a free monthly briefing on the knowledge agenda
|No. 51||June 2001|
SPECIAL FEATURE No. 2
Knowledge Capital Scorecard No. 3
A recent edition of CFO Magazine (April 2001), included the article 'Knowledge Capital Scorecard: Treasures Revealed' by Andrew Osterland (go to http://www.cfo.com and click on the 'new' Knowledge Capital at the scoreboards on the right of the screen).
"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 is 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."
As reported in the article, this year's Scorecard, which ran the numbers for the leading companies ranked by knowledge capital in 22 non-financial (i.e., from aerospace to telecom) industries, confirms the importance of such intangible assets. As was the case last year, companies with high levels of investment in R&D and advertising continued to show higher levels of knowledge earnings and far better stock performance than companies with lower levels of spending in those areas. Intel topped the list in 1999, with knowledge earnings of $9.5 billion. The semiconductor giant also came in with the highest level of knowledge capital - the present discounted value of all future knowledge earnings - at $209 billion, surpassing last year's leader, Microsoft, which saw its knowledge capital drop 10 percent, to $189 billion. Pharmaceuticals giant Pfizer posted the largest increase in knowledge earnings ($3 billion) for the year, due in large part to its acquisition of Warner-Lambert.
Marc Bothwell, vice president and portfolio manager at Credit Suisse Asset Management, contributed to the development of the measures and performed the required programming and computations. "We compared it with other metrics, and this was a particularly strong result," says Bothwell. "If a stock looked overvalued according to our metric, the market realigned it."
According to the article, this gives further credence to the argument that intangible assets and knowledge capital are the real drivers of value in corporate enterprises.
The issue also has features a letter from the Editor-in-Chief, Julia Homer:
"There's no denying the influence of the intangible assets. By some reckonings, that account for 80 percent of the market value of public companies, even with the match of the irrational exuberance blown out of the market in the past few months. Clearly, financial statements fail to capture this value. But like jumbo shrimp, measuring intangibles is an oxymoron - a contradiction of terms. Even the most ardent experts...are quick to acknowledge that at best we can measure these assets only crudely."
The work features the patent-pending measures by Baruch Lev who was mentioned as an expert who is featured in the ENTOVATION Global Knowledge Leadership Map ( http://www.entovation.com/kleadmap/index.htm). Other experts in this field who are also featured are Leif Edvinsson (Sweden), Ante Pulic (Austria/Croatia), Karl-Erik Sveiby (Australia) and Parthasarathi Banerjee (India). For those of you who have missed the recent articles on measuring the intangible value of innovation, check the story at http://www.entovation.com/whatsnew/intangible-innovation.htm.
As indicated, this is the 3rd year that attempts have been made to provide a scoreboard to illustrate the relative performance of companies within an industry. We've also featured several other articles that feature similar attempts to do so. Naturally, it all comes down to a definition of terms - something that the FASB officials are also highlighting. Just because this is something that is difficult to do is no reason not to try. In fact, it is precisely the reason to make the efforts! Our suspicions are that the companies that do figure out how to effectively manage their intangible value will have an advantage over those who do not.
Email: Debra M. Amidon
© Copyright, 2001. David Skyrme Associates Limited and Authors - All rights reserved.
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