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36

Advances in Business Research

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John Morgan, Winona State University

Frederic Ihrke, Winona State University

James Hurley, Winona State University

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more fully measure and report intellectual assets on the balance sheet. We conclude that intractable measurement 

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balance sheet. Therefore we are against these measurements.

Concept “Intellectual Capital”

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wealth. He also conceptualizes intellectual capital as having three broad components - human capital (employees 
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and structural capital. He describes human capital as embodied in the knowledge of current employees, whereas 
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over time. General agreement seems to exist that intellectual capital refers to value derived from internal knowledge 
developed and institutionalized over time.

Interest in intellectual capital as a critical component of business success is evident from the large and growing 
number of academic and popular journal articles directed towards it. John Kenneth Galbraith is believed to have 
coined the phrase intellectual capital in a 1969 letter to fellow economist Michal Kaleck, and thereby initiated a 
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of the importance of knowledge and its artifacts to growth and success in modern business organizations. Drucker’s 
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literature concerning the importance intellectual capital, its stewardship, and the related concepts of knowledge 
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a technology-driven world the increasing importance of internally generated knowledge and its related artifacts 
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 .>'66$IJJ;P$H%#@'"%$IJJK<=$$

2010, Vol. 1, No. 1, 36-44

Morgan, Ihrke and Hurley



37

Advances in Business Research

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unmeasured and unreported internally generated intellectual assets, necessary to success in modern high-technology 
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commentators Robert Elliot, Tom Davenport, Leif Edvinsson, and Steven Wallman have all asserted unreported 
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Calls for Additional Balance Sheet Reporting of Intellectual Assets
 

 Intellectual capital advocates over the past two decades have increasingly expressed concerns and frustration 
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unrecorded intellectual assets are the major source of this discrepancy. For example, Sveiby in his 1997 book, The 
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sheets for failing to report intangible factors that he believes have more to do with a company’s total worth than 
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stock shares and the total reported book value of net assets on the balance sheet. Sveiby notes that this difference is 
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Because unreported invisible assets are proportionately so large relative to reported assets, Sveiby suggests balance 
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based compensation plans for top managers that recognize stewardship of intellectual assets, and communicating 
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believed, omitting measures of intellectual capital from an organization’s balance sheet not only reduce its relevance, 
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Other intellectual capital researchers also posit that the balance sheet is largely irrelevant since intellectual assets 
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out that the biggest challenge facing the accounting profession today is measuring and explaining the growing gap 
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balance sheet measures of intellectual assets are believed to be desirable, and that the accounting profession has been 
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Review of Asset Measurement Theory

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their measurement principles. This project resulted in the following statement about the fundamental importance of 
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2010, Vol. 1, No. 1, 36-44

Morgan, Ihrke and Hurley



38

Advances in Business Research

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'11#%1$1&!/-)$6#$"#.!C(+D#)$'()$"#0!"%#)$+($*('(.+'-$1%'%#3#(%1$+1$(!%$(#@$'()$&'1$'$-!(C$&+1%!"2$+($!,*.+'-$*('(.+'-$

reporting communities. Authoritative around the world bodies recognize that measurement uncertainties inherent 
to some types of assets will prohibit their useful measure. For instance, the FASB has consistently ruled that merely 
3##%+(C$ %&#$ )#*(+%+!($ !,$ '11#%8$ '-%&!/C&$ 1+C(+*.'(%8$ )!#1$ (!%$ '/%!3'%+.'--2$ d/'-+,2$ '($ +%#3$ ,!"$ +(.-/1+!($ +($ %&#$

*('(.+'-$1%'%#3#(%1$4A5HS$[!(.#0%1$H%'%#3#(%$O8$'00#()+B$S<=$Z&#$A5HS$"#'1!(1$%&'%$3#'1/"#3#(%$/(.#"%'+(%+#1$

can be so large as to destroy any potential usefulness of dollar disclosures made, and may in fact harm other data.
In their joint conceptual framework project, both the FASB and the IASB concurred that not every item meeting 

%&#+"$`!+(%-2$)#?#-!0#)$@!"7+(C$)#*(+%+!($!,$'11#%$.!/-)$6#$/1#,/--2$"#.!C(+D#)$!"$"#0!"%#)$!($*('(.+'-$1%'%#3#(%1$

6#.'/1#$!,$3#'1/"#3#(%$/(.#"%'+(%+#1$4N!+(%$[!(.#0%/'-$A"'3#@!"7$T"!`#.%8$9::O<=$5$1+3+-'"$?+#@$@'1$#B0"#11#)$

62$%&#$A#)#"'-$5..!/(%+(C$H%'()'")1$5)?+1!"2$S!'")$+($HHA5[$_G

“This Statement establishes two basic recognition criteria that an item must meet to be a candidate for recognition 
+($%&#$6!)2$!,$'$*('(.+'-$1%'%#3#(%G$$4I<$%&#$+%#3$3/1%$3##%$%&#$)#*(+%+!($!,$'($#-#3#(%$4+=#=$'11#%<$'()$49<$%&#$+%#3$

must be measurable, meaning a monetary amount can be determined with a reasonable certainty or is reasonably 
#1%+3'6-#=̂ $4A5H5S8$HHA5[$>!=$_8$U#*(+%+!(1$!,$#-#3#(%1$'()$6'1+.$"#.!C(+%+!($."+%#"+'$,!"$'.."/'-F6'1+1$*('(.+'-$

1%'%#3#(%18$0'C#$I<=

W($1&!"%8$%&#$N!+(%$[!(.#0%/'-$A"'3#@!"7$T"!`#.%8$%&#$A5HS8$W5HS8$'()$A5H5S$&'?#$'--$1#0'"'%#-2$'%$)+,,#"#(%$

%+3#1$.!(.-/)#)$%&'%$3##%+(C$%&#$.!(.#0%/'-$3#'(+(C$!,$'11#%$+1$'$(#.#11'"2$'()$+30!"%'(%$.!()+%+!($,!"$*('(.+'-$

1%'%#3#(%$ +(.-/1+!(8$6/%$ +1$(!%$62$+%1#-,$1/,*.+#(%=$f(-#11$%&#$+%#3$.'($'-1!$3##%$.#"%'+($d/'-+%'%+?#$3#'1/"#3#(%$

