Journal of Intellectual Capital Emerald Article: Intellectual capital: definitions, categorization and reporting models Kwee Keong Choong

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Intellectual Intellectual capital: definitions, capital categorization and reporting models Kwee Keong Choong 609 Department of Accounting, School of Business, La Trobe University, Melbourne, Australia

Abstract Purpose – The purpose of this paper is to develop a conceptual framework that can be used to formalise a reporting model for intellectual capital (IC). Design/methodology/approach – This paper proposes a reporting model with a formal definition and classifications of IC to analyse and report on the IC generated by a firm. Findings – This paper demonstrates that the field is maturing to one in which it is possible to analyse existing definitions and classifications of IC to construct a formal body of items that can be considered as IC for use in the study and application of IC. Practical implications – The paper presents a formal reporting model which can be used generally in the analysis of the IC generated from the production process of a firm. Originality/value – This study examines the characteristics of items that can be considered as IC in order to provide a formal classification system of IC that can be instilled in a reporting system which can be used generally in any organization that involves the use of IC. Keywords Intellectual capital, Intangible assets Paper type Conceptual paper

1. Introduction The field of study into intellectual capital (IC), also known as intangible assets (IAs), or other names (to be discussed in the next section) has been ongoing since the early 1990s (Marr and Chatzkel, 2004, see Table I, p. 20)[1]. However, the wide array of studies across disciplines has created a magnitude of definitions and emphasis, and a wide range of resources, properties and attributes that can be considered as IC or intangibles. The literature is also proliferated with different terms to describe either the same or different information used in relating to IC (intangibles). Kaufmann and Schneider (2004) provide a good account of the variety of terms and definitions for each term in the literature. What we need is a system to streamline the various definitions and terms into manageable categories (classes)[2]. Categorization enables us to put in order the systematic organization of a magnitude of possibilities into a set of class (group) consisting of a coherent number of items. According to Rudner (1966), the value of classification is associated with its ability to function as a heuristic device, which is useful for the interpretation of substance. Researchers have developed various models to facilitate the measuring of each category of intangibles (human, customer, and structural capitals) and enable the intangibles Journal of Intellectual Capital Vol. 9 No. 4, 2008 reported to be compared with other firms. However, up until now, there has been no pp. 609-638 widespread acceptance of these models partly because these models are too qualitative, q Emerald Group Publishing Limited 1469-1930 broad or general, and the objectives remain ambiguous (Kaufmann and Schneider, 2004). DOI 10.1108/14691930810913186 entoso C(IAs) IC of definitions and terms of Use I. Table 610 9,4 JIC

Authors Term/concept Definition

Itami (1991) Invisible assets “Intangible assets are invisible assets that include a wide range of activities such as technology, consumer trust, brand image, corporate culture, and management skills” Hall (1992, p. 136) Intangible asset “Intangible assets are value drivers that transform productive resources into value-added assets” Smith (1994) Intellectual property “Intangible assets are all the elements of a business enterprise that exist in addition to working capital and tangible assets. They are the elements, after working capital and tangible assets, that make the business work and are often the primary contributors to the earning power of the enterprise. Their existence is dependent on the presence, or expectation, of earnings” Brooking (1997, p. 13) Intellectual capital IC as “market assets, human-centered assets, intellectual property assets, and infrastructure assets” Edvinsson and Malone (1997, p. 22) Intellectual capital and “Intangible assets are those that have no physical existence but are still of intangible assets value to the company” Sveiby (1997, p. 10) þ Immaterial values IC has three dimensions (employee competence, internal structure and external structure) Nahapiet and Ghoshal (1998, p. 245) Intellectual capital IAs as “knowledge and knowing capability of a social collectivity, such as an organization, intellectual community or professional practice” Stewart (1998, p. XI) þ Intellectual capital IC is intellectual material – knowledge, information, intellectual property, experience – that can be put to use to create wealth – collective brainpower Granstrand (1999) Intellectual property “IP is property directly related to the creativity, knowledge and the identity of an individual” Brennan and Connell (2000, p. 1) þ Intellectual capital “Knowledge-based equity of a company” Harrison and Sullivan (2000, p. 34) þ Intellectual capital “Knowledge that can be converted into profit” Sullivan (2000, p. 228) þ Intellectual capital “IC is knowledge that can be converted into profit” Heisig et al. (2001, p. 60) þ Intellectual capital “IC is valuable, yet invisible” Lev (2001, p. 5) þ Intangibles “An intangible asset is a claim to future benefit that does not have a physical or financial (a stock or a bond) embodiment” “Assets exclude financial assets” IA cannot stand alone Gu and Lev (2001, p. 14) þ Intangibles Intangibles are defined by their value drivers (RD, advertising, IT, capital expenditures, and human resources practices)a (continued) Authors Term/concept Definition

FASB NN (2001, p. 6) þ Intangible assets “Intangible assets are non current, nonfinancial claims to future benefits that lacks a physical or financial term” Petty and Guthrie (2000, p. 158) þ Intellectual capital IC are indicative of the economic value of two categories (organization and human capital) of IA of a companya Pablos (2003, p. 63) þ Intellectual capital “A broad definition of intellectual capital states that it is the difference between the company’s market value and its book value. Knowledge based resources that contribute to the sustained competitive advantage of the firm from intellectual capital” Rastogi (2003, p. 230) þ Intellectual capital “IC may properly be viewed as the holistic or meta-level capability of an enterprise to co-ordinate, orchestrate, and deploy its knowledge resources towards creating value in pursuit of its future vision” Mouritsen et al. (2004, p. 48) Intellectual capital IC mobilises ‘things’ such as employees, customers, IT, managerial work and knowledge. IC cannot stand by itself as it is merely provides a mechanism that allows the various assets to be bonded together in the productive process of the firm IASB (2004b, p. 2) Intangible assets An identifiable IA as a “non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes” Note: aModifications of definitions Source: þ Taken from Kaufmann and Schneider (2004, Table II) Intellectual capital al I. Table 611 JIC Moreover, there is no clear explanation on why many of the attributes (variables) are 9,4 included in the respective models. More fundamentally, what constitute IC is not clearly defined, and what exists is an assortment of terminologies that provides more or less the same meaning. The purpose for this paper is therefore to examine what items are treated as ICs (IAs) and how these expenditures contribute to value creation of firms. The author 612 adopts a staggered approach in developing a formal framework in identifying, defining, categorizing, measuring and reporting IC. This approach is similar to the approach taken by Kaufmann and Schneider (2004) in their review of the literature on intangibles. The contributions of this research are the formalization of IC through more appropriate definition and categorizing of IC, which can be used in providing a more formal IC reporting framework. The author recognizes that not all issues can be addressed here. For example, the identification of every attribute (item) that can be considered as IC appears remote. This paper should therefore provide the motivation for future research in the areas of identification of what constitutes IC, how IC is measured and managed, and ultimately how IC is reported. The remainder of this paper is organized as follows: Section 2 reviews the literature on the appropriateness of the various definitions and terms relating to the various attributes of IC. Section 3 discusses the state of the current categorization of IC. The re-categorization of IC using normalization is in Section 4. Section 5 provides a proposed reporting IC model. Section 6 concludes.

