In the field of the new economy, or knowledge economy, Intellectual Capital has become the main factor that generates added value and the one that creates competitive advantages for companies, however, traditional accounting, in addition to only showing Past results do not record intangible assets.
The knowledge of the key people of the company, the satisfaction of employees and customers, the know-how of the company, among others, are assets that explain a large part of the valuation that the market gives to a company and that, however, are not included in their book value. Intellectual capital is an important part of the market value of companies and its evaluation responds to the need generated by the traditional accounting system that only measures physical assets.
Faced with these paradigms of the new knowledge society, there is an imperative need to seek effective means that allow the measurement and registration of Intellectual Capital, since there is full awareness that it is an intangible asset, that is, an intangible asset, which is only known from Subjectively, but it is known to exist and to add great sustainable value to many companies.
This article revolves around calculating the Intellectual Capital of the Corporation (Corperijá), using the CIV method (Calculated Intangible Value), described by Thomas A. Stewart in his book on Intellectual Capital, and Jay Liebowitz and Lile Wilcox in their book on elements of Knowledge Management.
Introduction
For a few years, many authors indicate that after several centuries of indisputable prominence, traditional accounting (which only measures tangible assets and reports historical performance results) has lost much of its ability to synthesize the daily transactions of a company in financial statements that reasonably reflect their solvency and their ability to generate profits (Armani, 2002). It is considered that there is a lack of connection between the information provided by the financial statements and that needed by investors and suppliers. It is also argued that the lack of connection lies in the fact that accounting reports of the "old economy" are made for companies of the "new economy" (Ibid.).
If we try to value a company, the most obvious are its tangible assets (land, machinery, furniture and fixtures, etc.), that is to say, the "iron", which is what determines its book value. But, it would be necessary to assess the "soft" part, represented by human knowledge, know-how, staff skills, intellectual property, brands, customer relationships, knowledge about market behavior, innovation capacity, which are some examples of intangible assets, and that added to the book value determine the market value, that is, what one is willing to pay for the company (Palomo, 2003). For this reason, it is possible to affirm that the value of companies today is given by the set of their tangible assets and that of their intangibles.
Intangibles are one of the main factors in the present and future success of companies, which is why investments in this type of assets are increasing more and more. Nowadays having modern facilities does not guarantee companies a competitive position in the markets, since nowadays it is necessary to have permanent innovation processes, have a staff with the appropriate skills, have customer loyalty, with the credibility of managers, etc. In short (Nevado and López, 2000), the development of a whole set of intangible attributes is becoming the pillars of companies immersed in a knowledge-based economy.
To highlight the importance of Intellectual Capital in companies in the knowledge economy, Román (2004) refers to the case of Microsoft, one of the most valuable companies in the world, which has competitive advantages arising from its ability to design and create software computer science of a constant quality level, marketed through its brand. Its creator, Bill Gates, is the forward-thinking driving force that produces knowledge and adds value to your company. Therefore, the value of a share of this company in the stock market cannot be equal to the book value of its tangible assets, or the accounting books must reflect the added value of knowledge.
After the recognition of the existence of intangible assets, there is a need for homogeneous and consensual rules that serve to account for the true economic value of aspects such as the brand, reputation, business ethics, human capital, etc. All this situation has led to a series of large companies, business associations, consultants and business schools have joined forces to resolve this situation and define a series of rules that can be used when valuing intangible assets.
On the other hand, some of the large capitalist companies such as Microsoft, American Airlines and the Skandia insurance company, among others, use their own models to measure the value of their intangible assets in order to determine their strengths and weaknesses in this area. crucial to the survival of the modern organization.
This work aims to assess the Intellectual Capital of the Corperijá Corporation, applying the CIV method (Calculated Intangible Value), described by Thomas A. Stewart in his book on Intellectual Capital, and Jay Liebowitz and Lile Wilcox in their book on Management elements of knowledge.
Definition of Intellectual Capital
The term Intellectual Capital was coined in 1969 by the economist John Kenneth Galbraith, who suggested that it means intellectual action, rather than mere knowledge or pure intellect. Thus, intellectual capital can be considered as a form of value creation as well as an asset in its traditional sense.
