unrecognized statement intangible assets: accounting · gary cokins of sas, who served as...

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Copyright © 2010 in the United States of America by Institute of Management Accountants

All rights reserved

IMA® would like to acknowledge the work of Nick A. Shepherd, FCMC, FCCA, CGA, of EduVision Inc., and Mary Adams, CMC, of I-Capital Advisors, on whose work this SMA is based. Thanks also go to Rosemary Amato of Deloitte Accountants B.V. and Gary Cokins of SAS, who served as reviewers, and to Raef Lawson, Ph.D., CMA, CPA, IMA vice president of research and professor-in-residence, who serves as series editor.

Unrecognized Intangible Assets: Identification, Management and Reporting

Statement on Management Accounting

BUSINESS PERFORMANCE MANAGEMENT

TABLE OF CONTENTS

1 ExecutiveSummary 1

2 Introduction 2

3 TheGoalofEffectiveandTransparent Reporting 3

4 IntangiblesandtheEmergenceofthe NewEconomy 4

5 IntangiblesandtheManagement Accountant 6

6 TheTypesofNonDisclosedIntangibles andTheirImportance 7

6.1 HumanCapital 7

6.2 RelationshipCapital 9

6.3 StructuralCapital 10

7 TheChallengeofAccountingfor Intangibles 11

8 TheReportingofIntangibleAssets 12

9 Intangibles,CSR,Sustainability,andthe TripleBottomLine 13

10 ChallengesandSolutionsforDisclosure 14

10.1 HumanCapitalDisclosure 14

10.2 RelationshipCapitalDisclosure 16

10.3 ProcessDisclosureMetrics 17

11 GlobalBestPracticeExamples 17

12 ProgressonDisclosurewithinthe AccountingProfession 18

13 Conclusions 18

14 Glossary 19

15 References 21

16 AdditionalResources 21

Exhibits

Exhibit1. BreakdownofGlobalEnterpriseValue 5

Exhibit2. TypesofIntangibleCapital 7

Exhibit3. Process capabilit y drives relationship capital 10

Exhibit4. Motivation—convertinghumanpotentialtocapital 15

Exhibit5. AspectsofHumanCapital 16

Exhibit6. Financial“PresentValue”ofRelationshipcapital 17

Unrecognized Intangible Assets

EXECUTIVE SUMMARY

Intangibles are those assets that are not physicalin nature. They fall into two categories: those that are“recognized”andhaveanattributedvalueinthefinancialstatementsandthosethatareunrecognizedforfinancialreportingpurposes.

ThisStatementonManagementAccounting(SMA)focuses onthe growingimpactofthe unrecognized por-tion of intangible corporate assets. These items havegrowntobecomeamajorsourceofvaluetopubliccorpo-rations.Theycontributetocompetitivecapacityandtheyformacriticalaspectofanorganizations’sustainability1into the future. While these type of assets fail to meetthecriteriaforrecognitionundercurrentreportingstan-dards, the identification, assessment, management, con-trol,retention,andnurturingoftheseassetsisnecessaryforanorganizationtomaintainitscapacitytooperate.

1 In the general literature, the term “sustainability” can have two

meanings: (1) the economic survival or “viability” of an organization,

and (2) achieving economic and social development in ways that

avoid destroying or depleting natural resources or polluting the envi-

ronment. As argued later in Section 9, the two concepts are related.

Typically, statutory reporting lags that desired bystakeholders. Progressive organizations tend to assesstheirstakeholders’ need for information and voluntarilydisclose that which is “over and above the minimumrequired”.Financeandaccountingprofessionals,intheirrolesbothasadvisorstomanagementandinensuringthetransparency(i.e.,visibilitytomoredetailedandsupportinformation) of external reporting, must be concernedwithanorganization’sabilitytoremainagoingconcern,tocompeteeffectively,andtoprotectitsassets.ThisSMAidentifies the importance and breadth of unrecognizedintangibles and presents issues and concerns related tothem. Various types of unrecognized intangible assetsarediscussedandapproachestomanagingandreportingtheseassetsaresuggested.

Key Words: knowledge; intangible; intangibleassets;intellectualcapital;goodwill


1

2 INTRODUCTION

Thegreatcrashinthe1920sthataffectedtheUnitedStatesandmanyotherindustrializednations,followedbythe recovery in the 1930s, brought with it tremendouschangesincorporateaccountability. Publicly-heldorga-nizationswererequiredtodiscloseamuchbroaderrangeof financial information; standards were developed thatcreated defined frameworks for reporting; audits wererequiredtoensurecompliance.Sincethattimefinancialreporting has continued to evolve to meet the needs ofexternalaswellasinternalusers.

The1980sand1990ssawanincreasingpaceoftech-nologicaldevelopmentthatheraldedthematuringoftheindustrial society and the emergence of the knowledgesociety. While the industrial society focused on the useoftangibleassetstocreategoodsandservicesanddelivervalue for investors, the knowledge society increasinglyreliesonintangibleassets.Althoughthesetwo“societies”overlap—traditional manufacturing organizations applythe newer concepts of knowledge management tech-niques to optimize the performance of tangible equip-ment—both types of organization increasingly deliverresults from the effective harnessing, utilization, anddevelopmentofintangibleassetsthatnolongerfallwithinthecurrentframeworkofaccountingrulesandstandards.

Anumberofinitiativeshavebegunoverthelast20yearsthatcontributetoanincreasedconcernandaware-ness of this issue. These have developed through threeparallel tracks. Each track complements the others yetremains somewhat isolated in its adoption and applica-tion. The first track, dealing with existing frameworksand oversight accountability, is pursued by the account-ingprofession.Initiatives includethe responsestoorga-nizational risk management in the 1980s resulting inthe COSO framework; the enhanced business reportinginitiative of the AICPA; and enactment of the Sarbanes-Oxley Act to improve public trust in the accountabilityof publicly-traded companies. There have also been ini-tiatives at the nonstatutory compliance level that haveinfluenceddisclosureandreporting,includingthedevel-opmentandadoptionoftechniquesforbroaderreportingsuch as the balanced scorecard. Internationally, effortshave also included increased focus by InternationalFederation of Accountants (IFAC) on the challenges ofintangible assets and efforts to develop new reportingframeworks.

These efforts, however, have been limited by thereliance on existing frameworks for capitalization ofassets and the difficulty in making intangible assets

part of mainstream reporting. What has emerged as asecond, parallel track of attention is an alternative andsupplemental reporting approach that attempts to com-plement traditional disclosure by producing a broaderbase of organizational performance information. ManywellknownauthorssuchasBaruchLev,LeifEdvinsson,Karl Sveiby, and Thomas Stewart have contributed tothe stream of thinking as to how to identify and reportthevalueof intangibleassets.Yetmuchofthisworkhasfailedtoreachmainstreamreporting,andithasnotbeenembracedbythefinancialcommunity.

The third track is the developing interest in thereporting of corporate social responsibility1 (CSR). Thisareacomplementstheissueofsustainabilityofintangibleassets because of two main factors. First, an organiza-tion’s public “value” is impacted by the perception of itsbehavior within society. In today’s society, the publicis increasingly prepared to discount the value of orga-nizations that fail to implement management systemsthat address a company’s environmental impact andsocial behavior. One only has to look at many “brandname”U.S.-basedglobalcorporationstoseethespeedatwhich attitudes have changed in addressing such issues.Complementingthisisthegrowingnecessityfororgani-zations to pursue initiatives in the area of “sustainableprocurement.” A second impact is at the investmentcommunity level. Socially responsible investing (SRI)is a growing approach through which money managershaveexpandedtheirduediligenceeffortsaswellastheirshareholder activism towards those organizations thatfail to demonstrate an appropriate level of attention tothe environment and social responsibility. Growth insuchattentionwillintimeresultinlendersdemandingariskpremiumforthoseborrowerswhofailtoimplementmanagementsystemstoaddressthesebroaderaspectsofbehavior.Noinvestorwantstobesurprisedbytheoccur-renceofanotherExxonValdez.3

2The accounting profession is a key player in theworld of both internal and external accountability andhas a public role in ensuring responsible stewardship ofinvestors’ portfolios. As such, it must be a strong con-

2 CSR or Corporate Social Responsibility is an approach through

which an organization expands its public accountability to include

performance relative to all key stakeholders (for a broader definition see

Wikipefia et.al.)

3 The Exxon Valdez was an oil tanker that gained infamy on March 24,

1989 after it ran aground, spilling an estimated 10.8 million U.S. gallons

of crude oil into the ocean off the coast of Alaska. This was one of the

largest spills in United States history and one of the largest ecological

disasters in history.


2

tributortotheseemergingissues.Failuretodosowillseeit taking on the responsibility to develop and maintainstandards and reporting that increasingly deal with asmaller and smaller share of an investor’s value—nota prescription for a healthy and growing profession.

3 THE GOAL OF EFFECTIVE AND TRANSPARENT

REPORTING

Reporting occurs for internal and external pur-poses. The goal of internal reporting to managementfocuses on the provision of information that facilitateseffectiveoperationaldecisionmaking,inordertoprotectthe organization’s assets and capacity to function andto balance the optimization of short-term results withlong-term sustainability. External reporting is typicallyoftwotypes—thatwhichisdefinedbystatuteforlegalorsecurities regulatory purposes (mandatory reporting),andthatwhichisdiscretionaryanddevelopedtoprovideinformationandcommunicateaffairsoftheorganizationtostakeholdersinanopenandtransparentmanner.Thegoal of statutory reporting is to achieve compliance; thegoal of discretionary reporting is to provide key stake-holders with additional information that allows themto make informed decisions relative to their interests,accountability, and responsibility. Typically, statutoryreportingrequirementslagthatdesiredbystakeholders.Progressiveorganizationstendtoassesstheirstakehold-ers’ need for information and voluntarily disclose thatwhichis“overandabovetheminimumrequired”.