2. Definition of intellectual capital The starting point in defining IC or IA should start from the definition of assets. IA (IC) are considered the most critical resource of today’s enterprise and yet, most enterprises cannot clearly define what constitutes an IA (Andreou et al., 2007, p. 52). A literature review across disciplines indicates that there is a wide range of definitions that can be considered as IC or IA. The literature is also proliferated with different terms to describe either the same or different information used in relating to IC (IA). For instance, nonaccounting researchers define “intellectual capital” as the “difference between the firm’s market value and its book value of entity” (Edvinsson and Malone, 1997; Stewart, 1997; Sveiby, 1997; Mouritsen et al., 2001). To accounting researchers (Ohlson, 1995, p. 662; Feltham and Ohlson, 1996, p. 220; Beaver, 1998, p. 78; Holthausen and Watts, 2001, p. 50), the difference between the market value of the entity and the book value of the entity’s identifiable assets is defined as “goodwill.” Goodwill is also known as “intangible assets.” This difference between the firm’s market value and its book value of entity is never fully explained let alone identifying the constituents of the difference between market value and its book value. Goodwill can be externally or internally generated. According to generally accepted accounting practices of most countries, only external goodwill, or purchased goodwill can be reported and its value amortised over its useful life (AICPA, 1970; ASB, 2004a, b; IASB, 2004a)[3]. The above discussion implies that the “goodwill” is “intangible assets” or “intellectual capital”. However, we cannot accept IC or IA to be represented by goodwill as the term is too broad and researchers have never fully explained its meaning. Kaufmann and Schneider (2004) provide a good account of the variety of terms and definitions for each kind of IA in their literature review from 1997 to 2003. They indicate that there are some limitations of their coverage, as they did not focus on Intellectual intangibles covered by the accounting literature, and that the coverage only capital commenced from 1997. Nevertheless, their paper provide a good starting point for this paper, and the author extends his literature review, including the major accounting and nonaccounting journals before 1997 and after 2003[4]. The analysis of the terms used for IC (IA), and their definitions are done as follows. As the author wants the definitions to be specific, he has selected only those papers that provide unambiguous 613 definitions in Kaufmann and Schneider. In most cases, the authors makes use of the definitions of IC (IA) in Kaufmann and Schneider, and only make modifications of the definitions if the phrase is not clear. The terms used for IC (IA), and their definitions in Kaufmann and Schneider plus those from the author’s findings, sorted in chorological order is contained in Table I. Next, the author has selected those papers that do not provide any definition and yet made unambiguous references to IC (IA) by providing indications of their existence, and they are contained (sorted in chorological order) in Table II. Tables I and II show that the terms used by various researchers included but not confined to “intangible assets,” “intangibles,” “intangible resources,” “intellectual capital,” “intellectual property,” “intellectual knowledge” and “immaterial values” to mean more or less the same thing. The term “immaterial values” is used by researchers/bodies in countries that do not adopt UK/US-based accounting systems (e.g. Germany, Sweden and France) to mean non-monetary value and without physical appearance, a term very similar to “intellectual capital” or “intangible asset.” Therefore, the only difference between the terms “immaterial values” and “intellectual capital” is one of usage or culture, and this difference is trivia, and hence, these two terms can be treated as synonymous. There are various definitions (indications) of ICs (IAs), and in general, most definitions (indications) state that an IC (IA) is a non-monetary asset without physical substance but it possesses value or it can generate future benefits. As there are a large number of definitions (indications) of IC (IA) contained in Tables I and II, the author will only elaborate on those that are less ambiguous. Itami (1991) indicates that “intangible assets are invisible assets that include a wide range of activities such as technology, consumer trust, brand image, corporate culture and management skills.” Hall (1992) considers that “intangible assets are value drivers that transform productive resources into value added assets.” He splits IA into two categories: (1) intellectual property (IP); and (2) knowledge assets.

IA drives capability differentials, which in turn drive sustainable competitive advantage. Smith (1994) defines IAs as: Intangible assets are all the elements of a business enterprise that exist in addition to working capital and tangible assets. They are the elements, after working capital and tangible assets, that make the business work and are often the primary contributors to the earning power of the enterprise. Their existence is dependent on the presence, or expectation, of earnings. Brooking (1997, p. 13) identifies IC as “market assets,” “human-centered assets,” “intellectual property assets,” and “infrastructure assets” that when combined with an fterexistence their of indications provides (IAs), but IC of definition No II. Table 614 9,4 JIC

