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These days accounting and finance got a very wide scope and area of application. It is not confined to the business world alone, but spread of over in all spheres of society, social institutions, and in all professions. The course is intended to provide basics of accounting and finance practices in every organisation.Meaning of Accounting, Objectives of Accounting in organisations, Users of accounting information, Advantages of accounting.

Meaning of Accounting and Finance Practices

The research concentrates on prior literature where the primary concentration is on the measurement, recognition as well as disclosure of intellectual capital in reporting.  In essence, the study at hand elucidates in detail about the importance of measurement and incorporation of intellectual capital in the financial statements for carrying out corporate analysis. Moving further, this study explains in detail about different methods of valuation of intellectual; capital and analytically presents competing academic views as regards valuation of intellectual capital.

Analysis of pertinent empirical papers for supporting and disproving intellectual capital valuation models are also presented in details. Thereafter, the study presents evaluation of intangible assets with special reference to the firms Coca Cola, Telia, Dow Chemical and IBM. The reporting of intangible assets is analyzed and Tobin’s Q is calculated for all the four firms.

Importance of measuring intellectual capital for corporate financial analysis

As indicated by Sydleret al.(2014), intellectual capital assets can be considered to be strategic resources that need to be appropriately handled for deriving maximum advantages out of them. Effectual management of assets aids in the process of recognition, enumeration and systems of reporting. Enumerating the advantages acquired from possessing intellectual capital and value of assets necessarily has internal along with external purpose. As far as internal purposes are concerned, a firm would enumerate intellectual capital in a bid to handle its resources more effectually (Zambon 2017). This can minimize the overall cost.

Then again, enumerating intellectual capital for different external purposes would have need of verifiable information that signals the expected growth of the firm to different existing and prospective financiers as well as to different external users of requisite information. Essentially, the procedure of enumerating intellectual capital for both internal as well as external purposes engages utilizing financial as well as non-financial measurement mechanisms.

Bearing in mind the difficulties in enumerating financial measures suitable for enumerating worth of intellectual capital, different non-financial measures are developed namely, the balanced score card plus Skandia navigator. This is undertaken in a bid to balance the necessity to report on different assets and challenges engaged in enumerating them (Garanina and Dumay2017). For that reason, the information gathered utilizing non-financial procedures match the information divulged in the financial assertions. However, some of the non-financial enumerations associate to enumerating diverse classes of intellectual capital, in that way making it effortless to report the appropriate value related to each class.

Users and Advantages of Accounting Information

Essentially, diverse measures framed take in the value chain scorecard, balanced score card, human capital accounting in addition to Skandia navigator. Effectual non-financial dimensions of intellectual capital also matches financial dimensions, present both a feedback system for different actions along with the information to build up novel stratagems, help in weighing diverse action courses, and help the management of the firm (Scafartoet al. 2016). Again, non-financial dimensions of intellectual capital present information that can aid potential financiers as well as other stakeholders of the firm with diverse other information users, to arrive at informed financial judgment associating to the firm.

Also, it can be said that it is important to incorporate value of intellectual capital in financial assertions due to value relevance of intellectual capital (IC) (Osinskiet al.2017). Prior studies on value relevance of intellectual capital(IC) are based on the hypothesis that IC is merely a collection of different individual components consisting of different categories of relational, structural as well as human capital. Essentially, this kind of studies pays no attention to the value generated by the dealings among diverse types of IC, between specific IC that include ?nancial as well as physical capital (Nielsen and Farooq 2015).

Fundamentally, this intellectual capital valuation models aid in process of assessment of the stock price influence of elements of IC in separation. Learners have observed different categories of IC to be value relevant. These categories include worth of brand, quality of brand; customer satisfaction; support and endorsements of celebrity; base of consumers and infiltration; agreement; intangible assets; R&D; firm’s patents; development of software; and innovation among many others (Yuet al. 2015).

Therefore, the importance of incorporation of intellectual capital in the financial analysis can be said to be very important for the following reasons stated below:

Knowledge based firms: Irrespective of the field or segment a firm is functioning, these days the only variation between competitors is the way how speedily and capably can the firms revamp themselves (starting from organizational restructuring, product line modification, technological advancements, and production and marketing). The majority of market leading corporations can necessarily not be characterized as dynamic or service firms. Fundamentally, they attempt to deliver what customers might perhaps demand (Sydleret al. 2014). Also, they try to search for novel opportunities at places where they have not operated before. Essentially, all these innovative actions as well as ideas are founded on the intellectual capital that a business entity a firm possesses inside its margins.

Valuation and Incorporation of Intellectual Capital in Financial Statements

Intangible assets: It can be observed that by the year 2010 intangible assets represented 60-75% of average corporate value. Essentially, this implies that less than one half of overall corporate principal can be quantified, calculated or evaluated using qualitative methods (Berzkalneand Zelgalve 2014). This reflects the fact that there is need for new and advanced methodology to estimate actualvalue of a firm correctly.

Sources of innovation and strategic renewal: intellectual capital is the only mechanism inside the company, which can renew itself. This asset can be considered as the foundation for both learning as well as creativity (Fragouli 2015). This can bring up new ideas or strategy what influence the whole operation. Innovative thinking is the key to stay in business, according to unpredictable and rapid environmental changes.

