Importance of Measuring Intellectual Capital for Corporate Financial Analysis

This research report discusses the importance of measuring intellectual capital for corporate financial analysis and presents competing academic views regarding valuation of intellectual capital. It also reviews intangible assets of IBM, Dow Chemical, Coca Cola, and Telia, and analyzes Tobin’s Q for all four firms. The report includes a table of contents, introduction, and references.

Running head: BUSINESS RESEARCH REPORT
Business Research Report
University Name
Student Name
Authors’ Note

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Table of Contents
Importance of measuring intellectual capital for corporate financial analysis..........................3
Competing academic views regarding valuation of intellectual capital....................................6
Review of intangible assets.....................................................................................................21
IBM......................................................................................................................................21
Dow Chemical.....................................................................................................................22
Coca Cola.............................................................................................................................23
Telia.....................................................................................................................................24
Tobin’s Q.................................................................................................................................25
Limitation of Tobin’s Q...........................................................................................................27
References................................................................................................................................28

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Introduction
The research concentrates on prior literature where the primary concentration is on the
measurement, recognition as well as disclosure of intellectual capital in reporting. In essence,
the study at hand elucidates in detail about the importance of measurement and incorporation of
intellectual capital in the financial statements for carrying out corporate analysis. Moving further,
this study explains in detail about different methods of valuation of intellectual; capital and
analytically presents competing academic views as regards valuation of intellectual capital.
Analysis of pertinent empirical papers for supporting and disproving intellectual capital
valuation models are also presented in details. Thereafter, the study presents evaluation of
intangible assets with special reference to the firms Coca Cola, Telia, Dow Chemical and IBM.
The reporting of intangible assets is analyzed and Tobin’s Q is calculated for all the four firms.
Importance of measuring intellectual capital for corporate financial analysis
As indicated by Sydleret al.(2014), intellectual capital assets can be considered to be
strategic resources that need to be appropriately handled for deriving maximum advantages out
of them. Effectual management of assets aids in the process of recognition, enumeration and
systems of reporting. Enumerating the advantages acquired from possessing intellectual capital
and value of assets necessarily has internal along with external purpose. As far as internal
purposes are concerned, a firm would enumerate intellectual capital in a bid to handle its
resources more effectually (Zambon 2017). This can minimize the overall cost. Then again,
enumerating intellectual capital for different external purposes would have need of verifiable
information that signals the expected growth of the firm to different existing and prospective

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financiers as well as to different external users of requisite information. Essentially, the
procedure of enumerating intellectual capital for both internal as well as external purposes
engages utilizing financial as well as non-financial measurement mechanisms.
Bearing in mind the difficulties in enumerating financial measures suitable for
enumerating worth of intellectual capital, different non-financial measures are developed
namely, the balanced score card plus Skandia navigator. This is undertaken in a bid to balance
the necessity to report on different assets and challenges engaged in enumerating them (Garanina
and Dumay2017). For that reason, the information gathered utilizing non-financial procedures
match the information divulged in the financial assertions. However, some of the non-financial
enumerations associate to enumerating diverse classes of intellectual capital, in that way making
it effortless to report the appropriate value related to each class.
Essentially, diverse measures framed take in the value chain scorecard, balanced score
card, human capital accounting in addition to Skandia navigator. Effectual non-financial
dimensions of intellectual capital also matches financial dimensions, present both a feedback
system for different actions along with the information to build up novel stratagems, help in
weighing diverse action courses, and help the management of the firm (Scafartoet al. 2016).
Again, non-financial dimensions of intellectual capital present information that can aid potential
financiers as well as other stakeholders of the firm with diverse other information users, to arrive
at informed financial judgment associating to the firm.
Also, it can be said that it is important to incorporate value of intellectual capital in
financial assertions due to value relevance of intellectual capital (IC) (Osinskiet al.2017). Prior
studies on value relevance of intellectual capital(IC) are based on the hypothesis that IC is

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merely a collection of different individual components consisting of different categories of
relational, structural as well as human capital. Essentially, this kind of studies pays no attention
to the value generated by the dealings among diverse types of IC, between specific IC that
include financial as well as physical capital (Nielsen and Farooq 2015). Fundamentally, this
intellectual capital valuation models aid in process of assessment of the stock price influence of
elements of IC in separation. Learners have observed different categories of IC to be value
relevant. These categories include worth of brand, quality of brand; customer satisfaction;
support and endorsements of celebrity; base of consumers and infiltration; agreement; intangible
assets; R&D; firm’s patents; development of software; and innovation among many others (Yuet
al. 2015).
Therefore, the importance of incorporation of intellectual capital in the financial analysis
can be said to be very important for the following reasons stated below:
Knowledge based firms: Irrespective of the field or segment a firm is functioning, these days
the only variation between competitors is the way how speedily and capably can the firms
revamp themselves (starting from organizational restructuring, product line modification,
technological advancements, and production and marketing). The majority of market leading
corporations can necessarily not be characterized as dynamic or service firms. Fundamentally,
they attempt to deliver what customers might perhaps demand (Sydleret al. 2014). Also, they try
to search for novel opportunities at places where they have not operated before. Essentially, all
these innovative actions as well as ideas are founded on the intellectual capital that a business
entity a firm possesses inside its margins.

