INTELLECTUAL CAPITAL: A HIDDEN VALUE IN FINANCIAL STATEMENTS? Essay

This research conducted on the rating of rational capital has been conducted in order to mensurate the value of an endeavor, physical assets, assorted fiscal assets every bit good as intangible assets. As portion of the intangible assets is the rational capital. As used by many fiscal analysts IC jointly refers to all the resources that determine the value and the fight of a corporation ( Ehin, 2002 ) . Intellectual capital as portion of the intangible assets includes as subset the properties that concur to constructing all fiscal statements every bit good as balance sheet ( Remenyi, 2005 ) . This survey therefore has been put frontward as a manner of unearthing the degree of rational capital exposure in one of the taking package company in the universe ; Microsoft Inc. In order to carry through this, the survey has focused on two old ages fiscal statement for Microsoft Inc. a thorough analysis of these fiscal statements is done by the usage of content analysis methods. For any corporate caput with the cognition of how high bets have become in order for the corporation to last in the cognition and information age, pull outing and mensurating the existent value and public presentation of rational capital become an indispensable facet ( Abeysekera, 2008 ) . However as the survey suggest the fact that rational capital or IC is categorized among the intangible assets means that it is non easy translatable in fiscal footings. In add-on to that, it is found that IC is chiefly made up of elements that include employees ‘ quality, or how reputable is a trade name among certain consumers. Most of these elements even though are of import to a corporation can non be expressed in pecuniary footings. Therefore in order to unearth degree of IC in Microsoft Corporation, the survey concentration is based on the non-financial assets of the house as projected in their 2008 and 2009 fiscal statements.

Introduction

This survey begins with a brief debut which is followed by a literature reappraisal on some of the similar surveies done in the yesteryear. The methods used to garner the needed information every bit good as methodological analysiss used to come up to a sound decision. The research inquiry every bit good as the principle of the research is clearly stated at the get downing phases of the research. The analysis of the rational capital follows, which is besides broken down into assorted parts and decision comes at the terminal of the survey.

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Literature Review

Many surveies refering rational capital have already been conducted. And as most of them have differing decision, the facet of IC playing an of import function in a corporation fiscal construction stands out. Bontis ( 1999 ) in his research came up with a decision that rational capital in modern-day concern happened to be a platitude by the terminal of the 1990s.

This nevertheless, has been countered by a contradicting research conducted by ( Bryer, 2002 ) . The couple came to a close decision that rational capital is still at its early phases, a survey that caused corporations start to oppugn Bontis survey. In add-on to that, strengthening of rational capital as Gary Becker found out in his research happens to be a critical factor for the economic success of a corporation ( Baker, 2007 ) .

However, as Ehin ( 2000 ) put out, the success of an organisation does non entirely depend on strengthening of the Intellectual Capital. Its direction is a factor with equal importance excessively. On the contrary since IC fundamentally focuses on physical assets it has become feverish occupation for the traditional accounting system to cover with its growing as measuring and revelation is concerned ( Abeysekera, 2008 ) . Through Bontis ( 2001 ) , it is found that, the acknowledgment of the rational capital is to fault for the failure of the traditional accounting.

Apart from merely acknowledgment of the rational capital other this which includes designation, measuring and acknowledgment have to be considered and therefore these three when put together will take to some of the information about rational capital hidden the fiscal statements of a corporation. Harmonizing to Karier ( 2010 ) there is no uncertainty that the present period is different from the old 1s in many facets. The displacement from industry economic system towards scientific discipline oriented economic system, fading physical and material economic system, the focal point on intangible assets such as human to organize the rational capital has become far more of import to many research workers ( Lin & A ; Edvinsson, 2010 ) .

Harmonizing to the diary of Intellectual Capital, imperial theoretical accounts to mensurate rational capital in a peculiar organisation exist. The basis of rational capital direction and measurement has attracted much attending signifier faculty members and practicians ( Jackson, 2008 ) . In their research Jin and Co designed a measuring theoretical account and a quantitative index system of IC, so as to supply a good tool for corporations to pull off their rational capital ( Jackson, 2008 ) .

