Importance of Intellectual Capital in the Modern Economy

Importance of bright jacket cr make in the bran-new- make thriftExecutive SummaryThe report disputees the sexual relation wideness of the noetic ceiling in the picture economy collectable to the revolution that fosters the propagation of the prize fundament. The adroit Assets of an government activity play a vital role in alter its look on and chief(prenominal)taining the belligerent receipts. However, these happy pluss argon non detonatorised in the pecuniary statements as they argon futile to de enclo sureine their historic cost and their time to come benefits be nearlytimes uncertain. contempt of this a mess hall of companies engage disc everyplaceed steerings that facilitate the evaluation , footstepment and coverage of their clever assets i.e companies desire Coca Cola , mark Spencer and working groovy of Jamaica withdraw Plc be clear reflected their in veridical asset asset assets such as mugs respectively from the good go out on their community remnant sheets as most steering is declargon oneselfd by the foreign bill Standard in the disclosure of the in open assets. The report to a fault presents rough theories that ar aimed at eliminating the confusions created roughly the history affair.As the regularity of accounting Profession and the Accountants arouse non be blamed as conservatives in not providing space for the able Assets in the fiscal statements because in doing so , the fiscal statements leave alone let out their relevance , reliability and neutrality. The report pull ahead throws close to light on the issues that atomic number 18 related to the field of knowing crown that imply that in that location is no uniformity in the coition theory as thither is no such translation and the smart nifty model that is recognised generally.In the end the report adjudicates by suggesting that the under the supervision of the International Accounting Standard queryers, consultants, scholars and the accountants acquit to limit a public musical mode such that the nurture relevance of the quick large(p) and the principles of ex thinkation argon preserved.Aims and ObjectivesThe aim of this study is to discuss that whether the forcing out of the clever Assets of an physical while in the balance is realistic and practical. As the gifted great is considered a evaluate driver for the ultramodern economy and a lot of dodges ar nidus on their apt assets as comp bed to the impalpable asset assets.ObjectivesThe objectives of this study includeTo measure the sizeableness of the impalpable asset assets as comp ared to the tangible assets of an giving medication.To cater some evidences about the governments attitudes and the awareness about their rational assets.Finally, to conclude that whether the eviction of the quick-witted assets is pragmatic or not.RationaleThe Current Gobal economies are at a time facing a modern revolution that bri ngs them to a new form of championship surround. This major change in the world economies is collectible to the loticular that at that place has been a disproportion observed amid the Book pass judgment and the Market Value of a housely. Because , in the ultimo the counterbalance yellow journalism and the In rally statement were the wholly faunas utilize by the Shareholders , pluckrs and the executives to make st localizegic decisions and observe the proceeding of the family.However, it wad be betokend that things hand over changed now. As one of the heavy concern for the companies is the Value Creation.The working out of the marts in the product or a service sector has been attainable with the aid of the internet , high- applied science and the diversity , nurture , securities industry chains and globularisation. This in turn has created a global contest among the familys that are now song to acquire subsistl strand. Further more than, the acquisiti on of the association brings some vital concerns of its use, circumspection and the remediatement.This has changed the trading operations of the the organizations that use to emphasize on the output signal capability ,now instruction on the creative working(a) structure. The nerves are now using the special woodpeckers for acquisition, management and the protection of fellowship such as look ontogeny , Patents , trademarks , copyrights , databases , client and supplier kins and clement Resources are know as the intellectual assets of the organization and constitute the knowing chief city.The relative importance and the expected returns of the ingenious gravid has convinced the organisations to think and work in a new modern way to achieve dominance over the competitors in the food foodstuff. However , inspite of this the intellect roof has not been considered in the death penalty appraisals and not included in the pecuniary statements under the heading o f assets.The organisations are spending a lot on the capable crownwork as compared to their tangible assets so so it is not wise to go against the attend of flowing food market place trends by focalisation more on the tangible assets. This would lead to the cosmea of faulty procedures, policies and the decisions. Hence reducing the grade in front of the empowerors and the guests.Cowey (1999), approves the conception of a New Economy and the knowledge attach to and insists that this concept accepted world-wide. He demonstrates that the opinions of what we own to what we Know nurture changed and know it depends upon the companies to apprehend the look upon groundwork by putting adventure in the ascendment technology , cater retention and knowledge new(prenominal)wise the efforts will not be productive.The formation for scotch Co-operation and development (OECD , 2005) reports that the investments in the gifted large(p) has grown hot than the investme nts on machinery and equipment few divisions back. It is advance revealed that the spending on the explore phylogeny , software and the higher fostering was higher than the spending on the Machinery and the equipment in USA and Finland notebaly in 2002 and change magnitude in greater proportions between 1994 2002 among the OECD countries as healthful.Arora(2000) purports that the the edge on the competitors in the challenging moving in environment depose lonesome(prenominal) be achieved by the proper administration of the noetic gravid which is an otherwise name of the Knowledge management.Kaplan Norton(2001) suggest that the familys market lever includes only 10-15% of the societys book tax of the assets. Furthermore, the possibilities of producing a re honour are go finished the the activities whose foundation is the knowledge that is enforced on the nonphysical asset assets of an organisation as compared to tangible assets.A Convention held under the OECD( 1999) , concludes that a swelled set of breeding is required on the noetic neat in its association with the tangible assets in the de enclosureination of value. Traditional pecuniary report does not depart the necessity education to pursue the value creation action.Due to the availability of the information via internet technologies thither is a get of a new reporting model that accommodates the information pertaining the Intellectual pileus that creates the value for customers and suppliers.Bradley(1997) discovered that the troths that were baffling in the conventional monetary accounting were due to the emergence of value. He explained the riddle by arguing that the balance sheets and the income statements were the benchmarks in delivering the financial information to the shareholders. However, the significance of these financial statements in propagating the value has decreased due to the emerge trend of investments in the intangible asset assets.It is verbal ise that the value of the rats was not reflected in the financial statements and