Intellectual capital definition
/What is Intellectual Capital?
Intellectual capital is the technical expertise and process knowledge contained within an organization. If intellectual capital gives an organization a significant competitive advantage, it is entirely possible that a large portion of the firm's valuation is derived from this expertise and knowledge.
If a firm does not recognize the value of its intellectual capital, it may engage in adverse personnel management practices, triggering an outflow of valuable employees. Conversely, a management team that is determined to maximize its use of intellectual capital will follow a detailed plan for focused knowledge acquisition and employee training, while also converting it into specific competitive advantages.
Examples of Intellectual Capital
Examples of intellectual capital are the expertise needed to process a complicated production procedure, the development of a secret recipe for a food product, and a high level of business training given to a consulting firm’s employees. It may also include an in-house research program that is designed to expand the knowledge of employees in an area that is critical to its development of new products.
Advantages of Intellectual Capital
There are multiple advantages associated with building or acquiring intellectual capital, which are as follows:
Enhanced competitive position. By building intellectual capital, a business can develop unique processes and products that competitors cannot duplicate. This may allow the entity to increase its market share and profits.
Improved efficiency. Intellectual capital can be employed to enhance the efficiencies of an organization’s internal processes with best practices, automation and so forth, which increases the firm’s production capacity and its profit margins.
Improved products. If intellectual property results in innovative new products, it can foster intense customer loyalty, which in turn can increase its sales over the long term.
Increased flexibility. When a business has a deep pool of intellectual capital, it is in a better position to respond to competitor actions, while also allowing it to take advantage of new market opportunities.
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Accounting for Intellectual Capital
The cost of acquiring intellectual capital is derived from excellent hiring practices, as well as a deep investment in employee training. The costs of hiring and training are considered to be period costs, and so are charged to expense as incurred. This means that an organization does not capitalize the cost of its intellectual capital.
When a firm with a large amount of intellectual capital is acquired, the acquirer will likely pay a high price for the business. If so, a portion of the purchase price is assigned to the assets and liabilities of the acquiree. The remaining unallocated amount of the purchase price is assigned to the goodwill asset. This means that the intellectual property of an acquiree is essentially being recognized in the goodwill asset of the acquirer. Depending on the circumstances, it is allowable to amortize the goodwill asset over time. If the value of this acquired knowledge declines subsequent to the acquisition date, then the asset is considered to be impaired; the impairment amount is then charged to expense.