Their survey based on some reappraisals from several IC measuring theoretical accounts proposed by western research workers found that, IC is chiefly classified into human capital, structural capital, invention capital and client capital ( Goddard & A ; Melville, 2004 ) . In add-on to that they can to a decision that a quantitative index system for the four elements can be designed the analysis of their content ( Goddard & A ; Melville, 2004 ) .

On the contrary, in a chase of a ‘Developing a hierarchal construction for measuring concerted instruction plans for the rational capital position ‘ , Sullivan ( 1998 ) conducted a survey that was based on the fact that prioritization of rational capital measuring indexs for concerns under unsure status were reported. In their survey, an experiment was carried out to grok the usage of rational capital for the appraisal of concerted instruction plan ( Chen, 2005 ) .

In another survey, Mouritsena, Larsena and Bukh ( 2001 ) found that in the new economic system, cognition is the cardinal economic resource and possibly the lone beginning of competitory advantage ( Minaxi, 2010 ) . As rational capital is concerned, Malaysia has embarked on developing several schemes to speed up its transmutation to a knowledge-based economic system ( Minaxi, 2010 ) .Their research was chiefly conducted in the effort of supplying some penetration in the extent to which Malayan houses have adopted rational capital direction ( Mackey, Susan & A ; Gass, 2005 ) .

Since it was established that most of these surveies are similar to what was intend to transport out, it is rather clear that most of the techniques that this will be incorporated in the survey that has already been used before. My method of informations aggregation and how the information is traveling to be analyzed afterwards will non dwell of any new technique.

Case Study

Analysis of Intellectual Capital for Microsoft Corporation

Before the analysis of IC for Microsoft Inc. , there are some things that I will necessitate to set frontward. It is more so imperative that know that every bit defined in the debut, rational capital is nil but a combination of cognition, accomplishments, endowment and intelligence of a company ‘s human force that differentiates it from its rivals ( Banerjee, 2010 ) . The intelligence of the company human force is what is sometimes is referred to as the encephalon power. Thus intelligent capital can be seen as the intangible plus that is used by a corporation to in the devising of its merchandises and services ( Banerjee, 2010 ) .

Having said that, it is of import to observe that, IC is the cardinal facet of a company ‘s net income and loss statements every bit good as the balance sheet. The value of a company is therefore comprised of its physical assets, its fiscal assets every bit good as its rational assets ( Berry, 2004 ) . Three elements make up the IC viz. ; the human capital, organisational capital and relational capital.

Human Capital

The human capital consists of the value that concerns employees provide through the application of accomplishments know how and expertness ( Bounfour & A ; Edvinsson, 2005 ) . This component of rational capital is non owned by the organisation and therefore when a individual leaves a corporation and therefore the human capital lessenings. Human capital can be used to demo how effectual an organisation uses its people resources as a step of creativeness and invention.

Structural Capital

Structural capital includes the supportive substructure, procedures and databases of the organisation that enable human capital to map ( King, 2003 ) . Among the structural capital are the traditional things like edifices, hardware, package, procedures and so on. In add-on to that, structural capital besides includes such things as the organisation ‘s image, information system and proprietary databases ( Roos, Pike & A ; Fernstrom, 2005 ) . The diverseness of structural capital requires it to be broken down into organisation, procedure and invention capital. The organisational capital includes the overall organisational cognition such as its systems, rational belongings, and so on every bit good as the relational capital. This entailed its good will generated out of its relationship with spouses, clients, agents and besides the authorities and its trade name image ( Roos, Pike & A ; Fernstrom, 2005 ) .

Process capital includes the techniques, processs, and the plans that implement and heighten the bringing of goods and services ( Teece, 2002 ) . Innovation capital includes the rational belongingss and intangible assets of a corporation ( Remenyi, 2005 ) .

Relational Capital

A company ‘s hallmarks, licences and franchises belong to this class of the rational capital. Largely, relational capital besides includes those facets of a concern that are less definable such as client interactions and relationships ( Remenyi, 2005 ) .

Therefore to analyse rational capital all these facets will hold to have in my analysis. For the exclusive intent of hold oning a better apprehension on Microsoft Inc. rational capital, I am traveling to utilize the 2009 and 2008 fiscal statement for Microsoft for the twelvemonth ended at 30 June.