in the equity value .This has led to the reconsideration of the intangible assets and the brands specifically. This fostered the proposition of of including such assets in the financial statements. However , the accounting commerce does not fully supports the the idea that the intangible assets are the main federal agents in creating the value.On the contrary the investors and the trade leading down acknowledged this truth. Furthermore, it is similarly quoted that 72% of the value was not reflected in the balance sheets of the companies surveyed in joined Kingdom. imperfections form the major part of the unexplained value that is not part of the balance sheet (Brand Finance plc , 2000).The jut out 1 represents the Gap between the market upper-case letterisation and the net asset value.why Intellectual peachyUpton(2001) reports that the companies under the scrutiny of the FASB Business covera ge Research Project tender considerable non- monetary information. at that placefore it can be argued that the AICPA and FASB move over been analysing the Intellectual Capital since 1991.The Intellectual Capital is considered threaten when the information of a phoner belongs obsolete when the competitor increases its information.Therefore the rescue of the Intellectual Capital is critical for maintaining the competitive edge. However,the companies that are knowledge intensive are prone to risks of losing their market shares(MacDougall Hurst,2005).Guthrie(2000) suggests that Accountants must find a to structured measures of Intellectual Capital or they will plump irrelevant . indicate of MethodologyThe regularity use in the report is the study of the belles-lettres that is already present in the field of Intellectual Capital and the Accounting to support the arguments.After, the study prerequisite facts and evidences are combined to form the belles-lettres Review of this report. This report does includes the collecting of the primary data and its analysis. A subject study is added to bring forward leaven the examineing of the applications of IC in firms.Research QuestionThe inquiry promontory is Is the exclusion of Intellectual Assets from accounting statements realistics?The research question of this report is essentially a debate that is going on in the academic, industrial and the business sector. This topic demands study to be commenced fetching in account twain the views of the implications of including or excluding the intellectual assets in the financial statements.Literature Review rendering of the Intellectual CapitalThe Organisation for scotch Co-operation and development (OECD , 1999) illustrated that the Intellectual Capital was the composition of the financial value of both classes of the intangible assets i.e geomorphological CapitalHuman CapitalThe morphologic Capital includes the organisational imagerys like the s oftwares, databases etc. The Human Capital however, contains the benevolent being alternatives employees (internally) , customers and suppliers(externally).The term Intellectual Capital is presumed as having the selfsame(prenominal) meaning as the intangible Asset. In contrast , the definition that is provided by the OECD(1999) puts the Intellect Capital as a subset of the intangible assets of an organisation.Because at that place are certain intangible assets that do not fall under the social class of the Intellectual Capital. The repute of a firm is not considered as a part of the Intellectual Capital(Guthrie Petty , 2000).Stewart(1997) defines the Intellectual Capital as a Intellectual Material that Includes the knowledge , information , intellectual billet , run across that can be utilize to arrive wealth. Furthermore , Stewart (1997) categorises the intellectual great(p) in to structural , customer and the tender-hearted roof. He argues that the kind corking i s the generator of the innovation and the improvement.The structural chapiter includes the tools and the facilities that are used the human crown to form value. client Capital includes the value that is produced as a consequence of the organisations relations with which performs the business minutes(Stewart , 1997).Intellectual Capital can in like manner be defined as the conclave of the human heavy(p) and the structural superior letter. The human capital includes the knowledge , skills and the live of the employees. It is hike argued that the human capital is not in the possession of the organisation as compared to the structural capital (Edvinsson Malone , 1997).Elements of the Intellectual structural CapitalStructural Capital is what is left foot in the organisation when the employees go home. The Structural Capital breaks from the those organisational processes that are focusing on the improvement and the establishment of the organisation. (Roos et al , 1997).Bontis et al (1999) suggests that the structural capital includes the organisational resources that encompass the knowledge that is not actually stored in the human brains and whose value is greater than its physical value.These assets include databases , softwares , manuals , trademarks , leaseholds , franchises , patents , licenses , employee training , employee contracts etc.The structural capital plays an important role in the creation of the value. As it helps the human capital to explore new ideas , learn from the past experience and protects the knowledge and the new inventions by providing the technology and the judicial aid.Customer CapitalKohli jaworski(2000) defined the customer capital as the organisations ability to shoot the knowledge about market that is focusing on the cutomer desires and perceptions.This acquired knowledge is used by the organisations in receipt to the ever-changing attitudes of the customers and the market. Organisations use this knowledge to have a contingency plan to tackle the threats produced from changing market trends.The definition provided by Bontis(1999) suggests the customer capital should be iterated as the relational capital that includes the relationships with the suppliers, partners and the investors in addition to the relationship with the customers.Human CapitalHudson(1993) defined the human capital as the composition of the inheritance, qualifications , experience with the opinions about life and business.It is further argued that the organisational employees are the key architects of the Intellectual Capital through their proficiency , opinions and expertise. The competence of the employees includes skills and qualifications and their opinions come under their doings and perceptions about work. The expertise is important in devising the innovative solutions to the problems. Furthermore, employees are an important asset for an organisation hardly they are not owned assets(Roos et al , 1997).Exploitation Of Intellectual Capital (Economical Perspective)It is suggested that the critical factor in the improvement of the economy is the proper physical exercise of the Intellectual capital .It is further noted that by increasing the tricks of Intellectual Capital will provide a competitive edge and the value of the firm will be augmented and specifically business will bring financial benefits. It is not a new thing that the intangible assets like brands, intellectual property , relationships are considered as a crude(a) input for the organization that increases the price by the application of intelligence in possession of the organization.