Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-2, 2017
ISSN: 2454-1362, http://www.onlinejournal.in
Methods of Measuring Intellectual
Capital and the Efficiency of Investment
It: Advantages & Disadvantages.
Analytical Comparative Study
Ibrahim. A. H. Mohamed
Kastamonu University
Abstract: This study presents a comparative analysis
for methods of measuring intellectual capital through
focusing on most common methods by addressed
literature, with the aim of finding an appropriate
method adopting on the discussion of advantages
and disadvantages per method. Where the findings
showed through this analytical comparative study
all the methods have weaknesses Except for that the
value added intellectual capital Coefficient( VAIC )
affiliated to (ROA) method is the best way to creating
added value and the appropriate method for
measuring intellectual capital and the efficiency of
investment it .
KEYWORDS : intellectual capital, measuring ,
methods , advantages , disadvantages.
1. Introduction
The relative importance of the nature of tangible
assets has deteriorated through last decades as there
has been an upsurge in the importance of intangible
assets that based on knowledge. Where that
Intellectual capital associated with intangible assets
that represented mainly in the knowledge that is in
itself an intellectual, not physical, so measuring
Intellectual Capital is essential and very important in
order to compare different companies, to estimate
their real value or even to control and improvement
their activities. Because which can’t measure it, it
cannot be managed it and then cannot judge the
value and effectiveness of investments it. Also to
improve the way in which companies manage its
intellectual resources that generate value and give
back some benefits in consequences maximizing
advantages for the company (Jurczak,2008). Many
companies s have always used a variety of methods
to measure and evaluate their assets, as it was in the
past the focus is on financial Intangible assets only,
measured by the ways in which specializes in the
measurement of this type of asset, but in light of the
knowledge economy a search is performed for new
ways of measuring specializes in trying to measure
Imperial Journal of Interdisciplinary Research (IJIR)
the intangible resources in spite of the existing
difficulties, due to newness of the subject of
intellectual capital, there is no agreed unified way for
its measure despite the many attempts made to it. and
it's measurement methods. Consequently, the
analysis will present the advantages and
disadvantages of each method which analyzed to
providing information for companies, business
people, and academics to facilitate and provide new
perspectives,
where methods
of measuring
intellectual capital in continuously increasing. This
call for academics and researchers to revaluation the
foundations of management and accounting systems
which are useful for managing and measuring of
intellectual capital.
Methods of measuring intellectual capital
Nowadays, in spite of the attempts of many
researchers to measure intellectual capital but this
process became facing some difficulties, as the
following:
• Some intangible assets which are originally
difficult to measure, Creativity for example, which is
at the core of knowledge generation process, it is a
process unable to be predicted and their results are
unpredictable also and can appear in different ways.
• The intellectual capital which is considered
valuable to a certain company may not be the case
for other companies Differs in the nature of work, as
a result of that different measurement systems appear
making the comparison between companies and
sectors of different nature is a difficult thing.
• Historical reasons, the accounting rules in spite of
constantly revised on the regular basis, it had been
originally designed for actual assets, Such as
machinery which represent wealth during the
industrial age. (Starovic & Marr, B. 2003, p:7
CIMA).
In spite of the existence of these difficulties, we
cannot overlook the need and importance of
measuring intellectual capital and for the following
reasons:
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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-2, 2017
ISSN: 2454-1362, http://www.onlinejournal.in
1. The intellectual capital measure is contributing
effectively to determine the real value of the
organization, Because it represents the difference
between the book value and market value of the
organization, Whenever the difference is high, the
organization is richer by her ideas and her
intelligence and knowledge.
2. Increased attention and recognition of the real
value (market) for the intellectual capital for
companies despite the lack of methods of
measurement and evaluation of accounting and
traditional financial indicators.
3. The growing recognition of the essential role
played by intellectual capital in the overall
performance of the company in terms of physical
results or in terms of market competition Thus, the
measurement of intellectual capital to achieve a
twofold objective: the first is to assess the
organization in order to reach its real value in the
market (external perspective),The second is to
determine the cognitive components of the
organization in order to manage ,in order to improve
performance (internal perspective), where many
researchers believe that the real value of the
organization cannot be assessed without taking in
the account the intangible assets, Neely ,Such as
knowledge of workers and Culture of the company
and relations with stakeholders and markets and
competitive position and other assets out of budget .
