Lucubrate Magazine, Issue 42, October 12th, 2018

For the next 2 to 3 articles we are going to introduce and discuss intellectual capital (IC) and knowledge management. For you readers that continue to be excited about discussing financial accounting standards, don’t worry we will get back to them with IAS 23. But on a serious note, as you will read in these 2 to 3 articles, financial accounting standards do not by definition recognize all true assets. Yes, intangible assets are recognized but only to a limited extent. Read the comments below by Mr. Hans Hoogervorst, Chairman of the International Accounting Standards Board (IASB), the shortfall becomes very apparent. In these articles, you will also observe that IC includes “human capital” i.e. employees, not ordinarily recognized under financial accounting standards. Thus IC embraces a broader scope of what are intangibles compared to what are considered to be traditional intangible assets under IAS 38.

Throughout these articles, we have stressed repeatedly that accounting, assets, and liabilities, must adhere to the Framework. We have also discussed that by definition an asset must have derived future economic value i.e. revenue. Intellectual capital does not violate the Framework as we will discuss. IC very simply recognizes what was previously off the books. As you will learn eventually there is a parallel with special-purpose entities that at one point were also never recognized.

The lack of measurement of intangibles at micro-level (i.e. company) is another  recurrent policy priority which underlies many of the above issues. Shared methods for valuation and accounting are a relevant basic issue which may explain the difficulty to see intangibles in company annual financial statements and disclosures. This issue is particularly true for internally generated intangibles, such are – in many cases – the IPRs. As Mr. Hans Hoogervorst, Chairman of the International Accounting Standards Board (IASB), pointed out recently “Intangible assets go unrecorded (or under-recorded) on the balance sheet…. we know that the [accounting] standard [IAS 38] is rudimentary because it is based on historical cost,  which may not reflect the true value of the intangible asset” (June 2012).

Again, despite what may appear to be a digression from the previous articles, accounting for IC does, in fact, create a supplementary balance sheet also based on the debit and credit system in the same way as financial accounting standards. Thus IC accounting creates a recognition of otherwise not-reported or off-balance sheet assets. The charts below should be studied carefully.

 

The above Financial balance sheet is exactly what we have been covering thus far in these articles. The only difference is now the introduction of an IC financial statement assets and liabilities using the same principles of debits and credits i.e. the accounting model.

We have a lot more to discuss, next week onwards, including definitions to clarify, but first, read this excellent introduction to IC.

Some people say that knowledge can only exist in people’s heads and that anything else that is written or stored in databases including voice, video etc., is information. Others make a distinction between tacit and explicit knowledge. Tacit knowledge is stored in people’s heads while explicit knowledge is stored in various ways. So depending who tries to come up with a definition always get stuck with descriptions and cannot come up with a kind of definition.

Knowledge Management is about getting the right information to the right people at the right time in order to perform better in the business processes.

Macro photo of tooth wheel mechanism with KNOWLEDGE. Photo: EtiAmmos 

But Knowledge Resides in Many Places… And Has Many Faces!

Knowledge is in …

  • presentations, reports, journals;
  • licenses, patents, licenses, intellectual property;
  • databases, software, risk tools, audits;
  • libraries, catalogs archives;
  • manuals, policy documents, memo’s
  • individual ability, memory, know-how, experience;
  • teams, communities, groups, networks;
  • meetings, training materials, management info.

Knowledge is …

  • time critical, virtual, relevant now;
  • reflexive, complex, evolving, interactive, serendipitous;
  • messy, created for a purpose but drawing on experience from other times and places;
  • social, often self-organizing, achieved through a question, challenge, and debate;
  • filtered, creative, selective.

Photo: Element5 Digital

Knowledge Management 

How do we manage knowledge: through a systematically and specified process for acquiring, organizing, sustaining, applying, sharing and renewing both the tacit and explicit knowledge of employees , active in the business processes ,  to enhance process performance , create value and, in doing so, to leverage, improve, and make knowledge transferable so it becomes an asset of the company and will not stay a liability by leaving the tacit knowledge ( lessons learned , cases , stories and little methodologies ) in the heads of the people so that company assets walk home every night . Key is to identify the key knowledge carriers in the company’s business processes so the key knowledge of the organization can be captured, stored and made re-usable, by which the knowledge becomes that companies most important asset.  Turn the saying: “ my most important assets are my people “ into real company auditable assets.

Intelligent integration of knowledge in your business processes leads to “Acceleration”

 

Photo: Pixabay

 

The conclusion:

  • Everybody talks about knowledge management, but stay’s very conceptual in their definitions and application areas
  • Everybody knows it is important but no-one can capture it, store it,
  • Measure it or know how to make it re-usable in a practical way
  • Most of the knowledge used in an organization, via training and IT, is not related to the work of every day.
  • IT can only store it, but no-one knows what and how to capture it or what and how to make it re-usable.
  • We learned we need a framework in order to identify and manage the company knowledge. Therefore we learned that knowledge is related to the business processes. The knowledge that one needs in the process steps is 15% explicit and 85%

 

 

What next?

Next week, relative to IC, we’ll start addressing:

Differentiation ~ businesses must differentiate themselves from the competition to stand out to potential customers.

#1 reason why managers fail: inability or ineptitude in retaining top talent. Many bosses have this attitude that anyone is replaceable easily like gloves, that they can hire someone even better. They are fooling themselves, and do a disservice to their company and they may lose their own future. A good employee has knowledge of systems, products, and processes. They have trust relationships with clients and co-workers that takes years to build.

 


Lucubrate Magazine, Issue 42, October 12th, 2018

The Photo on Top: Robert Kneschke

 

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Peter Welch
Peter Welch

GlobalCfo.LLC is an expert at developing entrepreneurs and building 3-5 year business plans and cash flow projections as a prerequisite for accessing financing sources. GlobalCfo.LLC targets accounting standards compliance and theory, sound infrastructure /process mapping and COSO 2013-17/solid internal controls, ERM, and last but not least documentation /Policy and Procedures and other manuals. Additionally, interim CFO services (or Rent-a-CFO by the hour/day) are offered locally or remotely as well as training at all levels and all functions, not just accounting; e.g., management and leadership skills. Pre/Post-M&A is also offered.

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