Summary
When a company is liquidated or participation in a joint venture is discussed, it is common to face the dilemma that the financial capital that is contributed is not a sufficient criterion for the subsequent distribution of dividends. A possible solution to this question would be to register the organization's intellectual capital in the accounting books. Different authors have approached the subject from different approaches. Here a method of valuation, registration and management of this capital is provided based on a model of the author himself, published in various sites and magazines in Cuba and abroad. The essence of the method consists in the capitalization of expenses and decremental costs that form sources of future value for the company. It also includes indicators of efficiency and competitiveness of intellectual capital.
When a company is liquidated or the participation in a joint venture is discussed, whether by shares or cooperated production, it is common to face the dilemma that the financial capital that is contributed is not sufficient criterion for the subsequent distribution of dividends.
This will be relatively important depending on the economic sector in question and is decisive in the case of the so-called knowledge organizations whose fundamental assets are intangible, such is the case of software, consulting and research companies, to mention only some.
If intellectual capital were recognized or reflected in our accounting books the process would be much simpler, but international accounting practice has avoided the matter because of its controversial nature.
The limitations and insufficiencies of traditional accounting to incorporate intellectual capital to the balance sheet of the company have already been discussed, and methods for measuring intangible assets have been proposed by various authors, framed in what has been called the new economy or knowledge age economy.
Goodwill as a measurement method, although it really characterizes the value of a company according to the market and from this point of view it is a good indicator, it is also true that it can be affected by speculative actions and that its excess of dynamism makes it have than to be valuing the intellectual capital daily which in fact is impractical in the eyes of traditional accounting.
Return on assets (ROA) in excess of the industry average, has the disadvantage, contrary to the first, of too much stability, and although it is very suitable for taking a picture of the value of intellectual capital at a given time The truth is that it does not characterize its dynamics or its periodic evaluation, which is also contrary to what is commonly accepted by traditional accounting.
Other valuation methods studied and applied by some important companies are the MCM (Market Capitalization Method) (Mohammed 2002) which corrects the drawbacks of Goodwill but has the same drawbacks as ROA, while DIC (Direct Intellectual Capital) (Mohammed 2002), although it is the most accurate and endorsed by Skandia, it is too complex for smaller companies and too expensive to implement.
In previous articles in which we approached the subject, we proposed a model to record this intellectual capital. We said then that we considered the greatest obstacle to its implementation the fact that accounting standards require that for an intangible asset to be recognized on the balance sheet, it must be probable that future benefits attributable to it will flow to the company and that to satisfy This criterion the company should demonstrate the expected way in which the intangible asset will increase the inflow of profit.
It is precisely this concept that we intend to return to to propose a hypothesis of a possible register of intellectual capital with a reasonable level of certainty.
As a starting point, it is important to establish a uniform classification of intangible assets.
From studying the different models we have that the classification of intangibles is very similar in both. Sveiby (1996), Bontis (1996), Saint-Onge (1996), Modelo Intelect (1998), Dow Chemical (1998), Nova (1999) coincide in three groups: human, relational and structural capital; with some variations in the names, the relational: social, clients and the structural: performance, organizational.
For their part, Skandia (1996) and Dragonetty Roos (1998) consider the structural and the relational as one in a first hierarchical level, and at a second level they break down the structural into innovation capital and process capital. This approach to innovation is also taken into account by Sveiby when defining the indicators and by Nova when considering it as a capital apart from the three mentioned.
For the purposes of the method proposed here, the most appropriate classification is that of the Technology Broker model by Annie Brooking (1996)
- Human assets Market assets Intellectual property assets Infrastructure assets
Human assets: Ability to learn and use knowledge based on people's competencies and motivations.
Valuing people's skills in money may be unacceptable to overly orthodox minds, but if we already accept that Legal Law and insurance institutions value the life of a person or the different parts of the human body, for practical reasons and regardless of human nuance or sentimental of what this means, for the same or better practical reasons we have to accept that people's competencies are valued depending on the contribution they make to the organizations that employ them.
Market assets: Those that provide a competitive advantage in the market: brands, customer list, collaboration capacity, product portfolio.
Intellectual property assets: Additional value that the exclusive exploitation of an asset represents for the company: patents, copyrights, design rights, trade secrets, know-how.
Infrastructure assets: Includes the technologies, methods and processes that allow the organization to function: business philosophy, organizational culture, information systems.