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Intangible assets: It can be observed that by the year 2010 intangible assets represented 60-
75% of average corporate value. Essentially, this implies that less than one half of overall
corporate principal can be quantified, calculated or evaluated using qualitative methods
(Berzkalneand Zelgalve 2014). This reflects the fact that there is need for new and advanced
methodology to estimate actualvalue of a firm correctly.
Sources of innovation and strategic renewal: intellectual capital is the only mechanism inside
the company, which can renew itself. This asset can be considered as the foundation for both
learning as well as creativity (Fragouli 2015). This can bring up new ideas or strategy what
influence the whole operation. Innovative thinking is the key to stay in business, according to
unpredictable and rapid environmental changes.
Not merely “human capital pool” dealings: It can be said that intellectual capital can help in
learning. Basically, this learning reflects two fundamental cases of learning from the earlier
period (Kamath 2015). These are the cases when we assess diverse consequence of a specific
action inside or else outside the firm. Intrinsically, this is referred to as external knowledge, and
this knowledge leads to generation of collective intellectual capital through learning from one
another. Particularly, this is the specific case when different individuals, operating in the similar
place transmit knowledge between one another (Purohit and Tandon 2015). Essentially, this is at
the time when widespread knowledge becomes authentic intellectual capital, as that does not
necessarily replicate outside, but helps in learning and developing independently.
Association between management of human capital and results of business: As per
previously stated attribute, intellectual capital’s connection can be effortlessly recognized with
business outcomes. Yuet al.(2015) suggests that the more intellectual capital is utilized during

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the process of operation, the more functional strategy comes out that can be applied in a better
way. Particularly, this helps in generation of higher income levels, lessens costs and exerts
impact on diverse business outcomes (Parr 2018).
Prospective value addition in the future period: Particularly, in intellectual capital, it is
important to analyse beyond traditional thinking. Dzenopoljacet al.(2017) suggests that the
intellectual capital comprises of two different parts. The first part manages the assets that are
already created, and that are already undertaken. Again, the second part is necessarily the trust
that this efficiency of intellectual capital shall remain in the upcoming period or even enhance
with time. Essentially, this segment of intellectual capital is not properly studied and researched
owing to its intricacy and insecurity (Celenza and Rossi 2014).
Competing academic views regarding valuation of intellectual capital
The question on the subsistence of intellectual capital within a business was initially
illustrated through the recognition as well as goodwill definition that is division of a business
(Khaliqueet al.2015). The IASB, (2011:A941-A943, A152), nevertheless, makes a difference
between goodwill obtained in a particular business combination and goodwill generated
internally.
During fieldwork of IASB and round-table debate undertaken to obtain reaction on
projects of IFRS 3 Business Combinations, there were several disputes in support of and against
identifying intellectual capital. This debate is particularly concerning identification of intellectual
capital in the yearly financial assertions of firms (referring to IASB, numbered 2008:382 and

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IASB, numbered 2010:A97) (Linet al.2015). There are IASB project that led to modifications to
acquired goodwill treatment in a particular business combination and goodwill generated
internally.
As suggested by Chiucchi and Dumay (2015), regulations of IASB (2011:numbered
A152) indicates towards goodwill obtained in a particular business combination that reflects a
disbursement by an acquirer in expectation of economic benefits in the future period from assets
that are necessarily not capable of being individually recognized and disjointedly recognized.
Therefore, the obtained goodwill value is, ascertained by transactions in a specific business
combination, and is identified as an intangible asset in the pronouncement of financial position
of a firm. Again, the acquirer takes in goodwill in the overall value of an obtained intangible
asset that is not recognizable as of the date of acquisition (Russ and Catasùs 2014). For instance,
an acquirer might possibly point out towards value to the subsistence of assembled workers that
indicates towards existing collection of workforce that allows the acquirer to keep on operating
an acquired business from the acquisition date. For the reason that, the assembled workers are
not necessarily an identifiable asset to be identified independently from firm’s goodwill, any
specific value accredited to it is incorporated in the goodwill obtained (Cleary and Quinn2016).
Goodwill generated internally, conversely, indicates towards expenditure that is incurred
so as to create economic benefits in the future period that do not leadto an intangible asset
creation (referring to regulation IASB, 2010: numbered A941) (Nielsenet al. 2017).
Consequently, these assets are not acknowledged as assets stated in the financial assertions,
thereby, form a component of the intellectual capital. This intellectual capital is expensed and
represented as an intermittent cost in the assertion of comprehensive earning. An instance of
goodwill generated internally is necessarily the expenses incurred so as to service an important