Currently, there are movements affecting internalandvoluntaryexternalreportinginreactiontotheshiftof the global economy from the industrial society to theknowledge society. These can be expected to eventu-ally also influence statutory reporting requirements.Statutory changes will take more time. In fact, the his-toryofaccountingstandardsanddisclosureintheperiodimmediatelyafterthe1929crashandsinceindicatesthatoften a significant event has to occur in society beforechange takes place. Increased concern in the late 1980scenteredontheapparentinabilityofboardsofdirectorstobeawareoftheriskswithintheirorganizationsduetoan absence of or inadequate disclosure. This resulted inthe development of enhanced risk management frame-works and the work of the Treadway Commission. In2002, following a number of corporate scandals, includ-

ingthecollapseofEnron3,passageoftheSarbanes-Oxley(SOX) legislation led to the improvement of corporatecomplianceandreporting.Asaresultofthe2008globaleconomiccrisis,newregulationsonfinancialinstitutionsandgovernanceagenciesarelikelytooccur.Todate,how-ever, regulatory agencies have yet to deal with the chal-lengeofaccountingforcorporateknowledgeassets.

Notwithstanding the regulatory delay, questionsabouttheadequacyofbothinternalandexternalreport-ing and disclosure began emerging as the shift to theknowledge era escalated in the 1980s. Relevance Lost (Johnson and Kaplan, 1987) asked the question whetherinternal approaches used for management accountingwere any longer adequate: “Corporate management sys-temsareinadequatefortoday’senvironment.Inthistimeofrapidtechnologicalchange,vigorousglobalanddomes-tic competition, and enormously expanding informationprocessingcapabilities,managementaccountingsystemsarenotprovidinguseful,timelyinformationforthepro-cess control, product costing, and performance evalua-tion activities of managers.”4 This book highlighted thesubstantial distortion of product costing using broadlyaveraging cost allocation factors that did not reflect thecausality principle of accounting. It advocated activity-basedcostingasthepracticetoremedythisweakness.

ThisbookwasfollowedupbyKaplanandNorton’swork,The Balanced Scorecardwhichmadethepointthatcorporate reporting needed to be expanded to includenonfinancialdriversofcompetitivesuccess:“Today,orga-nizationsarecompetingincomplexenvironmentssothatanaccurateunderstandingoftheirgoalsandthemethodsforattainingthosegoalsisvital.”5Formorethan20yearsmanagementhasbeenmovingtowardsnewandbroaderinformationreportingsystems.

The work of the Enhanced Business ReportingConsortium (EBRC) since 2003 has continued this dis-cussionandfocusedonexternalreportingrequirements.Prior to EBRC, several other approaches to enhanceexternal corporate reporting had been initiated bothby investors and by other interest groups—some acting

4 Enron was a major U.S. energy corporation that filed for bankruptcy

in 2001.

5 Johnson, T. and Kaplan, R. Relevance Lost – The Rise and Fall of

Management Accounting. Harvard Business School Press, 1987.

6 Kaplan, R. and Norton, D. The Balanced Scorecard, , Harvard

Business Press, 1996.


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directly on behalf of investors, the traditionally primestakeholdersandbythirdpartyorganizationsaswell.Alloftheserepresentagrowinglevelofconcernovercorpo-ratetransparencyandvisiblity.Corporationsthemselves,from shareholders to boards of directors, have beenincreasinglyconcernedovertheperceptionbythepublicoforganizations’failuretodisclosecertainaspectsofcor-porateactivity,particularlyintheareasofenvironmentaland social impacts. Achievement of the goal of effectivereporting and transparency is thus being increasinglyquestionedinternallyandexternally.

The Enhanced Business Reporting Consortiumincludedthefollowingasthefocusofitsefforts:

Enhanced Business Reporting provides a frame-work structure around company disclosures thatwillgiveinvestorsamorecompletepictureofcom-panies—especially companies that rely heavily onintangible assets. The overarching objective of theEBRConsortiumistoachievetherightmixoffullydisclosed, high-quality information, made pos-siblenotonlybyaddingcriticalinformationthatisnot currently disclosed (enhancement), but also byadvocatingforimprovementintheconsistencyandrelevance of existing disclosures, and in the com-municationfocusoffinancialreportingasitstandstoday(simplification).

EBRC has joined in a n internationa l ef for t, theWorld Intellectual Capital Initiative (WICI), whosegoal is to create a “global framework for measur-ing and reporting on intellectual assets and capital.”(http://www.worldici.com/index.php)

4 INTANGIBLES AND THE EMERGENCE OF THE NEW

ECONOMY

Threadedthroughthewholedebateovertranspar-ency and visibility has been the challenge of the declinein the relative importance that tangible assets play inorganizational competitiveness and sustainability, andtheriseinimportancethatintangiblesplay.Thisshiftisrelatedtothebiggertrendoftheshiftfromtheindustrialsocietytotheknowledgesociety.

The knowledge economy started slowly over thecourse of the 20th century as more and more workersbeganworkinginwhitecollarjobsdealingwithinforma-

tionasopposedtobluecollarjobsmakingthingsorgrow-ing food. 6 This trend accelerated after the invention ofthecomputermid-centuryandexplodedwiththeadventoftheInternettowardtheendofthecentury.Beginninginthe1980swhenthepersonalcomputer(PC)wasintro-duced,moreandmorejobsinboththewhiteandbluecol-lar sectors began to rely on computers. This technologyenabled information and knowledge to be captured andsharedatagreaterpacethaneverbeforeinthehistoryofmankind. This explosion of information and knowledgecametoaffectalmosteverykindofworkplaceandjob.

These business trends created a challenge for thereporting systems upon which our economic system isbuilt. Theeasiest waytoseethis isthroughthe growinggapbetweenthemarketvalueandbookvalueoftheaver-agecorporation.

Until the 1980s, the valuation of a typical com-pany was approximately equal to its book value. Thismade sense because a company’s earning capability wasstronglytiedtoitstangibleassets—whatitowned.Fromthat point on, however, an increasing portion of earn-ingshasbeendrivenbyacompany’sknowledge—whatitknows. Even in manufacturing businesses that continuetorelyheavilyontangibleassets,theabilitytooptimizethe performance of these assets is increasingly seenas being driven by the innovation and creativity of theworkforce.Whilethesekindsofknowledgeassetscanbeextremely productive, they are invisible in traditionalreporting and governance systems in place today thatwere,forthemostpart,developedfortheindustrialage.

The extent of this information gap can be seenin the annual “Intangible Tracker” published by BrandFinance,whichreviewsalargesampleoftheworld’slarg-estpublicly-tradedorganizations.TheEBRC’sDecember2007 report observed that some 75% of corporate valueis now not reflected in statutory financial disclosure.Using traditional financial reporting meeting either IASorFASBstandardsresultin25%ofcorporateassetsbeingcapitalized (the tangibles), plus a portion of the intangi-bles,suchaspatents,trademarks,andothersthatamountto about another 10% of total value. Thus, accountingdisclosuredealswithabout35%ofwhatthemarketattri-butes to an organization as its value. Put another way,accountingdisclosuretodayfailstoexplain65%oforga-nizationalvalue.(SeeExhibit1.)

6 http://www.pbs.org/fmc/book/2work1.htm


4

A similar gap is seen in a recent study by Ernst& Young7 which examined 709 merger and acquisitiontransactions in 2007 worldwide. This study found thatonaverage,only30%ofthepurchasepricecouldbeallo-catedtotangibleassets.Another23%ofthepricecouldbeallocatedtoidentifiableintangibleassetssuchasbrands,customercontracts,andtechnology.Theremaining47%wasbookedtogoodwill.Bottomline,thismeansthat70%oftheaveragedealwasattributedtointangibleassets.

Thisincreasedvaluedidnotappearoutofnowhere.To a great extent, the growing intangible value reflectsinvestments that have been made over the past decadesincomputersystems,employeetraining,automatedpro-7 Ernst & Young, “Acquisition Accounting: What’s Next for You,”

February 2009. Available at http://int.sitestat.com/ernst-and-young/

international/s?TAS_Acquisition_accounting_Whats_next_for_

you&ns_type=pdf&ns_url=%5bhttp://www.ey.com/Global/assets.nsf/

International/TAS_Acquisition_accounting_Whats_next_for_you/$file/

TAS_Acquisition_accounting_Whats_next_for_you.pdf%5d.

cesses, internal and external networks, and branding,as well as research and development. In 1985, tangibleinvestmentsexceededintangiblesby40%.Thetwokindsof investments were roughly equal by 1995. By 2007,intangible investments were $1.6 trillion per year, 33%higherthantangibleinvestmentsat$1.2trillion.8

This information gap is recognized but has yet tobe fully addressed. Historically, the need for changingapproaches to accountability and reporting is driven byshifts in global economic and social conditions. Prior totheWallStreetcrashin1929,therewerealmostnostan-dards for financial reporting, no need for independentaudits, and minimal requirements for disclosure andtransparency to the owners of capital invested in publicinstitutions.Afterthecrashitbecameapparentthatnewframeworks needed to be in place. What was created atthattimeislargelywhatweusetodayandwhatweare

8 Mandel, M. “The GDP Mirage,” Business Week, October 29, 2009.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0

2001 2002 2003 2004 2005 2006 2007 2008

44%36%

53%

7%

4%

44%

42%

9%

5%

38%

50%

8%

4%

37%

51%

8%

4%

35%

54%

8%

4%

35%

55%

8%

4%

37%

51%

8%

5%

60%

60%8%

11%

20%

Undisclosed value Goodwill Disclosed Intangibles (ex Goodwill) Tangible Net Assets

EXHIBIT 1. BREAKDOWN OF GLOBAL ENTERPRISE VALUE (US$ BILLION, 2001–2008)

Chart reproduced courtesy Brand Finance “Intangible Finance Tracker 2009”.