The accounting equation is then written as suggested by Mantilla (2000):
Resources (intangible assets + tangible assets) = responsibility + intellectual capital
The accounting model previously proposed by the author includes the variations caused by the application of this method:
Under this approach, it is important to establish two details:
- intellectual capital + stockholders' equity give the value of the company, not its price. The purchase-sale price or its stock market value continues to be influenced by speculation, the supply-demand relationship and other market mechanisms. It is necessary to differentiate between intangible assets and the management indicators of those assets, this question is not fully elucidated in the extensive biography that can be consulted on the subject.
In the case of intangible assets, we will not refer to those of intellectual property that traditional accounting already admits to be reflected in books when they are acquired or something has had to be paid for them, but we intend to show that other sources of value are important for the company. The organization can also accommodate the sine qua nom requirement that future cash flows can be demonstrated and that they can be measured relatively easily.
I Market assets
- Market: Real market value expressed in the current contracting Suppliers: Amount that reports the differentiated supply conditions in relation to the conventional market (payment terms, discounts, interest on commercial credits and others) and that represent the disbursements that will not be Government: Amount represented by state bonuses, priorities, subsidies and subsidies Treasury: Amount represented by bonuses and tax exemptions Bank: Savings in the cost of money due to favorable interest, grace periods, payment terms Image: Promotion and advertising expenses.
II Infrastructure assets
- External infrastructure: Possible expansion of the market thanks to external infrastructure: railways, communication lines, bandwidth as well as cost savings from having this infrastructure Internal infrastructure: Cost savings thanks to the level of computerization, organizational changes, organizational measures. When projects of this type are carried out, feasibility studies are carried out where the benefits derived from the changes are calculated.
III Human assets
- Training: Training expenses: habilitation and development Value of the workforce: Salaries paid above the industry average, employee benefits (health insurance, special conditions, bonuses) Motivation: Salaries that would correspond to unclaimed overtime.
All these intangibles are measurable and verifiable by means of control actions, which is a basic requirement that Accounting follows for the record, their traceability being an important condition.
In relation to accounting treatment, they can be classified into two large groups:
- Capitalizable expenses Differential costs (decremental or incremental)
For capitalizable expenses, the proposed method is based on determining the net present value of future cash flows attributable to intangibles and that in one way or another will be the result of previous disbursements that have not been capitalized.
The cost of promotion and advertising is perhaps the most important example. The returns that are obtained as consequences of promotional and advertising campaigns, generally do not appear in the periods in which the expenses are made, especially when the result of that campaign is the formation of an image and a more or less permanent clientele.
Companies often spend considerable sums on developing their human resources, on staffing, setting up sales agencies, studying distribution methods, studying new forms of advertising and market research, reorganizing structures, computerization of systems and automation of processes, so that the advantages derived from this kind of expense can become a competitive advantage that significantly increases your profits in the medium term.
Thus, the image, internal infrastructure and training assets would be located in this group.
For differential costs, its decrease can be determined by expert opinion.
The accounting record would be:
Intangible asset
vs.
Intellectual capital
The intangible asset account must be opened for each type of asset. The intellectual capital account should be treated in a similar way to social capital: analyzed by initial value, debits and credits so that its trace can be followed.
In the case of capitalizable expenses, their value will be updated by amortization, while the differential costs will be updated by a new valuation so that the value of the KI remains updated in the company's books. If precise valuation and amortization standards are established for each case, a level of uniformity in the necessary record can be achieved to make it comparable.
Since it does not represent cash income it will not be taxed by taxation taxes.
In no case has the possibility of operations between the accounts of the traditional balance and the aggregated balance been considered, but the future possibility that this may be the case, depending on the evolution of accounting standards, is not underestimated.
For the management of this intellectual capital, it would be necessary to determine the factors that determine the increase in intangible assets and establish a system of management indicators.
Likewise, it would be necessary to establish efficiency and competitiveness indicators that demonstrate the need for such management:
- growth (increase - decrease / initial value) soundness (intellectual capital / equity capital) profitability (profit / intellectual capital)
In addition to the financial and commercial benefits, the social benefits represented by applying this method of registering intellectual capital and its subsequent management should not be lost sight of. Several of the aforementioned factors foster the interest of the company in paying better salaries, motivating and training its employees and contributing to the improvement of external infrastructures for social use.
Bibliography
Brooking, Annie (1996). Technology Broker
Mantilla, S. A (1999) "Intellectual Capital and Knowledge Accounting". Ecoe Editions, Bogotá.
Mohammad J. Abdolmohammadi and Lynette Greenlay. Accounting Methods for Measuring Intellectual Capital.. 2002
Sveiby, KE (1998) "The Intangible Assets Monitor". Journal of Human Resource and Accounting. Vol. 2, No. 1, pp 73-97
Accounting Model for the Measurement of Intellectual Capital. Veritas Magazine, p. 30, August, 2003. Mexico