Not merely “human capital pool” dealings: It can be said that intellectual capital can help in learning. Basically, this learning reflects two fundamental cases of learning from the earlier period (Kamath 2015). These are the cases when we assess diverse consequence of a specific action inside or else outside the firm. Intrinsically, this is referred to as external knowledge, and this knowledge leads to generation of collective intellectual capital through learning from one another. Particularly, this is the specific case when different individuals, operating in the similar place transmit knowledge between one another (Purohit and Tandon 2015). Essentially, this is at the time when widespread knowledge becomes authentic intellectual capital, as that does not necessarily replicate outside, but helps in learning and developing independently.

Association between management of human capital and results of business: As per previously stated attribute, intellectual capital’s connection can be effortlessly recognized with business outcomes. Yuet al.(2015) suggests that the more intellectual capital is utilized during the process of operation, the more functional strategy comes out that can be applied in a better way. Particularly, this helps in generation of higher income levels, lessens costs and exerts impact on diverse business outcomes (Parr 2018).

Prospective value addition in the future period: Particularly, in intellectual capital, it is important to analyse beyond traditional thinking. Dzenopoljacet al.(2017) suggests that the intellectual capital comprises of two different parts. The first part manages the assets that are already created, and that are already undertaken. Again, the second part is necessarily the trust that this efficiency of intellectual capital shall remain in the upcoming period or even enhance with time. Essentially, this segment of intellectual capital is not properly studied and researched owing to its intricacy and insecurity (Celenza and Rossi 2014).

Different Methods of Intellectual Capital Valuation

Competing academic views regarding valuation of intellectual capital

The question on the subsistence of intellectual capital within a business was initially illustrated through the recognition as well as goodwill definition that is division of a business (Khaliqueet al.2015). The IASB, (2011:A941-A943, A152), nevertheless, makes a difference between goodwill obtained in a particular business combination and goodwill generated internally.

During fieldwork of IASB and round-table debate undertaken to obtain reaction on projects of IFRS 3 Business Combinations, there were several disputes in support of and against identifying intellectual capital. This debate is particularly concerning identification of intellectual capital in the yearly financial assertions of firms (referring to IASB, numbered 2008:382 and IASB, numbered 2010:A97) (Linet al.2015). There are IASB project that led to modifications to acquired goodwill treatment in a particular business combination and goodwill generated internally.

As suggested by Chiucchi and Dumay (2015), regulations of IASB (2011:numbered A152) indicates towards goodwill obtained in a particular business combination that reflects a disbursement by an acquirer in expectation of economic benefits in the future period from assets that are necessarily not capable of being individually recognized and disjointedly recognized. Therefore, the obtained goodwill value is, ascertained by transactions in a specific business combination, and is identified as an intangible asset in the pronouncement of financial position of a firm.

Again, the acquirer takes in goodwill in the overall value of an obtained intangible asset that is not recognizable as of the date of acquisition (Russ and Catasùs 2014). For instance, an acquirer might possibly point out towards value to the subsistence of assembled workers that indicates towards existing collection of workforce that allows the acquirer to keep on operating an acquired business from the acquisition date. For the reason that, the assembled workers are not necessarily an identifiable asset to be identified independently from firm’s goodwill, any specific value accredited to it is incorporated in the goodwill obtained (Cleary and Quinn2016).

Goodwill generated internally, conversely, indicates towards expenditure that is incurred so as to create economic benefits in the future period that do not leadto an intangible asset creation (referring to regulation IASB, 2010: numbered A941) (Nielsenet al. 2017). Consequently, these assets are not acknowledged as assets stated in the financial assertions, thereby, form a component of the intellectual capital. This intellectual capital is expensed and represented as an intermittent cost in the assertion of comprehensive earning. An instance of goodwill generated internally is necessarily the expenses incurred so as to service an important customer and to gain loyalty of the customers towards the product of the firm (Fulmerand Ployhart2014).

Empirical Evidence and Evaluation of Intangible Assets

The consequence of acquiring these expenses is the loyalty of the customers that might lead to economic advantages flowing into the business concern in the future period. Nevertheless, these economic benefits in the future period will not lead to recognizable intangible asset. This is because the business concern will not have authority to control neither loyalty of customer acquired nor economic benefits for the future period that might perhaps flow from this specific gain(Alcanizand Roslender 2011). Additionally, the intangible assets measurement can also be considered to be problematical.

Opinions by researchers namely Nazari (2015), who are essentially against presenting reports on intellectual capital value in the financial assertions, are founded on the above mentioned facts stipulated under the IASB. Additionally, the IASB mentions that intellectual capital does not essentially satisfy the asset definition as well as criteria for recognition. As an important part of recognition criteria, item cost to be identified need to be reliably enumerated (IASB, 2011: numbered A847) (Too and Wan Yusoff 2015). Thus, measurement can be said to be elementary to the process of recognition of asset as per IASB rule.

Fundamentally, the discussion in favor of identifying intellectual capital in different financial assertions is founded on the fact that intellectual capital value stays unreported to different users of firm information (Wanget al.2015). In actual fact, non-recognition of these specific assets in the financial assertions hence generates a gap/variance between reported accounting and values of capital market.