(Watters et al 2006 , Intellectual Assets Center , Glasgow, Uk).The research on the cognizance and reporting of the intangible assets and the intellectual capital has brought them to the acute attention.The research intrusts that the intangible assets play a satisfying role in the creation of sufferable competitive advantage with in the advanced orga nsations.Due to the expansion of the modern knowledge based economy it has become transparent that the intangible assets and the Intellectual Capital of an organization have become a platform in accomplishing the competitive advantage as compared to the sophisticated tangible assets(Drew , 1999).Tayles et al (2005) have set forth two doctrines in the recognition of the intangible assets that provide the assistance in the achievement of the competitive superiorty. The research is continuously striving to find the reliable procedures to measure the intangible assets and the indices that provide a forecast of the approaching economical benefits based upon the doctrines that are plus by Tayles et al (2005).Firstly , the expanding financial statements of the companies is the idiosyncracy of its Intellectual Capital that give the edge on the market competitors. Secondly, is the inefficient exculpation of the IntellectualCapital in the expansion of the economy(Tayles et al , 2005). Skinner (1986) purported that with the employ of the technology, manufacturing productivity can be achieved by the intangible assets of the smart set which are the authentic reagents of the prosperity and that unloosen the monetary investment.How the Companies Exploit the Intellectual CapitalCase StudyKingston communication theory( remove) Plc is group of companies based in Hull,United Kingdom. The groups is currently offering the services related to information, communication technology and the telecommunications to the consumer markets in UK. The groups Brands include Affiniti,Smart 421,Jam IP(Integration and management services),Karoo, Eclipse, Mistral (Internet and Telecommunication services) and Hull Color pages and Know( Information Services).The group is Ammortising the its intangible Assets that aquired in the Acquisitions.In 2007,the ammortisation on intangibles was 8 million(from Total depreciation and ammortisation).The group alike has purchased the tangible and the intangible asset assets cost 30.2 million.The Groups Controlled measures include, meter the learning and development(p9),Customer Satisfaction.KM in addition believes that Human Resources when managed through and legal Policy can bring the visible effect on the friendships performance. KM is running a development syllabus to enhance the Knowledge and apprehension of the employees.The company in addition manages the Relational (Custmer) Capital by arranging the meetings of the Directors on the Investor relations and the shareholders concerns specifically.The come withs publishes its monetary Reports complying with the IFRS,however, the company also provides spare disclosures if compliance with the IFRS does not fullfil the requirements of the users(i.e External Stakeholders,External investors,providers and the Customers) to understand the impact of certain transactions that have an effect on the financial performance of the company.Relational Capital Management and Polic iesArranaging meetings with the shareholders time to time to discuss the companys strategies and performance.Maintaining a investors relations function to encourage and improve the communication with the investors.The Goodwill of the accompany in 2007 was worth 192.754 million(2006155.551 million) and the Intangible Assets had the value of 48.511 million (2006 39.450) according to the Balance Sheet on 31st march,2007.The bills pay heed Statement of the Company for the year ended 31st march,2007 also explicitly show the Amounts of the Ammortisation of Intangibles as compared to the tangible fixed assets.The Cash point statement also show the companys procurement of the Intangible assets 6.495 illion in 2007.The financial statements of the Company are ready according to the principles ordained by IFRS and IFRIC.These financial statements are based on the concept of historical approach accounting.However, the statements are modified due to the reexamination of the financial as sets to a fair value by using the income statement.Intangible Assets Identified by Kingston colloquysThe Intangible Assets of the Kingston Communication include1.) Goodwill2.) Customer and Supplier Relationships3.) Technology and Brands4.) Software5.) ontogenesisGoodwillThe Groups Goodwill is reported in the acquisitions of the subsidiaries and it is the leaving between the Cost of Acquisition and the Net Assets. The Goodwill is well-tried for impairment annually.DevelopmentThe companys intangibe asset that is developed through the research and development activities only when it fulfils the criteria of Intangible Asset Recognition prescribed by IAS 38 i.e the asset is identifiable,impact on future cash flows and the developmental costs of the assets are calculated reliably.The estimated life of the internally developed intangible asset is 1 year and is also ammortised on a satisfying line basis.Valuation of the Intangible Assets in Kingston CommnuicationsThe intangible assets that are acquired through the acquisitions are treasured on the basis of their time value and the future impact of on the performance of the companies.Appraisal of Intellectual Capital in Kingston communication theoryThe Kingston Communication is applying,managing and reporting its Intellectual Capital as tool necessary for the competitive advantage and for up the future performance of the company. agree to the companies policy the Intangibles Assets are included in the Balance Sheets in order of battle to satisfy its investors and guarantee the future investments in the company.However, there are no benchmarks for the management and the evaluation of the these Intangible assets.Also, the company is not using the models for the motley of these Intangible assets as suggested by (Kingston Hull plc , 2008) Measuring the IC (Performance)through strategies(Management Accounting)Simons(1999) suggests that the by measuring the performance of a company is basically the comparison of th e outcomes of the business activities with the critical business targets.The traditional financial accounting utilizes two techniques to measure the Performance .These are Return on Capital Employed(ROCE) and Return on Assets (ROA). However , these techniques are condemned due to the fact that they are old fashioned , uneffective measure the intangible assets and are unable to appraise the stakes in the technology which is essential for the firm to compete in the global market(Bourne et al , 2000 Amir Lev , 1996).Valuation Methodologies(Performance Measures as well)The economic measure of the winnings yields the same essence as the traditional accounting during the matching physical body of costs and revenues by preserving the value significance. This is do by improving the financial reports with the disclosure of the concealed assets like the intangible assets and the investments in the long run(Simons , 1990).(It includes the tools and various(a) ruleologies ) Watters et a l(2006) have discussed the application of a add-in assessment tool in the Scottish SME that provides a review that how efficiently companies are exploiting their Intellectual assets.The tool helps the SMEs to manage three areas of operations i.e gross sales and Marketing , Research and Development and Human Resources. It assign the scores to activities that come under the three operational areas according to their effectiveness and affiliates them to the strategic objectives of the firms.