There are many definitions that have been given of Intellectual Capital since the 90s when theories began to be developed in relation to the administration and measurement of knowledge within companies.
Among some definitions of what is Intellectual Capital we have those of the following authors, cited by Osorio (2006):
For Brooking, Intellectual Capital is nothing new, but has been around from the moment the first salesperson established a good relationship with his client. Later it was called commerce fund. What has happened in the last decades is an explosion in certain technical areas, including the media, information and communication technologies, which have provided us with new tools with which we have built a global economy. Many of these tools provide immaterial benefits that are now taken for granted, but did not exist before, to the point that companies cannot function without them. Ownership of such tools provides competitive advantages and therefore constitutes an asset. According to Brooking,The term Intellectual Capital refers to the combination of intangible assets that allow a company to function.
Edvinsson presents his concept of Intellectual Capital using the following metaphor: a company is like a tree. It has a part that is visible (the fruits) and a part that is hidden (the roots). If you only care about the fruits, the tree can die. For the tree to grow and continue to bear fruit, the roots must be healthy and nourished. This is valid for companies: if we only focus on the fruits (financial results) and ignore the hidden values, the company will not survive in the long term.
Steward defines Intellectual Capital as intellectual material, knowledge, information, intellectual property, experience that can be used to create value. It is brain and collective force. It is difficult to identify and even more difficult to distribute effectively. But whoever finds it and exploits it, triumphs. The same author affirms that in the new era, wealth is the product of knowledge.
In summary, Intellectual Capital can be defined as the set of Intangible Assets of a company that, despite not being reflected in traditional accounting statements, currently generates value or has the potential to generate it in the future.
Importance of the study of Intellectual Capital
The importance or justification of the study of Intellectual Capital is found in the so-called «New Economy», in the treatment that accounting has given to intangible assets, in the securities markets and accounting, in the response of regulatory bodies international and in the approach that other disciplines give to the subject of intangible assets (Rodríguez, 2006).
In this new context, Intellectual Capital will change the way of doing business, since it will contribute not only to determine the real value of companies, but, most importantly, to add value to them, which will result in an important transformation in the modern economy, since the market will become more competitive, which will in turn result in better quality of products and services and, therefore, greater satisfaction in the consumer or client (Román, 2004).
According to Serrano, cited by Rodríguez (2006), the justification for investors' preference for New Economy companies could be found in their important intangible assets, which are not reflected in their Balance Sheet and Income Statement.
Another reason that justifies the study of intangible assets and the treatment that accounting has given it is what Chaparro, cited by Rodríguez, (2006) defines as a «accounting of tangible assets». According to these authors, over the past centuries, the efforts of academics and accounting professionals have perfected accounting systems, achieving very detailed charts of accounts for these assets. A totally different panorama is that which concerns intangible assets, to which little attention has been paid, except for a few of them, such as goodwill, research and development (R&D) expenses or industrial property. This, despite the fact that in many companies, the value of these intangible assets and others that are not accounted for, is much higher than that of their tangible assets.
According to Román (2004), a third reason that justifies the importance of the analysis of Intellectual Capital is the disparity between the values assigned by the stock markets and by the accounting books to certain companies. Although this difference has always existed, in recent years the gap has widened. In recent decades, an almost general revaluation phenomenon has been observed in all large (and those that are not so much) companies, which can be measured, among other factors, by their market value, a value that, more than times, it triples the total amount of the net assets of the companies. The question that should be asked is: What is the huge difference between the market value of a company compared to the amount of its net assets?The answer will probably be found if the environment in which the company develops is reviewed, in which surely, if not all, some of the following characteristics will coincide: excellent relationships with clients, suppliers, investors and financial entities, work oriented towards optimal innovation organizational capacity, as well as knowledge and expertise put into practice by the members of the company, all of these properties inherent to intangible assets, today called Intellectual Capital.as well as knowledge and expertise put into practice by the members of the company, all of these properties inherent to intangible assets, today called Intellectual Capital.as well as knowledge and expertise put into practice by the members of the company, all of these properties inherent to intangible assets, today called Intellectual Capital.
TABLE 1
MARKET VALUE AND ASSETS (in billions of dollars)
The hidden value is the same Intellectual Capital, and it results from the difference between the market value and the value of the net assets.