(Marr, ScNeely,2004) .
According to Luthy (1998); Jurczak (2008); Sydler
et al (2013) there are sets of methods of measuring
the Intellectual Capital that used
for evaluation
these assets, can be divided into four main groups in
detail
with introducing of
advantages and
disadvantages all these methods as following:
1. Direct Intellectual Capital Methods (DICM).
2. Market Capitalization Methods((MCM) .
3. Scorecard Methods (SC).
4. Return on Assets Methods (ROA).
Pike & Roos (2004, October) where asserted
another method to becoming five methods which
are:
5. Proper Measurement Systems (MS). Everything
has value inside the company and outside it can be
measured.
These are built into a measurement system, such as
conjoint hierarchy uses real data to produce reliable
calculations of value with financial data to provide
value for money and related outputs. In this study,
the searcher will discuss four methods from the most
common methods that addressed by literature .
Imperial Journal of Interdisciplinary Research (IJIR)
Methods of measuring intellectual capital
1. Direct Intellectual Capital
Methods (DICM) :
First: Technology Broker method:
This method to Brooking (1996) where refers to
estimation the coin value of intangible assets
through identifying its different components, that
components are identified, they can be immediately
evaluated, either individually or as an aggregated
coefficient. The IC Audit model suggested by Annie
Brooking (1996) that, is trying to calculate Dollar
value for intangibles assets of the organization
known as IC.
Brooking was interpreted, that IC include the
following components :( assets of markets, Assets
related to humans, Assets of intellectual property and
Assets OF infrastructure). (Luthy,1998, August).
Market assets, known as market-related intangibles
such as: (brands, customers, distribution channels,
contracts, franchise contracts and specific licensing
agreements. Where that Assets related to humans are
the knowledge of the people within the organization
such as: ( ability to solving of problems, expertise,
entrepreneurial, managerial skills, and creativity).
Whereas, Assets of intellectual property represent
assets which can be expressed in financial terms like
:( trade secrets, copyright, patent, service marks and
design rights).
Lastly, Assets of infrastructure are those operations,
technology and
methodology which
allow
organizations to work.(Monavvarian & Lotfizadeh,
2007 , p:21 ; Jurczak ,2008 , p:42 ) .
Second : Citation weighted patent :
This method to Bontis,1998, where, refers to
the factor of technology that calculated according to
patents developed by a firm. Where the performance
of intellectual capital is measured based on an effect
of researching development of efforts on groups of
indices, for example, a number of patents and cost of
patents to sales turnover, which depict the patents
of an organization (Jurczak, 2008,p:42).
Third :The Value Explorer :
This method to Andries sen &Tiessen (2000)
where refer to proposed by KMPG to calculate and
allocate value five kinds of intangibles assets:
i)- Assets and endowments, ii) - Skills & implicit
knowledge, iii) - the rules of Collective values.
iv) - Technology and explicit knowledge, iv) - major
and management processes.
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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-2, 2017
ISSN: 2454-1362, http://www.onlinejournal.in
Fourth: Intellectual Asset Valuation:
This methodology to Sullivan where, refers to
use in estimate the value of Intellectual Property.
(Jurczak, 2008 ,p:42).
Fifth :Total Value Creation, TVC :
This method to Anderson &Mclean where refer
to use in discounted projected cash-flow to
reexamination to how events impact on planned
activities.
2.
Market Capitalization Methods
(MCM):
Methods of Market Capitalization
include a group of manners such as:
First: Market – to – Book Value :
This method to Stewart where, this method is
based on the assumption that the increase in market
value of an entity (the value of shares of
shareholders) to its book value represented in the
intellectual capital of the entity, meaning that
intellectual capital expressed as a cash residual
values. But disadvantage of this method ignoring part
of the difference between the market value and book
value, this may be due to other factors such as the
market, in order to take advantage of this method the
book value which is calculated by historical cost
must be adjusted to substitutive cost, in order to
calculate the value of intellectual capital more
accurately, because the historical data deformity
measurement process . ( Luthy, 1998, August, p: 8 ;
Jurczak, 2008 ,p:41,42).
Second: Tobin, s Q :
worth more than the cost of their replacement, The
advantage of this method eliminate effect of the
different consumption policies, which vary from one
company to another and from one country to another,
which considered more meaningful when comparing
companies over a period of time. ( Luthy, 1998,
August, p: 9 ; Jurczak, 2008 ,p:41,42 ; Van den
Berg, 2003, p:14).
