangibles is increasingly valued as part of macroeconomic analysis. Interestingly, the concept of intellectual capital does not bring about any significant disagreements in terms of definitions. It is easy for an explicitly detailed classification to be derived for financial accounting and management purposes.

            Developments in the research on IC valuation, measurement, and reporting are indicators that the ongoing research on intellectual capital is headed in the right direction. However, it is too early to tell whether the research trend will move towards an emphasis on generic models or on individual company models. Currently, most researchers tend to compare different approaches to the balanced scorecard method, which is widely known both in the academic and scholarly worlds.

            Future research activities will continue to generate more relevant results at a much faster pace than in the past. this is because the information age in which we live today is putting increased pressure on corporations to adapt to new ways of looking at and using intellectual capital in order to a main a competitive edge in an increasingly competitive world. Just like before, the issues of productivity, analysis of investment in the education of individuals (human capital), and policy issues will predominate the intellectual capital discourse.


In summary, efforts to measure and report on intellectual capital have resulted in many experiences, issues, and prospects within the past few decades. As technological developments change the way companies operate, the place of intellectual capital in the valuation of a company’s assets is increasingly being asserted.

Although many attempts have been made to try and measure intellectual capital, there is no agreement on the best approach. Traditional accounting practices continue to predominate, with many practitioners expressing resentment on the use of new standards for measuring intellectual capital. Practitioners and scholars frequently express opposition to the violation of long-standing accounting principles that have been developed over many centuries merely to incorporate aspects of intellectual capital.

The balanced scorecard is the most commonly used method of determining the value of intellectual capital and reporting it in the balance sheet. This generic model differs sharply with other generic models as well as individual company models in terms of simplicity and accuracy. The various individual company models explored here are crucial indicators of the various efforts that individual companies have made to determine the value of their intellectual capital. Of course, each of these approaches is laden with problems and criticisms, meaning that they merely set the groundwork for a long debate on the measurement of and reporting on intellectual capital.

The majority of the firms that are at the forefront in research on intellectual capital are those that are forced by circumstances to do so. The main source of motivation is the need to derive competitive advantage in a world of increased reliance on technology, human capital, patents, and intellectual property rights.

The intellectual capital debate appears to have attracted an unusually high sense of collaboration between corporate players and academics in efforts to find effective solutions on how intangibles should be accounted for in the books of accounts. This collaboration is responsible for the development of many company-based approaches for IC valuation. As the debate intensifies, more collaboration initiatives will be made in the future. This trend is poised to create a pool of intellectual capital reference resources that are crucial in the move towards the development of standards.

When information on intellectual capital is shared among companies, standards can be established with more ease. After all, company owners are realizing that the intellectual capital information that they are hiding from competitors is more or less the same information that these competitors are trying to hide from everyone else. Moreover, government policymakers need to be involved in the intellectual capital debate in order for them to be able to create the right business environment for the adoption of new standards.


  1. There is a need for a standard to be established on the way in which intellectual capital is measured and reported.
  2. Further research is needed in order for the drawbacks of the balanced scorecard to be addressed.
  3. Practitioners are still undecided on whether the traditional accounting principles should be amended in order to pave the way for new accounting standards that create room for calculations on intellectual capital. More research needs to be undertaken in order to address various areas of contention.
  4. The various reports on the standardization of intellectual capital reporting that have been produced since the late 1980s need to be implemented. All of these reports present an excellent opportunity for the identification of various qualitative changes in the way intellectual capital information is reported and utilized for strategic planning.
  5. The intellectual capital reporting trends that have been gathered from the Scandinavian countries should be incorporated with those derived from Canada, Australia, and continental Europe in order to be a reflection of the interest that these countries have on the value of intellectual capital in the modern technology-based company.
  6. Although people are universally recognized as the most important asset in a company, it is imperative that the relationship that exists between human, structural and customer capital in a company is not ignored. This relationship is integral in the determination of the true value of a company from the perspective of intellectual capital indices.
  7. Managers should value intellectual capital in order to perceive the need to invest in it within the framework of long-term standards. They should perform more research on the value that it adds to a company from the perspective of long-term considerations. They need to make sure that it forms an integral part of their business strategy. In other words, they should ensure that their companies have knowledge-based structures in place in order to maintain an edge in today’s competitive environment.




















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Asset: any tangible or intangible element that has the potential to contribute value.

Goodwill: future economic benefits that are derived from the synergy between various identifiable assets or intangible assets that fail to meet the criteria for being recognized as intangible assets.

Human capital: The total (estimated, imputed) value of qualifications, technical, scientific and skills, knowledge, mobility, as well as experience of a person, which is the property of that individual.

Human resource accounting: the systematic recording of spending on various human resources controlled by the company.

Innovation: the development and introduction of the new or changed product into the market

Intangible assets: Non-monetary assets that are without physical substance, which are held for use within the production or supply of various goods or services, either for rental to others or merely for administrative purposes.

Intellectual capital: The economic value of all intangible assets held by a company.

Intellectual Property: All property rights that relate to the exploitation and commercialization of various intangible assets.

Patent A monopoly right that is owned, and which can be bought, hired, sold, or even licensed.

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