."+%#"+'8$+%$3'2$(!%$6#$/1#,/-$%!$+(.-/)#$%&#$+%#3$'1$0'"%$!,$*('(.+'-$"#0!"%+(C= The FASB summarizes this sentiment 
?#"2$(+.#-2G

]Z&#$.&'"'.%#"+1%+.1$!,$+(,!"3'%+!($%&'%$3'7#$+%$'$)#1+"'6-#$.!33!)+%2$.'($6#$?+#@#)$'1$'$&+#"'".&2$!,$d/'-+%+#18$

@+%&$ /1#,/-(#11$ ,!"$ )#.+1+!($3'7+(C$ !,$3!1%$ +30!"%'(.#=$M+%&!/%$ /1#,/-(#118$ %&#"#$ @!/-)$ 6#$ (!$ 6#(#*%1$ ,"!3$

+(,!"3'%+!($%!$1#%$'C'+(1%$+%1$.!1%1=̂ $$4A5HS$[!(.#0%1$H%'%#3#(%$98$0'"'C"'0&$I<=$$

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Z&#$A5HS8$%&#$W5HS8$'()$%&#$A5H5S$&'?#$#'.&$+)#(%+*#)$"#-#?'(.#$'()$"#-+'6+-+%2$'1$%&#$%@!$0"+3'"2$d/'-+%+#1$

3'7+(C$*('(.+'-$+(,!"3'%+!($/1#,/-$%!$)#.+1+!(F3'7+(C=$H&!/-)$#+%&#"$!,$%&#1#$%@!$d/'-+%+#1$6#$#(%+"#-2$'61#(%8$%&#$

+(,!"3'%+!($+%1#-,$.'($&'?#$(!$)#.+1+!(F3'7+(C$?'-/#=$4A5HS$[!(.#0%1$H%'%#3#(%$98$0'"'C"'0&$9<=$$

With regard to the measurement of intellectual capital, it seems obvious that additional measures of intellectual 
.'0+%'-8$+,$0!11+6-#$+($'$3#'(+(C,/-$@'28$.!/-)$6#$"#-#?'(%$%!$*"3$?'-/'%+!($)#.+1+!(1$'()$%&#"#,!"#$@!/-)$3##%$%&#$

relevance criterion of useful information. On the other hand, it is the reliability of these measures where the problem 
exists.  Possible measures for most internally developed items of intellectual capital, when examined closely, are 
so inherently so lacking in reliability as to preclude decision utility. The commentary which follows focuses on the 
problems of reliability of intellectual capital measures, and not their relevance if reliably measured.
W($)+1./11+(C$"#-+'6+-+%28$%&#$A5HS$1/CC#1%1$+(,!"3'%+!($+1$!(-2$"#-+'6-#$%!$%&#$#B%#(%$+%$0!11#11#1$%&"##$d/'-+%'%+?#$

.&'"'.%#"+1%+.1=$Z&#$*"1%$+1$?#"+*'6+-+%2=$Y#-+'6-#$+(,!"3'%+!($3/1%$%!$1!3#$)#C"##$6#$+()#0#()#(%-2$?#"+*'6-#8$'()$

(!%$0/"#-2$%&#$,/(.%+!($!,$%&#$/(?#"+*'6-#$1/6`#.%+?#$`/)C3#(%1$!,$%&#$3#'1/"#"=$f%%#"-2$1/6`#.%+?#$+(,!"3'%+!($+1$

thought to be without decision utility because it affords no reasonable basis for determining whether or not it is 
correct. If there is no reasonable basis to believe information is correct, it is unhelpful.

A second related characteristic of reliability is representational faithfulness (i.e. information must be a reasonably 
'../"'%#$)#1."+0%+!($!,$@&'%$+%$0/"0!"%1$ %!$)#1."+6#<=$W($%&#$.'1#$!,$*('(.+'-$3#'1/"#3#(%$%&+1$3#'(1$%&#$)!--'"1$

'11+C(#)$%!$'($+%#3$0"!?+)#$'$"#'1!('6-2$'../"'%#$"#X#.%+!($!,$ %&#$?'-/'%+!($+(%#()#)$4#=C=$.!1%$!"$,'+"$?'-/#<=$Z!$

%&#$#B%#(%$`/)C3#(%1$!"$#1%+3'%#1$'"#$+(?!-?#)$+($#1%'6-+1&+(C$)!--'"$'3!/(%1$4'1$?#"2$!,%#($+1$%&#$.'1#$+($*('(.+'-$

"#0!"%+(C<8$%&#$`/)C3#(%1$!"$#1%+3'%#1$3/1%$)#"+?#$,"!3$1!3#$-!C+.'--2$)#,#(1+6-#$0!1+%+!($%&'%$%&#2$'"#$"#'1!('6-2$

accurate. Reasonable accuracy does not mean absolute accuracy, only that the measurement is expected to contain 
enough information to offset its error term. The principle of reasonable accuracy, or representational faithfulness, is 
(#.#11'"+-2$1/6`#.%+?#-2$'00-+#)$'()$"#d/+"#1$1!3#$`/)C3#(%$+($'00-+.'%+!(=$M&#($#1%+3'%#1$',,!")$D#"!$#B0#.%'%+!($

that they are accurate, they can be of no decision-making utility. This principle explains why local weather forecasters 
"#,"'+($,"!3$0"#)+.%+(C$@#'%&#"$%!!$,'"$+(%!$%&#$,/%/"#=$S#2!()$'$.#"%'+($,/%/"#$0!+(%$4%&!/C&$0!%#(%+'--2$"#-#?'(%<$

weather forecasts have little expectation of any accuracy and are assigned no value.        
A third characteristic important to reliability is that of neutrality. Neutrality refers to the particular environment 

in which information has been collected and interpreted. Ideally, information is gathered in an environment free of 
systematic bias. Systematic bias occurs when those responsible for gathering and interpreting information also have 
a strong personal stake in one particular outcome above others. The environment in which information is collected 
3'2$+($1!3#$.'1#1$6#$%&'%$!,$)+1+(%#"#1%#)$!6`#.%+?+%2$'()$+($!%&#"1$3'2$6#$!(#$!,$1%"!(C$0#"1!('-$6#(#*%$,"!3$'$