Third: Financial method of intangible assets
measuring ( FIMIAM) :
According to this method, you can estimate the
monetary value of the intellectual capital of the
company, on the grounds that the difference between
the market value and book value represents the
intellectual capital which is divided into human
capital, structural capital and customer capital. The
advantage of this method is providing information on
intellectual capital for the interested and enable to
make decisions. The disadvantage of this manner.
Despite being different from other manners ,which
consider the difference between the market value and
book value fully the value of the intellectual capital
,this manner consider this difference is the achieved
intellectual capital which differs from the real
intellectual capital, the steps to defined the achieved
intellectual capital according to this manner is not
clear , In particular with regard to the identification
parameters for each component of the three
components of the intellectual capital, and also the
difference between the real intellectual capital and
the achieved intellectual capital which expressed as
defunct Capital cannot be calculated. ( Jurczak,
2008 ,p:41,42) .
3.
Scorecard Methods (SCM):
Methods of Scorecard include a group of manners
such as:
First: Balanced Scorecard "BSC" :
This methodology developed by Tames Tobin
who has Nobel prize in economics proposed this
method to help to predict the investment decisions
for the organization, it is not improved from the
beginning to measure the intellectual capital,
In 1996 each of (Kaplan & Norton ) proposed a
form for Balanced Scorecards one of the tools that
aim to create an integrated vision for Measuring
Systems.
Q is the ratio of market value of the organization
divided by the replacement cost of the assets, and
reflect the investments in human capital and
information technology, the positive value of ratio Q
refers to the intellectual capital, which is not shown
by traditional accounting systems, If the proportion
was less than one, the asset value be less than the
replacement value, and thus it is Improbable that the
company will buy more assets of this type, On the
other hand if the ratio Q is greater than one, the
company will invest in similar assets, which are
Where it does not include financial elements only
but include non-financial elements as well (such as
the market, internal processes, learning)It affects the
organization's performance, the Balanced Scorecard
also complement the role of information which is
obtained through traditional measurements with three
additional point of views which are: customers,
internal processes, growth and learning, base of
Balanced Scorecard is that if the organization wants
to achieve success
it must have to combine
requirement of three groups which are investors,
Imperial Journal of Interdisciplinary Research (IJIR)
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Vol-3, Issue-2, 2017
ISSN: 2454-1362, http://www.onlinejournal.in
customers, and staff . Thus, the Balanced Scorecard
becomes through its content of measurement to
evaluate the intellectual assets such as skilled labor,
creativity and innovation and high-quality products,
it offers a holistic strategy for the evaluation of
activities related to the generation of value through
tangible and intangible resources, this is what
distinguishes it from other accounting forms.
(Monavvarian & Lotfizadeh, 2007, p:21 ; Jurczak,
2008 , p:40; Van den Berg, 2003, p:15,16).
(See Figure 1).
systems as well as some financial indicators , The
special dimension focusing on innovation and
renewal tries to measure the creative capacity of the
company by measuring the effectiveness of their
investment in training and spending on research and
development ,finally measuring dimension related to
human resource include dimensions that reflect the
human capital of the company and how to develop
and enhance these resources, also Skandia Explorer
interested in temporal perspective of mentioned
dimensions ,achieving a balance between the past
who cares in measurements & financial indicators
only, and ending into the future, which focus on
innovation and creativity value of the company and
is expressed in some financial and non-financial
indicators, So the intellectual capital extends
according to Skandia Explorer to include all
dimensions,, the following figure 2 shows the fivedimensional for Skandia Explorer. ( Luthy ,1998 ,
August , p :6,7; Monavvarian & Lotfizadeh , 2007, p:
21; Marr , Schiuma & Neely ,2004 , p: 555 ,557 ;
Van den Berg, 2003 , p:17,18 ; Jurczak , 2008 ,
p:42) . (See Figure 2).
Figure 1: Balanced Scorecard
(Kaplan & Norton, 1996).
Source: Herman Anthony Van den Berg, 2003.