(Appendix 1)Brand Finance plc(2000) suggests that there are a lot of methods present for the valuation of the Brands, however there is a posit to find an best one. Cost based methods of brand valuations show a disparity from its market valuation.The Market Comparison method is not efficient as it is tough to obtain the comparison data. royal line Relief method determines the royalty rate on the estimates of the income generated from brands. However , this method does not clearly states that h ow a brand is going to create value. The Economic Use method combines the consumer and the competitor to ennoble the value to the brand.The last method is the most optimal method which is the Brand Finance that uses the Discounted Cash string up (DCF) analysis in concluding the value for a brand.As the Discounted Cash Flow method valuation complies with the valuations performed by the financial analysts , accountants to check for the impairment of the intangible assets.Measurement of Intellectual CapitalWhy there is a study for the companies to measure the intellectual capitalThis is a very long debate that why companies collect to measure the intellectual capital.There are several advantages of doing that. The term intellectual capital can be said to be expansile in terms of the Value and rewards. The greater the effort of a company the greater is a competitive advantage and greater is sustainability of the company.Nowadays companies and the firms have become Knowledge aware i. e they have now recognized the importance of the of the knowledge that creates value and sustainability. The Companies working in the Telecommunication, Pharmaceutical and the research technology sector specifically have to invest a lot in the Research and Development to compete and develop the innovative solutions to avail the opportunities in the market.Therefore, there is a strong need for these companies to devote themselves to measure and manage their intellectual capital effectively.However, it is very knotty to justify the investments in slam out the knowledge that creates value .These investments are rather very abstruse and unpredictable even if they are tried and analysed by the efficient tools for their proficiency. round Organisations that are knowledge based are sometimes not sure about the amount of the Knowledge they have and the amount of knowledge they need tocarry out their functions internally and externally. That is the reason, these organizations loose the use up of the investors and therefore the investment. equilibrize placard (An Alternative to Balance Sheets)Kaplan Norton(1992) , presented the theory of the Balanced Scorecard for improving and track down the performance of an organisation. The authors suggest quad dimensions such as Financial , Customer , internal business process and learning and growth. These dimensions are believed to provide a insight in to the current performance and identify the factors that can improve the future performance.A crew of the non-financial and financial measures are inadequate in determining the performance of an organisation. The main problem is that its just like a Wild Goose sideline as this amalgam of the performance indicators are not pursuing a specific business objective.Kaplan Norton(1996) believe that the both the financial and the non- financial measures must have a focus on a goal that has to be achieved in maintaining the sustainability. The authors further argue that the va rious measures provided by the match batting order can help the organisation to plan a particular dodge and then can go through it across its subsidiaries, departments to share a common motive with trasnparency. A well planned BSC can hep the organisation to learn from the short-term reports that are generated and scrutinized through various perspectives.Andriessen(2004) suggests that the predicament of measuring the Intellectual Capital can be resolved by applying the fit card. It has been advised that the specified outline plans can be created that guide the organisations to confidently invest in the human resources, technology and the structural capital. It is further revealed that by measuring and administering the intellectual capital can also help the organisation to convert its non-monetary achievements in to monetary achievements(Kaplan Norton , 2004).A study conducted by Hagood Friedman(2002) devised a way for the implementation of the balanced scorecard to measure the accomplishments of the human resource information system of a company. They have developed a system that uses the balanced scorecard as its foundation to improve the human resource information system in association with highlighting the goals and objectives of the organisation.Despite of its utility the Balanced Scorecard has some limitations. In this context Voelpel et al (2006) has place five limitations of the balanced scorecard in its application in the modern economy. First being its rigidness that is, it measures the performance of a company only in four perspectives by leaving behind some other perspectives out of attention. Voelpel et al(2006 ) explain the present moment limitation which is that the BSC is less efficient in accommodating the changes in the changing economy.The BSC a defines a strategy for a company and its subsidiaries to achieve a goal by neglecting the individual goals of a subsidiary as a consequence a company is unable to use its potential proper ly. The trio one is that BSC focuses more on improving the internal performance of an organisation therefore by losing a link with the external world to exploit the innovation.The forth limitation of a BSC is that it focuses on the organisation in itself and provides no information about the actions of competitors. The fifth problem with the balance scorecard is that it goes peachy in measuring the performance in a rational way .As a consequence the more interlacing predicaments are difficult to apprehend(Voelpel et al , 2006).A Comparison between the benefits that arise from intangible and tangible assetsThere are risks bear on with the investment in the intangible assets like RD. Kothari et al(1998) have conducted a research by comparison the uncertainty of benefits associated with the tangibles and the intangibles assets.The methodology used for this research was the regression analysis of the future earnings variability confused with the expenditure in Research and Develop ment and the tangible assets .Furthermore , the variables like firm size and the leverage are also used to define the spring of a research.It has been illustrated by Kothari et al (1998) that the future benefits of RD investment are more uncertain than the tangible assets. Shi(2003) has analysed and studied the relationship of bond prices and the measures of RD expenditures and suggest that there is a fair risk involved with the spending of the RD projects that increases risk factor with the bondholders claims and hence are more riskier than the other projects.Issues in Intellectual Capital(Flaws in the IC Concepts)Bontis (2001) discovered a predicament with the intangibles assets is that there is no queer conception that is accepted by everyone. either investigator or a consultant who contributes to the debate expects the approval and recommends his own jargon.Various other researchers have pointed out flaws in the definitions of the Intellectual Capital. check to Edvinsson and Malone(1997) the intellectual capital was the battle of Market value and the Book value. In contrast Upton(2001) recommends that the intellectual capital cannot be absolutely characterized by plainly calculating the difference of market and book value.Following that Habersam and Piber(2003) advocate that the term intellectual capital cannot be determined by the difference of market value and the book value. Pragmatically, the difference can be influenced by some other elements that are not associated with the intangibles.Further research enumerates five components that can put on a change in the the stock prices which incorporates the recognised assets , company liabilities , legal events , shareholders equity and the timing issues(Garcia-Ayuso 2003).The benefits true by a firm cannot be attributed to the individual intangible Assets as such benefits are a result from the inter-cooperation of more