As put forward bySecundoet al.(2017), unlike different other assets, overall value of goodwill that are internally generated is formed over a specific period in the course of a series of actions and it is not feasible to associate this particular value to a definite business transaction. As suggested by Wang (2015), Intellectual capital hence becomes an element of this internally generated business value, and as a result need to be reported to different providers of capital and information users. Therefore, it surfaced from review of literature that the debate in support of recognizing intellectual capital in firm’s financial reporting entails identifying that company’s true value may possibly be assessed by taking into consideration the intellectual capital (Nielsen and Farooq2015).

It has also become clear from the above debate that there is both a need and a drive to establish new measures and ways in which to report on intellectual capital, in order to complement the financial reporting. Chiucchi and Montemari (2016) indicate towards to this type of reporting as broad-based reporting system in business. This Broad-based system of reporting presents financiers along with diverse other stakeholders with obligatory and contextual information and assists them to make informed decisions.

Non-Financial Measures to Balance the Reporting of Intellectual Capital

Way of incorporating enumeration of intellectual capital in valuation

There are various mechanisms that can be taken into consideration for valuation of intellectual capitals that necessarily has three different components namely, human capital, structural capital and relational capital.

Human Capital: As suggested by Giulianiet al.(2016), for the purpose of valuation of human capital various types of mechanisms can be taken into consideration. Essentially, these mechanisms are associated to quite popular notion of Human Resource Accounting (abbreviated as HRA) else wise Human Resource Costing and Accounting (abbreviated as HRCA). Sydleret al.(2014) divides approaches to system of HRA into two different groups, that is to say, cost based as well as value based. It is important to mention about the models proposed by Lev and Schwartz while considering valuation of particularly human resources.

As suggested by Roos and Pike (2018), Lev and Schwartz suppose that workers will be working for firms till the period of death otherwise the period of retirement. However, probabilities of promotionchange to another position or leaving the firm for any reason other than death or else retirement can be taken into account. Fundamentally, valuation of different employees on particularly individual basis can be considered to be extremely problematical for large business concerns. Based on the models designed by Lev and Schwartz, it can be hereby mentioned that human resource valuation can be carried out a group basis (Dumay 2016). In essence, they claim that for different homogenous groups, it is easier to forecast movements in career and possibility of leaving the firm. The process of enumeration used in this model to anticipated economic value of different employees is calculated using a formula.

Specified models might be implemented to approximate overall value of individual workforce or else employee groups. Analysis of different individual sections of human capital can be said to be extremely challenging. The cost approach appears to be the easiest way to undertake it (Ozkanet al. 2017).

Structural Capital:

Essentially, knowledge under this class was already stated. Additionally, this consists of intangible asset to the four basic sets. Organizational framework, culture of corporate, regulations, norms and routines undertake as the first group. Kiantoet al.(2014) assert that these assets normally cannot be sold disjointedly, but they might be acquired by means of franchising. Thus, their valuation can be founded on anticipated flows of cash, from potential franchising. Certainly, the worth of certain intangible assets needs to be deducted from franchising value. In order to solve the issue, MEEM might be utilized (Chahal and Bakshi 2015). However, in different cases, these intangible assets normally have extremely low value for diverse other business concerns.

Value Relevance of Intellectual Capital in Financial Analysis

Again, the second group is essentially generated by list of customer, databases and pertinent information. In case if a replica is easily obtainable the fair value of customer list and identical database is often approximated by essentially cost approach. In case if these databases otherwise information are not properly reproduced or else they reflect an important benefit of the business concern, the income approach might perhaps be more appropriate. Website as well as domain name are engaged in the third set. As rightly indicated by(Bontis 1998), value relies on utilization. However, Hejaziet al.(2016) suggest that income approach namely relief from loyalty mechanism is applicable if the domain names are commonly the subject matter of licensing agreements and.

if the business depends heavily on revenues from internet. However, in different cases, particularly at the time when flows of financials do not subsist or else their approximation is unfeasible, the value can be ascertained by cost approach (Zambon 2017). Commercial software as well as information system can be considered as the substance of particularly the fourth group. In essence, their valuation is normally founded on market prices

Relational Capital

As suggested by Garanina and Dumay (2017), relational capital comprises of different associations with customers, diverse suppliers as well as partners, brand, loyalty of customers, reputation, customer satisfaction, association with suppliers, channels of distribution, agreements of licensing as well as franchising.

There are several intangible assets and that cannot be easily transferred from one particular entity into another one, particularly business associations with diverse other parties(Subhash 2014). Fundamentally, it is said to be practically unfeasible to purchase them. However, it is possible to try to approximate specific fair value by means of incremental flows of finances otherwise or income mechanisms, but this task can be said to be demanding. Thus, relational capital is normally enumerated by different financial indicators. Nevertheless, there are certain mechanisms that can be utilized for the purpose of valuation (Nielsen and Farooq 2015).

Also, franchising along with licensing contracts can be valued by means of discounted anticipated flows of cash or comparative models of valuation. Essentially, for valuation of brand equity, Yuet al.(2015) assertdiverse models that are divided into three conventional groups based on cost, market as well as income mechanisms. This helps in comparing income mechanisms founded on different criteria and list their benefits as well as limitations. Fundamentally, final choice of the mechanism relies on the objective of the valuation.