0'"%+./-'"$!/%.!3#=$T#"1!('-$+(%#"#1%$+1$@#--$7(!@($%!$6+'1$3#'1/"#3#(%$#10#.+'--2$@&#($%&#$"#d/+"#)$3#'1/"#3#(%1$

'"#$1/6`#.%+?#-2$)#%#"3+(#)$62$%&!1#$@+%&$'$1%"!(C$0#"1!('-$+(%#"#1%$+($!/%.!3#1$!,$%&#$3#'1/"#1=$[!(.#"(1$'6!/%$

systematic bias explain why tobacco industry studies on the health impacts of tobacco are viewed as less reliable than 
those of independent university research. 

In the next section we review proposals from intellectual capital literature concerning how to more fully measure 
and report intellectual assets on the balance sheet. This is followed by our commentary (from an accounting 
3#'1/"#3#(%$0#"10#.%+?#<$!($%&#$3#"+%1$!,$%&#1#$0"!0!1'-1=$

Review of Intellectual Capital Measurement Proposals and Related Commentary

Several recent comprehensive literature reviews of intellectual capital literature identify just three broad 
theoretical approaches for measuring internally generated intellectual assets in that literature (Grossman, 2006; 
S!(%+18$9::IP$'()$T#%%2$'()$V/%&"+#8$9:::<=$Z&#1#$6"!')$'00"!'.&#1$'"#$ "#,#""#)$ %!$'1G$ 4I<$3'"7#%$.'0+%'-+D'%+!($

3!)#-1$ "#.!C(+D+(C$ '()$ "#0!"%+(C$ +(%#--#.%/'-$ '11#%1$ +($ '3!/(%1$ #d/'-$ %!$ %&#$)+,,#"#(.#$6#%@##($ %&#$ ./3/-'%+?#$

%"')+(C$0"+.#$!,$'--$!/%1%'()+(C$1%!.7$!,$'$.!30'(2$'()$%&#$6!!7$?'-/#$!,$'--$+%1$(#%$'11#%1$./""#(%-2$"#0!"%#)P$49<$

"#%/"($!($'11#%1$3!)#-1$"#.!C(+D+(C$'()$"#0!"%+(C$+(%#--#.%/'-$'11#%1$+($'3!/(%1$#d/'-$%!$%&!1#$+30-+#)$62$.!30'"+(C$

a company’s return on assets ratio to an industry benchmark return on assets ratio. Under these models it is assumed 
that whenever a company’s return on assets ratio is found to be higher than the industry benchmark, it must have 
unrecorded intellectual assets explaining the higher than average return on assets ratio, the amount of which is 
inferable using algebra. (Note if a company’s return on assets ratio is lower than the benchmark, no intellectual 
.'0+%'-$+1$0"#1/3#)$%!$#B+1%=<$'()P$$4Q<$+()+?+)/'-$#-#3#(%1$3!)#-1$@&+.&$'%%#30%$%!$#B&'/1%+?#-2$+)#(%+,2$'()$-+1%$

the knowledge assets thought to exist and then assign dollar amounts to each on some basis. Some of these models 
attempt to estimate the historical cost of developing each item on the list, others estimate current replacement costs, 
'()$1%+--$!%&#"1$#1%+3'%#$,/%/"#$)+1.!/(%#)$.'1&$X!@1$'11!.+'%#)$@+%&$#'.&$+)#(%+*#)$+%#3=

V"!113'($49::O<$(!%#1$'$3'`!"$)+1')?'(%'C#$!,$%&#$*"1%$%@!$3!)#-1$+1$%&'%$%&#2$0"!?+)#$!(-2$-/30F1/3$%!%'-1$,!"$

'--$+(%#--#.%/'-$'11#%1$.!36+(#)$'()$0"!?+)#$-+%%-#$+(1+C&%$+(%!$%&#$0'"%+./-'"$!"$10#.+*.$'11#%1$%&'%$&'?#$0"#1/3'6-2$

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6##($+)#(%+*#)$'()$3#'1/"#)=$S&'"%#1&$'()$S'()2!0')&2'2$49::_<$(!%#$%&'%$%!$!?#".!3#$%&#$0"!6-#3$!,$'$1+(C-#$

undifferentiated total for intellectual capital, some of these models involve a stage 2 disaggregation of total intellectual 
.'0+%'-$+(%!$?'"+!/1$1/6FC"!/0+(C1$4#=C=$&/3'($.'0+%'-8$1%"/.%/"'-$.'0+%'-8$./1%!3#"$.'0+%'-8$#%.<=$

Better known examples of market capitalization models include Sveiby’s invisible balance sheet, the Investor 
511+C(#)$  '"7#%$ g'-/#$ 4W g5<8$ '()$ Z!6+(E1$ ]h^$ 4V"!113'(8$ 9::OP$ S!(%+18$ 9::IP$ T#%%2$ '()$ V/%&"+#8$ 9:::<=$$

Protagonists of market capitalization models justify them on the basis that they provide investors information more 
/1#,/-$,!"$'11#11+(C$%!%'-$*"3$?'-/#$%&'($)!$0"#1#(%$)'2$6'-'(.#$1&##%1$4V"!113'(8$9::O<=$$

