Review of Ic Valuation and Measurement: Classifying the State of the Art, by Daniel Andriessen

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  • Topic: Goodwill, Labor theory of value, Value
  • Pages : 5 (1181 words )
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  • Published : June 19, 2012
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Measuring Intellectual Capital
Over the last few years, he research into measuring the Intangible Assets or the Intellectual Capital of companies has produced a plethora of proposed methods and theories. This paper is intended to provide an overview of four methods of measuring intellectual capital as illustrated in IC Valuation and Measurement: Classifying the state of the art, by Daniel Andriessen, published in: Journal of Intellectual Capital, Vol 5 No 2 pp.230 – 42 .

Andriessen's article is intend to clarify by classification of existing IC concepts, motives and proposed methods; which is the first of three steps to prove that IC can help improve organizational performance. The other two steps are: separation of the corn from the chaff by assessing the rigor and effectiveness of the proposed methods, and standardization and further development of the most.

For the clarification, he deals with two questions: WHY to measure IC (motives)? How to measures it (methods)? He undertakes a literature review to analyze the motives and methods of influential authors.

Motives:
He explains the existence of a wide variety of motives as each writer has defined the problem he intends to solve differently. He grouped theses motives under three main categories: 1- Improving Internal Management:

2- Improving External Reporting.
3- Statutory and Transactional Motives.

Methods:
He shows the difference between valuation and measurement.

Valuation: He states the different aspects of Value: usefulness and desirability. A valuation, thus, requires implicit and explicit criteria. Valuation, according to Rescher 1969 is "a comparative assessment or measurement of something with respect to its embodiment of certain value". So valuation requires:

1- An object to be valued
2- Framework for the valuation
3- Criterion reflecting the usefulness and desirability of the object. A) Monetary criterion- using money as unit of value: financial valuation method B) Nonmonetary criterion translated into observable phenomena: value measurement method C) Nonmonetary criterion depends on personal judgment: value assessment method D) No criterion for value but a metrical scale: measurement method

Measurement: Swanborn 1981 the process of assigning scaled numbers to items in such a way that the relationships that exist in reality between the possible states of a variable are reflected in the relationships between the numbers on the scale.

Classifications of 10 existing methods:

Financial Valuation Methods:
1. Economic Value AddedTM (EVA): based on an analysis of the economic value that is added in a company, taking into account the cost of the capital needed to create that value.

2. Market-to-book ratio
3. Tobin’s Q both are based on an analysis of the difference between the market value and book value of companies.

4. Calculated intangible value: based on the assumption that the premium on a company’s value is a result of its IC. 5. Cost, market and income: more ‘traditional’ approaches to financial valuation.

Value Measurement Methods:
6. Balanced scorecard
7. Intellectual capital audit both contain norms to act as yardsticks of value.

Value Assessment Methods: no methods are found, however, Viedma’s Intellectual Capital Benchmarking System can be one method depending on expert judgment.

Measurement Methods: don't use value or norms so they aren't valuation 8. Skandia navigator: Edvinsson and Malone (1997) state that their Skandia navigator fulfils the task to "Look upward toward more sweeping measures of value” (p. 70).

9. The intangible asset monitor:

10. The intellectual capital index: Roos et al. (1997) state that it "can help the company signify to the market its hidden value creation process, and thus help the market make a better assessment of the company’ s value” (p. 91).

The author concludes...
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