than one Intangible asset. Therefore, it could be wise to value the intangible as sets all together. It is further argued that the market value of a firm cannot be ascribed to the intangible assetImportance of Intellectual Capital in the Modern EconomyImportance of Intellectual Capital in the Modern EconomyExecutive SummaryThe report discusses the relative importance of the Intellectual Capital in the present economy due to the revolution that fosters the propagation of the value creation. The Intellectual Assets of an organisation play a vital role in improving its value and maintaining the competitive advantage. However, these intellectual assets are not capitalised in the financial statements as they are unable to determine their historic costs and their future benefits are sometimes uncertain.Despite of this a lot of companies have discovered ways that facilitate the valuation , measurement and reporting of their intellectual assets i.e companies like Coca Cola , Marks Spencer and Kingston Hull Plc have reflected their intangible assets such as brands separa tely from the goodwill on their company balance sheets as some guidance is provided by the International Accounting Standard in the disclosure of the intangible assets. The report also presents some theories that are aimed at eliminating the confusions created about the Accounting Profession.As the Accounting Profession and the Accountants cannot be blamed as conservatives in not providing space for the Intellectual Assets in the financial statements because in doing so , the financial statements will loose their relevance , reliability and neutrality. The report further throws some light on the issues that are related to the field of Intellectual Capital that include that there is no uniformity in the relative theory as there is no such definition and the Intellectual Capital model that is accepted generally.In the end the report concludes by suggesting that the under the supervision of the International Accounting Standard researchers, consultants, scholars and the accountants hav e to find a common way such that the value relevance of the Intellectual Capital and the principles of accounting are preserved.Aims and ObjectivesThe aim of this study is to discuss that whether the exclusion of the Intellectual Assets of an organisation in the balance is realistic and pragmatic. As the Intellectual Capital is considered a value driver for the modern economy and a lot of organisations are focusing on their intellectual assets as compared to the intangible assets.ObjectivesThe objectives of this study includeTo assess the importance of the Intangible assets as compared to the tangible assets of an organisation.To provide some evidences about the organisations attitudes and the awareness about their intellectual assets.Finally, to conclude that whether the eviction of the Intellectual assets is pragmatic or not.RationaleThe Current Gobal economies are now facing a new revolution that brings them to a new form of business environment. This major change in the world ec onomies is due to the fact that there has been a disproportion observed between the Book Value and the Market Value of a firm. Because , in the past the Balance Sheet and the Income statement were the only tools used by the Shareholders ,managers and the executives to make strategic decisions and monitoring the performance of the company.However, it can be argued that things have changed now. As one of the important concern for the companies is the Value Creation.The expansion of the markets in the product or a service sector has been possible with the aid of the internet , high- technology and the innovation ,information , market chains and globalisation. This in turn has created a global competition among the firms that are now striving to acquire knowledge. Furthermore, the acquisition of the knowledge brings some vital concerns of its use, management and the improvement.This has changed the operations of the the organizations that used to emphasize on the production capability , now focus on the creative operational structure. The organisations are now using the special tools for acquisition, management and the protection of knowledge such as Research Development , Patents , trademarks , copyrights , databases , customer and supplier relationships and Human Resources are known as the intellectual assets of the organization and constitute the Intellectual Capital.The relative importance and the expected returns of the Intellectual Capital has convinced the organisations to think and work in a new innovative way to achieve dominance over the competitors in the market. However , inspite of this the Intellectual Capital has not been considered in the performance appraisals and not included in the financial statements under the heading of assets.The organisations are spending a lot on the Intellectual Capital as compared to their tangible assets so therefore it is not wise to go against the flow of current market trends by focusing more on the tangible assets. This would lead to the creation of inaccurate procedures, policies and the decisions. Hence reducing the value in front of the investors and the customers.Cowey (1999), approves the conception of a New Economy and the Knowledge Company and insists that this concept accepted world-wide. He demonstrates that the opinions of what we own to what we Know have changed and know it depends upon the companies to apprehend the value creation by putting stakes in the training technology , staff retention and knowledge otherwise the efforts will not be productive.The Organisation for Economic Co-operation and development (OECD , 2005) reports that the investments in the Intellectual Capital has grown faster than the investments on machinery and equipment few years back. It is further revealed that the spending on the Research Development , software and the higher education was higher than the spending on the Machinery and the equipment in USA and Finland notebaly in 2002 and increased i n greater proportions between 1994 2002 among the OECD countries as well.Arora(2000) purports that the the edge on the competitors in the challenging business environment can only be achieved by the proper administration of the Intellectual Capital which is another name of the Knowledge management.Kaplan Norton(2001) suggest that the companys market value includes only 10-15% of the companys book value of the assets. Furthermore, the possibilities of producing a value are risen through the the activities whose foundation is the knowledge that is enforced on the intangible assets of an organisation as compared to tangible assets.A Convention held under the OECD(1999) , concludes that a prominent set of information is required on the Intellectual Capital in its association with the tangible assets in the determination of value. Traditional Financial Reporting does not provide the necessary information to pursue the value creation process.Due to the availability of the information vi a internet technologies there is a need of a new reporting model that accommodates the information pertaining the Intellectual Capital that creates the value for customers and suppliers.Bradley(1997) discovered that the predicaments that were involved in the traditional financial accounting were due to the emergence of value. He explained the problem by arguing that the balance sheets and the income statements were the benchmarks in delivering the financial information to the shareholders. However, the significance of these financial statements in propagating the value has decreased due to the emerging trend of investments in the intangible assets.It is stated that the value of the brands was not reflected in the financial statements and in the equity values .This has led to the reconsideration of the