A brief management accounting note on Intellectual Capital

There is no common definition of intellectual capital (IC); roughly, IC refers to the intangible resources of a company. IC is hard to measure and is idiosyncratic in nature. Both financial accountants and management accountants are interested in valuing intellectual capital though their main concerns are not the same. Financial accountants want the financial reports to provide valuation of IC to inform both internal and external parties, notabley the financial community. Management accountants need to value IC as well as setting up proper management control systems to manage IC so as to support corporate management to discharge their management functions. More specifically, Tayles et al (2002) identifies the motives of adopting managaement accounting systems for IC in terms of strategic thrust, ROI evaluation, management control, future planning, organisation valuation and organization rationalisation.

Starvic and Marr (Year known) distinguishes two IC approaches, namely, (a) the measurement approaches and (b) the valuation approaches, the former mainly related to management accounting while the latter more affiliated with financial accounting. IC becomes an important topic in Management Accounting (the focus of this article) because increasingly it becomes strategically important to the companies; thus IC value needs to be measured and processes that create and maintain IC values need to be supported with effective Management Accounting system, among others.

IC is generally classifed in the following way:

1. human capital (employees' expertise that can be lost when these employees leave the companies)
2. relational capital (intangible resources as related to external relationships of a company, e.g. with customers, suppliers, and business partners, etc.)
3. structural capital (intangible resources that stay within a company, e.g. cultures and procedures, etc.)

You should note that intellectual property (e.g. patents, trademarks and copyrights, etc) is a subset of IC which can be included in financial statements.

There are a number of models to measure IC value; they usually identify measures of IC performance drivers. Thus, they serve both purpose of IC valuation and accounting support on corporate IC management. These models include performance prism, knowledge assets map approach and Skandia navigator, etc. (Starvic and Marr, Year known). These models adopt the measurement approaches, thus more relevant to management accounting study. [The valuation approaches are not discussed here as they are more related to financial accounting study.] Tayles et al's IC valuation model is another example which explicitly takes on a strategic management accounting stance. Some of these IC models operate in a balance-scorecard way. Most, if not all, of of these models endorse a holistic perspective in value measurement.

The subject of IC draws on the intellectul insights from Knowledge Management and the Resource-based view in strategic management, among others. You need to study these related literature when learning IC.

The following diagram indicates the major topics involved in IC management from strategic management accounting perspective (my lecture notes):

The following diagram further depicts how strategic management accounting is related to Intellectual Capital management. The notion of management control system and the notion of knowledge production process from Bjurstrom and Roberts (2007) are explicitly identified in this diagram as major analytical concepts to use.

A useful academic journal on IC is Journal of Intellectual Capital published by Emerald.


References

1. Bjurstrom, E. and Roberts, H. (2007) "Chapter 4: The principle of connectivity: networked assets, strategic capabilities, and bundled outcomes", in Chaminade, C. and Catasus, B. (editors)Intellectual Capital Revisited: Paradoxes in the Knowledge Intensive Organization, Edward Elgar.
2. Chaminade, C. and Catasus, B. (editors) (2007) Intellectual Capital Revisited: Paradoxes in the Knowledge Intensive Organization, Edward Elgar.
3. Starovic, D. and Marr, B. (year unknown) Understanding corporate value: managing and reporting intellectual capital, published by CIMA, UK.
4. Tayles, M., Bramley, A., Adshead, N. and Farr, J. (2002) "Dealing with the management of intellectual capital", Accounting, Auditing & Accountability Journal Vol. 15(2), pp. 251-267.