Analysis

In 2009, Microsoft recorded a figure of $ 1759 on its intangible assets. This figure was lower compared to that of 2008 which was at $ 1973. This shows that in 2008, Microsoft invested more on intangible assets as compared to 2009. However since that most of the rational capital is found in the intangible assets my premise will chiefly be based on figures that have been recorded in the intangible assets subdivision.

Human Capital

Human capital is more of import to Microsoft Inc. since as a package company, the cognition of its employees and their accomplishments are required to be off the charts. However, since the figure for the intangible assets for the company in 2008 seems greater than that of 2009, it is right to presume that in 2008 Microsoft acquired more employees than in 2009 ( Lin & A ; Edvinsson, 2010 ) . However, by looking at their research and development column of the income statement, 2009 recorded a greater figure compared to 2008. In 2009 the corporation recorded a figure of $ 9,010 which is some 100s higher than that of 2008. In 2008 the figure was at $ 8,164 ( Kwok, 2005 ) . This shows that in 2009 Microsoft invested more in their research and development likely for the intent of heightening their employees ‘ accomplishments and ability to develop new merchandises.

In add-on to that, the company had a $ 330 employee rupture while the figure for 2008 has been left space. The employee rupture for 2009 may be due to the difficult work or the fact that they had to put off some the employees in 2009. This may besides be the ground why intangible assets in 2009 are less compared to that of 2008. However for both periods it is clear that Microsoft Inc. did pass a batch of money on their employees. The chief ground for this premise is the fact that at the period, Microsoft was busy with the development of their new operating system, Windows 7. This needed non merely a batch research and development but besides employees with high accomplishments in package scheduling every bit good as researching.

This is the clip when a batch of University pupils with good scheduling accomplishments are employed as housemans at the company. However, since the 2008 is higher than that of 2009, it can be assumed that there was a batch of work to be done in 2008 compared to 2009 ( Goddard & A ; Melville, 2004 ) . Probably the creative activity of Windows 7 was still at its initial phases where the company would hold required using excess work force to make other simple undertakings like informations aggregation.

This facet can besides be seen in their disbursals as their disbursals for 2008 was at $ 38,149 which was higher compared to that of 2009. Expenses were non merely recorded on things like research and development and the similar but disbursals were besides recorded when they had to pay their employees. And therefore by holding a higher disbursal in 2008 compared to that of 2008 can still be used to warrant the fact that their human capital in 2008 was higher compared to that of 2009.

However, this factor can be proved incorrect by the gross. Cost of gross for 2009 was at $ 12,155 while that of 2008 was at $ 11598 ( Ehin, 2000 ) . The higher the cost of gross can be linked to the fact that employees are working an excess stat mi to do more money for the company. Although the disbursals for 2008 are more by a twosome of 100s, it can be argued that in 2009 employee capital was much greater in footings of gross earned at the clip. Therefore until a theoretical account of mensurating human capital is designed, this analysis will still be based on premises generated on detecting the Numberss recorded on the fiscal statement.

Structural Capital Discussed

To analyse the structural capital of Microsoft I am traveling to concentrate on such assets as long-run assets, good will and the remainder. The purpose is to happen out how the company fared on in this sector the old ages 2009 and 2008. Therefore when we look at the fiscal statement, Microsoft Inc. had a belongings and equipment that amounted to $ 7547 in 2009 and $ 6,302 in 2008 ( Catty, 2010 ) . The figure obviously indicates that there was a diminution in the value of their belongings and equipment assets. Their belongings may include such things as working computing machines, edifices every bit good as the small things as touch tablet that belong to the organisation.

In the same old ages, it can be seen from the fiscal statement that there was a differing sum of good will that the company recorded. For 2009, it recorded good will of 12,503 which less by a twosome of 100s to the figure recorded in 2008. This clearly shows that the good will contributed in raising the structural capital for the organisation. In the fiscal statement, there is besides a figure that shows that Microsoft had rather a batch of assets in their long-terms assets. However, when the old ages are compared, in 2009 their long-run assets were lower compared to 2008. The long-run assets for 2009 were at $ 1,599 while that of 2008 were at $ 1,691 ( Catty, 2010 ) . This besides shows that the company invested to a great extent on long-run assets which may include assets like edifices and the related. It is this assets and equipment together with other belongingss that enable the human capital for the corporation has the equal cognition required for them to transport out their undertakings.

