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Accounting in the Knowledge Economy

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  • 1. ACCOUNTING IN THE KNOWLEDGE ECONOMYLecturers:Prof. (FH) Mag. Dr. Ferry Stocker, Head of the Economics DepartmentMag. Kerstin StrobachPrepared By:Burak Özsuna , Business Consultancy International (Master Programme)1st Semester / University of Applied Sciences Wiener Neustadt 1December 3rd, 2010
  • 2. CONTENTS Part 1 : The Knowledge Economy Part 2 : Accounting in The Knowledge Economy Part 3 : Measuring and Accounting for Intangibles - Current and Potential Methods - Part 4 : Conclusion Part 5 : Discussion / Questions Sources 2
  • 3. WHAT IS THE KNOWLEDGE ECONOMY?The knowledge economy is a term that refers either toan economy of knowledge focused on the productionand management of knowledge in the frame ofeconomic constraints, or to a knowledge-basedeconomy.In the second meaning, more frequently used, it refersto the use of knowledge technologies (such asknowledge engineering and knowledge management)to produce economic benefits as well as job creation. 3
  • 4. GENERAL CONCEPTA key concept of the knowledge economy is thatknowledge and education (often referred to as "humancapital") can be treated as one of the following two: A business product, as educational and innovative intellectual products and services can be exported for a high value return. A productive asset 4
  • 5. KNOWLEDGE ECONOMY INDEX 5
  • 6. THE FASTEST GROWING SECTORKnowledge workers has been the fastestgrowing sector in the US economy andcomprised 75% of the total workforce in2006. 6
  • 7. RAPID GROWTH: HUMAN CAPITAL Other R&D 7% Human 9% Capital 21% UK Business spending on Design intangibles in 2004. 14% Organizational Capital Brand Equity 17% 15% Software 17%Source: HM Treasury, October 2007 7
  • 8. ACCOUNTING IN THE KNOWLEDGE ECONOMY What are the current and hot issues or problems? Measurement and accounting for intangible assets. 8
  • 9. AN INTERESTING COMMENT“ The market value of S&P (Standard & Poors)500 companies is more than six times that ofwhat is on their books. This means that for every$6.50 or so of market value, only $1 appears onthe books. Its extraordinary that the balancesheet number reflects only 15 percent or so ofthe value of the company…“ Baruch Lev Director Vincent C. Ross Institute of Accounting Research 9
  • 10. “ACCOUNTING PRINCIPLES OUT OF DATE” Today, most companies show less than 20 percent of their market value in tangible assets. The real value of the company is in intangible assets, such as customer and vendor relationships, copyrights, patents, knowledge and etc. 10
  • 11. ACCOUNTING PRINCIPLES OUT OF DATE (Cont`d) The intangibles may have some monetary value on the companys financials, the resources used to develop these assets are frequently considered expenses. Therefore, the money paid to build, develop or make human resources more productive does not build any offsetting asset on the companys financials 11
  • 12. DEFINITION OF INTANGIBLE ASSETS Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. 12
  • 13. THE FORMS OF INTANGIBLE ASSETS COMPETITIVE LEGAL INTANGIBLES INTANGIBLES - Knowledge / Know How - Trade Secrets - Collaboration Activities - Copyrights - Leverage Activities - Patents - Structural Activities - Trademarks 13
  • 14. CURRENT METHODS FOR MEASURINGTHE INTANGIBLES 1. Direct Intellectual Capital Methods 2. Market Capitalization Methods 3. Return on Assets Methods 4. Scorecard Methods 14
  • 15. THE APPROACHES FOR MEASURING INTANGIBLES1. Direct Intellectual Capital MethodsEstimate the money value of intangible assets by identifying itsvarious components. Once these components are identified, theycan be directly evaluated, either individually or as an aggregatedcoefficient. 15
  • 16. THE APPROACHES FOR MEASURING INTANGIBLES (Cont`d)2. Market Capitalization Methods Calculate the difference between a companys market capitalization and its stockholders equity as the value of it intellectual capital or intangible assets. 16
  • 17. THE APPROACHES FOR MEASURING INTANGIBLES (Cont`d) 3. Return on Assets Methods Average pre-tax earnings of a company for a period of time are divided by the average tangible assets of the company. The result is a company ROA that is then compared with its industry average. The difference is multiplied by the companys average tangible assets to calculate an average annual earning from the Intangibles. Dividing the above-average earnings by the companys average cost of capital or an interest rate, one can derive an estimate of the value of its intangible assets or intellectual capital. 17
