April 2001 article in
CFO magazine on knowledge capital.
patents, R&D, and human capital may not be easy. But with
now driving corporate performance, assessing the investments in those assets
has become crucial.
A corporate balance sheet, prepared according to
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
Lev, Intangibles: Management,
Measurement, and Reporting
Smith, Valuation of Intellectual
Property and Intangible Assets