However, merely like the human capital, it would non hold been easy for the corporation to enter high grosss in the two old ages without the aid of structural assets. This facet is non truly shown in the fiscal statement, but by following the logic that states, structural capital helps human capital map to their degree best, it means that holding a batch of structural capital means high human capital every bit good increase in the degree of cognition the human capital can get.

Human capital and structural capital when these fiscal statements shows go manus in manus since when we look at 2009 fiscal income and the balance sheet for case, the entire assets were at $ 49,280 and the gross was at $ 12,155 for the same period. On the other manus gross for 2008 was at $ 11,598 while its entire current assets were at $ 43,242 ( Bryer, 2002 ) . And therefore by looking at this image in means the more structural capital increases the more the human capital becomes stronger.

It is the human capital that drive the operations of a company and therefore while Microsoft operational income additions therefore one can reason that the company invested to a great extent on human capital in order to make that province. And while that is the instance it can besides be assumed that it is the handiness of the structural capital or what others call the organisational capital that has caused the addition in gross of the company.

Relational Capital

As we saw earlier, relational capital for a company refer to those things like hallmarks, licences and franchises. These things are non featured in the fiscal statement, but nevertheless, there presence can be felt. Microsoft has a batch of client relationships which include corporations that used their merchandises like Windowss server edition every bit good as office endeavor.

Despite that this signifier of capital is non recorded in the fiscal statement does non intend that it does non be. Its being can be found within investings such equity and other investing. The fact that these other investings have non been mentioned gives room for premise that these investing may include such things like franchises and the similar. Therefore when we look at the figures for these investings, the figure for 2009 was at $ 4,933 which is less compared to $ 6,588 recorded in 2008 ( Bryer, 2002 ) .

Other investings merely like the gross and operations are really of import since they help to lend hard currency for driving the company frontward. It is with no uncertainty that Microsoft has a batch of franchises all over the universe every bit good as hallmarks. And therefore as these hallmarks, franchises and other facets like client dealingss exist, the company will go on to enter higher grosss.

Therefore, as I have discussed on the three facets of the rational capital for Microsoft, it can be assumed that all the three are interconnected. They all enable the creative activity of the balance sheet and the income statement of the company since without the rational capital, Microsoft would non hold been basking its returns as Windows 7 is still selling high in the international market.

Measuring Intellectual Capital

Although I have used certain facets of the fiscal studies to analyse the rational capital for Microsoft there is no grounds that that is precisely the instance with this corporation. In existent sense rational capital can non be given any pecuniary value which means that my analysis is based chiefly on premises instead than existent facts.

The fiscal statement does non enter any values that points out that either human capital for Microsoft at a peculiar period of clip was for case 70 % nor the structural capital was 60 % ( Banerjee, 2010 ) . It is the work of the corporation to really come up with a manner of mensurating this capital. However, by looking at the fiscal statements and holding in head that it is within the ability of rational capital that a corporation is able to run expeditiously that I am able to do the above premises approximately Microsoft as their fiscal statements for both 2008 and 2009 are concerned.

Decision

In a nutshell, the fact that rational capital can non be assigned a pecuniary value besides makes many fiscal analysts to hold trouble in mensurating how a peculiar company is fairing on as this facet is concerned. Most of the methods nevertheless that exist for mensurating this facet of a corporation are entirely dependent on other factors like what the relationships of a company are to its clients and how many employees the company owns every bit good as are the employees good educated to provide for the demand of that company?

However, these trouble does non truly exclude a corporation from the ability of mensurating its rational capital since it is until a corporation knows how it is doing on in this country that it will be able to understand which way it should take. Microsoft Inc. will necessitate mensurating its human capital in order to cognize if they should add more employees and if there is a demand for that so which type of employees they should use.

On the contrary, Microsoft excessively needs to mensurate their structural capital so that they should cognize if they truly require adding new equipment to its houses. However, every bit much as we may happen it had to mensurate this signifier of capital, the grounds in the fiscal statement still remains that this capital is a really of import facet of a corporation.

As many analyst have come to happen out rational capital dramas of import function in the creative activity of a company ‘s fiscal statement. This is seen in both the 2008 and 2009 fiscal statement for Microsoft, and as it required much analysis to understand it the fact remains that this signifier of capital is hidden in the fiscal statement.

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