  • 18. THE APPROACHES FOR MEASURING INTANGIBLES (Cont`d)4. Scorecard MethodsThe various components of intangible assets or intellectual capitalare identified and indicators and indices are generated andreported in scorecards or as graphs.SC methods are similar to Direct Intellectual Capital (DIC)methods, expect that no estimate is made of the money value ofthe Intangible assets. A composite index may or may not beproduced. 18
  • 19. INDUSTRIAL BUSINESS VS. KNOWLEDGE BUSINESS 19
  • 20. SAMPLE: THE INCOME FORMULA IN THE NEW ERA* CONVENTIONAL ACCOUNTING IDEAL ACCOUNTING Revenue Revenues (Cost to serve customers) (Cost to produce products/services) (Cost of Goods Sold) (Cost to develop products/services) Gross Margin (Administrative Costs) (Operating Expenses) EBIT EBIT (Taxes) (Interest and Taxes) +/- Noncash Adjustments Profit Cash Earnings* For Know – How Companies 20
  • 21. KNOW-HOW CAPITAL = ORGANISATIONAL VALUEIn assessing the value of a know-how company, it is necessary touse an overall view. Apart from its had (reported) assets, it has atotal know-how capital that makes it possible to attain a long-term profit that is higher than the normal return on the reportedshareholders’ equity. This know-how capital consists of threeparts:a) Structural capitalb) Human capitalc) Management capital 21
  • 22. THE KNOW-HOW COMPANY’S PROFIT AND LOSS ACCOUNT(MUST TO HAVE) P&L Table Invoiced sales X Operating costs before salary costs X Salaries X Operating profit before investment in the organisation X Investment booked as cost Structural capital X Human capital X Management capital X X Operating profit before depreciation of plant X Depreciation of plant X Operating profit after depreciation of plant X Net financial items X Profit before appropriations and tax X Appropriations X Tax X Net Profit X 22
  • 23. THE KNOW-HOW COMPANY’S BALANCE SHEET BALANCE SHEET HARD ASSETS 1. Working capital X 2. Fixed capital X 3. Financial capital X Reported value X Part 1 23
  • 24. THE KNOW-HOW COMPANY’S BALANCE SHEET (Cont`d) BALANCE SHEET ( Cont`d)ORGANIZATIONAL VALUEKnow - how capital1. Structural capital BALANCE SHEET (cont`d)Business concept X FINANCINGCompany name and market identity X 1.Borrowed capital XBusiness fields and products X 2.Shareholders’ equity XCustomers XNetworks of contacts X Untaxed reserves Organisational structure X Taxed capital X Administration and accounting systems X Reported value X Production routines X 3. Shareholders’ equity2. Human capital The value of the know-how capital X Key people X Total value X Other personnel X X3. Management capital X Part 3Total value X Part 2 24
  • 25. AN EXAMPLE: BALANCE SHEET WITH HUMAN CAPITAL The XYZ Company Ltd Balance Sheet as at 31 December 2009 $ millions Human Assets 812 Fixed Assets* 329 Net Current Assets 201 1.342 Equity 350 Loan Capital 320 Human Capital 672 1.342 *Excludes fixed assets forming part of human assets Gearing: 26% Equity 24% Borrowings 50% Human Capital 25
  • 26. CONCLUSION The changes occurring in the world-wide economy directs all countries to the search and the trial of different financial methods. This difference didn’t remain only at the financial extent, it also brought about the coordination of some certain changes in other disciplines with the world-wide practices. One of these disciplines is accounting. Recording methods used in accounting have shown a tendency of differentiation with the effect of changings taking place in economic structuring. The aim of this presentation is to explain the effects of knowledge-based economy structuring on recording methods in accounting. 26
  • 27. DISCUSSIONCan the cost of human capital (as an intangibleasset) be the same as the cost of commercialcapital? If not, why? 27
  • 28. QUESTIONS• What are the current methods for measuring the intangibles?• While growing the knowledge economy, what are the issues for accounting? Please, explain it briefly. 28
  • 29. REFERENCESo Bender, C., Röhling, T., Ansätze zur Bewertung und Risikomessung von Humankapital, 2001o Drucker, P., The Effective Executive, 1966o Drucker, P., The Age of Discontinuity, Chapter 12, 1969o Goughnour R.C., Human Resources on the Balance Sheet, Alaska Business Monthly, October 2003o Kenneth, M.W., Nippani, S., Financial Counseling and Planning Volume 15 (1), 2004o Leydesdorff, L., The Knowledge-Based Economy: Modeled, Measured, Simulated, 2006o Mansour, E., Ahmed, M., Missi, F., Validity of Accounting Models in the Knowledge Era, May 2008o Rooney, D., Hearn, G., Ninan, A. Handbook on the Knowledge Economy, 2005o Sveiby, K.E., Methods for Measuring Intangible Assets, 2001 29
  • 30. Thank You For Your Attention. 30