Importance of Intellectual Capital for Knowledge-Based Firms

Essentially, valuation of firm’s reputation can be considered to be easiest in the area of loss. Following scandals namely oil spills in Deepwater Horizon, drop in overall value of the company mainly relates to the loss of the firm’s reputation (Berzkalne and Zelgalve 2014). It can be hereby approximated from customer or else market surveys. There are customer as well as market surveys, competitive evaluation and analysis of ROI that are specific mechanisms suggested for enumeration of some part of relational capital.

Kamath (2015) recommends the valuation of different relational capital founded on the relational investments. Particularly, relational investments are necessarily investments that can help in building and sustaining network of suppliers. In essence, they comprise of investment to get competitive and innovative suppliers, institute associations, align business procedures, train partners and when necessary handle conflicts and renew contracts (Purohit and Tandon2015).

There are various methods that can be taken into consideration for valuation of intangibles. This is regardless of the fact that there are several mechanisms that have been suggested for that reason. Purohit and Tandon (2015) presents three wide approaches for approximating fair values and most used mechanisms for financial valuation of particularly intangible assets, namely, market approach, income approach and cost approach. The market approach refers to comparison methods in business sales transactions and the market multiple mechanisms. Again, the income approach refers to relief from royalty mechanism, method of comparative income differential, direct cash flow mechanism and the multi-period excess earnings technique. In addition to this, there are cost approach that indicates towards reproduction cost mechanism together with the replacement cost mechanism.

As suggested by Parr (2018), there are different market mechanisms that are founded on current transactions along with market prices of identical intangible assets. Particularly, these data are not often available, therefore, market approach is said to have limited usage in reality.

The reproduction cost mechanisms helps in the process of approximation of the costs borne for reproducing firms’ intangible assets in the date acquisition and the method of replacement cost reflects the costs incurred to acquire a substitute asset of relative utility. As stated by Linet al.(2015), the cost approach is said to be comparatively less widely accepted in comparison to the market as well as income approach, particularly as it ignore economic advantages of the future period. 

Review of pertinent empirical papers for supporting and refuting intellectual capital valuation models

Methods on valuation of intellectual capital of a firm have been studied in detail by several scholars (Tseng et al. 2015).  Research works presented by prior scholars talk about and propose over 60 different mechanisms of valuation of intellectual capi­tal. In essence, some of these works are mainly theoretical in nature whereas others are sensibly implemented in firms of different types. As suggested by Su and Wells (2015), there are different valuation methods that are founded on traditional financial themes. diverse methods present a range of opportunities, and no one of the mechanisms that are published in academic literature is able to fulfill diverse objectives that might perhaps have been placed, whilst a number of specific techniques valuation of intellectual capital is said to be effective in definite industries or else just in particular firms (Wang et al. 2015).

Intangible Assets and Their Importance in Corporate Valuation

Wang (2015) asserts that this happens owing to the intricacy of valuation of intellectual capital as in the course of valuation one of the main difficulties is faced: the distinction between intellectual capital along with other capital forms is time and again blurred since intellectual capital is caught up in physical capital (That is to say, technologies along with knowledge in a novel airplane) as value creation is based upon the dealings of intellectual with physical capital. It is said that the powerful the relations become, the complicated it becomes to identify intellectual capital and appraise the same as a separate business concern (Yaseen et al. 2016). Apart from that, when carrying out valuation of intellectual capital,

it is important that pointers founded on value creation in the upcoming period are regularly con­sidered. However, they are extremely dangerous since different projections and hypothetical data for the future period are essentially suppositions that might dramatically fail if unforeseen alterations occur (Yaseen et al. 2016). Again, there are many other issues existent in the process of searching methodologies of valuation of intellectual capital. This refers to different academic works that reflect a trend of developing, although diverse new mechanisms, suggesting new classifications and groups of pointers, overlooking completed theoretical work by now, suggesting “subjective dimension”, and providing preference to different qualitative mechanisms and in maximum number of cases do not seek universal suitability (Yu et al. 2015).

For this reason, current methods are difficult and restricted qualitative or else theoretical proposals having a narrow evidence of application that essentially complicates process of development of a lone as well as universal mechanism of intellectual capital valuation of business enterprise. Particularly, this is demonstrated by the results of varied researches and prior studies that claim that no one of the present mechanisms or else models has acquired a global recognition of theoreticians along with practitioners, and, accordingly, no one is being implemented in business enterprises at the state otherwise global level. Therefore, the subject matter has so far been not resolved. In particular, this set of techniques, mechanisms and changes in function unquestionably com­plicate both theoretical along with empirical studies in this particular field. Nevertheless, as said by Yu et al. (2015).

this might perhaps lead to development of a consistent system of valuation of intellectual capital. In essence, the method would institute previously existing mechanisms or else build up new ones. Also, the new mechanisms might perhaps be an amalgamation of different extensive mechanisms else wise thoughts, and it can help in circum­venting certain problems of the present technique. As a consequence, the current research study intends to systemize and simplify already undertaken hypothetical and experiential research study in a bid to evaluate, compare, and categorize mechanisms of valuation of intellectual capital. This can help in contributing towards procedures of generating this standardization scheme. At present, with no global or state.