Second: (Skandia Navigator) :
Skandia Sweden company who work in the field
of financial services and insurance began in the year
1991 to work on building. Instruments to measure
intellectual capital, through her intellectual capital
director ( Leif Edvinsson )Where he has developed a
model called by the name of Skandia discoverer ,So
this model includes a set of elements which form the
intellectual capital of the organization in addition to
the method of its administration, this model is
designed to produce a balanced view for the
intellectual capital and financial capital of the
organization .
The major feature of this model in presenting a
balanced and completed view of the organization's
operations, and that by focusing on five dimensions
mainly in the organization which are : ( Customers ,
Processes , Human , Research , development &
Financial ) . for each dimension of the fivedimensional a set of indicators is available, for
example, it is found that the indicators used to
express the financial focus is often financial ,special
dimension care on focusing on the customer to
estimate customer capital for the company ,both the
financial and non-financial indicators are used in
this, for the indicators used to focus on Processes, it
emphasizes the effective use of technology and
quality control processes and quality management
Imperial Journal of Interdisciplinary Research (IJIR)
Figure 2. Skandia Navigator
Source : Bernard Marr et al ,2004.
Third : Intangible Asset Monitor (IAM) :
Intangible Asset Monitor developed by Sveiby
in 1997 when he was working as financial manager
in one of the biggest companies ,While he was
working he realized that traditional data of the
company was more like a joke and that the value of
the company has already lain in its assets based on
knowledge and invisible ,this method based on total
market value which includes visible liabilities ( book
value ), and three types of intangible assets
represented in knowledge capital which is divided in
internal structure, individual competence , and
external structure, the external structure includes
trademarks and relation with the suppliers and
customers , internal structure consists of internal
administration and legal administration and research
, progress , programs systems but individual abilities
include education and experience. ( Monavvarian &
Lotfizadeh , 2007, p: 21 ; Marr , Schiuma & Neely
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,2004 , p :560 ; Van den Berg, 2003 , p :23,24 &
Jurczak , 2008 , p:42) . (See Figure 3) .
Figure 3 : Market Value of a Company (Sveiby, 1997).
Source: (Herman Anthony Van den Berg,2002).
Forth: Knowledge Assets Map ( KAM ) :
Knowledge assets map provide a wider
framework of organization knowledge internally and
externally ,It also allows organizations to distinguish
critical areas of knowledge within the organization,
where the knowledge assets are classified within the
organization to structural resources and resources of
stakeholders ,The last is classified as the relationship
with stakeholders a relationship outsourcing, human
resources a relationship indoor, Structural resources
to be classified as physical infrastructure and moral
infrastructure referring to physical nature and The
incorporeal nature, the moral infrastructure is divided
to Culture of the organization, procedures and
practices and Intellectual Property, under each
category of these categories it is possible to provide a
wide range of indicators for the purpose of
measuring and evaluating these assets .
In order to determine its contribution to the creation
of value for the organization. (Marr , Schiuma &
Neely ,2004 , P:561,562 ; Starovic, & Marr, 2003,
p:9) . (See Figure 4).
First : Calculated Intangible Value (CIV):
This method is the only one that can be easily
applied to any person from outside the company
without the need for a specific type of information
within the company, Where this method is designed
to estimate the value of the intellectual capital of the
company, which is based on company's profits
should be higher than the industry average so the
value of intellectual capital can be calculated, and
the company that reaches to the level of the average
industry in terms of profits and extends, this is the
result of intellectual capital, method of calculating
value of intellectual capital divided into six stages :
1.
Calculating the average of company's
profits before taxes for a period of three years.
2.
Calculating the average of company's
tangible assets for the same period (from the budget).
3.
Calculating the return on company's Assets
by dividing average of company's profits before
taxes on the average tangible assets of the company,
according to the following equation:
A. If the return on tangible assets of the
company is bigger than the return on the tangible
assets of the industry the rest of the steps to be
completed, but if it is equal zero or less it should be
stopped
at this point, and thus there is not
intellectual capital for the company.
B. Calculating The increase in return on assets
by multiplying the industry average by the tangible
assets average, then multiplying the result by the tax
rate to get the increase in return after tax.
C. Calculating the value of intellectual capital,
by dividing the increase in the return on assets on the
cost of capital, as the following equation:
The advantage of this method is getting easily the
data from the budget, and also the possibility of
getting the value of intellectual capital, however
practically it is not used only slightly.
Figure 4: Knowledge Assets Map .
Source: (Bernard Marr,2004).
