The Class of Problems and Meta-Requirements 4.0 Introduction
4.1 Three Methods of Valuation of Knowledge in Intellectual Capital Management Technologies Compared to IASBs Guidelines for IC
The section explores why trust and usefulness does not get assigned to IC disclosures by financial markets (Andon et al., 2015; Fløstrand, 2006) in order to precise requirements to methods of valuation, accounting, and disclosures, when usefulness is the objective.
The financial paradigm and discourse constitute a global monopoly of the narrative of valuation (McCloskey, 1998), and the values in IC are currently predominantly embedded in and
indirectly reported through financial control systems. The values of tangibles and intangibles are interrelated constructs in international guidelines for accounting, such as the IFRS. IC values are defined as “underlying intangible resources” in financial representations, as outlined in
“International GAAP 2012: generally accepted accounting practice under international financial reporting standards,” which, in a global financial context, formulates guidelines about reporting (Ernst & Young, 2012) chapter 19. But the “underlying resources,” although labelled, are still invisible. Exploring knowledge as part of “the underlying resources” places this thesis as part of the problematization of the existing global value framing; that is, of financial accounting as unframed values, connecting it to the dominant valuing context and to the financial capital by considering the notion of underlying resources as part of the prerequisites for financial capital growth. If the optimal intellectual resources are allocated in daily operations in product
development and innovation, then the assumption is that growth happens. The capitals being so narrowly connected in this view add arguments to the choice of IFRS as inspiration for the anticipated concept for the valuation of knowledge as an element of control supporting the broadly recognized view in knowledge economy (Stewart, 1997) and the conviction that
knowledge is the most important resource for companies that is still unmanaged and consistently unreported as a value (Druckman, 2013).
Definitions in the guidelines (Ernst & Young, 2012) chapter 19:
- “Intangible asset” is defined as “an identifiable non-monetary asset without physical substance.”
- “An asset” is defined as “a resource controlled by an entity as a result of past events (a) and from which future economic benefits are expected to flow to the entity (b).”
- “Identifiable asset” is defined as “is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so (a) or arises from contractual or other legal rights, regardless of
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whether those rights are transferable or separable from the entity or from other rights and obligations (b).”
- “Control” is defined as “the power to obtain the future economic benefits flowing from the underlying resources and to restrict the asset the access of others to those benefits.”
(ibid.)
Management can be defined as a craft that requires tools and skills according to pragmatic instrumental rationality. “Understanding management entails understanding the choice of things to be accomplished, as well as the tools and skills necessary to do so” (K. Kreiner & Mouritsen, 2003, p. 2). Knowledge is also defined as an intangible asset in the “underlying resources,” and KM as context, methods, and tools for “controlling” knowledge. Relations between the
guidelines and existing MTs applying valuation of knowledge using the taxonomy above for N-F valuations are tabulated below in N-Figure 3 applying distinctions in N-N-F measurement methods (Andriessen, 2004b):
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Three Methods of Valuation of Knowledge in IC MTs Compared to IASBs Guidelines for IC Methods
(Andriessen, 2004b)
IASB guidelines
N-F Method 1:
“Value measurement method”
Valuation criterions to observable phenomenon
N-F Method 2:
“Value assessment method”
Personal judgment by self-judgment and/or
evaluator(s)
N-F Method 3:
“Measurement method”
No value criterion but metric scale related to observable phenomenon
Is it an asset?
“A resource controlled by an entity as a result of past events (a) and from which future economic benefits are expected to flow to the entity”
No resources are valued and no control is exercised but interpretations of output from Q&A are analyzed
No resources are valued and no control is exercised but classifications and interpretations of output from surveys are analyzed
No financial figures are analyzed and interpreted in an intangible context to predict future conditions and possibilities
Relevance
“Make a difference to the decisions of the user.
Predictive value Confirmatory value”
Management is on the basis of the measurement able to enhance financial and inclusive value (MPherson, 2001)
The method enables the identification, audit, and benchmark of the key intellectual capital.
(Marti, 2000)
The performance indicators are constructed to create predictive value (Edvinsson & Sullivan, 1996)
Faithful representation
“- complete, neutral, free from error”
- description of the nature of the asset
- numerical depiction of the asset
- description of what the numerical depiction represents”
No faithful representation.
Translations based on a questionnaire to
stakeholders, constructed depiction of
multidimensional outputs
No faithful representation Elective method to the choice of “core.”
Descriptions and numerical depictions are included in the method
Based on the choice of the analyzer completeness, neutrality is not assured.
