Techniques for measuring intangible capital: a review of current practice
- Wiley-Blackwell Publishing Asia
- Publication Type:
- Journal Article
- Australian Accounting Review, 2005, 15 (2), pp. 4 - 21
- Issue Date:
t is argued that the approaches and unofficial metrics which have been developed to fill the error in the official information systems have limited scope for widespread use. The batteries of intellectual capital (IC) indicators which have been privately proposed make components of IC visible. However, this IC information is not consistent, comprehensive or reliable, nor is it informative about the relative monetary allocations to different categories of IC investments. Further, since it is generally not clear whether these non-financial indictors are reflections of the activity (cost) expended to generate the asset, or represent forward-looking values to the firm, there are no all-purpose ways to use the data analytically. The existing rules seek to minimize Type II errors but overlook the consequent implications for Type I errors. Moreover, given the rising significance of IC in firms over the past half-century, the magnitude of the Type I error is expected to grow. The objective of the accounting decision should be to optimism - that is, minimize combined errors, not a single error. It is fundamental to the economics of the firm that cost-based measures of IC be based on the knowledge of the categories of expenditures dominating the value-creation processes. The rate of return to this investment can only be determined through an analysis involving the original expenditure data. Much of what takes place under existing approaches is concerned with measuring the expected future value of the firm's intermediate output rather than the firm's original monetary allocations to IC investments of different types.
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