Intellectual capital: current issues and policy implications
| DOI | https://doi.org/10.1108/14691930010350792 |
| Date | 01 September 2000 |
| Published date | 01 September 2000 |
| Pages | 206-240 |
| Author | Niamh Brennan,Brenda Connell |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
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Journal of Intellectual Capital,
Vol. 1 No. 3, 2000, pp. 206-240.
#MCB University Press, 1469-1930
Intellectual capital:
current issues and policy
implications
Niamh Brennan
University College Dublin, Dublin, Ireland, and
Brenda Connell
Ernst & Young, Dublin, Ireland
Keywords Intangible assets, Intellectual capital
Abstract Substantial differences between company book values and market values indicate the
presence of assets not recognised and measured in company balance-sheets. Intellectual capital
assets account for a substantial proportion of this discrepancy. At present, companies are not
required to report on intellectual capital assets, which leaves the traditional accounting system
ineffective for measuring the true impact of such intangibles. Regulations currently in place are
analysed in this article. Prior research concerning intellectual capital is presented. Frameworks for
intellectual capital are compared. Indicators used for the measurement of intellectual capital are
examined. The research methodologies employed for collecting information about the use of
intellectual capital accounts in companies are reviewed. Guidelines available to companies for
reporting on intellectual capital are considered and also the efforts made towards developing an
accounting standard for intellectual capital. Finally, current issues and policy implications of
accounting for intellectual capital in the future are examined.
Introduction
Substantial differences often exist between the market and book values of
companies. Many of these differences can be explained by intellectual capital
assets not recognised in company balance-sheets. Intellectual capital can be
thought of as the knowledge-based equity of a company (International
Federation of Accountants, 1998). It includes assets relating to employee
knowledge and expertise, customer confidence in the company and its
products, brands, franchises, information systems, administrative procedures,
patents, trademarks and the efficiency of company business processes (Danish
Trade and Industry Development Council, 1997). This has presented companies
with a new challenge ± how to account for intellectual capital.
Objectives of this paper
This paper reviews the literature to date on accounting for intellectual capital
focusing on five main areas:
(1) current regulations for intangible assets;
(2) prior research on intellectual capital;
(3) frameworks for classifying and managing intellectual capital;
(4) intellectual capital indicators and measurement techniques; and
(5) methodology used in prior empirical research.
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Current issues
and policy
implications
207
The paper also focuses on issues currently facing policy makers, such as future
guidelines for companies and the setting of accounting standards.
Definition and classification of intangible assets
Table I compares UK/Irish, US and international accounting standards on
intangible assets. It highlights the definitions, classification, recognition and
amortisation of intangible assets as referred to in the standards.
IAS 38 and APB 17 deal only with identifiable intangible assets, while FRS
10 encompasses both goodwill and intangible assets. Unlike FRS 10 and IAS
38, APB 17 Intangible Assets, issued in 1970, offers no definition. The
definitions of intangible assets in FRS 10 and IAS 38 have many similarities.
They specify that intangible assets should be identifiable, non-mandatory/non-
financial assets and without physical substance. FRS 10 emphasises control of
the intangible asset, which must be under that of the entity through custody or
legal rights. Control is mentioned elsewhere in IAS 38, separate from the
definition. Unlike FRS 10, legal enforceability of a right is not a necessary
condition for control under IAS 38. The US standard emphasises the purpose
for which the intangible asset is held, i.e. future economic benefits are expected
to flow to the enterprise through the use of the intangible asset.
The accounting standards all provide methods for classifying intangible
assets and examples of classification categories. FRS 10 provides that
intangibles should be classified in a category if they have a similar nature,
function or use in the business of the entity. Examples of classification
categories are licences, quotas, patents, copyrights, franchises and trademarks.
IAS 38 provides that intangible assets should be classified in terms of
expending resources or incurring liabilities or the acquisition, development or
enhancement of intangible assets such as: scientific or technical knowledge,
design and implementation of new processes or systems, licences, intellectual
property, market knowledge and trademarks. IAS 38 has a broader list than
FRS 10, including elements of intangible assets such as design and
implementation of new processes. Common examples of items to be listed
under these classification headings are computer software, patents, copyrights,
customer lists, market share and marketing rights. APB 17 proposes several
different bases to classify the types of intangible assets. APB 17 has several
bases of classification (which reduces comparability across companies):
identifiability, manner of acquisition, expected period of benefit and
separability from the entire enterprise.
Intangible assets are defined very narrowly, not including assets such as
human resources, customer loyalty, company reputation. These elements of
intellectual capital, if managed properly, have huge potential for creating value
which many companies feel can no longer be ignored.
Elements of intellectual capital such as human resources, company
reputation, customer loyalty, are not included in the narrow definition of
intangible assets as set out in UK/Irish and international accounting standards.
However, in the knowledge management field, the term intangible asset is
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understood in a broader context. Most approaches follow the IAS 38 notion of
intangibles but include some additional factors such as value-generating
databases and employer-employee relations.
Roos et al. (1997) traced the theoretical roots of intellectual capital to two
different streams of thought ± the strategic stream and the measurement
stream (Figure 1). The strategic stream focuses on the creation, use of
Table I.
Comparison of
accounting standards
for intangible assets
FRS 10
Goodwill and intangible
assets
IAS 38
Intangible assets
APB 17
Intangible assets
Definition of
intangible
assets
Non-financial fixed assets
that do not have physical
substance but are
identifiable and controlled
by the entity through
custody or legal rights
An identifiable, non-
monetary asset without
physical substance held
for use in the production
or supply of goods or
services, for rental to
others or for
administrative purposes
No definition
Classification
of
intangibles
A category: intangible
assets having a similar
nature, function or use in
the business of the entity,
e.g. licences, quotas,
patents, copyrights,
franchises and trademarks
Expending resources or
incurring liabilities or the
acquisition, development
or enhancement of
intangible resources such
as scientific or technical
knowledge, design and
implementation of new
processes or systems,
licences, intellectual
property, market
knowledge and
trademarks
Classified on several
different bases:
identifiability, manner
of acquisition,
expected period of
benefit, separability
from the entire
enterprise
Recognition An internally developed
intangible asset may be
capitalised only if it has a
readily ascertainable
market value
An intangible asset
should be recognised if:
it is probable that the
future economic benefits
that are attributable to the
asset will flow to the
enterprise;
the cost of the asset can
be measured reliably
An internally
developed intangible
asset should be
recognised if it:
(a) is specifically
identifiable;
(b) has a determinate
life;
(c) can be separated
from the entity
Amortisation Where intangible assets
have limited useful
economic lives they
should be amortised on a
systematic basis over
those lives. Where
intangible assets have
indefinite useful economic
lives, they should not be
amortised
The depreciable amount
of intangible assets should
be allocated on a
systematic basis over the
best estimate of their
useful lives
Intangible assets
should be amortised
by systematic charges
to income periods
over the estimated
time to be benefited
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