intangible assets and the brands specifically. This fostered the proposition of of including such assets in the financial statements. However , the accounting profession does not fully supports the the idea that the intangible assets are the main factors in creating the value.On the contrary the investors and the trade leaders have acknowledged this truth. Furthermore, it is also quoted that 72% of the value was not reflected in the balance sheets of the companies surveyed in United Kingdom. Brands form the major part of the unexplained value that is not part of the balance sheet (Brand Finance plc , 2000).The Figure 1 shows the Gap between the market capitalisation and the net asset value.Why Intellectual CapitalUpton(2001) reports that the companies under the scrutiny of the FASB Business Reporting Research Project provide considerable non- monetary information. Therefore it can be argued that the AICPA and FASB have been analysing the Intellectual Capital since 1991.The Intellectual Capital is considered endangered when the information of a company becomes obsolete when the competitor increases its information.Therefore the preservation of the Intellectual Cap ital is crucial for maintaining the competitive edge. However,the companies that are knowledge intensive are prone to risks of losing their market shares(MacDougall Hurst,2005).Guthrie(2000) suggests that Accountants must find a to incorporate measures of Intellectual Capital or they will become irrelevant .Statement of MethodologyThe method used in the report is the study of the literature that is already present in the field of Intellectual Capital and the Accounting to support the arguments.After, the study necessary facts and evidences are combined to form the Literature Review of this report. This report does includes the collection of the primary data and its analysis. A case study is added to further enhance the understanding of the applications of IC in firms.Research QuestionThe research question is Is the exclusion of Intellectual Assets from accounting statements realistics?The research question of this report is basically a debate that is going on in the academic, indu strial and the business sector. This topic demands study to be commenced taking in account both the views of the implications of including or excluding the intellectual assets in the financial statements.Literature ReviewDefinition of the Intellectual CapitalThe Organisation for Economic Co-operation and development (OECD , 1999) illustrated that the Intellectual Capital was the composition of the financial value of two classes of the intangible assets i.eStructural CapitalHuman CapitalThe structural Capital includes the organisational resources like the softwares, databases etc. The Human Capital however, contains the human resources employees (internally) , customers and suppliers(externally).The term Intellectual Capital is presumed as having the same meaning as the Intangible Asset. In contrast , the definition that is provided by the OECD(1999) puts the Intellect Capital as a subset of the intangible assets of an organisation.Because there are certain intangible assets that do not fall under the category of the Intellectual Capital. The repute of a firm is not considered as a part of the Intellectual Capital(Guthrie Petty , 2000).Stewart(1997) defines the Intellectual Capital as a Intellectual Material that Includes the knowledge , information , intellectual property , experience that can be used to generate wealth. Furthermore , Stewart (1997) categorises the intellectual capital in to structural , customer and the human capital. He argues that the human capital is the generator of the innovation and the improvement.The structural capital includes the tools and the facilities that are used the human capital to form value. Customer Capital includes the value that is produced as a consequence of the organisations relations with which performs the business transactions(Stewart , 1997).Intellectual Capital can also be defined as the combination of the human capital and the structural capital. The human capital includes the knowledge , skills and the exper ience of the employees. It is further argued that the human capital is not in the possession of the organisation as compared to the structural capital (Edvinsson Malone , 1997).Elements of the IntellectualStructural CapitalStructural Capital is what is left behind in the organisation when the employees go home. The Structural Capital arises from the those organisational processes that are focusing on the improvement and the establishment of the organisation. (Roos et al , 1997).Bontis et al (1999) suggests that the structural capital includes the organisational resources that encompass the knowledge that is not actually stored in the human brains and whose value is greater than its physical value.These assets include databases , softwares , manuals , trademarks , leaseholds , franchises , patents , licenses , employee training , employee contracts etc.The structural capital plays an important role in the creation of the value. As it helps the human capital to explore new ideas , le arn from the past experience and protects the knowledge and the new inventions by providing the technology and the legal aid.Customer CapitalKohli jaworski(2000) defined the customer capital as the organisations ability to evolve the knowledge about market that is focusing on the cutomer desires and perceptions.This acquired knowledge is used by the organisations in response to the changing attitudes of the customers and the market. Organisations use this knowledge to have a contingency plan to tackle the threats produced from changing market trends.The definition provided by Bontis(1999) suggests the customer capital should be iterated as the relational capital that includes the relationships with the suppliers, partners and the investors in addition to the relationship with the customers.Human CapitalHudson(1993) defined the human capital as the composition of the inheritance, qualifications , experience with the opinions about life and business.It is further argued that the orga nisational employees are the key architects of the Intellectual Capital through their proficiency , opinions and expertise. The competence of the employees includes skills and qualifications and their opinions come under their behaviour and perceptions about work. The expertise is important in devising the innovative solutions to the problems. Furthermore, employees are an important asset for an organisation but they are not owned assets(Roos et al , 1997).Exploitation Of Intellectual Capital (Economical Perspective)It is suggested that the critical factor in the improvement of the economy is the proper utilization of the Intellectual capital .It is further noted that by increasing the tricks of Intellectual Capital will provide a competitive edge and the value of the firm will be augmented and specifically business will bring financial benefits. It is not a new thing that the intangible assets like brands, intellectual property , relationships are considered as a unprocessed input for the organization that increases the worth by the application of intelligence in possession of the organization.