A"!3$'$3#'1/"#3#(%$0#"10#.%+?#$3'"7#%$.'0+%'-+D'%+!($3!)#-1$'00#'"$%!$6#$+(1/,*.+#(%-2$"#-+'6-#$%!$&'?#$)#.+1+!(F

utility. Values assigned to total intellectual assets under this approach would be unstable and would change over 
time in ways suggesting the measures themselves have little representational faithfulness. The measured amount 
!,$ +(%#--#.%/'-$'11#%1$@!/-)$.&'(C#$'1$.!30'(2$1%!.7$0"+.#1$X/.%/'%#=$U'2F%!F)'2$.&'(C#1$ +($1%!.7$0"+.#1$@!/-)$

likely bear little relationship to actual new investments made in intellectual assets (or the expiration of intellectual 
'11#%1<=$51$1%!.7$0"+.#1$"+1#8$1!$%!!$@!/-)$%&#$3#'1/"#)$?'-/#$!,$+(%#--#.%/'-$'11#%1$#?#($+,$%&#"#$&'?#$6##($(!$(#@$

investments made in knowledge assets. If stock prices fall, computed amounts of intellectual capital would decline 
4!"$0!11+6-2$C!$(#C'%+?#<$+($10+%#$!,$%&#$,'.%$%&#"#$3'2$&'?#$6##($1+C(+*.'(%$(#@$+(?#1%3#(%1$3')#$+($7(!@-#)C#$

'11#%1=$Z&#1#$X/.%/'%+!(1$@!/-)$(!%$6#$13'--$+($0"!0!"%+!('%#$%#"31$'()$+($1!3#$2#'"1$@!/-)$#B.##)$9::i$%!$Q::i$

of beginning of year values. Precisely what market capitalization models are measuring is unclear relative to the 
10#.+*.$+%#31$!,$+(%#--#.%/'-$.'0+%'-$0/"0!"%#)-2$6#+(C$?'-/#)8$'()$@!/-)$6#&'?#$!?#"$%+3#$+($@'21$+(.!(1+1%#(%$@+%&$

underlying inputs and expirations. This suggests to accountants lack of representational faithfulness.  
5))+%+!('--28$@#$(!%#$'1$&'?#$N#(7+(1$'()$f0%!($49::I<8$%&'%$3'"7#%$.'0+%'-+D'%+!($3!)#-1$'"#$.+"./-'"$+($%#"31$

!,$/()#"-2+(C$-!C+.$`/1%+,2+(C$%&#+"$/1#=$ '"7#%$.'0+%'-+D'%+!($3!)#-1$%20+.'--2$'"#$`/1%+*#)$'1$/1#,/-$,!"$0"!?+)+(C$

+(?#1%!"1$6#%%#"$6'-'(.#$1&##%$3#'1/"#1$!,$%!%'-$*"3$@!"%&=$Z&#$3!)#-1$%&#($)#*(#$/("#.!")#)$+(%#--#.%/'-$'11#%1$'1$

%&#$)+,,#"#(.#$6#%@##($"#0!"%#)$6'-'(.#$1&##%$(#%$'11#%1$'()$'CC"#C'%#$1%!.7$0"+.#$4%!%'-$*"3$@!"%&<$+($!")#"$%!$6#%%#"$

0"#)+.%$%&#$%!%'-$*"3$@!"%&=$Z&#$)#*(+%+!($'11/3#1$7(!@-#)C#$!,$%&'%$@&+.&$+%$+1$/1#)$%!$0"#)+.%=$$

We also note that the decision utility of an extremely large undifferentiated total called intellectual capital 
3#'1/"#)$+($%&+1$@'2$+1$&+C&-2$d/#1%+!('6-#=$>!$)#1."+0%+?#$+(1+C&%$+(%!$%&#$10#.+*.$+%#31$0/"0!"%#)-2$6#+(C$3#'1/"#)$

is gained. The undifferentiated total  would be a ‘black box’ to users much in the same way that purchased goodwill 
+1$(!@8$%&#$)+,,#"#(.#$6#+(C$%&'%$%&#$?'-/#$@!/-)$X/.%/'%#$@+)#-2$'1$1%!.7$0"+.#1$.&'(C#)=$$

A+('--2$@#$(!%#$3'"7#%$.'0+%'-+D'%+!($3!)#-1$'"#$6'1#)$!($%&#$'11/30%+!($4+(.!""#.%$+($!/"$?+#@<$%&'%$'$.!30-#%#$

-+1%$!,$6'-'(.#$1&##%$'11#%1$1&!/-)$#d/'%#$@+%&$%!%'-$*"3$?'-/#=$A+('(.#$%&#!"2$&'1$-!(C$0!1+%#)$%&'%$*"3$?'-/#$+1$(!%$

'$,/(.%+!($!,$1/33#)$/(#B0+"#)$+(0/%1$4'11#%1<8$"'%&#"$+1$'$,/(.%+!($!,$#B0#.%#)$,/%/"#$)+1.!/(%#)$(#%$.'1&$+(X!@1$

4!/%0/%1<$4V+%3'(8$9::QP$ '+(#18$S'"%!?8$A'+"*#-)8$j$a+"1%8$9::Q<=$Z&#$0!+(%$6#+(C$*"3$?'-/'%+!($'00"!'.&#1$,"!3$

the summation of unexpired inputs, no matter how complete the list of inputs, are theoretically inappropriate for 
#1%+3'%+(C$*"3$?'-/#$@&+.&$+1$'00"!0"+'%#-2$'$,/(.%+!($!,$)+1.!/(%#)$#B0#.%#)$,/%/"#$.'1&$X!@1=$51$'($#B'30-#8$+1$

the value of a $10 million dollar winning lottery ticket its unexpired input cost, or would it be the present value of 
+%1$#B0#.%#)$0'2!/%e$V+%3'($49::Q<$(!%#1$%&#$%@!$3!1%$@+)#-2$'..#0%#)$*"3$?'-/'%+!($3!)#-1$+($*('(.#$4#=C=$%&#$