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stilltryingtomodifyandadjusttomakerelevanttothenewly emerging economy. However, the frameworksfor governance that worked well in the past must bechangedbecausetheyarenolongermeetingtheneedsofaknowledge-based economy.9 While traditional gover-nance approaches focus principally on the protection oftangible assets and performance in financial terms theknowledge economy is based on the protection and nur-turingofintangibleassetsasthekeydriverofcurrentandfuturefinancialperformance.

5 INTANGIBLES AND THE

MANAGEMENT ACCOUNTANT

Manytakethetermintangibleatfacevalue—thatis,theseassets are unknowable and unmeasurable. Accountants,the argument goes, are responsible for fact-based finan-cial reporting and only need to account for transactionsthatresultfromatangiblefinancialexchange.Asanover-simplification, cash or obligations for cash (e.g., accrualaccounting)areaddedorremovedfromthetreasurybankaccount.Howeverthemorerelevantissueiswhatkindoftreatmentmanagementaccountingshouldgivetointan-gibles.Toaddressthisissue,itisnecessarytolookatthepurposeandresponsibilitiesofaccounting.

Accounting ser ves several basic purposes inorganizations:

• Keeping track of the organization’s assets and lia-bilities. A balance sheet is the starting point forany accounting system. It records all assets andliabilitiesaswellasreportingownersequity.Untilthe 1970s, the balance sheet adequately explainedthevalue—the“bookvalue”—ofthecorporation.Asmentioned above the average balance sheet todayexplainsonlyathirdofthisvalue.This isbecauseintangibles are largely not capitalized (except inthecaseofabusinesscombination),yettheyarethedriversofthegreaterpartofcorporateearnings.

• Keeping track of operational movements. A nincome statement is a means of tracking all theoperating transactions of the organization in thecurrentyear:revenuesflowin,expensesflowout.Intoday’sknowledgesocietythelackofcapitalizationof intangibles means that the income statementincludesexpensesrelatedtoboththecurrentyearand investments expected to yield a return overmorethanayear(training,buildingclientrelation-ships, innovation in processes, etc.). In addition,

9 Shepherd, N. Governance, Accountability, and Sustainable

Development: A New Agenda for the 21st Century, Thomson Carswell,

2005.

current year revenues include benefits that arisebecause of previous years’ expenditures (invest-mentsinbrands,relationships,etc.).Aresultofthisis that the operating story available in the indus-trialeraislost.

Thestatementsproducedbytheaccountingsystemcanbeusedatanygivendatetocheckonthesuccessoftheorganization’s operations. Despite their shortcomings,financialstatementsarestillusedastheultimatemetricofthesuccessofaknowledge-basedorganization,whichisasitshouldbe—thegenerationofpositivecashflowisascriticalintheknowledgeeraasitwasintheindustrialage.Theymaynottellthefullstoryofhowacompanyreacheditsresult,butthefinancialstatements(e.g.,incomestate-ment,balancesheet,cashflow)cancommunicatethenet“bottomlineoutcome”offinancialsuccess.

What the financials cannot adequately addresstoday is the deeper question of viability. Industrial-eraaccounting could be used to explain the adequacy of anorganization’s assets and operations to help it meet itsfinancial obligations. Auditors could use the financialstatementstomakeadeterminationofanorganization’seconomiccapabilitytoremainoperatingasa“goingcon-cern.”Yetifthemajorityoftheassetsofanorganizationareintangibleandoffbalancesheet,itmaybedifficulttomakethisanalysisinatransparentandreliablemanner.The only remedy for this is for accountants to developobjectivedataaboutintangiblesthatcanbeusedforman-agement reporting and analysis in order to support thecontinuingviabilityofanorganization.

Many in the accounting profession remain happywithfocusingon“outcome-based”measuresoforganiza-tional performance. The investment community profes-sion is less happy. The environmentalists are asking formore. The problem with an “outcome-based” measuresapproach is twofold. First, outcome measures are bydefinition lagging indicators. Using relationships as anexample, when customers leave revenues will declineand sales expenses will increase as a percentage of rev-enueassalespeoplehavetodevoteahigherpercentageoftheirtimereplacingcustomerswhohaveleftratherthanattracting new ones. When this happens, however, theeventisalreadyover—it’stoolate!Managementaccoun-tantsneedtomonitorandreportleadingindicatorsthatprovide an early warning signal that the integrity of theintangiblecapitalisbeingerodedbeforeitshowsupinthefinancials. Only through this can they provide value tomanagement in protecting an organization’s capacity toutilizingall ofitsassets.


6

Asecondissuestemsfromthefinancialmanager’sresponsibilityfortheprotectingandsustaininganorga-nization’s asset base. While the marketplace assignsa value to a publicly-traded company that includes apremiumoverbookvalue,thevagariesofthiscannotberelied upon as a basis for determining an organization’sactual performance in building and sustaining theseaspects of its “corporate worth”. Additionally, waitinguntilavalueisdeterminedatthetimeofacorporatesale(i.e., when goodwill is created) is not appropriate as it isakintosayingthatthe“premiumassets”didnotexistorwere unimportant to understand, measure, and controluntilthatsaletookplace.

Weknowthevalueofintangibleassetsislarge;weknowitisimportant,weknowpeoplearepreparedtopayforit,andweknowitcanbecreatedanddestroyed.Theproblemisthatundergenerallyacceptedaccountingprin-ciples an asset is usually not recognized until an arms-length transaction between two parties has occurred,resultinginalargeproportionofintangibleassetsnotberecorded on balance sheets. Yet a new, complementaryframework can be developed that allows stakeholdersthe transparency to assess whether this aspect of cor-

porate value or capital is being enhanced, depleted, ordestroyed—and whether existing management strate-giesareincreasingtheriskthatcompetitiveadvantages,drivenfromthisaspectofcapital,mightbeevaporating.

6 THE TYPES OF UNRECOGNIZED INTANGIBLES AND

THEIR IMPORTANCE

The intangible value that currently falls outsideof statutory reporting can be divided into three majorcategories.(SeeExhibit2.)ThesehaveevolvedfromthemodeldevelopedbyKarlErikSveibywhichinitiallycov-ered human, organizational, and structural capital. Weredefine these as the areas of human, relationship, andstructuralcapital.

6.1 HUMAN CAPITAL

This first category must be positioned as the pri-maryintangible,asthroughitmostothersarecreatedanddevelopedordestroyed.“Peopleareourmostimportantassets” is a phrase that has been in use for many years.Therealizationofthevalueofthiscapitalhasbeentherefrom an intellectual perspective, yet the ability to iden-tify, understand, measure, monitor, and enhance the

Corporate Capital

Tangible Capital Intangible Capital

Equipment

Financial Assets

Plant

Property

Human Capital

Structural Capital

Relationship Capital

Management

Employees

Intellectual Property

Processes

Network

Brand

Customers

EXHIBIT 2. TYPES OF INTANGIBLE CAPITAL


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impactofthisfactorremainselusive.FromtheearlydaysoftheworkofFrederickTaylorandhistimestudies,andthrough this the development of standard costing, theprofession has created a good understanding of produc-tivityandefficiencyoftheworkforcewhentaskscouldbeclearly defined and measured and all that was requiredof “labor” was the ability to carry out the defined taskwithin the time allowed. Economic changes have madethisapproachlessvaluable.Thefailuretoadoptnewman-agement tools such as process thinking and new costingtoolssuchasactivity-basedcosting(ABC)hasopenedupalargervoidinunderstanding“anticipated”versusactualproductivity.Whyisthishardtoquantifyusingexistingapproaches?

• Farfewerpeopledorepetitiveworknowasaresultoftheintroductionofautomationinthefactoryaswell as enhanced process development in serviceandsupportorganizations.

• Those who are involved in production are movingtowardsgreaterflexibility,andthusperformavari-etyoftasks,whenorganizationsimplementstrate-giessuchasleanandflexiblemanufacturing.

• Much of the workforce is moving to knowledge-andservice-basedemploymentinwhich,althoughtheremaybeaprocesselement(thatcanbecosted),manyofthetasksinvolvevariabilitydeterminedbytheneedsofthesituation(client,project).

• In efforts to createa moreparticipative, inclusive,and respectful environment, many people don’t“clockin”orfillouttimesheetstodaytoaccountforwhattheyareactuallyworkingon,sosomeorgani-zationsdon’thaveactual“timeusage”data.

Nowhereisthisingreaterevidencethantheimpactof information systems on human productivity. Many aCEO,CFO,orCIOisfacedwith“knowing”thatmovementtomoreeffectiveenterprisemanagementsystems“mustbetherightthingtodo,”yetfindithardtodevelophardnumberstoeitherjustifyorlaterdemonstratethevalueofsuchaninvestment.

What we have learned is that an experienced,trained,andmotivatedworkforcethatisfullybehindanorganization’s business mission can create the greatestcompetitiveadvantageanorganizationcanhave.What

value do people create that gives rise to such an advan-tage, leading to enhanced financial performance andinvestors’value?

• Theyprovideinnovationandcreativitythat,giventhe right environment, lead to new products andservices, plus innovativeand creativeways to cre-ate and deliver such outcomes in the fastest andmostcost-effectiveways.

• They develop and sustain relationships that pro-videthebasisofmoreeffectivesupplychains(sup-plier relationships) and more effective sales andmarketingactivities(throughenhancedclientrela-tionshipsandwithotherssuchasdistributorsandagents),leadingtosavingsinbothinputandoutputcosts.

• Theycreatepositiveinternalworkingrelationshipsthrough “knowing the business” as well as havingeffectiveinterpersonalskillsthatleadtoenhancedinterdepartmentalactivities,thusincreasingcycletimesandsignificantlyreducingpoliticscausedbylack of trust, collaboration, communication, andcooperation.

