D11- Tangible versus Intangible Assets

I described in an earlier post (see: “KM is Not Enough!”) the factors that contribute to good performance or value creation:


We must note the following to better grasp the intricacies of tangible and intangible assets:

  • In the last two decades, market values of most corporations now far exceed their book values (for example, as of December 12, 2008 the market-to-book ratios of 215 industry groups listed in Yahoo! Finance averaged 4.458). This means that intangible assets are contributing more than tangible assets in creating value.
  • There are many evidences across various sectors and disciplines that intangible assets are more important than tangible assets in creating value (see previous post on “Intangibles: More Essential for Value Creation”).
  • International accounting standards recognize “intangible assets” as such if they are: non-physical, owned by the corporation, and can generate future economic benefits. Because of the ownership criterion, many corporations do not consider the human capital they hired and the intangibles that their personnel create (e.g. internally developed software and other structural capital) as assets to be entered in their books of account, although these definitely contribute to value creation by the corporation. In fact, training is often considered as a cost item, instead of a capital investment item. The intangible assets commonly recognized by accountants are: goodwill, brand, intellectual property rights like patents and copyrights, licenses/franchises and similar legal agreements, etc.
  • The intellectual capital accounting school of KM (e.g. Karl Erik Sveiby, Leif Edvinsson, Thomas Stewart, Patrick Sullivan, Baruch Lev, etc.) recognizes three categories of intellectual capital: human capital, structural capital and stakeholder capital (which includes customer capital proposed by Hubert Saint Onge) – which contribute to value creation but are missed by traditional accounting methods. These three categories are also recognized as “knowledge assets”. Note, however, that stakeholder capital is only the externally-facing part of Relationship Capital in the model diagrammed above (see next blogpost “D12- Relationship Capital versus Stakeholder Capital versus Consumer Capital”). Elements of intellectual capital are often not entered in books of accounts – a management gap which paved the way for various methods of “intellectual capital accounting”, Kaplan and Norton’s Balanced Scorecard, US Securities and Exchange Commission’s “colorized reports”, etc.
  • Knowledge assets are mainly intangible and often not entered in books of accounts. A common example of tangible knowledge assets is technology, which is a form of “embedded knowledge”. Examples of knowledge assets not always entered in book of accounts are trade secrets and internally developed patents (those that were not bought or sold by the organization).
  • To encompass the wide range of factors (including natural capital, social capital, indigenous knowledge, traditional or government-sanctioned access rights, cultural capital, etc.) that contribute to value creation, whether tangible or intangible, whether measured or not by accountants, we proposed the term “metacapital” (see the bottom of the previous post on “Valuation of intangible assets”).

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