Sources of Innovation and Strategic Renewal through Intellectual Capital

regulation of this procedure being employed, each and every concern has the need to decide whether the method optimally aligns with the purpose(s), state of affairs and requirements of users of information. IN essence, history reflects that business concerns transformed their mechanisms of valuation of intellectual capital, implemented the same in practice and also handled the same to develop potency of intellectual capital (Zambon 2017). For this reason, the purpose of this study is analysis of methods of valua­tion of intellectual capital and their categorization, and the intention is to simplify a system of technique of valuation of intellectual.

capital after having investigated and systemized mechanisms of intellec­tual capital valuation presented in operations of different authors. In particular, the primary processes implemented in the current study are necessarily synthesis along with generalization of educational writings, counting content analysis. The consequences of the study and its closing stage are founded on evaluation of academic investigations undertaken by varied authors and ensuing publications.

Educational writings present a variety of mechanisms of valuation of intellectual capital: both financial as well as non-financial. This literature talks about implementing quantitative otherwise more regularly, qualitative methods, both external as well as internal methods, valuation of intellectual capital as a universality or statement of diverse separate elements, based on conventional financial accounting of concerns or applying market pointers to recognize instituted events in the market. Again, there are also different methods of management when grounds of instituted situation are presented. In addition to this, there are different techniques that present a methodical single index-manifested worth of particularly intellectual capital whilst others think about multiple factors exerting influence on overall activ­ity of a business concern (Holmes and Maghrebi 2015).

There are different authors, who, in a bid to systemize and replicate specific features in different methods or else to recognize shared features, categorize the same consistent with specific criteria. Generally, schol­arly works at hand presents classifications founded on common valuation principles and distinguish four different methods (Fragouli 2015). Again, another classification, that is considered to be the most frequent in areas of academic studies, separates two different groups of mechanism of valuation of intellectual capital concerning the valued substances (Garanina and Dumay 2017).

Another categorization that is presented in scholarly operation divides mechanisms valuation of intellectual capital. This refers to utilization of monetary dimension unit into two different groups: monetary as well as non-monetary (Dumay 2016). In essence, the fourth categorization mentioned in academic literature indicates towards mechanisms of valuation of intel­lectual capital in accordance with presentation of valuation outcome into four different types (Chiucchi and Montemari 2016). A comprehensive scheme of categorization of valuation mechanisms has been formulated for searching terminology most appropriate for pertinent methodologies: financial valu­ation mechanisms also indicate towards quantitative monetary mechanisms, whilst the entire group can be mentioned as evaluation technique.

Learning and Development from Collective Intellectual Capital

As rightly indicated by Fragouli (2015), value measurement mechanisms can be referred to as quantitative non-monetary mechanisms belonging to particular group of enumeration. Essentially, it has been instituted that over and above 60 different mechanisms of valuation of intel­lectual capital of a business enterprise are present. The outcomes of study reflect that these mechanisms are categorized as per four different features. These features include general notions of valuation (that is to say, capitalization of market, return earned on assets, firm’s intellectual capital and scorecard mechanisms.

There are diverse valuated object (for example, holistic along with atomistic mechanisms that are separated); utilization of monetary unit present in the procedure of enumeration. In this case, monetary as well as non-mon­etary stuffs are essentially highlighted (specifically, presentations of valuation outcomes that include financial assessment, value enumeration, and value analysis and measurement mechanisms are presented) (Celenza and Rossi 2014). In the same way, a categorization system of valuation mechanisms of intellectual capital is formulated.

There are several authors who are interested in huge collection of intangible assets than the onesbelonging to intangible assets that are identifiable as per“International Accounting Standard 38”. Essentially, these assets are said to be classified into diverse categories (Chiucchiand Dumay 2015).

There are several studies that points out towards influence of intellectual capital (IC) on pecuniary in addition to market related performance of corporations. For most part, it can be inferred that there exists a positive association between diverse components of intellectual capital in cooperation with economic performance of firms. Essentially, similar studies were conducted on a sample of around 75 firms that are listed under Johannesburg Stock Exchange (Cleary and Quinn 2016). The results of the study reflected the fact that when survey was undertaken, the nation South Africa depended heavily on mistreatment of natural assets and firms operating in that region acquired competitive benefits out of it.

Additionally, a research work undertaken in the region of Taiwan showed positive impact of intellectual capital on overall financial performance and that was denominated by VAIC (Fulmer and Ployhart 2014). Also, a research work undertaken in the area Malaysia deals with examination of effectiveness of IC in mostly banking division. Consequences of the research work indicated towards the fact that domestic banks are normally less effective in the process of exploitation of Intellectual Capital (IC) related to banks having greater part of foreign possession.

Majority of investigation works indicated positive association between different elements of IC with other variables that were employed (Nazari 2015). This is mainly used in enumerating performance along with the strong impact of the individual elements of IC on the selected dimensions of business performance considerably (irrespective of segment in which they operate), in spite of a comparatively large number of units present in the sample.

Association between Human Capital Management and Business Outcomes

With respect to Republic of Serbia, it can be said that there are six different empirical studies were undertaken using different samples and considering different horizons of time, with one general and common attribute. In essence, they all implemented identical research methods. Essentially, studies have necessarily utilized the notion of enumerating overall efficacy of utilization of IC by means of VAIC coefficient (Wang et al. 2015). 