• They create structural capital (i.e., the capabilityand capacity to execute strategy), which capturesknowledge of “best practices” of the organizationand (even better) turns this knowledge into scal-able, repeatable processes, of ten automatedthroughtechnology.

Theimportanceofhumancapitalhasmovedtotheforefrontinawaythatremainsunnoticedbymany.Thisistheareaofcorporatevaluesandethics.Actionsthatanorganizationundertakes,fromthemostseniorexecutivedowntothelowestlevel,haveanimpactonrelationshipcapital. Legislatures can pass laws requiring ethicalbehaviorandorganizationscandevelopethicalcodes,butultimatelyitcomesdowntohumanbehavior.Anorgani-zation’smarketvaluewillbeprotectedandwillgrowovertimeifanorganization’sleadershipandworkforcesustainahighlevelofethicalintegrity.

Muchworkhasbeendonetotryandvaluehumancapital, and several approaches suggest that monitoringareas such as average years of employment/experiencemaybeagoodindicator,asareabsenteeism,training,andthe number of professional degrees represented. Thismisses a key point. An organization may have the mostmodernequipmentinstalled(i.e.,capability),butwithout


8

effective setup, maintenance, operator training, goodtooling, etc., it will never provide a competitive advan-tage. Thus we need both the capacity and the ability tooptimize the potential of this capacity. The same is truefor human capital. An organization can have the mostexperienced and qualified people in the world, but if itfailstoeffectivelymotivatethembyprovidingapositiveandsupportiveenvironment,itwillneveroptimizetheircapacity. Poor training, poor pay, poor communication,poorsupervision,unfairtreatment,andpoorequipment,among others, can all be seen as contributors to thisunder-optimization.

Human capital needs to be thought of as both abalance sheet asset (what we have available to us) andas a driver of lower operating costs as seen through theincome statement. Management accountants need tounderstandbothassetsandoutcomestoeffectivelyadvisemanagementoneffectivenessaswellastobeaccountableto stakeholders on optimizing utilization of their com-pany’sassets.

6.2 RELATIONSHIP CAPITAL

Humancapitalcreatesthesecondtypeofcapital—relationship capital—which in itself creates significantvalueforanorganization.Thistypeof“asset”iscapital-ized when it is in the form of a client list. However, thisexample is like the human capital, example however—havingalist(theasset)doesnotnecessarilyleadtoacom-petitive advantage. Key to taking advantage of this andgenerating premium outcomes will be the level of clientturnoverbeingexperiencedaswellasthelevelofsatisfac-tionofthecustomerbase.Therearemanyinterdependentrelationships both inside and outside an organization.Considertheseexamples:

• Buyers are under pressure and need their sup-pliers to be part of more effective supply chains.Expectations today for effective relationshipsincludelowprices,error-freeperformance,contin-ualinnovationandcreativitytoreducecostsinallareas. Building such relationships takes time andcannotbedevelopedbyconstant“priceshopping”.

• Positive “win/win” relationships with suppliers,developed over a long term, can lead to savings

in both products and services acquired as wellas administrative processes, which link the twoparties. Effective supply chain management canonly take place when the parties work together aspartnersformutualbenefit.Thismeansthatpricemust be but one of the factors. One could use asan example the relationships developed with sup-pliers in the automotive industry, comparing theapproachesofToyotaandHondawiththatadoptedbyGeneralMotors.

• Treatingcustomersas“assets”andthinkingaboutthevalueoftherelationshipversuseachindividualtransactioncanleadtoproblem-solvingapproachesthat enhance the relationship rather than termi-natingit.

• Inmanycases,anorganization’scommunity(oftenmore than just its customers) becomes a criticalasset.Examples includereferralnetworksandtheusersofGoogle’ssearchengine.

• In markets where repeat business is an opportu-nity, studies have shown a correlation betweensatisfaction and intention to re-purchase. Thusknowing and enhancing client satisfaction is adriverfortheimplicitvalueoftheintangibleassetcalledthecustomerbase.

• Inmostbusinessesgettinganewcustomerismoreexpensivethankeepinganexistingone(oftenbya4:1ratio).Lowerclientturnoverleadstolowersalescost.

• Organizations are changing from a hierarchicalmodelbasedonfunctionalspecializationtoa“neu-ral”modelbasedonintegrationofallareastocreatea knowledge base. Positive internal relationshipsremove barriers to the smooth flow of informa-tion across organizational boundaries, resultinginfastercycletimesfordecisionmakingandlowerincidence of “re-inventing the wheel” caused bypeoplefailingtoshareknowledge.

From a financial outcomes perspective, relation-ship capital leads to enhanced operating effectiveness,creatingcompetitiveadvantagetowhichthemarketplaceassigns value. The importance of this area is clear whenwe consider that external parties assign value based ontheir observation of the way in which an organization


9

functions. This can be based on either observation as athirdpartyorthroughdirectinteractionwiththeorgani-zation. Emerging trends that reinforce this relationshipsideandlinkittopotentialfinancialimpactsinclude:

• Buyersseekingoutmorefocusedstrategicrelation-ships with those who have effective approachesto error-free operations (e.g., quality standards,such as an effectively implemented ISO 9001) andparticipative work approaches through which col-laborationwithsuppliersisencouraged;

• Theemerginguseofexpandedduediligencecheck-listsinsupplierevaluationthatlookatorganizationbehavior in areas such as environmental commit-ment (using standards such as ISO 14001) and itssocial commitment (using standards such as SA8000,especiallyinoutsourcedprocurementinlessdevelopedcountries,andthenewISO26000stan-dardforCorporateSocialResponsibilityscheduledfor release in the fall of 2010), in addition to com-petitivepricing;

• The emergence over many years of expanded duediligence checklists used by investors who haveadopted SRI (Socially Responsible Investing) thatlook at risk management in building relationshipswith organizations that are not pursuing theseapproaches.

Relationship capital provides a key aspect of anorganization’s capacity to operate effectively. Whilefinancial markets often focus on outcomes from thesecapabilities, the rush to reduce operating costs in eco-nomic downturns can often lead to actions that destroy

notonlyelementsofhumancapitalbut,throughthis,rela-tionshipcapitalaswell.

6.3 STRUCTURAL CAPITAL

The third area of intangibles is structural capital.Whilethisisagaincreatedbyhumancapital,itincorpo-rates a broad range of capabilities that an organizationpossesses through which it goes about its day-to-dayactivity. It typically includes aspects of “manufacturedcapital” such as the ability, through human innovation,todevelop“executionalcapacity”usinghighquality,lowcostcorporatesystemsandprocessesbywhichproductsand services are designed, developed, and delivered.In addition, this category would include areas such asunique capabilities that have been covered by patents,trademarks,andcopyrights,andothersthatmaytosomedegreehavebeenassignedacarryingvalueinthefinan-cialstatements.

The best examples of structural capital can beseeninorganizationswhere“theprocessiseverything.”Severalyearsagotheterm“flawlessexecution”wasdevel-oped, which has since been further refined and focusedon as a key corporate strategy. In addition, attempts toenhance relationship capital by developing and commit-ting to “service standards” have led many organizationsto the realization that internal process capacity is thedriver of any capability to commit to and meet externalservice standards. Exhibit 3 provides a schematic over-viewoftheserelationships.

It has been estimated by those involved in pro-cess re-engineering that between 75% and 90% of an

EXHIBIT 3. PROCESS CAPABILITY DRIVES RELATIONSHIP CAPITAL

Internal (Process) Aspect External (Client)

Inputs Process Output Outcome Client

Internal (Process) Measurements Internal (Service Standards)

Effectiveness Measurements

Efficiency Measurements Drivers of Satisfaction

© Eduvision Inc. 2009.


10

organization’sresourcesarespentinprocessactivities—converting inputs to outputs. While in manufacturingthis reflects converting a tangible (material) input toa tangible (product) output, the concept is exactly thesame in service organizations. The only different pieceis the tangible input and tangible output—although onemight argue that a service such as a “delivered parcel”ora“paidinsuranceclaim”isinfactatangibleoutcome.The key is that effective cost control (i.e., competitiveadvantage)anddependabilityofoutput(reliablesupplier)dependontheeffectiveness withwhichthiswholevaluestream works.Thus, organizationsthathaveinvested indevelopedandsustainedeffectiveandreliable“executioncapacity”havebeenabletodemonstrateahigherpoten-tialtodevelopearningsandthereforehavebeenaffordedahighervalueinthemarketplace.

Take FedEx as an example. Its financial balancesheet includes sorting centers, trucks, airplanes, andmany other tangible assets that have been acquired aspart of the capacity to execute; however, the most criti-cal asset is not on the balance sheet. This is the organi-zation’s ability to sustain a process that links all theseaspectstogetherandiscapableofdelivering“before10:00a.m. the next business day.” The reason people chooseFedExisnotthatitischeaperthantheparcelservice;it’sbecause FedEx is reliable and has a service guarantee.Process also has great importance in corporate supportactivitiessuchasthosemanagedbyfinance,compliance,human resources, supply chain management, and legaldepartments.

Organizationsfacesomekeyrisksinsustainingthisaspectofintangibleassetsintheyearsahead,thegreatestof all being the impact of demographics and retirement.Howmuchofanorganization’s“capacitytoexecute”restsinthemindsoftheworkforce?Progressiveorganizationsaredevelopingcodificationsystems(i.e.,methodstoturnintrinsic knowledge into extrinsic knowledge throughdocumentationandsharing)usingeffectiveprocessman-agementtoolsandemployeetrainingsothatthisknowl-edge “asset” can be retained and passed on to the nextgeneration.Yetit’saboutmorethantheprocess,andthisiswheretheimportanceofeffectiveknowledgemanage-mentwillbekey.Wewilluseanexampletodemonstratethis.