V!")!($ !)#-$'()$%&#$['0+%'-$511#%$T"+.+(C$4[5T <$3!)#-<$'"#$6!%&$6'1#)$!($)+1.!/(%#)$#B0#.%#)$,/%/"#$(#%$.'1&$

+(X!@1$4')`/1%#)$,!"$"+17<$(!%$%&#$1/3$!,$/(#B0+"#)$+(0/%1=$$

Thus, while market capitalization models provide an easy computation for the dollar total of unrecorded 
intellectual assets, it is not clear the measure itself represents what is purportedly being measured, provides no 
'))+%+!('-$+(,!"3'%+!($'6!/%$%!%'-$*"3$@!"%&$(!%$'-"#')2$'?'+-'6-#8$'()$@!/-)$6#$'$0!!"-2$/()#"1%!!)$/()+,,#"#(%+'%#)$

total that behaves in counterintuitive ways. The degree of error evident in this measure would be large relative to its 
+(,!"3'%+!($.!(%#(%$4+,$'(2$+(,!"3'%+!($.!(%#(%$#B+1%1<=$$

The second of the three measurement models proposed in intellectual capital literature is referred to as the return 
on assets model. This model compares an individual company’s return on assets ratios to some benchmark return on 
assets, usually an industry average. Total unrecorded intellectual assets are then inferred through reference to excess 
return on assets, presumed to exist only because unreported intellectual assets are excluded from the company’s 
)#(!3+('%!"$ 4+=#=$ %!%'-$'11#%1<=$S#%%#"$7(!@($"#%/"($!($'11#%1$3!)#-1$ ,!"$#1%+3'%+(C$ %!%'-$/("#.!")#)$ +(%#--#.%/'-$

'11#%1$+(.-/)#$H%#@'"%E1$L.!(!3+.$g'-/#$5))#)$3!)#-$4Lg5<8$%&#$a/3'($Y#1!/".#$[!1%+(C$3!)#-$4aY[5<8$'()$%&#$

c(!@-#)C#$['0+%'-$L'"(+(C1$3!)#-$4V"!113'(8$9::OP$T#%%2$'()$V/%&"+#8$9:::<=$$

Though return on assets models also provide an easily calculable dollar estimate for unrecorded intellectual 
assets, they have many of the same inherent measurement shortcomings of the market capitalization models (i.e. 
-'.7$!,$ "#0"#1#(%'%+!('-$ ,'+%&,/-(#11$ +(.-/)+(C$ +""'%+!('-$6#&'?+!"$!?#"$ %+3#$'()$!0'd/#(#11<$0-/1$!%&#"1$'1$@#--= 
 As with market capitalization models an undifferentiated total value results from this approach that behaves in 
unstable and unpredictable ways. Additional shortcomings of return on assets models are apparent. Presently there 
is no theoretical basis for justifying how the benchmark ratio would be established for purposes of comparison 

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4V"!113'(8$9::O<=$M&'%$ ,'.%!"1$ 1&!/-)$ +($ ,'.%$6#$/1#)$ %!$ 1#-#.%$ .!30'(+#1$ ,!"$ +(.-/1+!($ +($ %&#$6#(.&3'"7$ 4#=C=$

+()/1%"28$ 1#.%!"8$ 1+D#8$ "+178$ #%.=<8$ '()$&!@$1&!/-)$ %&#+"$@#+C&%+(C1$6#$)#%#"3+(#)e$5))+%+!('--28$ "#C'")-#11$!,$ %&#$

benchmark selected, the benchmark companies themselves also presumably have unrecorded intellectual assets 
affecting them as well, a complication ignored by the proponents of the model. Additionally, return on assets models 
result in valuations that are highly unstable year-to-year as changes in net income occur suggesting very poor 
"#0"#1#(%'%+!('-$,'+%&,/-(#11$!,$%&#$/()#"-2+(C$+(%#--#.%/'-$'11#%1$0"#1/3'6-2$6#+(C$3#'1/"#)$4V"!113'(8$9::O<=$$

V"!113'($ 49::O<$ '-1!$ (!%#1$ "#%/"($ !($ '11#%1$ 3!)#-1$ 0"!?+)#$ +(%#--#.%/'-$ '11#%$ ?'-/'%+!(1$ %&'%$ 6#'"$ -+%%-#$

resemblance to intellectual asset valuations provided by market capitalization models suggesting that whatever has 
6##($3#'1/"#)$62$ #'.&$3!)#-$ +1$ (!%$ %&#$ 1'3#$ %&+(C=$5$*('-$ %"!/6-+(C$ '10#.%$ !,$ "#%/"($!($ '11#%1$3!)#-1$ +1$ %&'%$

companies with return on asset ratios below the selected benchmark norm are presumed to have zero intellectual 
.'0+%'-$4!"$(#C'%+?#$+(%#--#.%/'-$.'0+%'-<8$'($+30-'/1+6-#$"#1/-%$+($%&#$.'1#$!,$&+C&$%#.&(!-!C2$.!30'(+#1$@+%&$C!!)$

0"!*%1$ '()$ %"'+(#)$ #30-!2##1=$ Z&#1#$ 1&!"%.!3+(C1$ .!36+(#)$ 4#=C=$ -'.7$ !,$ 1/00!"%+(C$ %&#!"28$ "#-'%+?#$ +(1%'6+-+%2$

!?#"$%+3#8$,'+-/"#$%!$.!""#.%$,!"$%&#$/("#.!")#)$+(%#--#.%/'-$'11#%1$+($%&#$6#(.&3'"78$#%.=<$&'?#$.'/1#)$Y!)&!?$'()$

\#-+'#"%8$49::9<$%!$.!(.-/)#$%&'%$"#%/"($!($'11#%1$3!)#-1$&!-)$%&#$-#'1%$0"!3+1#$!,$%&#$%&"##$0"!0!1#)$'00"!'.&#1$,!"$