In essence, there are studies undertaken on companies operating in the BELEXI 15 group. However, the study failed to demonstrate overall subsistence of strong association between the coefficient of VAIC(valuation of intellectual capital) as well as company performance enumerated by ROE (return generated out of equity), ROA (return generated out of firm’s assets) together with productivity of workers (Wang 2015). Ascertainment of nature of association between return generated out of equity and return generated out of firm’s assets and movement in VAIC in 15 different firms is considerably affected by structural capital and its impact on ROE. Apart from that, impact of human capital on overall productivity of member of staffs was ascertained (Chichi and Montemari 2016).

With regard to banking division in the region of Serbia, it can be seen that there are substantially significant influence on firm’s return generated out of equity, productivity of workers, return generated out of firm’s assets with different other components of intellectual capital. Nevertheless, this kind of correlation was not recognized in the specific case of profitability of bank in the area of Serbia. Conversely, regression analysis showed the way to the specific conclusion that at the time when Serbian banks are taken into consideration, structural capital has a dominant influence on corporate performance, whilst the EP was more often than not affected by particularly human capital (Giulianiet al. 2016).

Again, operations of different top Siberian exporters, is close to banks operating in Siberia bears the strongest comparative influence on financial performance (enumerated by profitability, return generated out of equity as well as return generated out of firm’s assets). In addition to this, human capital ascertains ROA along with EP. Also, physical capital largely affected return generated out of equity and enterprise’s level of profitability.

There are 2 different prior research works conducted with real sector and with corporations possessing highest level of net profit during the year 2010 and 2011. These studies revealed that strong association between intellectual capital and economic performance of firms could not be instituted. In essence, the outcomes of the two studies proposes the fact that success of business enumerated by net income, operating earnings as well as operating profit is not ascertained by components of intellectual capital (Roos and Pike 2018). Regrettably, this directs the way towards inference that accomplishment/success is mainly caused by facets that do not come under the class of existing practices and common methods.

The present circumstances working in the economy of Serbia replicates a state in which performance of corporations is affected relatively less by level of expertise and competencies. Essentially, performance of firms again relies on physical assets of a business concern, value of location, and prospective position of market that has a trace of monopoly. Research was undertaken on a sample of approximately 54 firms listed under BELEXline index of essentially Belgrade Stock Exchange (Dumay 2016). The outcomes divulged the fact that there subsisted a positive connection of human capital on overall performance of the corporation in the market, whilst control of structural capital was statistically insignificant.

Particularly, the consequences of the study indicated that expertise, competencies, eagerness along with different elements of human capital ascertained performance of enterprise in the market as is articulated by market to book ratio. Conversely, physical capital necessarily plays a significant role in attainment of performance of market. However, influence of physical capital can be said to be comparatively more profound than the influence of human capital (Chahal and Bakshi 2015). Therefore, the largest comparative contribution to generation of value necessarily has physical capital, and human capital.

During industrial epoch, the important value-making procedure was necessarily proper administration of firm’s assets of a business concern that were material in nature. This included developing plants, specific sale points, management of levels of inventory, proper management of different resources such as land, space for office along with different other financial resources). Essentially, the procedure followed for creation of value in age of information is appropriate managing of intangible assets possessed by the firm (Hejaziet al. 2016). Accordingly, the content of different jobs has considerably altered during this information age.

Between the periods (1990 to 1999), overall fraction of workers (described as specialized creative workforces) augmented from the level of 0.7% to approximately 5.7% (Kiantoet al.2014). Resourceful workers produce and utilize IC and the specialized workforce includes architect, mathematicians, professional in information as well as communication technology, engineers, specialists from diverse social and natural sciences, planners of city, creative artists, writers, entertainers, as well as athletes. Till the period 1999, roughly 7 million were engaged in the U.S. market of specialized resourceful employees (Roos and Pike 2018). Essentially, the greatest enhancement in the overall value of IC, along with the growth and development of its influence on performance of business, became apparent during the middle of decade of 1980s, with the beginning of huge “immaterial businesses.

These industries include software industry; businesses based on biotechnology, as well as internet founded segments. However, the expansion, development and significance of IC have continued and sustained till the present period. Investments made in intellectual capital are now regarded as a fundamental indicator of vivacity of a business concern and an important dimension of performance in the upcoming period (Nielsen and Farooq 2015). Thus, it can be hereby inferred that it is important to incorporate valuation of intellectual capital for financial analysis of the firm.

This research study reflects that intellectual capital has considerable influence on productivity development. In the USA, ever since the period of 1973 till the year 1995, intellectual capital, on an average, put in 0.4 % points to the annual growth as well as development of productivity of particularly human labor (Chahal and Bakshi 2015). Essentially, this specific contribution has enhanced during the period ever since the period 1995 till the period 2003 to roughly 0.8 % points. It can be hereby observed that in France, during the period (1995-2003), intellectual contributed to a yearly enhancement in efficiency of human labor for approximately 0.9% (Inkinenet al. 2017).

Again, in the segment Germany, this specific input led to roughly 0.59 p.c points. However, in the region of Italy there are 0.4 p.c, and in Spain there are 0.19 p.c points. In addition to this, in the UK, during the period (1979-1995), intellectual capital contributed towards enhancement in average efficiency of 0.39% every year recorded. On the other hand, since the period (1995-2003) this specific number enhanced to 0.59 (Otcenášková and Bureš 2018). In the area Finland, intellectual capital enhanced overall efficiency by a mean of 0.6% every year during the period (1995-2000) (Tsenget al. 2015).