A large national taxation body wasfacing a major increase in retirement overthe next eight years, particular in the auditfunction.Whileworkhadbeencompletedtodefine the process of audit planning, execu-tion, reporting, and follow-up, with all the

necessary activities and tasks, littlethoughthad been given to the knowledge developedby the auditors themselves in carrying outauditsonspecifictypesofindustry.Howdidthey know what to actually look for? Theanswer was, “It’s all based on experience.”After asking how this knowledge was beingpassedontothenewauditors,itwasrealizedthatamechanismwasnotinplacetocodifythisaspectoftheknowledge.Theresultwasthe development of a whole series of “tipsand traps” developed with the experiencedauditors whereby they identified their expe-riencesoverthe30yearsofauditinginaspe-cificindustry.

Many organizations depend upon their employeesto use their experience to deal with any given “non-routine”situation.Howisyourorganizationpassingthison?Withoutit,akeyelementofcapacitytoexecutewillbelost,whichcanresultindecliningcompetitiveadvantageandincreasedcosts.

Capturingpriortoemployeeretirementthisaspectof competitive advantage is important. Who knows thebusiness and how the work is done? The people actuallydoingit!Anorganizationthathasthecapacitytoinnovateand continually improve its executional capability willsustain and grow its competitive advantage. Readers ofThe Toyota Way (Liker, 2004) see that key to success isboth a focused approach on the development of execu-tional capacity combined with a continuing commit-ment—everyminute,everyhour,everyday—tochangingthisandimprovingitinsmallways.Inarapidlychangingandcompetitive economy,theorganization thathasfos-tered a culture of innovation and creativity will have amajor competitive advantage leading to enhanced valuetotheinvestor.

7 THE CHALLENGE OF ACCOUNTING

FOR INTANGIBLES

Knowledgeasaneconomicassethasdistinctchar-acteristicsthatdistinguishitfromtangiblegoods.Thus,although intangibles are important to the 21st centuryorganization, there are a number of barriers to incor-porating them into existing economic and accountingparadigms.

Knowledgeisnotafiniteasset.Thiscontrastswithtangibleassets.Ifacompanyowns100productsandsells10, it is leftwith90. Bycontrast,whenacompanyownsaknowledgeproduct(suchassoftware),sellingalicense


11

to that software does not diminish the “inventory” ofsoftware. If the software is sold via a CD, the inventoryof CDs may go down, but the more important inventoryof knowledge does not decrease. In fact, many knowl-edge assets such as software 10 increase in value as theyare used. A large community of users of knowledge con-tained and managed through effective software makesthesoftwaremorevaluabletoeachincrementalnewuser.Traditionaleconomicsandaccountingarebuiltbasedonan assumption of scarcity. In contrast, knowledge eco-nomicsissometimescalledtheeconomicsofabundance.Accounting cannot measure abundance. It is unrealisticto expect that accounting will ever measure abundance.The fact remains, however, that businesses today doinvestinintangiblesandrealizeareturnontheseinvest-ments. In designing approaches to measuring thisactiv-ity,thereareseveralchallengesforthefieldofaccounting.

First,manyintangiblesarenotdirectlycontrolledorownedbytheorganizationtowhichtheyarecontribut-ingknowledge.Controlimpliestheabilityoftheorganiza-tiontocapturethefuturebenefitsgeneratedbyanasset.Many aspects of human capital and relationship capitalarenotcontrolledbytheorganization,althoughcontractswith specific employees or partners are sometimes rec-ognized as owned assets. Structural capital is generallycontrolledbytheorganizationthatbuiltit.

Second,mostintangiblesaredevelopedinternally.Toberecognizedforfinancialaccountingpurposestheremust be a financial transaction involved. Interestingly,as described in the next sections, there are financialtransactions associated with the development of manyintangibles have to do with investments in developingintangiblecapacitythatpotentiallycouldbebroughtintotheaccountingsystem.

Third, many intangibles are integrated withotherintangibles and are difficult to separate. Accountingrequires that assets be identifiable and separable. Thismeansthat theymust becapableofbeing separated andsold,transferred,licensed,rented,orexchanged.11Again,withincreasedunderstandingofintangibles,somekindsof structural capital, especially processes, could eventu-allybebroughtintoaccounting.

10 Software is used as an example because it is created by knowledge

workers but also serves as an enabling tool for converting data into

knowledge through effective analytic and simulation techniques charac-

terized by speed and accuracy that could not be achieved manually.

11 This requirement can be found in IAS 38 Intangible Assets, para-

graph 12. This standard also lays out many of the other basic principles

used today for recognition of intangible assets.

These challenges mean that it will not be easyto fully incorporate intangibles into existing externalreporting standards. Yet management accountants canandshoulddevelopcompetenciesintrackingintangiblesthroughinternalreporting.

8 THE REPORTING OF INTANGIBLE ASSETS

The Institute of Management Accounting (IMA)definesmanagementaccountingas:

“… the internal business-building role ofaccounting and finance professionals whoworkinsideorganizations.Theseprofession-als are involved in designing and evaluatingbusiness processes, budgeting and forecast-ing, implementing and monitoring internalcontrols, and analyzing, synthesizing, andaggregating information—to help drive eco-nomicvalue.”12

In this role, management accountants frequentlyuse the basic information contained in the financialsystems to support decision making. It is in this capac-ity that management accountants can and should beginto develop better information about their organization’sintangible assets, regardless of external reporting stan-dards.Therearefourbasickindsofinformationthatcanbedevelopedandtracked.

• Inventory—To account for intangibles, you needtostartinthesameplaceyouwouldwithanynewaccounting system: take an inventory. This inven-tory should include a listing of all key assets. Forhumancapital,thekeyitemsonthelistarethecorecompetenciesoftheorganization.Forrelationshipcapital,thekeyitemsarekeybrands,keycustomertypes,aswellassupplierandpartnerrelationships.For structural capital, it is the key business pro-cesses that help create customer value. For exam-ple,thekeyprocessesintheGooglesearchbusinessarethesearchprocessandtheadvertisingprocessthat fundsit.Every businessalso hassupport ser-vicesthatincludefinance,humanresources,legal,etc.

• Investment—Once you have an intangibles inven-tory, you need to start keeping track of your orga-nization’s annual investment in these intangibles.Thisinvestmentiscurrentlyreportedinanincomestatementaccount.Youarenotgoingtochangethatreportingmethodology;butratherkeepaseparatemanagement report. The standard for includingan “expense” as an “investment” is the same as

12 http://www.imanet.org/about_management.asp


12

it would be for a tangible asset: spending that isexpected to yield value beyond the current year.A good example of this would be the design andimplementation costs of a new supply chain sys-tem—spending on the process itself (structuralcapital),linkswithsupplychainpartners(relation-shipcapital),andtrainingofpersonnelintheuseofthesystem(humancapital).

• Assessment—Assessmentistheleastfamiliarcon-cept to accountants but one that should not beignored. Assessments are frequently used in busi-ness to evaluate personnel (Myers Briggs or 360°assessments),customerservice,andemployeesat-isfaction.Butthistoolcanalsobeusedtoevaluatethehealthoftheassetsintheintangiblesinventory.ThiscanbedoneusingastandardizedtoolsuchasICRating™orthroughthecreationofacompany’sown evaluation. The important thing is to ensurethatanorganizationisaskingthesequestions:Aretheseassetsperformingthewayweexpectthemto?Whatistheoutlookfortheseassets?Whereareweat risk? This final question is the counterbalance,theliabilitysideoftheequation.Thesethreekindsof information are similar to the kind of periodicinformationthatisnormallygatheredforabalancesheet. These speak to the investment and viabil-ity of an organization’s assets. This informationis important as input into strategic planning anddecision making and into the design of the finaltypeofinformation:indicators.

• Indicators—Indicatorsaremeasurementsthatcanbe made on an ongoing basis to track the perfor-mance of an organization’s strategy.Most accoun-tants are already familiar with these as they havebeen popularized by the balanced scorecard andperformancemanagementsystems.Indicatorsareoften delivered via a dashboard or a quick report-ing format. By definition, they do not measureall aspects of an operation, just the key perfor-mance indicators (KPIs) that have been identifiedas leading indicators of the performance of theorganization.

Indicators can be very powerful, but they shouldnot be used without the other three kinds of intangibleinformation.Usingindicatorsalonewouldbelikekeepinganincomestatementwithoutabalancesheet—youknowhow you are doing moment to moment, but how are youdoing overall? The knowledge era business needs bothperspectives.

9 INTANGIBLES, CSR, SUSTAINABILITY, AND THE

TRIPLE BOTTOM LINE

Inparallelwiththefocusonintangibleswithintheaccountingprofession,complementarydevelopmentsareunderwayinotherfields,someofwhichfinancialmanag-ers may already be exposed to or involved in. These fallwithinthebroadheadingof“sustainability.”SinceBen&Jerry’s13 publisheditsfirst“socialresponsibilityreport”there has been a growing interest in nonmandatory,broader-based accountability by corporations over andabove their financial performance. This reflects a grow-ing understanding by stakeholders of corporations thatfinancialperformancethatcomesatgreatcosttosocietyor theenvironment eventuallyaffects the organization’sownviability.

The interest in sustainability reflects an under-standingthatexclusivelycountingfinancialresultsskewsthedecisionsmadeonaneconomy-widebasis.Forexam-ple,GNPcountsthesaleofcigarettesbutnotthecostofrelatedhealthconsequences.Inalikemanner,GNPalsocountsthesaleofautomobilesandgasolinebutnottheireffect on global warming. There is a growing realizationthateconomicmeasurementmustcountontheimpactatamacrolevelaswellasatthemicroleveloftheindividualfirm.