Authors Term/concept Indication

Hall (1992, p. 136) Intangible resources IAs are value drivers that transform productive resources into value added assets Boudreau and Ramstad (1997) Intellectual capital IC is closely related to human resource management Edvinsson (1997, p. 372) Intellectual capital “IC is not an objective thing, but is a relationship issue and a debt item” Bontis (1998) Intellectual capital IC possesses intellectual attributes that can contribute value of a firm Bontis et al. (1999, p. 397) þ Intangible resources, Intellectual capital as a IC is quite simply the collection of intangible subcategory resources and their flows. Intangible resources is any factor that contributes to the value generating processes of the companya Arbeitskreis Immaterielle Werte im Immaterial values Non-monetary value without physical appearance Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) Kriegbaum (2001) Immaterial values Physical not embodied financial goods. Their nature is not monetary, and they are an economic advantage for the companya Daum (2002) þ Intangible assets and intellectual capital Intangibles are characterized by a set of attributes, and they can bring in economic benefits rather quickly, and they often show network effects Considers IA to include human capital, RD, advertising and knowledgea Funk (2003) þ Intangibles Intangibles relate to management creditability, innovativeness, brand identity, ability to attract talents, research leadership, social and environmental responsibility Note: aModifications of indications Source: þ Taken from Kaufmann and Schneider (2004, Table II) organization’s other productive resources will eventually lead to value creation. Intellectual Edvinsson (1997, p. 372) opines that IC is not an objective thing, but is a relationship capital issue and a debt item, which is borrowed from the customers and employees. By combining IC with these items, an organization can become more productive. Bontis (1998) considers that IC possesses intellectual attributes that can contribute value of a firm. Edvinsson and Bontis also provide that IC can be categorized into three kinds of IC – human, organizational and customer, similar to those of Brooking. 615 Boudreau and Ramstad (1997) consider that IC is closely related to human resource management that is needed by the organization to provide the necessary impetus for future development and growth. Davenport and Prusak (1997) relates IC with technology, technological changes, and things associated with the management of information technology (IT). The ability of an organization that can utilize technology to manage and process information will be the one that has the capability to employ IC into good use. Similarly, Stewart (1997, p. x) relates IC with “the management of information technology that can be put to use to create wealth.” Nahapiet and Ghoshal (1998, p. 245) refer IAs as “knowledge and knowing capability of a social collectivity, such as an organization, intellectual community or professional practice.” Sullivan (2000, p. 5) defines intangibles as “...knowledge that can be converted into profit.” Firms obtain value from this profit generated from the sale of goods or services, and that firms depend on intangibles such as reputation, customer loyalty, name recognition, leadership, and standard setting, and these are vitally dependent upon human capital to ensure repeat business (p. 12). Sullivan (2000) also adopted the three categories of IC: human, organizational and customer (similar to those of Brooking, 1997; Edvinsson, 1997; Bontis, 1998) but indicates that by undertaking various processes, these IC will lead to intellectual assets. Lev (2001, p. 5) considers that “an intangible asset is a claim to future benefits ... and it does not have physical substance.” He also provides a new definition of assets to exclude financial assets (for example, equities or bonds) from its scope. He states that IAs consist of innovation, human capital, organisational capital, knowledge, etc. that can be divided into three sub-categories: IP, separately identifiable IAs, and non-separately identifiable IAs. Daum (2002) indicates that intangibles are characterized by a set of attributes, and they can bring in economic benefits rather quickly, and they often show network effects. Hence, the definition of intangibles by Daum is influenced by Lev (2001) in at least two respects. First, intangibles are the result of the network effect. Second, intangible cannot stand by itself, and hence, any benefits derived from the use of intangibles cannot be reliably measured. Rastogi (2003, p. 230) states that IC is the result of the “collaborative effort among the firm’s human and social capital, and knowledge management.” This definition is similar to Lev (2001) and Daum (2002) in the sense that IC does not exit on its own but is the result of the network effect. Mouritsen et al. (2004) indicate that IC mobilises “things” such as employees, customers, IT, managerial work and knowledge. They add, “IC cannot stand by itself as it merely provides a mechanism that allows the various assets to be bonded together in the productive process of the firm.” JIC Andreou et al. (2007, p. 53) state that the business enterprise in this knowledge era 9,4 has a need to become “intelligent” about its environment to gain knowledge from its environment and subsequently value its intangible resources. They argue that in order for an enterprise to become “intelligent” it is necessary for it to scrutinize its business processes/functions, codify them to facilitate the modeling of business activities, and provide definitions, attributes and constraints of business intelligence that align with 616 the performance of the enterprise. The definition of IC by Lev (2001), Daum (2002), Rastogi (2003) and Mouritsen et al. (2004) appears to have two things in common: (1) intangible cannot stand by itself, and hence, it cannot be valued separately from other assets; and (2) IC is the result of the network effect of utilizing various intellectual, human, capital and organizational resources.

On the accounting policy (standard setter) perspective, IASB (2004b)[5] IAS 38 (revised) defines an identifiable IA as a “non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.” IAS 38 defines an IA that includes expenditure on advertising, training, start-up, and research and development activities. The range of activities that can be treated as IAs is wide but all are expected to generate future benefits (cash flows), and these could result from activities such as advertising (marketing), distributing, research and development, human resource expenditures, and values that come from brand names, copyrights, covenants not to compete, franchises, future interests, licences, operating rights, patents, record masters, secret processes, trademarks, and trade names. These items that can be considered as IC by the IAS 38 are similar to those advocated by the non-accounting group. The German Schmalenbach Society Working Group on “Intangible assets in accounting” (Arbeiskreis Immaterielle Werte im Rechnungswesen der Schmalenbach- Gesellschaft fur Betriebswirtschaft e.V., 2002) defines IC as immaterial items with non-monetary values without physical appearance. It follows that IC (IA) have been defined to include expenditures on advertising (marketing), training, start-up, research and development activities, human resource expenditures, organizational structure and values that come from brand names, copyrights, covenants not to compete, franchises, future interests, licences, operating rights, patents, record masters, secret processes, trademarks and trade names. However, from the recognition and treatment criteria of IAs from the accounting perspective, most of the above mentioned items should be expensed as they were incurred and that, only those that can be quantitatively identifiable or externally generated should be capitalised in the balance sheet.

3. The state of the current categorization of intellectual capital Kaufmann and Schneider (2004) reviewed the major literature on intangibles from 1997 to 2003 and found that most publications still lack a theoretical foundation. Even for the few that do, it is quite abstract (Grant, 1997) or they talked about theories on too broad context that do not address how it relates to practical matters (Johansson et al., 2001; Mouritsen et al., 2002; Wood, 2003). Diefenbach (2006) indicates that up till today, there has no serious attempt to define and identify all intangible resources systematically. This probably explains why it is difficult to define what IC (IA) is. Perhaps, it would be Intellectual more appropriate to classify them instead as classification is less stringent than capital definition. Nevertheless, classification also implies defining it (Grojer, 2001, p. 698). Categorization enable one to order the systematic organization of a magnitude of possibilities into a set of class (group) consisting of a coherent number of items. Numerous groups, accounting professions and researchers have attempted to categorize intangibles. Table III provides an overview of various attempts used in categorizing IC (IA). 617 As it is beyond the scope of this paper to deal with anyone’s work, only the prominent classifications of IC are discussed. Sveiby (1997) is the first from the non-accounting perspective to propose the classification of IC, and he concludes that intangibles can be categorized into three sub-categories: (1) employee (individual) competence; (2) internal structure; and (3) external structure.

Brooking (1997) added a fourth category – “intellectual properties assets” to the IC category of Sveiby. Edvinsson (1997) adopted the three categorizations of Sveiby, but termed them as: (1) human capital; (2) organizational capital; and (3) customer capital, respectively, for the Skandia NavigatorTM. Further, he indicates that IC is part of an organisational asset, and non-disclosure of such assets constitutes items that are hidden from the conventional financial statements. Edvinsson and Malone (1997), Bontis (1998), and Sullivan (1998) have also adopted the similar three group categorizations of Sveiby, but they termed them as: (1) human capital; (2) organisational capital; and (3) customer capital, respectively.