Review of intangible assets

      Intangible assets refer to the kind of asset that is not in the physical form. Some examples of intangible assets include goodwill, intellectual property like patents, copyrights, trademarks and brand recognition. Intangible assets are opposite to tangible assets that include physical assets such as vehicles, land, machinery and inventories (Bianchi 2017). In contrast to that financial assets like bonds and stocks, which derive values from contractual claim, are termed as tangible assets. Intangible assets can be either definite or indefinite. An example of indefinite intangible asset is the brand name of the company. The brand name of the company persists with the company as long as the company keeps working.

Legal agreement that is drawn to work under a company’s patent, having no plans for extending the agreement is an example of definite intangible asset. Intangible assets though do not have a physical value but might prove beneficial for long term success of the company. Consider the coca cola company for example. The company’s profits would have been very low if the brand name of the company was not associated. Thus, though brand value is not at all a physical asset which can be touches or seen but then also brand name has a great impact in generation sales for the company.


      The International Business Machine Corporation (IBM) is a multinational company thet is headquartered in America. The company operates over 170 countries. The company manufactures and sells the computer hardware products and also various software products. The company first started in 1911. The company is also involved in various types of data analytics and also builds gaming consoles like PlayStation, Xbox 360 and many others. IBM Watson is also a technology that is very useful in various machine learning to extract large chunks of unstructured data.

The impair accounting of a business involve considerable assumption and estimates. The acquisition practice of the company is subject to fail value estimation of assets acquiring identifiable intangible assets, assumed liabilities and other non-controlling interest payment. Testing impairment of assets except good will and other indeterminately lived intangible assets needs cash flows to be allocated to the group of assets and if required fair values of the assets are recorded. Estimation of the company is based on reasonable but unpredictable or uncertain assumption. The valuation to assets requires the company to apply assumption of the management practice that would not indicate unpredictable circumstances that might occur.

      Goodwill is one of the significant intangible asset of the company. Every year the company take reviews of the goodwill of impairment. The company also reviews the changing circumstances or event indicating possibility of non-recovery of the carrying value of intangible assets (Su and Wells 2015). In the last year, the company identified the qualitative risk factor with the objective of identifying circumstances where the reporting value of the asset fall short of the carrying amount. The table below shows reporting of intangible assets in IBM for the three consecutive years of 2015, 2016 and 2017.

Table 1: Intangible assets in IBM






Intangible asset class

Capitalized software




Client relationships




Completed technology
















As shown from the table, the total valued intangible assets increases from $3487 million in 2015 to $4688 million in 2016 ( 2018). The asset value again declined in 2017 with asset value being $3742 million

Dow Chemical

            Dow Chemicals is an American multinational corporation which is headquartered in Michigan, United States. The company is the world’s second largest chemical company. The company is very diversifies in nature. Water purification, performance plastics, agricultural science, performance chemicals, basic chemicals and hydrocarbons energy all these products are manufactured by the chemical company. In the middle phase of 19th century the company was also involved in manufacturing of nuclear weapons. The company also helped the United States military to manufacture napalm bombs that were very crucial for the Vietnam War.

      Dow Chemical considers durable assets and identifiable intangible assets for evaluation of impairment in where there is possibility of non-recovery of the assets. The company reviews the goodwill in situation where purchase price for different business combination exceeds the net fair value of the required tangible and intangible assets. Goodwill is tested annually or more frequently the reporting value does not tend to hit below the carrying value. For impairment assessment of goodwill, the qualitative factors are taken into consideration. Additional quantitative tests are performed if the reported unit has a carrying value higher than its fair value estimates. Once the quantitative testing indicates that goodwill is impaired then the carrying value is reported as the fair value ( 2018).Cash flow methodology is primarily used by the company to compute the fair value of the reporting units.

      The recorded units of different categories of intangible assets of Dow Chemical from 2015 to 2017 is presented in the following table

Table 2: Reporting of intangible assets in Dow Chemical

Dow Chemical





Intangible assets with finite lives:

Developed technology















Microbial cell factories



Favorable supply contract







Total other intangible assets with finite lives




Intangible assets with indefinite lives

In-process research and development ("IPR&D")








Total other intangible assets




Coca Cola

            Coca Cola is a soft drinks company. The Coca-Cola Company is the largest beverage company of the world with a choice of more than 3,800 beverages. The company is estimated to be 20 billion dollar brand including Diet coke, Coca-Cola zero, Sprite, Fanta, Minute Maid, Gold Peak, Dasani, Del Valle, Georgia, and PowerAde. The company provides more than 1.9 billion of these items to the consumers over 200 countries ("Financial Data", 2018). The company employs more than 700,000 employees and is considered to be among the world’s top 10 private employers (2018).

The intangible assets are categorized under three groups- assets that have definite values and assets that have indefinite lives and not subject to amortization and goodwill. For definite valued intangible assets, with presence of necessary condition test for asset impairment needs to be conducted. The impairment test more frequent for intangible assets with indefinite lives and goodwill. In situation where facts and circumstances suggest that the asset value cannot be recovered then the management assesses recovery of the carrying value in reference to sales volume, gross profit and cash flows.