Source: Fortune 500 Magazine, cited by Román and others (2004)
Based on table 1 and taking Microsoft and Intel as a reference, we observe how there is a substantial difference in figures for the concepts of sales and assets. While Microsoft had sales income in 1997 of 9,000 million dollars and had assets of 7,000 million dollars, Intel for these same concepts presented income of 21,000 million dollars and assets of 17,000 million dollars. However, there was one area in which Microsoft was significantly superior to Intel: market value. In 1997, Microsoft's market value was $ 119 billion for just $ 113 billion from Intel. An also relevant aspect to highlight is the difference between the value of the net assets compared to the market value. Microsoft's hidden value is 112.000 million dollars corresponding to 94% of the market value while for Intel, the hidden value is 96,000 million dollars equivalent to 85% of the market value. From this it follows that each time traditional accounting explains less the market, in other words, each time accounting explains less the movements of the stock market.
According to Roos, cited by Román (2004), companies such as Microsoft, Intel, Coca Cola, all of them with fewer sales and assets, are much more valuable than most of the industrial giants, such as General Motors, whose fortunes are It is largely due to the classic factors of production (land, labor and capital), not the aforementioned companies, whose revaluation in the market is due, above all, to the value of brands, the relationship with customers, to the productivity and motivation of employees, as well as to innovation and research projects, among other “invisible assets”, which today allow more wealth creation than the classic factors of production.
Intellectual Capital Valuation Models
Nevado and López, (2000) specify that there is no single model for the valuation of Intellectual Capital, since most of them are associated with the corporate strategy that the company has and, based on this, with the importance they give to each factor, hence each company establishes the most convenient indicators to measure it.
The need to develop models for the measurement of Intellectual Capital arises from companies and academics who consider that financial measures are not enough to guide the decision-making process in companies of the 21st century, since traditional accounting systems They only indicate the result of the past and that in this way they have little value for the future, which is why it is concluded that financial measures must be accompanied by non-financial measures, to determine the factors that can lead to business success (Ramirez, 2007).
One of the initial approaches to measuring Intellectual Capital was to employ Tobin's “q,” a technique developed by Nobel Laureate James Tobin, which measures the relationship between market value and replacement value of a company's physical assets.. Knowledge-intensive companies, such as Microsoft, have higher “q” values than those companies that are in basic industry.
There are various models to value intellectual capital. Among the most important are:
- Skandia Balanced Scorecard Navigator (BS) Economic Value Added (EVA) Intellectual Assetts Monitor Calculated Intangible Value (CIV)
1. Skandia Navigator
The first known efforts in the business sector to measure Intellectual Capital were developed by the Swedish company Skandia. This company since the eighties of the twentieth century, observed that the traditional theory of management did not accommodate knowledge-intensive companies, which led to the recognition that the competitive strength of a company was not in its tangible assets such as buildings, machinery, equipment, inventories, etc. but on other factors such as individual talent, relationships with customers and suppliers, Know How, in short, a series of intangibles that could be developed and measured could have an integrated and better balanced series of instruments to grow Skandia.
The Skandia model is based on the conviction that the true value of a company's performance lies in its ability to create sustainable value, pursuing a business vision. In its model called Navigator, Skandia divides the market value of a company into financial capital and intellectual capital, in turn, the latter is divided into human capital and structural capital (Ramírez, 2007). Human capital is found in people who can generate value for the company through their skills, attitude and intellectual agility. Structural capital, viewed as what remains when people go home, includes trademarks, patents, filing processes, clients, and the like.
2. Balanced Scorecard (BS)
Created by Robert Kaplan and David Norton, it has its origins in a 1990 study sponsored by the Nolan Norton Institute, KPMG's research division, entitled Measuring Perfomance in the Organizations of the future. This study was motivated by the belief that the then-existing approaches to performance measurement, based primarily on financial accounting measures, had become obsolete and were not aware of the abilities that companies had to create economic value.
This model consists of a system of financial and non-financial indicators that aims to measure the results obtained by the company.
The model integrates the financial indicators (from the past) with the non-financial indicators (from the future) and it does so in a scheme that allows understanding the interdependencies between its elements, as well as the strategy and vision of the company.