Even though Stewart (1998) accepted the classification of Sveiby, he renamed them as: . human capital; . structural capital; and . customer capital, respectively. Sullivan (2000) also adopted the three categories of IC proposed by Sveiby, but indicates that by undertaking various processes, these IC will lead to intellectual assets. Petty and Guthrie (2000) use only two out of the three categories of IC of Sveiby (human capital and organizational (structural) capital). Mouritsen et al. (2002), and Pablos (2003) also used the same three-category classifications of IC as per Sveiby, however, Pablos termed “customer capital” as “relational capital.” Lev (2001) states that IAs consist of: (1) innovation (discovery or knowledge); (2) human resources; and (3) organizational practices (capital). bodies or groups (researchers), authors by (IAs) IC of Categorizations III. Table 618 9,4 JIC

Authors Term/concept Categorization

Redovisnings Ra˚det (1995) Immaterial values Capitalized cost of research and development and similar projects, concessions, patents, licences, trademarks, and similar rights, tenancy agreements and similar rights, goodwill, payments on accounts LBK (1996) Immaterial values Development costs, concessions, patents, licences, trademarks, similar rights and goodwill Brooking (1997) Intellectual capital Market assets, human-centered assets, intellectual property assets and infrastructure assets Edvinsson (1997) Intellectual capital Human capital, organizational capital and customer capital Edvinsson and Malone (1997) Intellectual capital and Human capital and structural capital intangible assets Roos and Roos (1997) Intellectual resources Human capital and structural capital Roos et al. (1997) Intellectual resources Human capital and structural capital Skandia Insurance Services (1997) Intellectual capital Human capital and structural capital Sveiby (1997) Immaterial values Internal structure, external structure and personnel competence Stewart (1998) Intellectual capital Human capital, structural capital and customer capital Redovisnings Ra˚det (1998) Immaterial values RD, concessions, patents, licences, trademarks, and similar rights and assets, prepaid taxes and goodwill Bontis et al. (1999) Intangible resources, Human capital and structural capital intellectual capital as a subcategory Can˜ibano et al. (2000) Intangibles Human capital, structural capital and relational capital Granstrand (1999) Intellectual property Creativity, knowledge, identity of individuals Andriessen and Tiessen (2000) Intangibles Assets and endowments, skills and tacit knowledge, primary and management processes, technology and explicit knowledge, and collective values and norms Brennan and Connell (2000) Intellectual capital Internal structure, external structure and human capital Harrison and Sullivan (2000) Intellectual capital Human capital, intellectual assets that include IP Michalisin et al. (2000) Intangible resources Reputation, know-how, organization structurea Sa´nchez et al. (2000) Intangibles Human capital, structural capital and relational capital Chan et al. (2001) No term RD, advertising (continued) Authors Term/concept Categorization

Arbeitskreis Immaterielle Werte im Immaterial values Human capital, innovation capital, customer capital, supplier Rechnungswesen der capital, investor capital, process capital and location capital Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) FASB NN (2001) Intangible assets Technology, customer, market, workforce, contract, organization and statutory-based assets Gunther (2001) Immaterial values Internal structure, external structure and employee competence Gu and Lev (2001) Intangible assets Advertising, IT, capital expenditures and human resources practices Lev (2001) Intangibles Discovery, organizational practices and human resources Marr and Schiuma (2001) Knowledge assets Stakeholder resources and structural resources MERITUM (2002) Intangibles and Human resources, structural resources and relational resources Intellectual capital Bontis (2002) Intangible capital Human capital, structured capital and relational capital Mouritsen et al. (2002) Intellectual capital Human capital, organizational capital and customer capital Petty and Guthrie (2000) Intellectual capital Human capital and organizational (structural) capital Marr et al. (2003) Knowledge assets Strategy, influencing behavior and external validation Pablos (2003) Intellectual capital Human capital, organizational capital and relational capital IASB (2004b) (first issued in 1998)a Intangible asset Advertising (marketing), distributing, training (human resource), start-up, RD, brands, copyrights, covenants not to complete, franchise, future interests, licences, operating rights, patents, record masters, secret processes and trademarks (trade names) Note: aModifications of indications Intellectual al III. Table capital 619 JIC These three categories can be divided into three sub-categories: IP, separately 9,4 identifiable IAs, and non-separately identifiable IAs. Gu and Lev (2001, p. 14) simplify the study of IAs by grouping them into five sub-groups: (1) research and development; 620 (2) advertising; (3) capital expenditures; (4) information systems; and (5) technology acquisition.

They focus on measurement issues and how intangibles can influence the capital market and investors. Kaufmann and Schneider (2004) argue that the work of Gu and Lev may be interesting and address many issues (e.g. measurement, economic value-chain, value creation, etc.), but their approach consists of too many assumptions, most of which are rather arbitrary. Bukh et al. (2001) compared various taxonomies of IC and came out with three things in common: (1) activities connected to employees; (2) tasks, processes and structures; and (3) services and value-added activities connected to customers, very much similar to the three categories of IC of Sveiby (1997).

The Measuring Intangibles to Understand and Improve Innovation Management – MERITUM (2002) for the measurement of intangibles within the firm, the outcome of the MERITUM Project[6], have in many ways adopted the IC methodology of Sveiby (1997) including the classification of IC into three categories: (1) human resources; (2) structural resources; and (3) relational resources.

Moreover, the guidelines indicates that IC reports can be structured in various ways and use many different vehicles of communication, such as texts, figures, indicators and many other devices, in order to represent intangibles assets and performance. Analysis of the classifications of IC indicates that by and large, various researchers have adopted the three categorization-human, structure and customers of Sveiby (1997), suggesting that the categorization of IC is consistent. However, Kaufmann and Schneider (2004) consider that the categorization of IC by these authors is unclear and are generally too broad. For example, some researchers treated patents as customer capital while some treated it as knowledge capital. On the accounting standard setting perspective, two groups of purely normative researchers on IA came out with similar outcomes. They are the FASB and the German Schmalenbach Society Working Group on “Intangible Assets in Accounting” (Arbeiskreis “Immaterielle Werte im Rechnungswesen” der Schmalenbach-Gesellschaft fur Betriebswirtschaft eV). The FASB NN (2001) categories IA into seven categories for financial reporting: Intellectual (1) technology; capital (2) customer; (3) market; (4) workforce; (5) contract; 621 (6) organization; and (7) statutory-based assets.

The German Schmalenbach Working Group (Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V., 2001, 2002) also grouped IA into seven categories: (1) innovation capital; (2) human capital; (3) customer capital; (4) supplier capital; (5) investor capital; (6) process capital; and (7) location capital.

Both work on IA are useful, in particular the FASB approach as it provides a clearer description of items, less overlap of groups, and even provided examples on IA and events leading to the creation of IA, and as a result, provide more concrete and complete perspective on IA that can be applied in the business context (Kaufmann and Schneider, 2004, Figure 1). Marr et al. (2003) reviewed the literature on the measurement of IAs, and identified that IC can be categorized into three main categories: (1) strategy; (2) influencing behaviour; and (3) external validation.

Marr and Chatzkel (2004) find that the researchers on intangibles often classify them into: . human capital (employees’ skills, talent and knowledge); . information capital (information systems, databases and computer systems); and . organization capital (culture, leadership, employee alignment, teamwork).