4. Return on Assets Methods
(ROA):
Return on assets methods include a variety of
methods which are:
Imperial Journal of Interdisciplinary Research (IJIR)
Second: Economic Value Added ( EVA) :
It is a measure which has been developed in the
eighties by one of the Consulting companies in New
York ( Shorn Steward)as an indicator of shareholder
returns, This measure is commonly used in many of
US companies including Coca-Cola, AT&T, In
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Australia it is used by Fletna Ltd also in James
Harder Industries , this measure highlighted a lot of
distortions in the accounting system, represented in
difference between profits and capital cost, Providing
a measure directly linked to the return on used
capital, the measure is calculated as following :
An equation for calculating EVA as following :
EVA™ = (RI) + (AcAdj)
Where:
:
● RI = (NOPAT) – (Cap Chg)
● NOPAT = (EBEI) + (ATInt)
● EBEI = (CFO) + Accurals
● ATInt =NIE x (1 – Tax Rate)
Where :
Residual Income = RI
Accounting Adjustments= AcAdj
Net Operating Profits After Taxes= NOPAT
Capital Charge= Cap Chg
Earnings Before Extraordinary Item= EBEI
After Tax Interest= ATInt
Cash Flow from Operations= CFO
Net Interest Expense= NIE
The charge for use of capital. It includes interest on
the debt plus a charge for the equity capital based on
a cash equivalent equity multiplied by a cost of
equity= CapChg .
In a simplified way EVA is net operating profit
minus an appropriate burden for the opportunity cost
of the total capital invested in the company, by this
EVA is the amount which increase profit or decrease
from the first rate return which is possible to get it
by shareholders and lenders to invest in other paper
Securities with approximating risks. Taking into
consideration all capital cost including Property
rights , EVA shows cash amount of wealth created
by the company by the invested money represented
by issuing stocks and borrowing and retained
earnings and according to Stem Steward when EVA
used as a tool , it turns managers focus to general
budget rather than focusing on the income.
Estimating the burden of the use of capital, EVA
makes managers interested in asset management and
incomes and to estimate reasonable settlement
between them and all the basic management
decisions and its works connected actually by one
measure which is EVA " . Also, according to Stem
Steward the general traditional budget often needs to
be rewritten, and give an accurate picture of used
capital, and often it includes the addition of
intangible assets , more than one adjustment is
applied to general budget and other adjustments may
include the addition of research and development
costs R&D and the appropriate parts of the
marketing expenses, If this is not done EVA shows
short-term shortage although the investment may be
Imperial Journal of Interdisciplinary Research (IJIR)
finally growing EVA. Despite the prevalence of this
measure, it faces many of the criticisms of them
analysts begin to acknowledge that Eva must be
completed with standards to give stronger links
between long-term plans and financial targets and
securities price, Critics confirms that it is still a
historical measure, It does not make any sense for the
connection between the company's investments in
intangible assets and financial performance, as well
as it is criticized for its inability to explain why that
the facilities can be successful a year and then be
unsuccessful in the following year . (Van den Berg,
2003 , p :9,10 ; Jurczak , 2008 , p:40 ; Starovic, &
Marr, 2003, p:15) .
Third: Value Added Intellectual Capital
Coefficient (VAIC ) :
Value Added Intellectual Capital Coefficient
is developed by the Austrian (Ante Pulic ) in
1998 to measure the extent of the organization's
ability to create value as a measure of the
efficiency of investment in intellectual capital in
light of the current economy which is based on
the knowledge, where it was later known as the
Austrian approach . ( Abidin , Kamal, & Jusoff
, 2009, P: 154 ,155 ; Starovic, & Marr, 2003,
p:18) .
An equation for calculating VAIC as following :
(VAIC = CEE + HCE + SCE)
Where :
Value added intellectual coefficient
= VAIC .
Capital employed efficiency coefficient = CEE .
Human capital efficiency coefficient
= HCE .
Structural capital efficiency coefficient = SCE .
Pulic(1998) seeks to show which measuring system
would realize the requirements of new business
environments and needs of modern companies and in
his opinion, this measuring system has to meet two
requirements :
1. Establish reliable and objective guide for
processes of value creation . This means precise
measuring of knowledge which the employees
incorporate into products and services .