The company tests intangible assets to find out the useful lives which include franchise right, goodwill, trademarks. Based on this the company determines frequency of testing impairment ( 2018). Coca Cola performs review of the annual impairment on the first day of company’s third fiscal quarter. The company uses a variety of methods for impairment assessment. Discounted cash flow model is one way for impairment assessment. The table below presents different intangible assets of Coca- Cola.

 Table 3: Reporting of intangible assets of Coca-Cola

Coca Cola





Definite-Lived Intangible Assets




Customer relationships




Bottlers’ franchise rights
















Indefinite-Lived Intangible Assets





Bottlers’ franchise rights
















Total intangible assets





Telia is Swedish Telecom Company that operates in the Eastern Europe region. The company also extends its services in central Asia, northern Europe and south Asia. The company has a 12.25 percent share in Afghanistan. One of the major telecom company that is analyzed in the report.

The company estimates fair value of the acquired assets. The intangible assets are recognized at their fair values that are subject to impairment ( 2018). The table below shows goodwill and other acquired intangible assets of the company for three consecutive years from 2015 to 2017.

Table 4:Reporting of intangible assets of Telia










other intangible assets








Tobin’s Q

      The Tobin Q’s theory of investment estimates the ratio of market value of a company’s total existing share to the total value of the asset. James Tobin is the developer of Tobin model. The model states that investment is a function of quantity q. The q is the ratio between the market value of the capital and the replacement cost of the capital. The major factors that affect the market value of the capital is the expected returns and interest rate. These two factors should be analyzed when considering the acquisition cost. Mathematically, the equation for the Tobin’s Q model can be shown as follows,

A low ratio lying between 0 and 1 indicates that replacement cost of the company is higher than its stock value. This in turn indicates undervaluation of the company’s stock (Peters and Taylor 2017).  The higher value of Tobin’s Q implies company’s stocks are valued greater than the cost of replacement indicating overvaluation of assets.

Table 5: Tobin’s Q for IBM



Number of shares

Stock Price

Total market value

Total asset value

Tobin q



















For IBM, Tobin’s Q for all the three year (2015-2017) is greater than 1. The value of Tobin’s Q greater than 1 implies that the stocks are overvalued which are not good from the perspective of the investors. The Tobin’s Q has increased from 1.22 in 2015 to 1.35 in 2016. In the next year, following a lower stock price, the computed Tobin’s Q declined to 1.14.

Table 6: Tobin’s Q for Dow Chemical

Dow Chemical


Number of shares

Stock Price

Total market value

Total asset value

Tobin q



















For Dow Chemical Tobin’s Q for the three years are less than 1. This indicates that stocks of the company are undervalued. This provides opportunity for further growth is share price. The ratio of market value to total assets was 0.86 2015. This was declined to 0.70 in 2016 and further to 0.51 in 2017.

Table 7: Tobin’s Q for Coca Cola



Number of shares

Stock Price

Total market value

Total asset value

Tobin q



















 A very high Tobin’s Q ratio is obtained for Coca Cola. For 2015, the computed Tobin’s Q is 2.00. The ratio increased to 2.16 in 2016. The ratio slightly declined to 2.14 in 2017.

Table 8: Tobin’s Q for Telia



Number of shares

Stock Price

Total market value

Total asset value

Tobin q



















Tobin’s Q for TeliaCompany for the three years is less than 1 indicating undervaluation of stock. The q ratio in 2015 is 0.72. This declined to 0.63 in 2016. The q ratio slightly increased to 0.65 in 2017.

Limitation of Tobin’s Q

      The theory of Tobin’s Q was not supported empirically. The real world evidences suggests that there are several other factors except stock market’s value. There are several lagged values that affect the investment decision as well. The Tobin theory states that investment should be undertaken when the change in market value of capital stock due to the investment exceeds the cost of creating it. In real world, the marginal Q differs from average Q which plays an important role in investment decision (Holmes and Maghrebi2015). There exits an or ordering and delivery time lag which intervenes the decision of a firm regarding the time when investment is profitable and the time of delivery of investment good. Imperfect capital market is another factor that limits application of Tobin’s Q.


The above mentioned study helps in gaining deep insight regarding measurement, recognition as well as disclosure of intellectual capital in reporting.  Also, the study helps in understanding importance of measurement and incorporation of intellectual capital in the financial reports for appropriate financial analysis. Furthermore, the study helps in understanding different methods of valuation of intellectual capital and presents competing reviews from prior literature on valuation of intellectual capital. Thereafter, evaluation of intangible assets of the firms Coca Cola,Telia, Dow Chemical and IBM are presented that helps in understanding importance of evaluation of both tangible and intangible assets for assessment of market value of companies.

The reporting of intangible assets is analyzed and Tobin’s Q is calculated for all the four firms. Tobin’s Q for Telia Company indicates undervaluation of stock. A very high Tobin’s Q ratio is obtained for Coca Cola indicating overvaluation. Tobin’s Q for Dow Chemical calculated to be less than 1for the three years indicates that stocks of the company are undervalued. For IBM, Tobin’s Q for all the three years is greater than 1 implying that the stocks are overvalued. Tobin's q influenced by intangible assets helps in understanding the intellectual capital of the firms that is to say, the unregistered contribution of particularly, technology, knowledge as well as goodwill, in addition to other intangible assets.


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