They conclude that in general, IAs are a collection of knowledge, intellectual and revenue generating resources. Maines et al. (2003) categorize research on intangibles into three areas, research related to: (1) current financial reporting for IAs; (2) disclosures about IAs; and (3) recognition of IAs; the same three categories of IC by Sveiby (1997). JIC 9,4

622

Figure 1. Classifying IC using entity-relationship

Analysis of the attempts in rationalizing IC through categorization indicates that researchers have used several terms to refer to IC, and there is a tendency towards the harmonization of the classification of IC-most researchers have adopted the three categorization-human, structure and customers (relation) of Sveiby (1997). This finding is consistent to Marr and Adams (2004). They find that there has been a general convergence towards a three-grouped framework consisting of: (1) human capital; (2) organizational (or structural) capital; and (3) relational capital; based on Sveiby (1997), MERITUM (2002), and Bontis (2002).

Why are these three classes (human, structure, customer (relation)) of IC so accepted by the various researchers? Human capital relates to the skill-sets, aptitudes and attitudes of employees and they are widely reported (Garcia-Meca, 2006). Even though many authors consider that human capital is part of IC, technically and legally, human capital cannot be owned by a firm unlike other forms of IC such as structural capital (Edvinsson and Malone, 1997; Stewart, 1998). Organizational or structural capital is the most complex – and has undergone several changes, but recently, some researchers (Marr et al., 2003) have suggested it to include culture, innovation and process. Relational capital relates to the organizational relationships with all its stakeholders. The above discussion indicates that the rationalization of IC using the categorization approach better describe what IC is as compared to using the definition approach. There are two reasons for this. First, as IC is “invisible” (i.e. without physical substance), it is much harder to define than many other items. Second, the study of IC is relatively new and evolving, and it is hard to isolate the range of activities associated with IC that can be defined. However, even if we adopt the classification approach, issues still remain. There is still no cohesive methodology and objective used in classifying IC. Moreover, inconsistency and overlap of classes and Intellectual sub-classes occurs frequently and there is no agreed classification schema across capital studies of IC. What we need is a system to streamline the various categories and terms into manageable categories (classes). This will be discussed in the next section.

623 4. Re-categorization of intellectual capital using normalization concept This section attempts to improve the classification of IC through re-classification. On many occasions, when we attempt to categorize (classify) items, for exhaustive reason, we will try to classify as many intangible items as possible, but then, the more items we have, definition of items in terms of exclusiveness tend to be tautological, and as such, the conflict between exhaustiveness and exclusiveness become unclear. Therefore, for practical reasons, Grojer (2001) suggests that we have to seek an exhaustive-exclusive trade-off, and the outcome is a classification schema with less information content. As IC is non-physical and by nature, they exist conceptually, an appropriate methodology that can be used to classify IC is entity-relationship (ER) model because of its wide acceptance. The ER model is a high-level conceptual data model developed by Peter Chen in 1976 to facilitate database design. The main purpose for developing a high-level data model is to support a user’s perception of data, and to conceal the more technical aspects associated with database design. Even though ER is developed for use in the computer environment, it can also be applied to the IC (IA). After all, many of IC is in the form of computer technology (e.g. hardware and software), information system processing, and IP. The basic concepts of the ER model include entity types, relationship types and attributes. An “entity type” refers to “an object or concept that is identified by the enterprise as having an independent existence” (Connolly et al., 2005). An entity type has an independent existence and can be an object with a physical (or “real”) existence or an object with a conceptual (or “abstract”) existence. For example, a component of IC – human resource structure of an organization, the entity may be represented by human development. The particular properties of entities are called “attributes” (Connolly et al., 2005). The attributes of an entity hold values that describe each entity and the values held by attributes represent the main part of the data stored in the database. The human development entity may contain the attributes: staff number, and development. In order for the human development to be linked to the respective staff, a relationship between these two attributes must be established. The concept of “relation” is based on the concept of mathematical relations. In a relational structure (schema), a relation can be viewed as a table with columns and rows that links an entity (object) with another entity. The formal categorization (classification) process for this paper involves a series of steps and they are summarized as follows: . identification of the various entities (objects), their attributes and relationships; . grouping (classifying) common entities into a formalized order to become a taxonomy (Bloom and Krathwohl, 1956); and . formalize the IC taxonomy with ER. JIC This form of classification is consistent to the one used by Choong (2007). 9,4 The starting point of the refinement of the classification of IC stems from Table III. In this table, the various authors, their terms (concepts) used in referring to IC (IA), and how they categorize the various components of IC are analysed. The classification schema for all researchers (authors) from this table only provides sub-class with no relationship between classes. Thus, most of these classifications offer little description 624 of their reasons (logic) of classification and identification of classes and sub-class, and fail to classify the universe of discourse exclusively or exhaustively. Rudner (1966, p. 32) refers to this form of classification as classificational analytical schemata, Grojer (2001, p. 699) considers that this form of classification is common in the field of accounting. An important consideration in classification schemata is the use of attributes in relating to each class of IA. However, few authors discuss the attributes of their classification (Grojer, 2001). The few that do only provide vague description of the choice of their chosen attributes. For example, IAS 38 considers two attributes: recognition and origin are useful in classifying intangibles. The first concerns whether the intangible can be recognised or not. The second indicates where the intangible originates. Describing an entity in terms of the attributes as described above only offers limited usefulness. Grojer considers such description of attributes to be dated considering that business activities can be outsourced or co-produced. What we need is a system, along the line of a normative, deductive approach to divide (construct) an attribute for intangibles that can be divided into different classes. This is a normative, deductive approach. However, choosing a particular approach to classification can be an arduous task considering there are different approaches to attribute identification. Since IC classification must lead to somewhere; the most obvious is that it must be linked to the accounting system since they must be eventually reported. Roberts (1995) hypothesizes that there are five approaches that can be used in classifying financial accounting systems in different countries: (1) essentialist approaches; (2) overall similarity approaches; (3) diachronic approaches; (4) set theory approaches; and (5) archetypal approaches.

