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Intellectual capital is the intangible value of a company, and is measured as the difference between the enterprise value of a company and the market value of its tangible assets. According to Erik Sveiby, the first to use of the term "Intellectual Capital" was G.R. Feiwel in "The Intellectual Capital of Michael Kalecki", 1975) attributed to John Kenneth Galbraith, who in a letter to economist Michael Kalecki in 1969 wrote: I wonder if you realize how much those of us in the world around have owed to the intellectual capital you have provided over these past decades. It is Tom Stewart who in his June 1991 article "Brain Power - How Intellectual Capital Is Becoming America's Most Valuable Asset", brings IC firmly on to the management agenda. Stewart defines IC in his article as: the sum of everything everybody in your company knows that gives you a competitive edge in the market place.

The term became more widely known in the context of assessing the wealth of organizations. A metric for its value is the amount by which the market value of a firm exceeds its tangible (physical and financial) assets minus liabilities. This contrasts with physical and financial forms of capital; all three make up the value of an enterprise. Measuring the real value and the total performance of intellectual capital's components is a critical part of running a company in the knowledge economy and Information Age. Understanding the intellectual capital in an enterprise allows leveraging of its intellectual assets. For a corporation, the result will optimize its stock price.

Classification

Intellectual capital is normally classified as follows:

• Human capital, the value that the employees of a business provide through the application of skills, know-how and expertise. Human capital is an organization’s combined human capability for solving business problems and exploiting its Intellectual Property. Human capital is inherent in people and cannot be owned by an organization. Therefore, human capital can leave an organization when people leave, and if management has failed to provide a setting where others can pick up their know-how. Human capital also encompasses how effectively an organization uses its people resources as measured by creativity and innovation.
• Structural capital, the supportive non-physical infrastructure, processes and databases of the organisation that enable human capital to function. Structural capital includes processes, patents, and trademarks, as well as the organization’s image, organization, information system, and proprietary software and databases. Because of its diverse components, structural capital can be classified further into organization, process and innovation capital. Organizational capital includes the organization philosophy and systems for leveraging the organization’s capability. Process capital includes the techniques, procedures, and programs that implement and enhance the delivery of goods and services. Innovation capital includes intellectual property such as patents,trademarks and copyrights, and intangible assets. Intellectual properties are protected commercial rights such as patents, trade secrets, copyrights and trademarks. Intangible assets are all of the other talents and theory by which an organization is run.
• Relational capital, consisting of such elements as customer relationships, supplier relationships, trademarks and trade names (which have value only by virtue of customer relationships) licences, and franchises. The notion that customer capital is separate from human and structural capital indicates its central importance to an organization’s worth. The value of the relationships a business maintains with its customers and suppliers is also referred as goodwill, but often poorly booked in corporate accounts, because of accounting rules.

Exploitation

For a business, translating the potential of its intellectual capital is crucial. Works that focus on the subset, namely the patents, copyrights, and trade secrets ignore the benefits of their use with the business. The term "intellectual capital" is not yet common; other terms include "intangible assets". In order to profit from intellectual capital, knowledge management has become a task for management. Often, intellectual capital, or at least rights to it, are moved off-shore for exploitation, which entails risks that are hard to value. The transfer of rights to intellectual capital to offshore subsidiaries is a major enabler of corporate tax avoidance.

Audit

An intellectual capital audit is an audit of a company’s intellectual capital to monitor and oversee the intellectual capital of a firm in order to capitalize on intellectual capital already within the company, and to identify opportunities to increase the intellectual capital of the company.

References

1. Chen, Ming-Chin, Shu-Ju Cheng, and Yuhchang Hwang. "An empirical investigation of the relationship between intellectual capital and firms' market value and financial performance." Journal of intellectual capital 6.2 (2005): 159-176.
2. http://www.sveiby.com/articles/IntellectualCapital.html
3. Thomas A. Stewart: Intellectual Capital: the Wealth of Organizations; Currency, 1998
4. Paolo Magrassi (2002) "A Taxonomy of Intellectual Capital", Research Note COM-17-1985, Gartner
5. Sveiby, Karl Erik (1997). "The Intangible Asset Monitor". Journal of Human Resource Casting and Accounting. 2 (1).
6. Gio Wiederhold (2013) Valuing Intellectual Capital, Multinationals and Taxhavens; Management for Professionals, Springer Verlag.
7. Khavandkar , Jalil & Khavandkar , Ehsan . (2009), "Intellectual Capital: Managing, Development and Measurement Models". Iran Ministry of Science, Research and Technology Press.
8. ^ Maddocks, J. & Beaney, M. 2002. See the invisible and intangible. Knowledge Management, March, 16-17.
9. Edvinsson, L. & Malone, M.S. 1997. Intellectual Capital: Realizing your Company’s True Value by Finding Its Hidden Roots. New York: Harper Business.
10. Skyrme, D.J. 1998. Valuing Knowledge: Is it Worth it?
11. Marc M. Levey and Steven C. Wrappe: Transfer Pricing, Rules, Compliance and Controversy, 2nd edition; CCH, Wolters Kluwer, 2007, p.129-139]
12. Patrick H. Sullivan: Value-Driven Intellectual Capital: How to Convert Intangible Corporate Assets into Market Value; Wiley, 2000
13. Robert P. Merges, Peter S. Menell, Mark A. Lemley: Intellectual Property in the Technological Age, 3rd ed.; Aspen 2006.
14. Andrew J. Sherman: Harvesting Intangible Assets: Uncover Hidden Revenue in Your Company's Intellectual Property; AMACOM. Oct. 2011
15. Edna Pasher and Tuvya Ronen: The Complete Guide to Knowledge Management: A Strategic Plan to Leverage Your Company’s Intellectual Capital; Wiley, 2011
16. Gio Wiederhold, Amar Gupta, and Erich Neuhold: "Offshoring and Transfer of Intellectual Property"; Information Resources Management Journal (IRMJ); Vol.23 No.1, January–March 2010, pp.74-93
17. Reuven S. Avi-Yonah: Statement to Congress; University of Michigan School of Law, Permanent Subcommittee on Investigations, U.S. Congress, 20 Sep. 2012
18. Brooking, A. (1996) Intellectual Capital, Core Assets for the Third Millennium Enterprise, International Thomson Business Press, London, pp.86

External links

• National intellectual capital NIC as economic driver 2001-2011 / Findings and results
• The Pacioli Institute for intellectual capital accounting and financial reporting
• Intellectual capital accounting - an online presentation from scientific conference

• Capital (economics)
• Intellectual property law
• Financial accounting