One of the forces driving this in the U.S. and theU.K.isthechangingcharacteroftheshareholdersofpub-liccompanies.Inthesecountries,themajorityofstockisnow held by individual investors or by their representa-tives (such as pension funds). These organizations aredependent on not only the success of individual compa-niesbutalsotheviabilityoftheentiresystem.Theydonotwant to see individual companies succeed in a way thatputstheentiresystematrisk.14

There have emerged a variety of frameworks forsuchreportingthatdealwithissuessuchasenvironment,health, safety, community involvement, and philan-thropy,whichinsomecaseshavealsobeenincorporatedintoseparatereports.InitsMarch2009studyof“report-

13 Ben and Jerry’s is the now globally famous ice cream brand started

by two forward thinking and innovative U.S. entrepreneurs and later

sold to Unilver

14 The New Capitalists: How Citizen Investors Are Reshaping the

Corporate Agenda, by Stephen Davis Jon Lukomnik, and David

Pitt-Watson.


13

ingentities,”CorporateRegister15indicatedthatin2008over3,000organizations,includingover50%oftheglobalFT 500 firms, were producing stand-alone corporateresponsibility (CR) reports. In addition, more and morefirmsaremovingtoproduceareportthatfocusesonwhathas been termed the triple bottom line—environmental,social,andeconomicaspectsofcorporateperformance.

As social expectations change and organizationscomeundergreaterscrutiny,theirintangiblevaluewillbeimpactedbythepublic’sperceptionsofhowtheyoperate.

• Humancapitalmaybeerodedastalentedindividu-als decide not to join or not to stay with organiza-tionsthathavenotadoptedbroaderaccountabilityfortheiractions.

• Customersmaydecidenottodobusinesswithorga-nizationsthatdonothaveenvironmentalmanage-mentsystemsinplace.

• Investors may decide not to invest in or maydemand a higher risk premium for organizationsthatdonothaveinplacesupplierauditandevalua-tionfortheirsocialperformancewhenoperatinginlessdevelopedcountries.

Reputationandbrandsformakeyintangibleassetfor many organizations, and in particular these can beinf luenced by negative perceptions about corporatebehavior.OneoftheactionstakenbyAIG16asaresultofthe recent financial meltdown was to change its namebecauseofthenegativeaspectsassociatedwithcontinu-ingitsuse.Howmuchinvestmenthadbuildingthisbrandrequired?Howquicklywasthisdestroyed?

The linkage here for the financial manager is thatawarenessofchangingsocietalexpectationsoforganiza-tional behavior and performance can have an impact onintangiblevalues.Failingtoembracesuchchangesuntiltheyarelegislatedcanerodeintangiblevalue.Thestrate-gicimpactofnotrespondingmaybefargreaterthantheshort-termsavingsthatcanbeachievedbydeferringsuchinvestments.

Financial managers should review the types ofsustainability reports being developed and publishedthroughsourcessuchastheCorporateRegisterandiden-tify the types of measures and indicators that are being

15 Corporate Register has become a global repository on the World

Wide Web that contains one of the largest collections of publicly

reported CSR (corporate social responsibility) reports. See website in

references.

16 AIG (America International Group) is a large U.S.-based financial

insurance and re-insurance corporation that had underwritten many of

the bad loans that formed part of the 2008-09 U.S. financial crisis. .

adoptedinareassuchasenvironmentalandsocialreport-ing.Thesecanprovide valuable insight intothetypesofbroad-basedmeasuresthatmayhavepossibleapplicationindevelopingaframeworkforintangibles.

10 CHALLENGES AND SOLUTIONS FOR DISCLOSURE

Addressing the issue of intangible valuation andreportingisasignificantchallengeandshouldbeconsid-eredfromanexternalandaninternalaspectseparately.Externaldisclosurecancreatesignificantproblemswhenanalysis of such data might release information thatwouldbedetrimentaltocompetitiveadvantage.Externalreportingshouldbebasedoncaution.Muchofthedirec-tioninthisregardisbestdeterminedbyaligningwiththeemerging area of CSR (corporate social responsibility).Inthiswayanindividualmightassesstheorganization’seffectivenessinrespondingtoissuesthatimpactreputa-tion and brand values, as well as employee motivation.Inmostsituations,disclosureinthesereportsaddressesissuesthathavebeendeterminedtobeimportanttokeystakeholdersthroughanengagementandreviewprocess.

Moreimportantaretheinternalreportingaspects,as these focus on what management and the board ofdirectorsshouldknowabouttheorganizationalelementsof intangibles within the asset base of the organiza-tion and the degree to which management is buildingor diminishing such value. This has become critical inrecent years as senior leadership tenure has declined.Also, in many cases, executive compensation has beenlinked exclusively with financial goals, many of whichcan be achieved in the short term at the cost of a severenegativelong-termimpactontheintegrityoftheorgani-zation’sintangibleassetsanditsabilitytosustainitself.

10.1 HUMAN CAPITAL DISCLOSURE

In the area of human capital, significant researchis available to help develop strategies for protection andenhancement. As an example, the twelve core ques-tions presented in the book First Break all the Rules (Buckingham and Coffman, 1999) provides areas wherea company can assess its progress towards creating anenvironmentthatisconducivetooptimizationofhumancapital.Inordertobuildaframework,theapproachcouldincludestepsto:

• identifywhatattributesofhumancapitalarekeytobusiness sustainability (experience, skills, qualifi-cations/competencies,attitudes);

• evaluatetheexistenceofsuchattributeswithintheorganization’s workforce (inventory of key skillsandotheritemswithintheworkforce);


14

• Identify the linkages between capability and out-come (e.g., what attitudes lead to enhanced clientsatisfaction? What skill sets lead to higher indi-vidual productivity within job positions?) usingtoolssuchasself-discoverypersonalityevaluations(e.g.,“Insights”®andother“colors”-basedsystems),aswellasleadershipskills,emotionalintelligence,andothers;

• identify/benchmarkoutcomeperformanceindica-tors such as client satisfaction and cycle times ofprocessesincorecompetencyskillsets;

• Assesstheimpactofemployeesatisfactionoutcomelevels and assess their economic impact on mea-suressuchasre-purchaseintentions,processcosts/transaction,andotherperformanceattributes.

Whilethismayseema“loose”approach,itbeginstoofferalternativewaystolinkthevalueofeffectivehumanmanagementandleadershiptoorganizationaloutcomes.

Exhibit 4 depicts the understanding required toassessthesustainabilityofthehumancapitalbasewherethebenefitisthereturnonintellectualcapital(ROIC).Itshowsthefollowing:

a) Human capital creates almost all other aspects ofintangible capital, so its protection and develop-mentarekey;

b) Capability of the workforce (the asset) is key intermsof“whatwehave”;however,

c) The environment that is created determineswhether the asset is “turned on” and operatingeffectively;

d) Therealvalueofthehumanassetbaseisinwhattheoutcomeis;and

e) Effective management of “b” plus “c” definesthe competitive advantage created in “d,” whichultimately creates greater organizational valuethroughcapacitytooperate.

Effective metrics for intangibles, especially in thehuman capital area, require that we know what “assets”we have and, more importantly, know the impact onoutcomes that these “assets” create in terms of creatingcompetitive advantage. Two organizations may haveequivalentlyqualifiedgroupofemployees,butdifferencesinmotivationcanresultinverydifferentoutcomes.Boththe existence of the intangible asset and the outcomefromhavingitareimportant.

Managersandboardmemberswhoseekimprovedfinancial performance through cost cutting may well bemissing the negative impacts that achieving such costreductions may be having.Historyhas shownthat orga-nizations that focus on sustaining employee well-being

Human Capital creates Structural Capital that leads to Customer (relationship) Capital

“…people are our greatest assets…”

Capability + Motivation = Results

Capability• technical

abilities• years of

experience• industry

knowledge • tenure in

company• level of learning

Motivation• turnover • absenteeism • survey results • pay levels • benefit levels

Results• client

satisfaction• new products• new service• growth• fast cycle time

What is the correlation for Return On Intellectual Capital?

EXHIBIT 4. MOTIVATION—CONVERTING HUMAN POTENTIAL TO CAPITAL


15

throughrecessionsgenerallycomeoutofsuchdownturnsstrongerthanthosethat“justcutcostsacrosstheboard.”OnecanarguethatthesuccessofWal-Martmaywellbelinkedtothefactthatintherecessionoftheearly1980s,itfocusedoncompletelyredesigningitssupplychainandcutting “back office” process costs rather than cuttingstaff at the customer-interface portion of the organiza-tion. Others in retail maintained a “business as usual”approach and lost customers due to poor service causedby inadequate numbers of staff and a lack of experi-enced staff. Wal-Mart revolutionized the industry andleft others to catch up with its newly found competitiveadvantage.

FromExhibit5weseethathumancapitalisatthecoreofcreationofallotherintangiblesandthusmustbetheprimeareaofattentionforeffectivemanagementandoversight.Fromthiseffortotherareasmustalsobesup-portedthrough“sustainabilityofintangibles”metrics.

10.2 RELATIONSHIP CAPITAL DISCLOSURE

As a general measure trends in client satisfac-tion are important; however, so is the understandingof outcome. If, for example, an organization can assessthe linkage between client satisfaction and re-purchaseintentions, it can put a notional value on the “backlog”ofpotentialpurchaseswithinthecustomerbase. Suchameasure might provide an effective base for creating anROI from improving client satisfaction through productorprocessenhancements.

AnalternativemightbethatdepictedinExhibit6,whichshowshowclientstratification,turnoverlevels,andprofitabilitymightbeusedasabarometerforanetpres-entvaluecalculationofthecustomerrelationship“asset.”