Out of these five approaches, the author considers the set theory approach to be the most appropriate one that can be used in the IC setting. Using this approach, we can avoid the problem of attribute choice by classifying through deduction to express its property (attributes) in terms of “goodness” or properties that best describe (relate) to the class (Roberts, 1995; Grojer, 2001). Hence, only the attribute(s) that is the basis for classification counts. For instance, technology is considered as one class of intangibles. To sub-classify it into components, we need well-defined (expression) to define the various attributes to sub-classify its components base on the attributes of technology, information usefulness, and computer/IT (hardware). All other possible attributes of technology are of no use for classification purpose. The result is the class of technology and its sub-classes consisting of the sub-classes “technology,” “information” and “computer” (Figure 1). The cardinality for the components of IC is straightforward as it consists of Intellectual categories and their components, i.e. one object (class) (left hand side –LHS) relating to capital several components (sub-classes) (right hand side, RHS), i.e. 1: M relationship. To normalize IC into categories, let’s start from the right entity (sub-categories). The function of the classification or cataloging system is to establish a standardized form for the components of every class (not the names of every author) for which we have information, and hence being able to group, if not physically then virtually, works by one 625 group in one place. The existence of pseudonyms and variant spellings is a problem that must be addressed and typically, the classifier must choose to avoid ambiguity of classification, and provides a clear boundary of each sub-class. This approach in classification is similar to that taken by the Center for Education and Research in Information Assurance and Security (CERIAS)[7], where the librarian chooses one on the forms and groups variations under this one spelling in cataloging works for each authors. Therefore, classification of information is as much an art as it is science. The normalization process produces ten categories of IC, each having one or more sub-categories. For example, technology consists of information, IT, and technology (Figure 1). The column for researchers is added to the table for informativeness reason. What is missing is the relation between classes. For example, there is little indication of the relation between the technology and the customers class. As the literature does not provide much guidance as to how each class is related to another, it is beyond the scope of this paper to develop a relation between the different classes of IC. While the author endeavours to categorize IC into various sub-classes using the goodness attributes, he recognises that issues such as exhaustiveness and exclusiveness, consistency and recognition may not be consistently applied across the classes. Also, other approaches in classifying IC may be used, and the outcome may be different. All these issues of IC categorization identified are useful in shaping a good framework for IC, and this can be an avenue for future research in the direction of classification and relating classes for IC.

5. Reporting models The proposed reporting model for IC is based on existing models and hence it is necessary to discuss these models before formulating the model.

5.1 Discussion of approaches and issues of current models for reporting intellectual capital Kaufmann and Schneider (2004) state that researchers have developed various models to measure and manage intangibles, and they were constructed for different purposes; some for external reporting and some to manage intangible resources within a firm. Kaufmann and Schneider conclude that model constructors were based on four schools of thought. The first school believes that management has a primary responsibility to transform human capital into structural capital (e.g. the 1997 annual report and information on IC is available from Skandia’s web site (www.skandia.com)[8], Edvinsson, 1997; Ryde´n and Bredahl, 2003). They advocate supplying supplementary information to the annual financial report, and focusing on agents within the firm. The second school is based on the model developed by Sveiby (1997), which is now known as the Intangible Asset Monitor, which includes information about growth, renewal, efficiency, stability, and risk relating to each category of intangibles (employee competence, internal structure and external structure). According to Kaufmann and JIC Schneider (2004), this model has been used by many companies, e.g. Celmi (Sweden). 9,4 The third school is the model advocated by Stewart (1997) which focuses in measuring each category of intangibles (human, customer, and structural capitals) and enable the intangibles reported to be compared with other firms. The fourth school of thought relates to the balanced scorecard (BSC) model developed by Kaplan and Norton (1996, 2000, 2004). While the four perspectives (financials, customers, internal processes, and 626 learning and growth) are not directly related to intangibles, they provide strategic company performance measurement in a holistic way that goes beyond the financial perspective. In addition to the four schools of thought in modeling IC, the author considers three other schools of thought that warrant attention. The fifth school considers there are four main classes of IC: market assets, human-centered assets, IP assets, and infrastructure assets (Brooking, 1997). She perceives that each of these assets can be viewed as a component of IC, and their intersection is what creates value. The sixth school is based on the accounting methodology proposed by KPMG, and developed by Andriessen and Tiessen (2000) for calculating and allocating value to five types of intangibles: assets and endowments, skills and tacit knowledge, collective values and norms, technology and explicit knowledge, and primary and management processes. This model is now trademarked as the Value Explorere. The seventh school is the value chain approach in identifying, measuring, and determine value created by intangible expenditures. Lev’s (2001, 2002b) value chain scoreboard identifies the “fundamental economic process of innovation.” His value chain represents the factors critical for innovation and includes three phases of innovation, namely, discovery and learning, implementation, and commercialization. The Scoreboard includes nine “information boxes” of relevant information items. Lev’s nine boxes do not represent a generic model but rather provide a comprehensive set of information categories from which a firm can select depending on its strategic priorities. The seven schools of thought in modeling IC are presented in Table IV. Most models provide only supplementary information to the annual financial report and most of the measures are in nonfinancial terms, of which many are in assigned indicators (e.g. Skandia and Intangible Asset Monitor). Up until now, there is no widespread acceptance of these models with the exception of the BSC. This is partly because these models are too qualitative, broad and general, and the objectives remain ambiguous (Kaufmann and Schneider, 2004). Even the BSC model is broad and has many qualitative attributes, which can be cumbersome to implement in the IC perspective.

5.2 Formulating a model to report on intellectual capital The proposed IC reporting system is based on prior literature. It comprises of a: . collection of items that can be classified as IC (to be discussed later); and . value chain system that is needed to measure the various components of IC, and their intersection is what creates value.

