1	Intellectual Capital Reporting A Catch 22 or the Future of Corporate Reporting
2	IC Reporting: Catch-22 Need to report Financial statements do not reflect real value of enterprise Focus on short-term results limiting investment in IC
3	IC Reporting: Catch-22 “Our current system – through its continual devotion to traditional ‘reliability’ standards – is actually producing increasingly less reliable information, if viewed as the total picture”. Steven Wallman, Former US Securities & Exchange Commissioner
4	IC Reporting: Catch-22 Cannot report No agreed upon standards for IC reporting A plethora of reporting methods with different underlying methodologies No uniform or consistent application
5	IC Reporting: Catch-22 Challenge of IC reporting goes deeper: No agreed-upon framework for IC reporting No sufficient research into common IC value drivers across and within industries No uniform approach to tackle the challenge 2 Main underlying approaches: based on financial reporting method and IC model Necessary to understand each approach for IC/business community to move forward 2 main approaches
6	IC Reporting Approaches 1^st Approach 500 yrs old tradition framework of financial reporting Encourage voluntary disclosure Some IC items are reported upon in financial statements when possible to define as ‘assets’ Monitored by regulatory bodies 2^nd Approach Using the IC model to identify various genres of IC and monitor their performance according to recognized goals Measures compiled in a separate or supplement report An orphan – regulatory bodies reluctant to set standards
7	IC Reporting: 1^st Approach 1^st Approach: 500 Yrs old tradition framework General passive intervention Voluntary disclosures guidelines – not effective Active intervention in response to market pressure Reporting on selected types of IC in selected situations – FASB standards # 141 & 142
8	IC Reporting: 1^st Approach 1^st Approach: 500 Yrs old tradition framework
9	IC Reporting: 1^st Approach 1^st Approach: 500 Yrs old tradition framework
10	IC Reporting: 1^st Approach 1^st Approach: 500 Yrs old tradition framework Major shortfall Divergence in dealing with internally developed & externally acquired intangibles Internally developed IC are expensed except software programs after feasibility established (cut expenses) Externally acquired are capitalized (investments) Australia & UK capitalize brand development Limitations Quantitative measures inadequate to report on some IC – Human capital & knowledge resources – not fall under ‘assets’
11	IC Reporting: 2^nd Approach 2^nd Approach: IC model framework New language Creating new language classifying IC according to its source (HC/competency, CC/external, SC/internal) Develop performance measures concept for internal management Creating measures that monitor performance according to a certain yardstick using scorecard methods (IAM, BSC, Navigator) External reports Compile measures in indices or classes & report them to external stakeholders in IC supplements
12	IC Reporting: 2^nd Approach 2^nd Approach: IC model framework Scorecard methods: IAM, BSC, Navigator IC Statements guidelines: Danish Ministry (formulate a knowledge strategy & devise plan to tackle challenges) New accounting methods to measure value creation: Total Value Creation method: Canadian Institute of Chartered Accountants Indicators using public information (Patents & R&D expenditure: Science & Technology indicators, patent indicators
13	IC Reporting: 2^nd Approach 2^nd Approach: IC model framework Major shortfalls Idiosyncratic Inconsistent Not comparable Limitations IC model classification is too generic for reporting purposes since not recognize role each type of IC plays in business performance – limit ability to identify common value drivers
14	IC Reporting Future Despite catch 22 situation IC reporting is future of corporate reporting as markets push for more transparency After nearly a decade IC taxonomy appearing in business community & investor references – business interested & experimenting (struggling) Many professional organizations & schools adopting concept & advocating for change Which approach to use and how?
15	IC Reporting Future Regulatory & accounting bodies tend to favor first approach Gradual pace of change Least disturbance to stock market BUT lacks consistent or thorough treatment of IC – result in confusion & misrepresentation of enterprise value IC proponents tend to favor second approach Based on understanding nature of IC More promising in effecting a shift in organizational theory & business management BUT though useful for measurement purposes not sufficient for reporting purposes
16	IC Reporting Future Alternative IC model for reporting: classification under CICM® model (Al-Ali, 2003) Adopt an IC classification that considers function of IC types in business cycle & performance Identify common value drivers across & within industries Develop universal measures to report on performance of various types of IC Institute an international effort to create standards
17	CICM Classification
18	CICM Model
19	IC Reporting Future: CICM