')#d/'%#-2$3#'1/"+(C$'()$"#0!"%+(C$+(%#"('--2$C#(#"'%#)$+(%#--#.%/'-$'11#%1=$$$

A third approach proposed for measuring unrecorded intellectual assets is known as the individual elements 
3!)#-=$Z&#1#$3!)#-1$ 6#C+($@+%&$ +)#(%+*.'%+!($ '()$ -+1%+(C$ #'.&$ !,$ %&#$ 1#0'"'%#$ .!30!(#(%$ 6#-+#?#)$ %!$ .!30"+1#$

total intellectual capital. In a second step dollar amounts are estimated and assigned to each component is some 
manner.   Each component is assigned a value without reference to any known total value in advance. Better known 
individual elements models include the Technology Broker, the Value Explorer, Intellectual Asset Valuation, and the 
A+('(.+'-$ #%&!)$!,$W(%'(C+6-#$511#%1$ #'1/"+(C$4A+ W5 <$4V"!113'(8$9::OP$$Y!)!?$'()$\#-+#"%8$9::9P$T#%%2$'()$ 
V/%&"+#8$9::I<=$$

W()+?+)/'-$#-#3#(%1$3!)#-1$&'?#$1!3#$%&#!"#%+.'-$'00#'-$+($%&#$1#(1#$%&'%$%&#2$.'"#,/--2$#-'6!"'%#$%&#$10#.+*.$

+%#31$!,$+(%#--#.%/'-$.'0+%'-$0/"0!"%#)-2$6#+(C$3#'1/"#)8$'()$'"#$(!%$3#"#-2$!0'd/#$-/30F1/3$%!%'-1=$f(,!"%/('%#-28$

these models are by nature utterly subjective in terms of what items are listed and what values are assigned to them. 
Widely differing items have been included in many different models of this type that have been developed, and widely 
)+,,#"#(%$?'-/'%+!(1$!,%#($"#1/-%8$0"+3'$,'.+#$#?+)#(.#$!,$%&#$1/6`#.%+?+%2$+(&#"#(%$%!$%&+1$'00"!'.&=$$Y/%-#)C#$4IJJK<$

)#10'+"1$'%$%&#$&/()"#)1$!,$#-#3#(%1$3!1%$!,$%&#$.!33#".+'-$3!)#-1$+(.-/)#=$[!33#".+'--2$)#?#-!0#)$+(%#--#.%/'-$

capital measurement instruments which have blossomed in recent years purport to identify large numbers of individual 
components of unrecorded intellectual capital and then value each. These instruments, though universally complex 
!,%#($@+%&$1#?#"'-$&/()"#)$+()+?+)/'-$#-#3#(%18$-'.7$1+C(+*.'(%$'C"##3#(%$'6!/%$@&'%$%&#$#-#3#(%1$'"#=$Z&+1$'-!(#$

0!+(%1$ %!$1/6`#.%+?+%2$ +($ +)#(%+,2+(C$ %&#$#-#3#(%18$ -#%$'-!(#$'11+C(+(C$?'-/'%+!(1$ 4V"!113'(8$9::O<=$5)?!.'%#1$!,$

individual elements models have yet to agree whether it is better to develop a single generic list of intellectual assets 
,!"$'--$.!30'(+#1$!"$%!$)#?#-!0$'$/(+d/#$-+1%$,!"$#'.&$1#0'"'%#$.!30'(2$!"$#'.&$+()/1%"2$4a/(%#"8$M#61%#"8$'()$M'2'%%8$

9::_<=$S!(%+1$49::I<$(!%#1$%&'%$.!33#".+'--2$)#?#-!0#)$+(%#--#.%/'-$.'0+%'-$+(1%"/3#(%1$/1/'--2$+(.-/)#$'$&/()"#)$

!"$3!"#$+()+?+)/'-$,'.%!"18$'()$%&#($'11+C($#d/'-$?'-/#$%!$#'.&$,'.%!"8$'$&+C&-2$+30-'/1+6-#$?'-/'%+!($1.#('"+!$+($&+1$

view. He says such ‘devoid-of-theory’ measurements are exercises in complexity without demonstrable validity.
Advocates of individual elements models have also not agreed on the best valuation approach for assigning dollars 

%!$,'.%!"1$!(.#$%&#2$'"#$+)#(%+*#)=$H!3#$"#1#'".&#"1$'"C/#$%&'%$)!--'"1$1&!/-)$6#$'11+C(#)$6'1#)$&+1%!"+.'-$.!1%1$%!$

develop them over time. Others believe dollars should be assigned based on current market values, or replacement 
.!1%18$!"$./""#(%$%"')+(C$0"+.#1$4#?#($%&!/C&$(!(#$!,$%&#1#$?'-/#1$'.%/'--2$#B+1%<=$H%+--$!%&#"1$6#-+#?#$)!--'"1$1&!/-)$6#$

'11+C(#)$%!$.!30!(#(%1$!,$+(%#--#.%/'-$.'0+%'-$6'1#)$!($%&#$)+1.!/(%#)$(#%$,/%/"#$.'1&$X!@1$#B0#.%#)$%!$"#1/-%$,"!3$

%&#+"$!@(#"1&+0$46/%$0"!?+)#$?+"%/'--2$(!$C/+)'(.#$'1$%!$&!@$%&+1$3+C&%$6#$"#'1!('6-2$'.&+#?#)<=$M&'%$0"!0!(#(%1$

!,$'--$?'-/'%+!($'00"!'.&#1$4#=C=$&+1%!"+.'-$.!1%8$"#0-'.#3#(%$.!1%8$)+1.!/(%#)$.'1&$X!@18$#%.=<$,'+-$%!$.!(1+)#"$+1$%&'%$

not only are the particular components of intellectual capital highly subjective, their valuations are not reasonably 
determinable under any valuation approach. Many of these items have been developed internally over decades. Their 
+(0/%$.!1%1$&')$3/-%+0-#$!6`#.%+?#18$'"#$(!%$#'1+-2$+)#(%+*#)8$'()$3'2$&'?#$#B0+"#)=$5(2$0'"%+./-'"$?'-/'%+!($@!/-)$