The classification of IC is based on Brooking’s (1997) four main classes of IC: market, human-centered, IP, and infrastructure assets. Brooking’s four classes of IC is chosen because the three classes (human, structure and customers) are considered the fundamental drivers for IC by most researchers (discussed earlier). The fourth, IP Intellectual Method Authors Description of measure capital Skandia Navigatore Edvinsson (1997) and Edvinsson Provide supplementary and Malone (1997) information to annual financial report; focus on nonfinancial measures covering five components: (1) financial; 627 (2) customer; (3) process; (4) renewal and development; and (5) human Intangible asset monitor Sveiby (1997) Provide strategic information of the firm concerning: (1) growth; (2) renewal; (3) efficiency; (4) stability; and (5) risk Calculated intangible value Stewart (1997) and Luthy (1998) Calculates the excess return on tangible assets (ROA) in terms of: (1) human; (2) customer; and (3) structural IA Balance scorecard Kaplan and Norton (1996, 2000) Sets of financial and nonfinancial measures to indicate four perspectives: (1) financials; (2) customers; (3) internal process; and (4) leaning and growth Technology broker Brooking (1996) Report using qualitative measures on four components: (1) market assets; (2) human asserts; (3) intellectual property assets; (4) infrastructure assets Value Explorere Andriessen and Tiessen (2000) Provide supplementary report using calculated and allocating value to 5 types of intangibles: (1) assets and endowments; (2) skills and tacit knowledge; (3) collective values and norms; (4) technology and explicit knowledge; and (5) primary and management processes Value Chain Scoreboarde Lev (2001, 2002b) A matrix of nonfinancial indicators arranged in three categories according to the cycle of Table IV. development: discovery/learning, The seven schools of implementation, and thought in modeling commercialization intellectual capital capital is an integral part of the value chain process as it is needed for the implementation and commercialization of products and services as well as a form of economic rent as a reward to implementers of IC. Lev (2001, 2002a, b), Marr and Schiuma (2001), and IAS 38 also considers IP to be a vital IC component that can generate sustainable value for the firm. The data for the classification of IC are based on Table III and using the ER concept, the various classes of IC and their attributes can be reclassified into the four main classes of IC. Knowledge (skill) and competence are attributes referring to properties of human capital, and hence, the knowledge and competence are sub-classes of human JIC capital. This classification is consistent to Skandia Insurance Services (1997) annual 9,4 report, Kaplan and Norton (1996, 2000), Roos et al. (1997), and Bontis (2002). Similarly, development (process) and technology are the sub-classes of structure capital. This classification is consistent to Skandia (1994), Kaplan and Norton (1996, 2000), Roos et al. (1997), and Edvinsson (1997). It is obvious that brands and rights are the components of IC. supplier and investor are not used for the proposed IC reporting model because 628 the former is considered part of current accounts (short-term) and the later is part of Shareholders’ equity, both of which are components of tangible assets. The completed IC classification comprises of ten classes and they are presented in Table V. To provide a reporting system will require a value chain system. This value chain is necessary for three reasons. First, users of financial statements have an incomplete picture of IC due to identification, recognition and measurement problems (Garcia-Meca, 2006). From this, it can be shown that the traditional financial statement is not suitable for the reporting of IC. Second, since IC cannot stand by itself as it merely provides a mechanism that allows the various assets (customers, IT, development costs, etc.) to be bonded together in the productive process of the firm, value creation is viewed as a value chain process (Lev, 2001, 2002b; Mouritsen et al., 2001). Third, the value chain enables the firm to systematically monitor the performance and investment opportunities of the firm’s entire value creation system. Therefore, corporate reporting and internal management systems must provide a more holistic view that enables investors and managers to evaluate the performance of the total value process of the firm. The reporting statement must contain a set of rules that allows users to appreciate the content of the IC statement in such a way that they can make an independent judgment of its content (Nielsen et al., 2006). For the intangible inclusive management and financial systems to be effective, the systems must accommodate changes that take place on a continuous basis (e.g. technology, R&D, human capital, customers, etc.). The systems also require an IP management system that helps to monitor and oversee all available patents, determine new patents use, and to keep track of the corresponding “value extraction” projects and programs. In short, the new intangible inclusive system consists of two parts: (1) internal management system that mobilizes the relationships between invested and available resources (e.g. human resource, technology, organizational procedures, etc.); and (2) to generate sustainable value for stakeholders.

The complete reporting system is shown in Figure 2. Thus, the formalization of IC consists of a classification system and a value chain reporting system that is needed to be used in the initiation, development, implementation, and commercialization of a firm’s products and services.

6. Conclusions and future research IC is important because it has become a key resource of value creation in today’s knowledge economy. However, this study still finds many fundamental issues that have yet to be resolved. There are various definitions (indications) of ICs (IAs) contained in many studies, and there is still a lack of a standard definition of IC or IA. In general, most definitions (indications) state that an IC (IA) is a non-monetary asset without physical substance but it possesses value or it can generate future benefits. Category Components Researchers

Technology Technology Itami (1991), Andriessen and Tiessen (2000), Gu and Lev (2001), Mouritsen et al. (2004) and FASB NN (2001) Information Davenport and Prusak (1997) and Stewart (1997, 1998) IT Davenport and Prusak (1997), Stewart (1997), and Mouritsen et al. (2004) Knowledge/skill Intellectual/professional practice Nahapiet and Ghoshal (1998) and Stewart (1998) Intellectual property assets Brooking (1997) Knowledge/skill Granstrand (1999), Andriessen and Tiessen (2000), Brennan and Connell (2000) and Sullivan (2000) Creativity Mouritsen et al. (2004) and Granstrand (1999) Innovation capital Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) Discovery Lev (2001) Secret processes IASB (2004b) Customers/relation/external Consumer trust Itami (1991) Customer capital Edvinsson (1997), Stewart (1998) and Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) Mouritsen et al. (2002) External structure Sveiby (1997) and Brennan and Connell (2000) Gunther (2001) Customers Mouritsen et al. (2004), FASB NN (2001) Market assets Brooking (1997) Market FASB NN (2001) Advertising Gu and Lev (2001) and Chan et al. (2001), IASB (2004b) Distributing IASB (2004b) Contract FASB NN (2001) Payments on accounts Redovisnings Ra˚det (1995) Structure/internal Corporate culture Itami (1991) Infra-structured assets Brooking (1997) Organizational capital Edvinsson (1997), Mouritsen et al. (2002) and Petty and Guthrie (2000) Internal structure Sveiby (1997), Brennan and Connell (2000) and Gunther (2001) Organization (structure) Nahapiet and Ghoshal (1998), Michalisin et al. (2000), FASB NN (2001), and Petty and Guthrie (2000) (continued) aeoiain fIC of Categorizations Intellectual Is n their and (IAs) components capital al V. Table 629 al V. Table 630 9,4 JIC

Category Components Researchers

Structural capital Edvinsson and Malone (1997), Roos and Roos (1997), Roos et al. (1997), Stewart (1998), Bontis et al. (1999), Can˜ibano et al. (2000) and Sa´nchez et al. (2000) Structural resources Marr and Schiuma (2001) and MERITUM (2002) Start-up capital IASB (2004b) Relational structure Can˜ibano et al. (2000), Sa´nchez et al. (2000) and Petty and Guthrie (2000) Relational resources MERITUM (2002) Statutory-based assets FASB NN (2001) Location capital Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) Organizational practices Lev (2001) Culture (collective values and norms) Andriessen and Tiessen (2000) Strategy Marr et al. (2003) External validation Marr et al. (2003) Human Management skills Itami (1991) Human-centered Assets Brooking (1997) Human capital Edvinsson (1997), Edvinsson and Malone (1997), Roos and Roos (1997), Roos et al. (1997), Stewart (1998), Bontis et al. (1999), Can˜ibano et al. (2000), Brennan and Connell (2000), Harrison and Sullivan (2000), Sa´nchez et al. (2000), Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) and Mouritsen et al. (2002) Employee competence Petty and Guthrie (2000), Petty and Guthrie (2000) and Sveiby (1997), Gunther (2001) Experience Stewart (1998) Identity of individual Granstrand (1999) Human resources Lev (2001) MERITUM (2002) Human resource practices Gu and Lev (2001) Employees Mouritsen et al. (2004) Managerial work Workforce FASB NN (2001) Training IASB (2004b) Influencing behavior Marr et al. (2003) (continued) Category Components Researchers

