Knowledge Accounting Mohammed Aldaghir Abdulrahman Aseery Mike Abernathy Alan Brady
Presentation Outline • Introduction • Existing knowledge accounting • Determinants of the value of accounting information • Why does accounting prefer reliable information? • Alternative accounting models • The future of knowledge accounting • Prospects and possibilities for knowledge accounting
Introduction - Studies have shown that financial and managerial accounting failed the knowledge management revolution. - Two main points that criticisms center on: 1) Knowledge is the engine of economic productivity in new economy. 2) Traditional financial and managerial accounting consider physical capital is the primary productivity enabler.
Existing Knowledge Accounting • Financial accounting distinguish between physical and intangible assets: - Physical assets: valued on balance sheet at their purchased price less accumulated depreciation. - Intangible assets: expensed as incurred. - In the short term, earnings of companies investing in intangible assets will be lower than earnings of companies investing in physical assets.
Determinants of the value of accounting information • Information relevance: - Timely, predictive and has feedback • Information reliability: • unbiased, complete and verifiable • Any accounting system must trade off relevance against reliability
Why does accounting prefer reliable information? • Accounting issues: - Definition of asset - Objectives of financial statement • Business issues: - Manager’s incentive - Liability from shareholder litigation
Accounting Issues • Definition of Asset: - Asset is owned property that was obtained at arm's length and has probable future economic benefits. • Definition issues: - It excludes important components of knowledge accounting (e.g. employees) - Purchased assets vs internally constructed assets
Accounting Issues • Objectives of financial statement: • Information must be quantified in monetary terms - Non-financial information is NOT included
Business Issues • Manager’s Incentive: • Financial incentives motivate managers to systemically bias performance measures - Knowledge management initiatives are NOT sufficiently reliable to be auditable
Business Issues • Liability from shareholder litigation: • Auditors are often sued by investors who lose money • U.S. legal environment demands knowledge accounting measures that are verifiable to help auditors defend themselves • Legal threats exist to management for making non-mandatory disclosures
Measuring Knowledge (Knowledge Accounting Approaches) Six alternative KA approaches: Total Value Creation (TVC) Accounting for the Future (AFTF) Balanced Scorecard Skandia Navigator Intangible Asset Monitor Value Chain Scoreboard
1- Total Value Creation (TVC) • Source • Canadian Institute of Chartered Accountants (CICA)(2000) • Characteristics • Discounted Cash Model of Value Creating Activities. • Supplements existing financial reporting systems. • Financial and non- financial information.
2- Accounting for the Future (AFTF) • Source • Nash(2000) • Characteristics • Discounted Cash Model of Value Creating Activities. • Physical & Intangible Assets Valued at present Value of Future Cash Flows. • Replaces existing financial reporting systems. • Financial but no Non- Financial Information.
3- Kaplan's Balanced Scorecard • Source • Kaplan & Norton ( 1992, 1999, 2000) • Characteristics • Measures drive form management's strategic objectives. • Supplements existing financial reporting systems. • Focuses on performance in four areas: financial, customer, internal processes, and innovation and learning. • Financial and non- financial information.
4- Skandia Navigator • Source • Skandia ASF (1998) • Characteristics • Measures drive form management's strategic objectives. • Supplements existing financial reporting systems. • Focuses on performance in five areas: Financial, customer, process, and Renewal and Development. • Financial and non- financial information.
5- Intangible Asset Monitor • Source • Sveiby (1997, 1999a, 1999b) • Characteristics • Builds upon Skandia approach. • Supplements existing financial reporting systems. • Financial and non- financial information.
6- Value chain Scoreboard • Source • Lev (2001) • Characteristics • Ten step Model of the Process by Which Innovation Creates Value. • Criteria for Choosing among Measures. • Supplements existing financial reporting systems. • Financial and non-financial information.
Comparing Knowledge Accounting Methods • Both TVC and AFTF use a discounted PV method. • The Balanced Scorecard, Skandia Navigator, and the Intangible Assets Monitor are all very similar.
The future of and Prospects for Knowledge Accounting • The primary virtue of existing Knowledge Accounting is reliability. The primary deficiency is existing Knowledge Accounting is its irrelevance and inconsistencyin accounting for intangible and physical assets.
Conclusion • The primary virtue of the alternatives to existing Knowledge Accounting is relevance. The primary deficiency of these alternatives is a lack of reliability. • Thus, all existing and proposed solution to Knowledge Accounting are imperfect.