6#$'1$`/1%+*'6-#$'1$'(2$!%&#"8$%&#$#11#(.#$!,$.!30-#%#$1/6`#.%+?+%28$'()$@+%&$(!$"#'1!('6-#$6'1+1$,!"$'..#0%+(C$!(#$

?'-/'%+!($'1$1/0#"+!"$%!$'(!%&#"=$W(,!"3'%+!($!,$%&+1$1!"%$62$)#*(+%+!($-'.71$)#.+1+!($/%+-+%2=$L?#($@!"1#$+%$.'($3'171$

or destroy the information content of other more valid measures that are grouped with it.
In summary, individual elements models are also unacceptable in the sense of measurement reliability. They are 

&+C&-2$1/6`#.%+?#8$'()$'"#$('k?#$+($%#"31$!,$%&#+"$#B0#.%'%+!(1$'6!/%$@&'%$.'($6#$/1#,/--2$3#'1/"#)$,!"$*('(.+'-$

"#0!"%+(C=$a/(%#"8$M#61%#"8$'()$M2'%%8$49::_<8$.'0%/"#$%&+1$1#(%+3#(%$62$1/CC#1%+(C$+(%#--#.%/'-$.'0+%'-$&'1$/(.-#'"$

inputs, has uncertain legal status, is rarely accepted as collateral, is rarely bought or sold, is of uncertain value, and 
"'"#-2$1/"?+?#1$1#0'"'%+!($,"!3$%&#$!"C'(+D'%+!($%&'%$&'1$)#?#-!0#)$+%=$>!%$1/"0"+1+(C-2$+%$+1$'3!(C$%&#$3!1%$)+,*./-%$

of all assets to measure in a decision useful way.    

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It seems to the authors that mainstream intellectual capital advocates while highly critical of the accounting 
profession for not developing better measures of internally generated intellectual assets, have only proposed measures 
,!"$+(%#--#.%/'-$'11#%1$%&'%$+C(!"#$!,$-!(CF"#.!C(+D#)$'()$+(%"'.%'6-#$*('(.+'-$3#'1/"#3#(%$.!(1%"'+(%1$@&+.&$-+3+%$

%&#+"$/1#,/-$3#'1/"#3#(%$'()$)+1.-!1/"#=$5..!/(%+(C$6!'")1$'"!/()$ %&#$@!"-)$.!(./"$ %&'%$(!%$#?#"2$)#*(+%+!('-$

asset can be usefully measured. We have reviewed and evaluated the proposals coming out of intellectual capital 
literature and found them wanting in terms of possessing the characteristics of useful information. The fact that a 
0'"%+./-'"$C!'-$4#=C=$'$3!"#$.!30-#%#$"#0!"%+(C$!,$+(%#"('--2$C#(#"'%#)$+(%#--#.%/'-$'11#%1<$3'2$6#$)#1+"'6-#$+($1!3#$

sense, does not also mean it is possible in a useful way. Aesop, in one of his most clever fables, relates the story of 
a mouse who proposed a bell be tied to the cat’s neck so mice would be alerted when the cat was near and thereby 
avoid danger. The idea of “belling the cat” was widely applauded until one wise old mouse asked who among the 
mice intended to bell the cat. Aesop’s moral of course was that is easy to propose impossible solutions. A careful 
'('-21+1$!,$ %&#$3#'1/"#3#(%$)+,*./-%+#1$1/""!/()+(C$+%#31$!,$+(%#"('--2$C#(#"'%#)$+(%#--#.%/'-$.'0+%'-$1/CC#1%1$ %!$

the authors that intellectual capital protagonists may be guilty of proposing an impossible solution in this case. The 
present absence of internally generated intellectual capital from balance sheets is not accounting negligence, nor 
accountants’ resistance to change, nor is it even the accounting profession’s lack of imagination as has been suggested 
in intellectual capital literature. Rather the exclusion of items of internally generated intellectual capital from the 
6'-'(.#$1&##%$"#1/-%1$,"!3$/(,!"%/('%#$3#'1/"#3#(%$"#'-+%+#1$%&'%$-+3+%$@&'%$.'($6#$/1#,/--2$3#'1/"#)$+($*('(.+'-$

terms. Intellectual capital protagonists would be well advised to address measurement issues if they ever hope for 
their calls for broader reporting of internally generated intellectual assets on the balance sheet to be heeded by the 
accounting community.

0BC02D8)BC

This paper has reviewed suggestions coming out of intellectual capital literature for fuller measurement and 
reporting internally generated intellectual assets on the balance sheet and has found them unworkable from a 
measurement perspective. Each of the three proposed approaches for measuring intellectual capital found in 
+(%#--#.%/'-$.'0+%'-$-+%#"'%/"#$'00#'"1$)##0-2$X'@#)=$W,$+30-#3#(%#)$(!(#$@!/-)$"#1/-%$+($)#.+1+!(F/1#,/-$3#'1/"#1$

!,$+(%#"('--2$C#(#"'%#)$+(%#--#.%/'-$.'0+%'-8$%&+1$0"+3'"+-2$6#.'/1#$!,$%&#+"$-'.7$!,$"#-+'6+-+%2$4+=#=$-'.7$!,$?#"+*'6+-+%28$