It presents four perspectives in the form of questions:
- Financial perspective: To be financially successful, how must we appear to our shareholders? In terms of objectives, target measures and initiatives Customer perspective: To achieve our vision, how should we appear to our customers? In terms of objectives, target measures and initiatives Internal business process perspective: To satisfy our shareholders and our customers, which business process do we have to prioritize? In terms of objectives, target measures and initiatives Organizational learning perspective: To achieve our vision, how will we sustain our ability to change and improve? In terms of objectives, target measures and initiatives.
3. Economic Value Added (EVA).
It was developed by Stern Stewart. It is a financial performance measure that combines the familiar concept of residual income with the principles of modern corporate finance, specifically that all capital has a cost and that profits, rather than the cost of capital, create profits for shareholders.
The EVA or economic profit is the difference between the operating profit after taxes that a company obtains and the minimum that it should obtain.
The foregoing allows us to define the EVA as the amount that results from subtracting the financial cost of the company's possession of the assets from operating profit before taxes.
EVA = UODI - (Net operating assets * Cost of Capital)
EVA can also be understood from a profitability perspective. If a company obtains a return on its net operating assets that is higher than its cost of capital, it means that a remainder is generated on the value of said assets. This remainder is the EVA, which is defined as, therefore, as the remainder generated by net operating assets when they yield above the cost of capital.
4. Intellectual Assetts Monitor
This model is one of the results of the study of intangible assets by Karl Erik Sveiby. After defining a taxonomy on intellectual capital, he built a model that interprets the most important intangible assets of the company through indicators. The first application case was the Swedish consulting company Celemi.
The intangible Assets Monitor consists of a formal presentation of a series of relevant indicators for the company according to its strategies. From his perspective, these indicators are the basis for creating and developing a company with a strategy focused on knowledge. For its developer Sveiby, cited by Flórez (2001), this system can be integrated into administrative information systems. The purpose is to represent the intangible assets of the organization from the perspectives of stability, efficiency and growth.
The first step in carrying out the measurement is to establish the purpose of the measurement and who are the people to whom the measurement is directed. The second step is to classify the work that employees do within the three categories of intellectual capital, in order to determine which are the indicators that represent the use of intangible assets within the activities that are being carried out within the company.
The system divides into three categories of intangible assets:
- Clients, which represent the external structure of the company that supports relationships with clients and suppliers Organization, which is the internal structure of the company that supports its operations People, which represents the combination of competencies of the employees who work in the company business.
5. Calculated Intangible Value (CIV)
This model arises from a study by Evanston Business Investment Corp., Illinois called NCI Research, affiliated with the Kellogg School of Business at Northwestern University. NCI began studying intangible asset measurement models to foster the development of knowledge-intensive companies. The developers took the premise that investors do not pay attention to those companies that have few tangible assets to offer as collateral, and that, therefore, it was necessary to find a way to calculate intangible assets in monetary terms to provide more information. complete and solid real value of a company. The work team started from the stated value reason and Tobin's Q:"The value of a company reflects not only its tangible assets but also a component that can be attributed to intangible assets." Stewart, cited by Flórez, (2001).
The CIV method is also known as Return on Assets and uses the company's average profit before tax (UAI) for the last three years and the average value of tangible assets for the same period of time. This average profit is divided by the average value of tangible assets to obtain Return on Assets (ROA). The resulting rate is compared to the average rate of return of the industry to which the company belongs to calculate the difference. If this difference is zero or negative, the company does not have a surplus of intangible capital over the industry average, so it is assumed to be zero. However, if the difference is positive, then it is assumed that you have excess capital above the industry average. This excess capital, or excess profitability,By applying the tax factor and calculating its Net Present Value at a discount rate equal to the company's Cost of Capital, the value of the intangible assets is obtained.