2. providing safe and objective information on
the intellectual ability to employees to create value ,
because they far outweigh the assets that appear on
balance sheets. Value Added Intellectual Capital
Coefficient (VAIC) work on measuring efficiency of
Intellectual Capital of the organization beside its
physical capital , it consists of sum of three
components ratios, which are :the efficiency of
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human capital and structural capital efficiency
(which include efficiency of internal capital and
relation capital together ), and efficiency of used
capital ( which include Both the efficiency of
physical and financial capital together ) Where the
sum of these ratios forms the efficiency of
intellectual capital. This manner is also based on the
assumption that measure and develop of the added
value of a company may have an impact on the
market value of the company, through the review of
250 Study of a number of exchange companies and
financial companies included in the American Stock
Securities It shows that there is a close relationship
between the efficiency of creation the value of
resources and the market value of companies, it is
based on measuring the efficiency of the intellectual
capital of the company. ( Abidin , Kamal, & Jusoff ,
2009, p : 154 ,155) . Used calculates the difference
between sales and all inputs (except labour
expenses), divided by intellectual capital, that ,
estimated by total labour expenses. The higher of the
ratio and the more efficient to an organization is at
using intellectual
assets, so
(Value Added
Intellectual Capital Coefficient) is calculated
according to following steps:
1:
calculating company added value
( VA )
Added value ( VA) = Output - Input
Or Added value ( VA) =Net income before taxes and
dividends +Total staff costs + Expense of fixed
assets consumption
2:
calculating efficiency of used capital
(CEE)
It is calculated by dividing added value on used
capital (physical capital) CEE = VA ÷ CE
Efficiency of used capital ( CEE ) describes amount
of added value for company which is generated by
physical capital Each of the following to be
calculated :
A.
Efficiency of Human capital ( HCE) :
It is calculated by dividing added value on
human capital
HCE = VA ÷ HC
It is indicator for the efficiency of added
value by using human capital.
B. Efficiency of Structural Capital (SCE) :
Structural
Capital
(SC)
=
added value (VA) - human capital (HC)
It is calculated by dividing structural capital on
added value :
SCE = SC ÷ VA
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It is indicator for the efficiency of added value by
using structural capital. ( Van den Berg, 2003, p:
23,24 ; Starovic, & Marr, 2003, p:18) .
3.
Calculating Efficiency of intellectual
capital ( ICE )
It is calculated by sum of efficiency of human capital
plus efficiency of structural capital.
ICE = HCE + SCE
Finally, calculating Value Added Intellectual Capital
Coefficient (VAIC ) by the sum of the efficiency of
used capital plus the efficiency of intellectual capital.
VAIC = CEE+ICE
This method to way of creation new value of the
organization through invested cost in its physical
and intellectual resources, the higher the value of
(VAIC) indicates the ability of the organization in
using its resources in a better way in creating added
value, that means it supply us with information
about how they lead their investments in resources
to create a certain amount of value added in the
future, Investors can also benefit from this method to
identify investment opportunities in the future
.(Komnenic, Tomic & Tomic,2010, P:27-28).
The advantage of this method is that it provides
useful information to stakeholders such as managers,
investors, and governments. (Abidin, Kamal, &
Jusoff, 2009, p: 154,155).
According to, Svanadze & Kowalewska (2015).
They used Public's ( VAIC ) method. Where the
source of data came from balance sheets and profit
and loss accounts for the period( 2010-2013
)Warsaw Stock Exchange. They provided the means
to measure intellectual capital and the efficiency of
its individual components - showed manufacturing
companies has a lower level of intellectual capital
than telecommunications or financial companies.
Likewise, According to Nimtrakoon (2015) Adopted
Public's ( VAIC )method in measuring IC. Where
the data are taken from 220 technology firms listed
on five Asian stock exchanges ( 2011) to three
components of IC is a measure of the efficiency of
capital employed (VACA), human (VAHU) and
structural capital (STVA).
The findings indicate a positive relationship
between( IC) and stock market value, asserting that if
the firm has a high (IC) this meaning it has better
performance in the market.
Through above review of the literature on the subject
of this study to access the appropriate method in
measuring of intellectual capital , the searcher
would provide at the second part ,the most
important advantages and disadvantages of the these
common methods of measurement that addressed
by the study and make comparison to reach of the
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appropriate method of measuring from
the
researcher perspective
through what has been
discussed at the next section .
