The Problem of Measuring KC

Being such an important asset, it is indispensable to proceed its evaluation with objectivity. We believe that there is still no definitive method or information system with enough data to evaluate the value of knowledge available in a company.

It’s true that company’s assets are written in account books and must be disclosed in the Balance Sheet. But, accounting technicians will say based on Generally Accepted Accounting Principles (GAAP) especially prudence, that we should not attribute value to unknown assets, because lack of objectivity.

Is it correct to calculate company value from Balance Sheet, even after audited and conveniently adjusted to the market value? Maybe, if all assets are included – tangible and intangible- and if auditors use proper value criteria, particular questioning market, which is the best reference of assets value.

The market value of a company, evaluated by the stock market capitalization, is normally very superior to the balance sheet. For Portuguese companies quoted in Euronext stock Exchange, the difference between market value and net book value is remarkable, as we can  see in the following figure, the relationship between market value and book value is  increasing, the average ratios of listed companies has tripled between 1991 and 2004:


Figure 1 – Average of Ratios MtoB of listed Companies in the Lisbon Stock market from 1991 to 2004


Source: Data from Lisbon Stock Exchange

The analysis of this situation brings some complex issues. For instance:

  • Is the difference between market value and net book value of the company entirely due to the presence of intangible assets as knowledge in capital form?
  • Is it possible to attribute a value to company knowledge, objectively, emphasizing it or not from other sources that eventually exist?

In this line of worries and trying to find an answer to the questions, Leif Edvinsson maintains that  the traditional model of  accounting that so brilliantly noted companies’ operations through half millennium, is now revealing itself unable to follow the evolution verified in business activity.

It is necessary to identify and measure assets currently unaccounted to give objectivity to business information systems, namely accountants. Leif Edvinsson   alerts for the consequences of this situation by stating that “an economy that cannot properly measure its value can’t distribute with objectivity its resources nor properly reward  its citizens”. It is not possible to reward objectively unknown factors, so it is extremely important the identification and measurement of assets that count to the value of the company. 
Recent literature about this theme propose a few forms of intangible assets evaluation, assuming that they’re suitable in the comprehensive concept of knowledge capital, but  it still lacks to analyze the objectiveness of those models through their application to reality, with reliable and comparable data.

Recent literature on this subject considers some forms of evaluation of the intangible assets, assuming that they are fit in the concept of knowledge capital, but still lacks to analyze the objectivity of these models through its application to the reality, with data you wove and comparable.