In Exhibit 6 an organization has established itsprofit contribution from each stratum of clients usingactivity-based costing (ABC) to ensure core costs areaccuratelyreflected.Theorganizationhasidentifiedthatthe baseline turnover rate (loss of clients) ranges from

• leadership• style • management skills• commitment

• expertise• problem solving• “team ness”• creativity

EXHIBIT 5. ASPECTS OF HUMAN CAPITAL

Process• culture• methodology• financial depth• process • capability• sales • organization• risk management

Property• know how• copyrights• trade secrets• patents• design rights • trade & service

mark

Customer • loyalty• brands• channels• licenses /

franchise• core business • growth

opportunity

Human Centered Assets – who exhibit…

Converts into capacity in areas such as…

©Shepherd,Eduvision,2009.Usedwithpermission.


16

5% to 20% per year. It has determined that the value tobeattributedwillbebasedonfiveyearsofearnings,butthattheequivalentofjustthreeyearsoflosses/turnoverwillbeapplied.Basedonthis,thebasestatevaluationofthe“businessasusual”clientbaseis$9.6million. Ifcli-ent turnover rate increases, or client profitability levelsdecrease, and/or support costs change, then the overallvalue of the client base will change as well. The sameapproachmightbeappliedtotheassessmentofasupplychainwhereanorganizationcanassesstheimpactofthesupplychainonoverallcostofgoodsversusacompetitivebenchmark.

10.3 PROCESS DISCLOSURE METRICS

This category will have already been adopted bymany organizations utilizing balanced scorecards. Thescorecard’s “process” dimension should begin to revealthevalueofeffectiveprocesses.Typicalmetricsthatdem-onstrateincreasingordecliningprocessvalueare:

• Transaction cost/unit compared to history andbest practice benchmarks of the process (e.g., vol-umessuchasunits/hourorcycletimes,usingABCtoaccuratelyreflectprocesscost);

• Costofpoorqualitybyprocess(i.e.,trackingofbothdefectsfromaqualitymanagementsystemaswellasthefinancialimpactofsuchfailures);

• Percentage of transactions/cycles that meet bestpracticebenchmarks;and

• Customer satisfaction levels with key process out-comecapabilities(e.g.,cycletimes,accuracyrates,etc.).

This is a key area where the shift towards process- andactivity-based thinking within organizations, combinedwith adoption of new costing approaches such as ABC(activity-basedcosting),willallowtheeffectivefinancialmanager to align financial data with operational effec-tiveness in a way that can be linked and aligned to anorganization’scapacitytoexecuteand,throughthat,toitsimplicitgoodwill/intangiblevalue.

At the optimum level, managers and executives coulddevelop metrics such as overall system capacity utiliza-tion as a measure of organization effectiveness usingnewtoolssuchasthroughputaccounting.Thisapproachwouldstarttodefinetheorganizationmoreeffectivelyasa“system”andlookateliminationofconstraintsasawayofassessingtheoptimizationofanorganizationreturnontotalassetsthroughoptimizationofcapacityutilization.

11 GLOBAL BEST PRACTICE EXAMPLES

ExamplesofbestpracticesinvariouscategoriesofreportingcanbefoundontheWorldIntellectualCapitalInitiative (WICI) website (http://www.worldici.com/ )andtheCERES-ACCASustainabilityAwardssite(www.ceres.org). Examples from the former site related to“managingforvalue”include:

• GapInc.,adesigner,producer,andretailerofcloth-ingandfashion.ThisexampleidentifiesGap’scom-petitive advantage relative to its people strategiesandtheimportanceofsocialresponsibilityinman-agingasupplychaininwhichmuchoftheproduc-tion takes place in less developed countries. Thisexample reinforces the linkage between “reputa-

Stratification of customer base

“A” type customers

“B” type customers

“C” type customers

Cash clients

Total profit contribution

Less common costs

Net earning capacity

Profit Contribution

$2,750,000

750,000

150,000

350,000

$4,000,000

1,500,000

$2,500,000

Years Amortized

5

5

5

5

5

5

5

Asset base value

$13,750,000

3,750,000

750,000

1,750,000

$20,000,000

7,500,000

$12,500,000

Annual loss rate

5.0%

10.0%

15.0%

20.0%

% value attributed

85%

70%

55%

40%

77.1%

77.1%

77.1%

Amount Attributed

$11,687,500

2,625,000

412,500

700,000

$15,425,000

5,784,375

$9,640,625

EXHIBIT 6. FINANCIAL “PRESENT VALUE” OF RELATIONSHIP CAPITAL

©Shepherd,Eduvision,2009.Usedwithpermission.

Discount applied

(3 years)

15.0%

30.0%

45.0%

60.0%


17

tion”andorganizationalactivity.GapwasanearlyadopterofreportingagainstsupplierperformancerelativetobestpracticesfollowingNike’sproblemswith child labor. Standards such as SA 8000 andtheupcomingISO26000areexamplesofemergingglobal approaches that support reporting such asthatadoptedbyGapInc.

• CarmaxInc.,aU.S.-basedautomobileretailer.Thisexample shows managing for value, again withemphasisonfinancialandphysicalassetsaswellascustomersandthesupplychain(therelationships).Thisprovidesinterestinginsightintohowtheorga-nization’s people and process strategies provide acompellingcompetitiveadvantagethatsupportsitscustomerrelationships.

Thissitealsoincludesfinancialservicesorganiza-tions such as Wachovia Corporation and Wells Fargo.PriceWaterhouseCoopersisalsoactiveinthefieldoflead-ing-edge reporting through its review and assessmentof supplemental corporate sustainability/CSR reportsproduced under the GRI (Global Reporting Initiative)framework and others (see www.corporatereporting.com/good-practice.html). While such reviews are notyet mandatory, this involvement demonstrates how thetraditionalroleoffinancialoversightisbeingbroadenedandhowtheworkofaccountingprofessionalsischanging.

12 PROGRESS ON DISCLOSURE WITHIN THE

ACCOUNTING PROFESSION

As previously discussed, initial efforts by those inthe field of intellectual capital and knowledge manage-ment began to devise approaches in the 1980s and early1990s. Inparalleltothisworkwastheefforttoimprovecorporatedisclosureinareassuchasenvironmentalandsocialreporting,whicharedirectlylinkedtothemarket’sperception of an organization’s conduct within its busi-nessenvironment.Notableinthisareaisthedevelopmentof the SIGMA framework, which attempted to integratealllevelsoforganizationalcapital(naturalcapital,humancapital, social capital, manufactured capital, and finan-cial capital) into a reporting framework and the workof the Global Reporting Initiative (in developing triplebottom line disclosure of economic, environmental, andsocial performance. Additional approaches include thecreation of L’observatiore de l’immateriel with foundingmemberssuchasErnstandYoung,SASandothers).

Work has also been underway on a global basisto improve overall financial disclosure and report-ing through activity such as the Enhanced BusinessReporting Consortium (EBRC) initiative. Progress in

recent years has become significant as the convergingconcernsofgreaterpublicdisclosureandtheimportanceof intangibles assets arecolliding.Animportant organi-zationoperatinginthisareaisWICI(WorldIntellectualCapital Initiative), which was promoted and formedby EBRC, European Federation of Financial AnalystsSocieties, Japanese Ministry of Economy, Trade andIndustry, the Organization for Economic Cooperationand Development, Society for Knowledge Economics,UniversityofFerrara,andWasedaUniversity.Theorgani-zation’sgoalistodevelopaglobalframeworkforimprov-ingthereportingofintellectualassetsandcapitalandkeyperformanceindicators.

13. CONCLUSIONS

The role of intangible assets in an organization’sperformance is increasing. The basis upon which finan-cial accounting standards are founded precludes manyof these intangibles from being incorporated into tradi-tional financial statements. Nevertheless, creating andnurturing intangibles is having an increasing impact onanorganization’scompetitiveadvantageandthroughthisits business ability to sustain its operation and remainviable.. As societal expectations of public corporationsand entities change, reputations and thus the value ofshareholder investments are increasingly impacted bybehaviorinareassuchassocialandenvironmentalpolicy.

The accounting profession needs to be active inthesediscussionsandtomovetheagendaforwardforthefollowingreasons:

• Those responsible for corporate governance andoversightneedhelpindevelopingagreaterunder-standing of the need to be more certain that theorganization is sustaining those factors that arekeytoitsabilitytogrowandprosperinthefuture.Board directors in particular need to be aware ofthe intangible drivers of competitive advantageand hold management accountable for continualgrowthofsuchcapacity.Thereisgoodgroundworkalready in place using tools such as the balancedscorecardandactivity-basedcosting;andthesecanbebuiltupon.

• Management needs to be aware of how its day-to-day approaches to leadership and managementare impacting the integrity and sustainability ofits intangible assets, in particular the people andrelationshipsthatenabletheorganization’scapac-itytoproduceandserve.Financialreportingalonecannotfillthisgap,yetthisremainsakeysourceofinformationforinvestors.Again,partofthiscapa-


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bilityisinplacewithareassuchasrelationshipsur-veys,butmoreneedstobedone.Theseitemsneedto be developed within an overall accountabilityframework.

• Management accountants need to be active indevelopinganunderstandingofthesizeandimpor-tance of the “undisclosed” intangibles in theirorganizationsandinstartingtodevelopkeyperfor-mance indicators using, where practical, existingexamplesandframeworks.Throughthis,manage-ment accountants can enhance their value-addedcapacitybyensuringbothprotectionofunderlyingassets and sustainability of capacity to executeas well as overall competitive advantage. At themoment much of the focus has been on rational-izing “fair value,” especially when goodwill hasbeen created from a buy/selltransaction,but a fargreater focus needs to be given to assessing “pre-disposition”valuesofintangiblesaswellasongoingassessmentofintangibletrends.

• Leadersintheaccountingprofessionneedtoclar-ify the line between areas of accountability thatremainwithinthescopeanddefinitionsofexistingaccounting standards, and then establish a solidandvisiblepresenceinthethinkingrelativetonon-reported“value”thatfallsoutsidethesedefinitions.