● METHODS OF MEASURING (I C)
ADVANTAGES & DISADVANTAGES:
1. ( DIC ) METHOD :
◙ ADVANTAGES .
- Offering the ability to create a clearer picture
than both of methods ( MCM) and (ROA) than
financial metrics. - more detailed and accurate and
can be easily applied at any level of an organization
- faster and more accurate than (ROA )and (MCM)
methods with respect to the
resource - More detailed and can be easily applied
at any level of an organization. They measure
intellectual capital resources from the bottom up They are very useful for not-for-profit organizations
and do not need to be measured in financial terms Can be easily applied at any level of an organization.
- not need to measure in financial terms they are very
useful for non-profit organizations.
◙ DISADVANTAGES .
- cannot be connected easily to financial
statements results.
- The meaning of resource might differ to each
organization and to each purpose, this makes
comparisons not easy that
cannot be easily
connected to pending financial results always been a
weakness of the intellectual capital movement .
2.
( MC ) METHOD :
◙ ADVANTAGES .
-depended on financial metrics which, if not
perfect, are auditable where find have an element of
rigor in that.
-help to build because it depends on accounting
rules.
-can give crude comparisons between companies
within the same industry and they give far too little
detail for an adequate comparison.
-They attempt real valuations and may appear useful
in many situations since they can give crude
comparisons between companies within the same
industry.
-In The book value method affiliated to (Mc)
method, It is a simple method, market. This
indicator can be easily computed for the companies
listed on the stock market.
-About, stakeholders outside, refer to a high value.
Imperial Journal of Interdisciplinary Research (IJIR)
-In The Tobin, s Q method affiliated to (Mc) method
the positive value of ratio Q refers to the intellectual
capital, which is not shown by traditional accounting
systems, this advantage of this method eliminate the
effect of the different consumption policies. - In the
(FIMIAM) method affiliated to (Mc) method the
advantage of this method providing information on
intellectual capital for the interested and enable to
make decisions.
◙ DISADVANTAGES .
This method give far too little detail for a
complete comparison .
- This method the weakest measurement methods
where market vagaries can lead to big changes in
intellectual capital and lead to highly suspicious
indicators. - In The book value method affiliated to
(Mc) method , this method , ignoring part of the
difference between the market value and book value,
which is calculated by historical cost , must be
adjusted to substitutive cost, in order to calculate the
value of intellectual capital more accurately and
there is found quite low relevancy for senior manager
also, there is problem related to a price per share
where, affected by external factors facing the
management, which cannot controllable - In The
Tobin, s Q method affiliated to (Mc) method, The
method using replacement cost of tangible assets ,
instead of their book value.
Also, many difficulties with the market-to-book
ratio are neutralized Market-to-Book value
&Tobin’s( Q ) There is not very significant practical
.usefulness for the company management
- In the (FIMIAM) method affiliated to (Mc) method,
the steps to defined the achieved intellectual capital
according to this manner are not clear and the
difference between the real intellectual capital and
the achieved intellectual capital which expressed as
defunct Capital cannot be calculated.
3. ( SC ) METHOD :
◙ ADVANTAGES.
-Offering the ability to create a clearer picture than
both of methods ( MCM) and (ROA) than financial
metrics .
-They also measure intellectual capital resources
from the bottom up. They are very useful for not-forprofit organizations. - faster and more accurate than
(ROA )and (MCM) methods with respect to the
resources.
-more detailed and can be easily applied at any level
of an organization. - In the (BSC) method affiliated
to (SC) method, offer both Kaplan & Norton a
holistic strategy for the evaluation of activities
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ISSN: 2454-1362, http://www.onlinejournal.in
related to the generation of value through tangible
and intangible resources, this is what distinguishes it
from other accounting forms. Authorize managers to
understand the company’s strategy and their mission
in an inclusive group
of performance measures - This method uses
software solutions which facilitate a lot the process
of collecting and processing data. Help to translating
all the main objectives at the level of the company to
employee level objectives, this
helping to involve everybody - Targets play an
important role and measuring the improvements in
the various areas are proportional with these
targets. Help management to translate strategy into
action. - In the Skandia Navigator method affiliated
to (SC) method presenting a balanced and completed
view of the organization's operations, and that by
focusing on five dimensions mainly in the
organization which is:
( Customers, Processes, Human, Research,
development & Financial) . This meaning is
achieving a balance between the past who cares in
measurements & financial indicators only and ending
into the future which focuses on innovation and
creativity value of the company and is expressed in
some financial and non-financial indicators. It is one
of the best-known methods for measuring of
intellectual capital.