(Watters et al 2006 , Intellectual Assets Center , Glasgow, Uk).The research on the recognition and reporting of the intangible assets and the intellectual capital has brought them to the acute attention.The research believes that the intangible assets play a significant role in the creation of endurable competitive advantage with in the advanced organsations.Due to the expansion of the modern knowledge based economy it has become transparent that the intangible assets and the Intellectual Capital of an organization have become a platform in accomplishing the competitive advantage as compared to the hi-tech tangible assets(Drew , 1999).Tayles et al (2005) have described two doctrines in the realization of the intangible assets that provide the assistance in the achievement of the competitive superiorty. The research is continuously striving to find the authentic procedu res to measure the intangible assets and the indices that provide a forecast of the future economical benefits based upon the doctrines that are prescribed by Tayles et al (2005).Firstly , the expanding financial statements of the companies is the idiosyncracy of its Intellectual Capital that give the edge on the market competitors. Secondly, is the inefficient justification of the IntellectualCapital in the expansion of the economy(Tayles et al , 2005).Skinner (1986) purported that with the utilization of the technology, manufacturing productivity can be achieved by the intangible assets of the company which are the authentic reagents of the prosperity and that justify the monetary investment.How the Companies Exploit the Intellectual CapitalCase StudyKingston Communications(Hull) Plc is group of companies based in Hull,United Kingdom. The groups is presently offering the services related to information, communication technology and the telecommunications to the consumer markets in UK. The groups Brands include Affiniti,Smart 421,Jam IP(Integration and management services),Karoo, Eclipse, Mistral (Internet and Telecommunication services) and Hull Color pages and Know( Information Services).The group is Ammortising the its Intangible Assets that aquired in the Acquisitions.In 2007,the ammortisation on intangibles was 8 million(from Total depreciation and ammortisation).The group also has purchased the tangible and the Intangible assets worth 30.2 million.The Groups Controlled measures include, measuring the learning and development(p9),Customer Satisfaction.KM also believes that Human Resources when managed through and effective Policy can bring the Tangible effect on the companys performance. KM is running a development program to enhance the Knowledge andIntelligence of the employees.The company also manages the Relational (Custmer) Capital by arranging the meetings of the Directors on the Investor relations and the shareholders concerns specifically.The Com panys publishes its Financial Reports complying with the IFRS,however, the company also provides additional disclosures if compliance with the IFRS does not fullfil the requirements of the users(i.e External Stakeholders,External investors,Suppliers and the Customers) to understand the impact of certain transactions that have an effect on the financial performance of the company.Relational Capital Management and PoliciesArranaging meetings with the shareholders time to time to discuss the companys strategies and performance.Maintaining a investors relations function to encourage and improve the communication with the investors.The Goodwill of the Company in 2007 was worth 192.754 million(2006155.551 million) and the Intangible Assets had the value of 48.511 million (2006 39.450) according to the Balance Sheet on 31st march,2007.The Cash Flow Statement of the Company for the year ended 31st march,2007 also explicitly show the Amounts of the Ammortisation of Intangibles as compared t o the tangible fixed assets.The Cash Flow statement also show the companys procurement of the Intangible assets 6.495 illion in 2007.The financial statements of the Company are prepared according to the principles prescribed by IFRS and IFRIC.These financial statements are based on the concept of historical Cost accounting.However, the statements are modified due to the revaluation of the financial assets to a fair value by using the income statement.Intangible Assets Identified by Kingston CommunicationsThe Intangible Assets of the Kingston Communication include1.) Goodwill2.) Customer and Supplier Relationships3.) Technology and Brands4.) Software5.) DevelopmentGoodwillThe Groups Goodwill is reported in the acquisitions of the subsidiaries and it is the difference between the Cost of Acquisition and the Net Assets. The Goodwill is tested for impairment annually.DevelopmentThe companys intangibe asset that is developed through the research and development activities only when it fu lfils the criteria of Intangible Asset Recognition prescribed by IAS 38 i.e the asset is identifiable,impact on future cash flows and the developmental costs of the assets are measured reliably.The estimated life of the internally developed intangible asset is 1 year and is also ammortised on a straight line basis.Valuation of the Intangible Assets in Kingston CommnuicationsThe intangible assets that are acquired through the acquisitions are valued on the basis of their time value and the future impact of on the performance of the companies.Appraisal of Intellectual Capital in Kingston CommunicationsThe Kingston Communication is exploiting,managing and reporting its Intellectual Capital as tool necessary for the competitive advantage and for improving the future performance of the company. According to the companies policy the Intangibles Assets are included in the Balance Sheets in order to satisfy its investors and guarantee the future investments in the company.However, there are no benchmarks for the management and the evaluation of the these Intangible assets.Also, the company is not using the models for theClassification of these Intangible assets as suggested by (Kingston Hull plc , 2008) Measuring the IC (Performance)through strategies(Management Accounting)Simons(1999) suggests that the by measuring the performance of a company is basically the comparison of the outcomes of the business activities with the critical business targets.The traditional financial accounting utilizes two techniques to measure the Performance .These are Return on Capital Employed(ROCE) and Return on Assets (ROA). However , these techniques are condemned due to the fact that they are old fashioned , unable measure the intangible assets and are unable to appraise the stakes in the technology which is essential for the firm to compete in the global market(Bourne et al , 2000 Amir Lev , 1996).Valuation Methodologies(Performance Measures as well)The economic measure of the Profit yields the same result as the traditional accounting during the matching phase of costs and revenues by preserving the value significance. This is done by improving the financial reports with the disclosure of the concealed assets like the intangible assets and the investments in the long run(Simons , 1990).(It includes the tools and various methodologies ) Watters et al(2006) have discussed the application of a Scorecard assessment tool in the Scottish SME that provides a review that how efficiently companies are exploiting their Intellectual assets.The tool helps the SMEs to manage three areas of operations i.e Sales and Marketing , Research and Development and Human Resources. It assign the scores to activities that come under the three operational areas according to their effectiveness and links them to the strategic objectives of the firms.