Intellectual Capital is the hidden driver (EC Report, 2006)

Intellectual Capital is the hidden driver (EC Report, 2006)

The traditional accounting model is based on the principle of historic cost and for this reason, only a very narrow range of intangibles is included within financial statements.

In providing a record of what has happened in the past, historic cost accounts provide a useful starting point in assessing the performance of a business however, without forward looking information, the picture that they provide is incomplete.

IC Statements take a different and complementary stance by considering those things which are valuable in evaluating the future and this means that a much wider range of intangibles need to be included. The methodology of considering historical financial statements and forward-looking IC Statements together, is aimed at improving the transparency of the way in which an organization is seeking to create value. 

In the knowledge-based economy, successful innovations require various kinds of intangible investments.

These investments produce Intellectual Capital, which has been defined as the combination of the Human, Organizational and Relational resources and activities of an organization.

It includes the knowledge, skills, experiences and abilities of the employees; the R&D activities, the organizational routines, procedures, systems, databases and intellectual property rights of the company; and all resources linked to the external relationships of the enterprise, such as with customers, suppliers, R&D partners and etc.

Existing regulations on the treatment of Intellectual Capital in accounting (mostly referred to as ‘intangible assets’) led to its only receiving recognition on the Balance Sheet; as can be seen from the IAS 38 standard, partially until 2011, more extended now.