• Finally, accountants need to develop strong rela-tionshipswiththosewhohavespecializedskillsinthisareatomoreactivelyengagethemindiscussionand to bring their more “economic” approachesinto discussion. Such groups would include thoseengaged in business valuation activities and envi-ronmentalperformancemanagement.

Thefinancialcommunityhasakeyroleinreportingon the ability of an organization to function as a “goingconcern,”andauditors’assessmentsofthiscapabilityareincreasinglyfocusingontheperformanceofintangibles,yet companies’ MD&A (management discussion andanalysis) in its annual report remains the key windowintotheseaspectsofanorganization’shealth.

The accounting profession is engaged on a globalbasis in seeking out ways to enhance and improve busi-nessreporting.Thoseinvolvedinexternalreportingandcompliance issues have a responsibility to expand theirroleandprovideagreaterlevelofassurance.Thosereliantonfinancialreportingarealreadyseekinggreaterinsightthroughinitiativesincludingsociallyresponsibleinvest-ing(inwhichduediligenceextendstoincludesocialandenvironmentalperformance)andcarbongreenhousegasdisclosure reporting (through which investors are seek-

ingtounderstandtheorganizationalperformanceimpli-cations of publicly-traded companies on CO2 emissions)aswellasothernon-renewablesources.

Those involved internally must be able to provideinformation to management that indicates the health oftheirorganization’sintangibleassetsandthatillustrateswhether these are being built or depleted as a result ofmanagement actions, policies, and procedures or due toexternal factors. Management must be in a position toreport to those responsible for oversight that they areindeedbothprotectingallassetsoftheorganizationandalsomakingeffectiveuseofthekeyintangibles,todrivecompetitiveadvantage.Directfinancialimplicationswillstarttobeseenwhencarbontradingisimplementedandemissionreportinghasdirectfinancialresults.

The accounting profession is now starting to beinvolved in these questions and good progress is beingmade. Yet a broader involvement and engagement ofprofessionalstoseekoutwaysthroughwhichbetterandmore valuable information can be provided to investorsand management as well as to other interested partiesisneeded.Thefutureoftheprofessiondependsuponitsabilitytobeengagedinsuchinitiatives;otherwise,itwillbecome increasingly focused solely on items covered byaccountingstandardsandthusbecomebetterandbetteratmeasuringandreportingwhatislessandlessrelevantto protection of wealth and optimization of competitiveadvantage.

14 GLOSSARY

Activity Based Costing (ABC) —A costing methodol-ogy that measures the cost and performance of costobjects, activities, and resources. Cost objects con-sume activities and activities consume resources.Resource costs are assigned to activities based ontheir use of those resources, and activity costs arereassignedtocostobjects(outputs)basedonthecostobjects’ proportional use of those activities. Activity-based costing incorporates causal relationshipsbetweencostobjectsandactivitiesandbetweenactivi-tiesandresources.

Balanced Scorecard (BSC)—A performance manage-ment system that emphasizes the linking of an orga-nization’s performance metrics to its vision andstrategy. By organizing metrics along financial, cus-tomer,internalprocess,andlearningandgrowthper-spectives,itprovidesabalancedviewoforganizationalperformance.


19

Committee of Sponsoring Organizations (COSO)—COSO was formed in 1985 to sponsor the NationalCommission on Fraudulent Financial Reporting, anindependent private sector initiative that studied thecausal factors that can lead to fraudulent financialreportinganddeveloped recommendations forpubliccompaniesandtheirindependentauditors,fortheSECandotherregulators,andforeducationalinstitutions.Sincethattime,ithasissuedguidanceoninternalcon-trols and enterprise risk management, enabling pub-licly traded corporations to deal with fraud, controls,risk,andcomplianceissues.

CorporateSocialResponsibility(CSR)—Aframeworkfortheinclusionofpublicinterestissuessuchasenviron-mental, economic, and social issues within corporatedecision making and accountability; first efforts onCSRstartedwithBenandJerry’sin1987.

Emotional Intelligence (EI)—A term given to the abilitytoperceive,identify,andrelatetooneself,others,andgroups.

Enhance Business Reporting Consortium (EBRC)—An organization formed initially by the AICPA,Grant Thornton LLP, Microsoft Corporation, andPricewaterhouseCoopers LLP to investigate and sug-gestwaystostructureandprovidefinancialinforma-tion to key stakeholders in a way that adds greatervalue.

GlobalReportingInitiative(GRI)—Anindependentinsti-tution that began in 1997 and became independentin 2002. It offers sustainability reporting guidelinesthat help make the reports more standardized. It isan official collaborating center of the United NationsEnvironmentProgram..

Goodwill—1).Anassetaccountthatappearsastheresultofacquiringabusinessentityforanamountinexcessof the fair market value of the identifiable net assets.2)Characteristics of a business entity, not individu-allyidentifiable,thatpermitsittoearnabovenormalreturnsontheidentifiableassets.

Insights®—The trade name of a tool referred to as the“InsightsDiscoverProfile”(aswellasarangeofaddi-tionaltools)throughwhichanindividualcandevelopanunderstandingofselfandofrelationshipswithoth-ersasindividualsandgroups.

Internationa l Inta ng ible Ma nagement Sta nda rdsInstitute (IIMSI)—An organization formed to assistcompanies in creating breakthrough performance

improvementsthroughenhancedanalysisandreport-ingofvaluecreation.

Intellectual Capital—Nonfinancial assets of an organi-zation that create an organization’s value and com-petitive capacity; typically represents the value notrepresentedbyfinancialassets.

KeyPerformanceIndicators(KPI)—Typicallydefinedasbeingthoseperformancemeasuresmostrelevantandcriticalforthemonitoringandassessmentofanorga-nization’sactivity.

Knowledge—Expertise acquired by a person throughexperience and education; may also be used to rep-resent the capacity of a collective such as a group ofemployeeswithinanorganization.

KnowledgeManagement—Organizationalpracticesusedto retain data in an orderly formatand thento facili-tateanalysisofthatdataforbusinessknowledge(e.g.,recognition of trends). Extends to the distribution ofusefulinsightsthroughouttheenterprise.

ManagementDiscussionandAnalysis(MD&A)—Writtenpartofacorporation’sannualreport,requiredbytheU.S. Securities and Exchange Commission. In theMD&A, management comments on the firm’s recentperformanceandtheoutlookforfutureperformance.Theinformationisusedtosupplementfinancialstate-mentinformation.

MyersBriggs—Apsychometricquestionnairedesignedtomeasurepsychologicalpreferencesofhowpeopleper-ceivetheworldandmakedecisions;thetestisbasedontheworkofCarlJungandwasoriginallydevelopedbyKatharineBriggsandIsabelMyers.

ROIC—Return on Intellectual Capital; traditionallymayalsorefertoreturnoninvestedcapital.

SIGMA—TheSIGMAprojectwaslaunchedintheU.K.in1999todevelopasetofintegratedguidelinesforman-agement to help them address the challenges posedby social, environmental, and economic dilemmas,threats,andopportunities.

Socially Responsible Investing (SRI)—In this context atechniqueutilizedbyinvestorstoassessanorganiza-tion’sriskintermsofbothfinancialandbroader-basedCSR risks and through this to engage in investmentsthatmaximizebothfinancialreturnandsocialgood.

Sustainability—Progress that meets the needs of thepresent generation without compromising the abilityof future generations to meet their own needs, whilepreservingbiodiversityandnaturalecosystems.


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WICI—WorldIntellectualCapitalInitiative,aglobalpub-lic/private sector collaboration aimed at improvingcapital allocation through better corporate reportinginformation.

15 REFERENCES

Brand Finance. “Global Intangible Finance Tracker2009.” Published in conjunction with Institute ofPractitionersinAdvertising(IPA),2009.

Buckingham, M. and Coffman, C., First—Break all the Rules.Simon&Schuster,1999.

Edvinsson,L.andMalone,M.Intellectual Capital.HarperCollins,1997.

Johnson,T.andKaplan,R.Relevance Lost—The Rise and Fall of Management Accounting. Harvard BusinessSchoolPress,1987.

Kaplan, R. and Norton, D. The Balanced Scorecard.HarvardBusinessPress,1996.

Lev, B. and Hand, J. Intangible Assets, Values, Measures and Risks.OxfordBusinessPress,2003.

Liker,J.The Toyota Way.McGraw-Hill,2004.

Liker, J. and Hoseue, M. Toyota Culture. McGraw-Hill,2008.

Shepherd,N.Values and Ethics: From Inception to Practice.InstituteofManagementAccounting,2008.

Shepherd, N. Evolution of Accountability: Sustainability Reporting for Accountants. Institute of ManagementAccounting,2008.

Shepherd,N.Governance,Accountability, and Sustainable Development: An Agenda for the 21st Century.ThomsonCarswell,2005.

Standfield, K. Intangible Management. Academic Press,2002.

Stewart, T. Intellectual Capital. Currency-Doubleday,1997.

Sveiby, K. New Organizational Wealth. Barrett-Koehler,1997.

16 ADDITIONAL RESOURCES

WEBSITES

Brand Finance: www.brandfinance.com. Look for vari-ouspublications,inparticularthevarious“IntangibleTrackers”andbrandvaluereports.

CorporateRegister:www.corporateregister.com.

EBRC (Enhanced Business Reporting Consortium):www.ebr360.org.

FA SB ( Fi na ncia l Accou nti ng St a nda rds Boa rd ):www.fasb.org.

GRI(GlobalReportingInitiative):www.globalreporting.org.

IASB (IAS) International Accounting Standards Board:www.iasb.org.

IIMSI(InternationalIntangibleManagementStandardsInstitute):www.standardsinstitute.org.

Observatoire de l’Immateriel http://www.observatoire-immateriel.com

WICI(WorldIntellectualCapitalInitiative):http://www.worldici.com


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unrecognized statement intangible assets: accounting · gary cokins of sas, who served as...

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