-In Intangible Asset Monitor (IAM) affiliated to (SC)
method. Sveiby The first who was realized that
traditional data of the company was more like a joke
and that the value of the company has already lain in
its assets based on knowledge and invisible.
Stakeholders are taken into consideration, this
enhancing the importance for managers.- it is
complicated to create the comparison to company
with other company. - In Knowledge Assets Map
(KAM) affiliated to (SC) method. this method
provide a wide range of indicators for the purpose of
measuring and evaluating these assets, In order to
determine its contribution to the creation of value for
the organization.
◙ DIS ADVANTAGES .
-The meaning of resource might differ to each
organization and to each purpose, this makes
comparisons not easy that
cannot be easily
connected to pending financial results always been a
weakness of the intellectual capital movement.
4. ( ROA ) METHOD :
◙ ADVANTAGES .
-Usually, It has an element of rigor in that because
they rely on financial figures which, if not perfect,
are auditable.
Imperial Journal of Interdisciplinary Research (IJIR)
-Tool at help to the build, because it depends on
accounting rules .
-They attempt real valuations and may appear
useful in many situations since they can give crude
comparisons between companies within the same
industry.
-These methods are indicators at best but with
significant intra-sector
comparability.
-very sensitive to interest rate assumptions.
-No used for non-profit organizations...
-VAIC a different method and considers more
detailed, and there is a relationship between the
activities and the resources used and financial results.
-can use it to determine investment opportunities
through Economic Feasibility Studies.
-more objective and verifiable compared to other
measurements .
VAIC method refers to how the organization's
ability to using its resources in the best way to
creating added value.
-The investor is giving great Importance to
companies that maximize the efficiency of the
performance
of
intellectual
capital
by
calculating(VAIC), Where that increased its value
refers to firms efficiency in management and
investment their resources in the financial securities
market.
-VAIC is a simple and straightforward method to
use in determining the value of IC and gives an
important information to managers, investors, and
governments.
-VAIC can be successfully used for statistical
analysis.
- The source of data in VAIC derived directly from
the financial statements, therefore, is an actually.
◙ DIS ADVANTAGES .
-Except for VAIC, in fact, these methods are not
really intellectual capital methods but it as a simple
meaning of explaining a financial feature and
attributing changes in them to the efficiency in the
deployment of intellectual capital resources.
-Gives far too little detail for an adequate
comparison.
-The methods are also very sensitive to interest rate
assumptions.
-These methods avoid direct comparison with
market values .
-ROI method except for
( VAIC ) fails as a measuring system due to
internal difficulties and the defined resources
independence.
Conclusion
The importance of investing in intellectual capital
abilities in adding value to the organization, and
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Vol-3, Issue-2, 2017
ISSN: 2454-1362, http://www.onlinejournal.in
enhance its competitiveness, especially for those
operating in the knowledge-based industry as the
most important resource in light of today's
knowledge-based economy.
The investment in intellectual capital through
spending on a set of different aspects represented by
the staff such as attract new employees or training
existing employees and enhancing their abilities and
increase their skills, and attention to the relationship
with the customer also is consider the basis for the
formation of intellectual capital for the organization
to enjoy with a strong human capital represented in
the knowledge, skill and ability and creativity, and
also strong structural capital and its content from
relationship with customers, strong infrastructure
systems, information & technology systems and
communications to allow workers to raise their
abilities and skills from one side, customer service to
ensure their loyalty and satisfaction from the other
side, which leads to increase the efficiency of the
performance of investment in intellectual capital ,and
then create a high added value to the organization in
the light of the knowledge economy by success and
competitiveness and achieve profitability. From this
objective that organizations seek to achieved ,
should be there is an appropriate method for
measuring the IC and helping to achieve these goals.
The results showed All the methods have weaknesses
Except for the value added intellectual capital
Coefficient( VAIC ) affiliated to (ROA) method is
the best way to creating added value and the
appropriate method for measuring intellectual capital
measuring the efficiency of that investment is
through the use of Value Added Intellectual Capital
Coefficient. The researcher suggested this method
because it is the best suited in his opinion to
determine the efficiency of investment in intellectual
capital.
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