Descriptions and numerical depictions are incl. the method
Reliability
“Information has the quality of reliability when it is free from (material) error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to
R depends on the choice of Q&As, the choice of population, the way of asking, and not repeatable uninformed processes
R seems weak based on no criteria and self-assessed interpretations
The reliability relies on the analyzer’s reliability and judgment
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represent”
Comparability
“- enables users to identify and understand similarities in, and differences among, items”
No comparability The multidimensional construction does not allow separation of items
Not for external reporting If the company uses similar items and classifications as situated, internal
comparability in different periods of time could be obtained
The tendencies are difficult to compare varying the items and their compositions
Consistency
“- use the same methods for the same items, either from period to period within a reporting entity or in a single period across entities”
No consistency
As the collection of items measured differs over time and the stakeholders too, it weakens the possibility for consistency
Barely using self-assessments
No consistency as items changes
Verifiability
“- different knowledgeable and independent observers could reach a consensus, not necessarily a complete agreement that a particular depiction is a faithful representation”
With situated information translated into figures the possibility for independent observers to agree turns weak
Verifiability cannot be established
Verifiability cannot be established
Timeliness
“- information is available to decision makers in time to be capable of
influencing their decisions”
With event-based processes not integrated in daily operations and needing analyzing and publishing with a frequency of 1–2 annual releases, timeliness is only met for special decisions
With event-based processes not integrated in daily operations and needing analyzing and publishing with a frequency of 1–2 annual releases, timeliness is only met for special decisions
Timeliness understood as an intuitive annual indication of the situated future
Understandability
“- is classifying, characterizing, and presenting information clearly and concisely “
Information is clearly presented, but classifying items is not
Information is clearly presented, but classifying items is not
Easily understood, but no comparability
Figure 3 Assessment of methods of non-financial valuation (Andriessen, 2004b) in light of the IASB guidelines, by the author.
The table, figure 3, demonstrates that valuation methods in existing Intellectual Capital Management Technologies, IC MTs, only meet few requirements in the GAAP framework.
Aspects of control are barely taken into consideration; knowledge is not perceived as
identifiable items, resources, or assets; knowledge is not an input as a detached measured object;
the MTs do not control individual knowledge; and the output from KMTs does not provide managers with information that allows interventions independently of time and space.
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In order to further explore “usefulness” the notion of “control” is examined below. To establish control over an intangible asset it is necessary to identify the asset, but how do various existing KMTs do that?
Control of Intangible Assets as Underlying Resources in Management Technologies
Underlying resources represented in various types of KMTs
Characteristics Levels of managing knowledge
Control is defined in IASB as
- “the power to obtain the future (interventions, prospectively) economic benefits flowing (dynamic, not static) from the underlying resource and to restrict the asset the access of others to those benefits.”
The intangible asset, knowledge is defined in IASB as
- “an identifiable non-monetary asset without physical substance”
- “is separable, i.e.
capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so or arises from contractual or other legal rights,
regardless of whether those rights are transferable or separable from the entity or from other rights and
obligations”
- “a resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity”
KMTs generating
prevision KMTs
Dynamic process integration
Stocks Repositories Q&A Yellow pages
Listed unclassified, unvalued items with no power to create benefits
Text based knowledge from underlying resources, effect from the
Stocks are not intangible assets because they cannot be identified as such and they are not valued
Few knowledge management technologies contain no forecasting features
Mainly as indicators or tendencies (Edvinsson &
Pull functionalities, no automated integration to operations management
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resources Not a system
Malone, 1997)
Performance measurements Static retrospective accounts
KPI’s Indicators at individual, organizational and firm level
Retrospective, output from operations management
Partial systems Translated into financial metrics
Underlying resources are invisible, not manageable
Performance measurements are unidentified invisible intangible assets translated into economic metrics Performance managements as relative, partial, local, event-driven, aggregated metrics
Key performance indicators are often measured in financially
constructed metrics or quantities
Sometimes integrated interfaces to
operations management
MT example:
BSc
A system providing business intelligence for management but underlying resources are black-boxed and not accessible
The intangible elements—learning and resources—in the BSc are not intangible assets, because they cannot be identified as such and they are not valued
Strategic BSc deals with the future and links operations management to strategy
Integrations to operations, but not for individual knowledge or intangible assets
Figure 4 KMTs and their application of knowledge as an individual asset, as an object of control and of prevision, by the author.
The table places different types of Knowledge Management Technologies, KMTs, in the financial framework of control and demonstrates their inability to visualize and control
individual knowledge. None of the described methodologies uses a concept of knowledge in line with the guidelines in the IASB for intangible assets.
If a black-boxed knowledge construct as abundant resources (Penrose, 1995, pp. 66-86) is to be managed—identified, described, measured, developed, allocated, and controlled in operations—
its elements have to be operated by individuals in coordinating processes. The “productive opportunities” (ibid.) can be described to require certain knowledge elements, certain underlying resources. Underlying resources can be matched to an identified demand for knowledge objects, and knowledge as an object may become predictable and distributed as an input, if measured and objectified. The example is given to concretize how operations ex ante may activate and manage the abundant resources. Therefore, the following section explores how a concept to measure knowledge objects enters into a paradigm of control, based on the IASB guidelines.
This subsection has evaluated KMTs against the guidelines concretizing weaknesses in existing KMTs as lack of auditability and external trust in IC information, clarifying both positive and negative consequences for operations and thereby also implicit potential elements of design for the further theorizing of ICA.
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