Scope of study
For the application of the Calculated Intangible Value (CIV) model, the Corporation for the Development of the Serranía del Perijá (Corperijá), identified with Nit 824.003.522-6, registered in the National Tax and Customs Directorate, Chamber of Commerce in the city of Valledupar-Cesar-Colombia, whose corporate purpose before natural, legal, private or public law persons are the following:
- Design and implement nutrition programs, advise and supervise social, cultural, administrative, pedagogical and health programs aimed at organized groups in the community. Develop, among other activities, formal and non-formal education, health, environment and infrastructure of Institutional and community development Organize training workshops on the handling, preparation and use of foods of high nutritional value in order to improve the nutritional status of the vulnerable population Preparation and processing of food in school restaurants, food service and cafeteria.
To apply the CIV model in the Corperijá company, the two basic financial statements were taken: Balance Sheet and Income Statement as of December 31, 2006 and 2007, from which the relevant information was extracted for the application of the model, which is summarized in the following table:
Additional Information:
- Industry average Return on Assets (ROA) is 18% Income tax rate is 35% Company Cost of Capital is 15%
For the development of the CIV method (Calculated Intangible Value) we will follow the following steps:
First step: The average Return on Assets is calculated, or the average return on tangible assets.
Average Return on Assets (ROA) equals average pre-tax profit divided by average asset value.
ROA = UAI / Assets
ROA = 281,466,198 / 1,393,367,656
ROA = 20.20%, higher than the industry average return on assets (ROA) of 18%.
Second step: The excess profitability or the excess return is calculated, that is, calculate how much a company in the sector would earn on average on that average amount of tangible assets.
The industry average ROA is multiplied by the average value of assets, and this value is subtracted from the average profit before tax (UAI).
0.18 * $ 1,393,367,656 = $ 250,806,178
Excess Profitability = $ 281,466,198 - $ 250,806,178
Excess Profitability = $ 30,660,019.92
Corperijá's surplus is $ 30,660,019.92, which is the difference between what the company earns on average and what a company in the sector earns, on average.
Third step: The Premium attributable to intangible assets is calculated.
The average pre-tax income tax (AUI) rate is applied to the excess return and this value is subtracted from the excess return.
$ 30,660,019.92 - ($ 30,660,019.92 * 0.35)
$ 19,929,012.95
Fourth step: The Net Present Value (NPV) of the premium attributable to intangible assets is calculated, for this the latter value is divided by the company's Cost of Capital.
VPN (15%) = $ 19,929,012.92/0.15
VPN (15%) = $ 132,860,086
The $ 132,860,086 is the value of Corperijá's intangible assets and represents the company's ability to use its intangible assets to outperform its competitors in the sector. On the other hand, this amount represents what it would cost any buyer to create these intangible assets from scratch, assets that Corperijá owns with a current value.
The advantage of the CIV method is that it offers a monetary evaluation and, therefore, it is recommended in the event that there is interest in the business due to a merger and / or acquisition, or to value the shares in the market.
Although the CIV method offers the potential to make comparisons based on audited financial results, it has two limitations (Mantilla, 2004):
- The CIV method uses the industry average return on assets (ROA) as the basis for determining excess returns. By nature, average values experience external issues and could lead to excessively high or low ROA. The company's cost of capital dictates the Net Present Value of intangible assets.
However, in order for the CIV to be comparable with and within industries, the industry average cost of capital must be used as a proxy for the discount rate in calculating the Net Present Value. Once again, the problem of averages arises and you have to be careful in selecting an average adjusted for external factors.
Conclusions
It is recognized that the Intellectual Capital of a company plays a significant role in the creation of competitive advantage and in the creation of value, therefore, its valuation becomes an important factor in determining the real value, or market value.
According to Edvinsson, cited by Ramírez (2007), if Intellectual Capital constitutes the highest percentage of the market value of companies, not only is an inequity being committed with the investment community, but we are facing a crisis that extends through of the economy, by measuring what should not be measured, generating wasted resources that flow where they should not and at the wrong time.
A practical valuation case has been presented in this work that allows quantifying the value of Intellectual Capital, which added to the book value of physical assets allows us to know the market value of the company in question.
Although the CIV method presents the limitations of the averages of the profit before taxes and that of the value of tangible assets, it reflects in the result the efficiency in the management of the physical assets of the company's operation, because the higher the profit and the Lower investment in assets, the return on assets (ROA) is higher, which makes the method viable because when compared with the average return on assets of the industry, the difference must be positive for the company to have a surplus of capital, and thus can value the Intellectual Capital.
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