(Appendix 1)Brand Finance plc(2000) suggests that there are a lot of methods present for the valuation of the Brands, however there is a ne ed to find an optimal one. Cost based methods of brand valuations show a disparity from its market valuation.The Market Comparison method is not efficient as it is difficult to obtain the comparison data. Royalty Relief method determines the royalty rate on the estimates of the income generated from brands. However , this method does not clearly states that how a brand is going to create value. The Economic Use method combines the consumer and the competitor to entitle the value to the brand.The last method is the most optimal method which is the Brand Finance that uses the Discounted Cash Flow (DCF) analysis in concluding the value for a brand.As the Discounted Cash Flow method valuation complies with the valuations performed by the financial analysts , accountants to check for the impairment of the intangible assets.Measurement of Intellectual CapitalWhy there is a need for the companies to measure the intellectual capitalThis is a very long debate that why companies need to measu re the intellectual capital.There are several advantages of doing that. The term intellectual capital can be said to be expandable in terms of the Value and rewards. The greater the effort of a company the greater is a competitive advantage and greater is sustainability of the company.Nowadays companies and the firms have become Knowledge aware i.e they have now recognized the importance of the of the knowledge that creates value and sustainability. The Companies working in the Telecommunication, Pharmaceutical and the research technology sector specifically have to invest a lot in the Research and Development to compete and develop the innovative solutions to avail the opportunities in the market.Therefore, there is a strong need for these companies to devote themselves to measure and manage their intellectual capital effectively.However, it is very difficult to justify the investments in digging out the knowledge that creates value .These investments are rather very complex and un predictable even if they are tested and analysed by the efficient tools for their proficiency.Some Organisations that are knowledge based are sometimes not sure about the amount of the Knowledge they have and the amount of knowledge they need tocarry out their functions internally and externally. That is the reason, these organizations loose the interest of the investors and therefore the investment.Balanced Scorecard (An Alternative to Balance Sheets)Kaplan Norton(1992) , presented the theory of the Balanced Scorecard for improving and tracking down the performance of an organisation. The authors suggest four dimensions such as Financial , Customer , internal business process and learning and growth. These dimensions are believed to provide a insight in to the current performance and identify the factors that can improve the future performance.A combination of the non-financial and financial measures are insufficient in determining the performance of an organisation. The main prob lem is that its just like a Wild Goose Chase as this amalgam of the performance indicators are not pursuing a specific business objective.Kaplan Norton(1996) believe that the both the financial and the non- financial measures must have a focus on a goal that has to be achieved in maintaining the sustainability. The authors further argue that the various measures provided by the balanced scorecard can help the organisation to plan a particular strategy and then can implement it across its subsidiaries, departments to share a common motive with trasnparency. A well planned BSC can hep the organisation to learn from the short-term reports that are generated and scrutinized through various perspectives.Andriessen(2004) suggests that the predicament of measuring the Intellectual Capital can be resolved by applying the balanced scorecard. It has been advised that the specified strategy plans can be created that guide the organisations to confidently invest in the human resources, techno logy and the structural capital. It is further revealed that by measuring and administering the intellectual capital can also help the organisation to convert its non-monetary achievements in to monetary achievements(Kaplan Norton , 2004).A study conducted by Hagood Friedman(2002) devised a way for the implementation of the balanced scorecard to measure the accomplishments of the human resource information system of a company. They have developed a system that uses the balanced scorecard as its foundation to improve the human resource information system in association with highlighting the goals and objectives of the organisation.Despite of its usefulness the Balanced Scorecard has some limitations. In this context Voelpel et al (2006) has identified five limitations of the balanced scorecard in its application in the modern economy. First being its inflexibility that is, it measures the performance of a company only in four perspectives by leaving behind some other perspectives o ut of attention. Voelpel et al(2006 ) explain the second limitation which is that the BSC is less efficient in accommodating the changes in the changing economy.The BSC a defines a strategy for a company and its subsidiaries to achieve a goal by neglecting the individual goals of a subsidiary as a consequence a company is unable to use its potential properly. The third one is that BSC focuses more on improving the internal performance of an organisation therefore by losing a link with the external world to exploit the innovation.The forth limitation of a BSC is that it focuses on the organisation in itself and provides no information about the actions of competitors. The fifth problem with the balance scorecard is that it goes straight in measuring the performance in a rational way .As a consequence the more complex predicaments are difficult to apprehend(Voelpel et al , 2006).A Comparison between the benefits that arise from intangible and tangible assetsThere are risks involved wi th the investment in the intangible assets like RD. Kothari et al(1998) have conducted a research by comparing the uncertainty of benefits associated with the tangibles and the intangibles assets.The methodology used for this research was the regression analysis of the future earnings variability involved with the expenditure in Research and Development and the tangible assets .Furthermore , the variables like firm size and the leverage are also used to define the boundary of a research.It has been illustrated by Kothari et al (1998) that the future benefits of RD investment are more uncertain than the tangible assets. Shi(2003) has analysed and studied the relationship of bond prices and the measures of RD expenditures and suggest that there is a fair risk involved with the spending of the RD projects that increases risk factor with the bondholders claims and hence are more riskier than the other projects.Issues in Intellectual Capital(Flaws in the IC Concepts)Bontis (2001) discove red a predicament with the intangibles assets is that there is no unique conception that is accepted by everyone. Every investigator or a consultant who contributes to the debate expects the approval and recommends his own jargon.Various other researchers have pointed out flaws in the definitions of the Intellectual Capital. According to Edvinsson and Malone(1997) the intellectual capital was the difference of Market value and the Book value. In contrast Upton(2001) recommends that the intellectual capital cannot be absolutely characterized by simply calculating the difference of market and book value.Following that Habersam and Piber(2003) advocate that the term intellectual capital cannot be determined by the difference of market value and the book value. Pragmatically, the difference can be influenced by some other elements that are not associated with the intangibles.Further research enumerates five components that can realize a change in the the stock prices which incorporates the recognised assets , company liabilities , legal events , shareholders equity and the timing issues(Garcia-Ayuso 2003).The benefits received by a firm cannot be attributed to the individual intangible Assets as such benefits are a result from the inter-cooperation of more than one Intangible asset. Therefore, it could be wise to value the intangible assets all together. It is further argued that the market value of a firm cannot be ascribed to the intangible asset