"#0"#1#(%'%+!('-$,'+%&,/-(#118$'()l!"$(#/%"'-+%2<=$ '"7#%$.'0+%'-+D'%+!($3!)#-1$0"!?+)#$!(-2$6-'.7$6!B$)!--'"$%!%'-1$

that are poor representations of the intellectual assets they purport to measure. Furthermore, market capitalization 
3!)#-1$&'?#$6##($`/1%+*#)$%&"!/C&$.+"./-'"$"#'1!(+(C$%&'%$'11/3#1$7(!@-#)C#$!,$%&#$?#"2$3'"7#%$?'-/'%+!(1$%&#2$'"#$

supposed to predict. Return on assets models depend upon benchmark comparisons that have no theoretical basis, 
do not correct for the unrecorded intellectual assets in the denominators of the benchmarks, provide highly unstable 
"#1/-%1$!?#"$%+3#8$'()$,'+-$%!$#B0-'+($@&2$1!3#$0"!*%'6-#$%#.&(!-!C2$.!30'(+#1$&'?#$D#"!$!"$(#C'%+?#$+(%#--#.%/'-$

capital. Individual elements models are totally subjective in terms of their construction and implementation. Individual 
#-#3#(%1$3!)#-1$0"!?+)#$@+)#-2$)+,,#"+(C$!/%.!3#1$+($@&+.&$(!$!/%.!3#$+1$3!"#$`/1%+*'6-#$%&'($'(2$!%&#"=$$

M#$.!(.-/)#$62$.!33#(%+(C$!($'$1%/)2$62$\#?$'()$m'"!@+($4IJJJ<$+($@&+.&$%&#2$0/6-+1&#)$#30+"+.'-$*()+(C1$

1&!@+(C$ '$ .!(1+1%#(%$ )#.-+(#$ +($ %&#$ /1#,/-(#11$ !,$ &+1%!"+.'-$*('(.+'-$ '..!/(%+(C$ +(,!"3'%+!($ 46!!7$?'-/#18$ .'1&$

X!@18$'()$#'"(+(C1<$,!"$0"#)+.%+(C$,/%/"#$1%!.7$"#%/"(1=$\#?$'()$m'"!@+($.!(.-/)#)$4'3!(C$!%&#"$%&+(C1<$%&'%$%&#$

decline in usefulness must be in some part due to the failure of accounting numbers to accurately include the value 
of internally generated intellectual assets and to accurately expense them as they expire. While we readily concede 
%&#$)#.-+(#$ +($ %&#$.!""#-'%+!($6#%@##($&+1%!"+.'-$*('(.+'-$ +(,!"3'%+!($'()$ ,/%/"#$1%!.7$ "#%/"(18$@#$ +(%#"0"#%$ %&+1$

decline differently than did Lev and Zarowin. We think a rapidly increasing rate of technological and social change 
explains the decline in predictability of historical numbers for the future. If rate of technological and social change 
+1$'..#-#"'%+(C$4'()$@#$6#-+#?#$+%$+1<8$%&#$,/%/"#8$+%1#-,8$('%/"'--2$#(%'+-1$'$&+C&#"$)#C"##$!,$/(.#"%'+(%2$%&'($+%$&'1$

in the past and is less predictable. Historical data in a rapidly changing environment intuitively must be less likely 
to accurately predict a more uncertain future than it once did in a more slowing changing world.  In our view the 
'..#-#"'%+!($!,$.&'(C#$+1$%&#$6#%%#"$#B0-'('%+!($,!"$%&#$\#?$'()$m'"!@+($*()+(C=$ !"#$%!$%&#$0!+(%8$)#.-+(#1$+($%&#$

0"#)+.%'6+-+%2$!,$%"')+%+!('-$*('(.+'-$"#0!"%1$@!/-)$(!%$6#$"#?#"1#)$'()$0#"&'01$@!/-)$#?#($6#$+(."#'1#)$62$+(.-/)+(C$

in those historical data spurious measures of unrecorded intellectual assets. 
Since proposals for measuring internally generated intellectual assets provide spurious measures that would not be 

useful to decision making, and since bright minds have been unable to devise any other suitable approaches to measure 
intellectual assets, we conclude that including a broader set of internally generated intellectual assets on the balance 
1&##%$+1$/("#'-+1%+.$+($'$/1#,/-$@'2=$5..!")+(C-28$%&#"#$+1$-+%%-#$"#'1!($%!$#B0#.%$%&#$*('(.+'-$'..!/(%+(C$.!33/(+%2$

will change its present position on these matters. Intellectual capital advocates who argue for broader inclusion of 
+(%#"('--2$C#(#"'%#)$+(%#--#.%/'-$'11#%1$!($%&#$6'-'(.#$1&##%$1&!/-)$*"1%$'))"#11$%&#$#B0"#11#)$3#'1/"#3#(%$.!(.#"(1$

of accountants if they are to successfully advance their argument.

2010, Vol. 1, No. 1, 36-44

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43

Advances in Business Research

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56#21#7#"'8$W=$9::;=$W(%#--#.%/'-$.'0+%'-$0"'.%+.#1$!,$*"31$'()$.!33!)+*.'%+!($!,$-'6!/"=$Accounting, Auditing, and 

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John Morgan is a professor in the department of accounting at Winona State University. He received his Ph.D. in 
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teacher effectiveness. He has published in the Journal of 21st$ [#(%/"2$5..!/(%+(C8$ %&#$ N!/"('-$ !,$S/1+(#11$ '()$

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Perspectives.

Frederic Ihrke is a professor and chair in the department of accounting at Winona State University. He received his 
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interests include income tax policy, income tax law, and accounting for intangible assets. He has published in the 
Journal of Business and Leadership.

P/=#5!R.3,#> is an associate professor in the department of accounting at Winona State University. He received his 
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reporting and social audits. He has published in the Journal of Business and Leadership. 

2010, Vol. 1, No. 1, 36-44

Morgan, Ihrke and Hurley