Development/process Research and development (RD) Gu and Lev (2001), Redovisnings Ra˚det (1995), LBK (1996), Redovisnings Ra˚det (1998) and IASB (2004b) Capital expenditures Chan et al. (2001) and Gu and Lev (2001) Process capital Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) Brand Brand image Itami (1991) and IASB (2004b) Intellectual property Stewart (1998) and Harrison and Sullivan (2000) Competitive advantage Pablos (2003) Reputation Michalisin et al. (2000) Know-how Michalisin et al. (2000) Rights Concessions Redovisnings Ra˚det (1995), LBK (1996) and Redovisnings Ra˚det (1998) Patents Redovisnings Ra˚det (1995), LBK (1996) and Redovisnings Ra˚det (1998) Licences LBK (1996), Redovisnings Ra˚det (1998), IASB (2004b), Redovisnings Ra˚det (1995) and LBK (1996) Trademarks LBK (1996), IASB (2004b), Redovisnings Ra˚det (1995) and IASB (2004b) Tenancy agreements IASB (2004b) Copyrights IASB (2004b) Covenants not to complete IASB (2004b) Franchise IASB (2004b) Future interests IASB (2004b) Operating rights Patents Supplier Supplier capital Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) Investor Investor capital Arbeitskreis Immaterielle Werte im Rechnungswesen der Schmalenbach-Gesellschaft fu¨r Betriebswirtschaft e.V. (2001) Stakeholder resources Marr and Schiuma (2001) Notes: This classification is derived from Table III. (Record masters (IAS 38), prepaid taxes (Rekneskapslova av 17. juli (Norway), assets and endowments (Andriessen and Tissen), primary and management processes (Andriessen and Tissen) are excluded as they are either unclear, or only exist in isolated cases Intellectual capital al V. Table 631 JIC 9,4

632

Figure 2. Proposed IC reporting system

This definition may not be the most appropriate but it does help in reducing ambiguity in the understanding of IC (IA). Numerous researchers have attempted to categories intangibles, and recent development is positive as there has been a general convergence towards a three-grouped framework consisting of: (1) human capital; (2) organizational (or structural) capital; and (3) relational capital; based on Sveiby (1997), MERITUM (2002), and Bontis (2002).

A fourth group, IP capital is increasingly being used to indicate development and commercilization of products and services, and it can also indicate economic rent to implementers of IC. Researchers have also developed various models to measure and manage intangibles, and they were constructed for different purposes. Many of these are too broadly focused and are often qualitative, and hence, fail to offer any objective measurement usefulness. The study also found that most publications still lack a theoretical foundation and practical usefulness and lack of in-dept study of IC categorization and reporting. Even the few that do, they are quite abstract or they talked about theories on too broad context that do not address how they relate to practical matters. This finding is consistent with prior studies (Grant, 1997; Johansson et al., 2001; Mouritsen et al., 2002; Intellectual Wood, 2003; Kaufmann and Schneider, 2004; Marr, 2004; Marr and Adams, 2004). capital Nevertheless, this research has shown that a more formal method in the classifying of IC for reporting purposes is possible. The rationale behind the study of IC for this paper is not new, but the approach taken is quite different from existing literature. However, there are many issues and avenues of discussion of IC that are not found in other literature. For instance, since IC is not physical, the author suggests that a 633 classification approach instead of a definitional approach provides a better way to identify IC, and that since IC are drivers of growth and value creation, IC reporting can be achieved by following a value-added approach rather than one that is based on past-economic transactions. Thus, this paper extends previous studies by using a different approach in the study of IC and the author argues how these approaches can be viewed as a contribution to the literature on IC. The author recognizes that there are also limitations on this research. Attempts have been made to improve the definition of IC (IA) through classification and also suggestions of their measurements are to be more attuned towards value creation, however, there is still a lack of a more theoretical approach in rationalizing class, attributes and relation in formalizing the taxonomy of IC, and a more theoretical-based approach in developing the reporting models. These limitations (issues) should provide the motivation for future research in the definition, categorization and reporting of IC.

Notes 1. They cite the first publication on intangibles/intellectual capital appeared in Fortune magazine in 1991 and the first book by Hudson (1993), Intellectual Capital: How to Build It, Enhance It and Use It and now the Journal of Intellectual Capital. However, investigation of research and development costs started much earlier – Grabowski and Muellar (1978). 2. For the purpose of this paper, categories and classes are treated as synonymous, and similarly, categorization is synonymous with classification. 3. In Scandinavia, purchased goodwill should be amortized over a period not exceeding five years, the ASB and the IASB, the period of goodwill amortization should not exceed 20 years, and for the FASB, the limit is less than 40 years. For all cases, a longer amortization period is permitted provided there is good reason for doing so. 4. The author reviewed the major literature using a five-prone approach. He first used the ProQuest search keys on “intellectual capital,” “intellectual property,” “intellectual knowledge,” “intangible assets,” “intangibles,” “intangible resources,” “invisible assets” in searching multiple electronic databases covering a wide range of journals. He then conducted a manual search covering the major journals such as Measuring Business Excellence, Accounting Reviews, Journal of Accounting Research, Journal of Accounting and Economics, Accounting Horizon, Contemporary Accounting Research, Review of Accounting Studies, Accounting, Organisation and Society, Journal of Banking, Finance and Accounting, British Accounting Review, Accounting and Finance, Abacus. Since, Kaufmann and Schneider (2004) have searched the Academy of Management Journal, Academy of Management Review, Administrative Science Quarterly, Harvard Business Review, Journal of International Business Studies, Strategic Management Journal, and the Journal of Intellectual Capital for the period 1997 to 2003, he conducted a manual search before January 1997 and from June 2003 onwards. Next, he searched the sites for FASB, ASB and IASB concerning any statements of concepts, accounting statements and reporting relating to intangible assets. Finally, he conducted a world-wide web search using the same key search in locating for information on intangibles across countries. JIC 5. First issued in 1998. 9,4 6. Which has been funded by the European Union, various European companies (e.g. Shell, ATP and Dansk System Industri A/S), conducted by researchers from Spain, France, Denmark, Finland, Norway and Sweden (e.g. IADE Autonomous University of Madrid, University of Seville, Groupe HEC (France), Copenhagen Business School, the Research Institute of Finnish Economy, the Swedish School of Economics and Business 634 Administration, and Stockholm University, and the Norwegian School of Management). 7. CERIAS is the world’s foremost university center for multidisciplinary research and education in areas of information security (Library of Congress, 1995). 8. First reported in 1994 but formalized in 1997 (Skandia Insurance Services, 1997).

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Further reading Daum, J.H. (2003), “Intellectual capital statements: basis fur Rechnungswesen und Reportingmodell der Zukunft?”, Controlling, Vol. 15 No. 2, pp. 129-35. Kothari, S.P., Laguerre, T. and Leone, A. (1998), “Capitalization versus expensing: evidence on the uncertainty of future earnings from current investment in PP&E and R&D”, working paper, University of Rochester, Rochester, NY. SFASC (2001), Intangible Assets, SFASC No. 15, Swedish Financial Accounting Standards Council – SFASC, Stockholm. Sveiby, K.E. (2006), “The Swedish Community of Practice”, qKarl-Erik Sveiby, available at; www.sveiby.com/articles/CompaniestoLearnFrom.html

Corresponding author Kwee Keong Choong can be contacted at: [email protected]

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