In the knowledge-driven economy of today, intellectual capital and other such intangible assets have not got desired presentation in the annual reports of companies."Human capital and structural capital are an indication of a company's future value and ability to generate financial results. This is why a more systematic method of reporting on and managing these intangible dimensions is needed."
Did you ever wonder why some stocks like Microsoft trade at 41 times their earnings or, back home, what makes the FMCG bellwether Hindustan Lever command a fairly high P/E of 24? Take a look at another example: Skandia, a Swedish financial services company, had a market capitalization of SEK (Swedish Kronor) 157.62 bn whereas it had a net asset value of just 37.03 bn, as on December 31, 2000. All this raise one important question: Do there exist any other assets, which make the market put such huge premiums, but are not visible on the balance sheet? If yes, then where do these hidden assets lie in? Well, this is no uncommon a situation anyone associated with stock market or the discipline of finance come across quite often. With the transition from a capital-intensive business model to a knowledge-intensive one, valuations have got skewed in favor of those who have embraced latter. As a consequence, with more and more such knowledge-driven companies emerging as valuation leaders, there is hardly any doubt traditional metrics are proving to be of little help cracking the valuation riddle. The conventional accounting models fail to explain such seemingly irrational valuations. While it can be argued that measures like ROCE and ROIC give a fairly good idea about the efficiency of the management in utilizing precious resources, it is equally true that they provide the information in a retrospective manner, failing to provide any futuristic perspective. Given the examples like ones discussed above, is it that corporate balance sheet masks something, which is not quantifiable? Yes. Does a company's annual report tell us what is the worth of its intellectual capital, customer capital or trade mark? Not really. In the knowledge-driven economy of today's, intellectual capital and other such intangible assets have not got desired presentation in the annual reports of companies. To put things in perspective, in words of Merton Egol, partner, Arthur Andersen and author of the book "Information Age Accounting", "Because double-entry book-keeping derived accounting model is transaction based, information captured is, for the most part, limited by whether an `exchange' has occurred hence, the values created by successful strategic positioning, human capital development and organizational innovation are not reflected in this model." Another noted thinker Dr Karl Sveiby says, "Value, in most industries is not created from tangible assets, such as equipment or fixed assets. Value is created from well-managed intangible assets, such as client relationships, people competencies, image, patents and processes."
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