Valuing Knowledge capital

Andrew Osterland - Grey Matters: CFO's Third Annual Knowledge Capital Scorecard

Article summary

April 2001 article in CFO magazine on knowledge capital.

Valuing knowledge capital like patents, R&D, and human capital may not be easy. But with intangible assets now driving corporate performance, assessing the investments in those assets has become crucial.

A corporate balance sheet, prepared according to generally accepted accounting principles, does a reasonable job informing about the physical assets and financial capital employed by a company. But when it comes to the increasingly important knowledge capital and/or intangible assets of corporate enterprises, it provides next to no insight.

Under GAAP, expenditures made to increase brand awareness, to foster innovation, or to improve the productivity of employees cannot be capitalized. Instead, the logic goes, they must be expensed through the income statement, because the future benefits of such investments are so uncertain. The problem with that, says Baruch Lev, an accounting and finance professor at New York University, is that corporate investment in tangible assets has stagnated. "It's the investments in R&D, Internet applications, human resources, and customer acquisition that drive the performance of companies now. And there is no indication of the value of those investments in financial reports," he says.

Recommended Books on Knowledge Capital

Edvinsson, Corporate Longitude

Standfield, Intangible Management

Lev, Intangibles: Management, Measurement, and Reporting

Smith, Valuation of Intellectual Property and Intangible Assets

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