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customer and to gain loyalty of the customers towards the product of the firm (Fulmerand
Ployhart2014). The consequence of acquiring these expenses is the loyalty of the customers that
might lead to economic advantages flowing into the business concern in the future period.
Nevertheless, these economic benefits in the future period will not lead to recognizable
intangible asset. This is because the business concern will not have authority to control neither
loyalty of customer acquired nor economic benefits for the future period that might perhaps flow
from this specific gain(Alcanizand Roslender 2011). Additionally, the intangible assets
measurement can also be considered to be problematical.
Opinions by researchers namely Nazari (2015), who are essentially against presenting
reports on intellectual capital value in the financial assertions, are founded on the above
mentioned facts stipulated under the IASB. Additionally, the IASB mentions that intellectual
capital does not essentially satisfy the asset definition as well as criteria for recognition. As an
important part of recognition criteria, item cost to be identified need to be reliably enumerated
(IASB, 2011: numbered A847) (Too and Wan Yusoff 2015). Thus, measurement can be said to
be elementary to the process of recognition of asset as per IASB rule.
Fundamentally, the discussion in favor of identifying intellectual capital in different
financial assertions is founded on the fact that intellectual capital value stays unreported to
different users of firm information (Wanget al.2015). In actual fact, non-recognition of these
specific assets in the financial assertions hence generates a gap/variance between reported
accounting and values of capital market.
As put forward bySecundoet al.(2017), unlike different other assets, overall value of
goodwill that are internally generated is formed over a specific period in the course of a series of

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actions and it is not feasible to associate this particular value to a definite business transaction.
As suggested by Wang (2015), Intellectual capital hence becomes an element of this internally
generated business value, and as a result need to be reported to different providers of capital and
information users. Therefore, it surfaced from review of literature that the debate in support of
recognizing intellectual capital in firm’s financial reporting entails identifying that company’s
true value may possibly be assessed by taking into consideration the intellectual capital (Nielsen
and Farooq2015). It has also become clear from the above debate that there is both a need and a
drive to establish new measures and ways in which to report on intellectual capital, in order to
complement the financial reporting. Chiucchi and Montemari (2016) indicate towards to this
type of reporting as broad-based reporting system in business. This Broad-based system of
reporting presents financiers along with diverse other stakeholders with obligatory and
contextual information and assists them to make informed decisions.
Way of incorporating enumeration of intellectual capital in valuation
There are various mechanisms that can be taken into consideration for valuation of
intellectual capitals that necessarily has three different components namely, human capital,
structural capital and relational capital.
Human Capital: As suggested by Giulianiet al.(2016), for the purpose of valuation of
human capital various types of mechanisms can be taken into consideration. Essentially, these
mechanisms are associated to quite popular notion of Human Resource Accounting (abbreviated
as HRA) else wise Human Resource Costing and Accounting (abbreviated as HRCA). Sydleret
al.(2014) divides approaches to system of HRA into two different groups, that is to say, cost

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based as well as value based. It is important to mention about the models proposed by Lev and
Schwartz while considering valuation of particularly human resources.
As suggested by Roos and Pike (2018), Lev and Schwartz suppose that workers will be
working for firms till the period of death otherwise the period of retirement. However,
probabilities of promotionchange to another position or leaving the firm for any reason other
than death or else retirement can be taken into account. Fundamentally, valuation of different
employees on particularly individual basis can be considered to be extremely problematical for
large business concerns. Based on the models designed by Lev and Schwartz, it can be hereby
mentioned that human resource valuation can be carried out a group basis (Dumay 2016). In
essence, they claim that for different homogenous groups, it is easier to forecast movements in
career and possibility of leaving the firm. The process of enumeration used in this model to
anticipated economic value of different employees is calculated using a formula.
Specified models might be implemented to approximate overall value of individual
workforce or else employee groups. Analysis of different individual sections of human capital
can be said to be extremely challenging. The cost approach appears to be the easiest way to
undertake it (Ozkanet al. 2017).
Structural Capital:
Essentially, knowledge under this class was already stated. Additionally, this consists of
intangible asset to the four basic sets. Organizational framework, culture of corporate,
regulations, norms and routines undertake as the first group. Kiantoet al.(2014) assert that these
assets normally cannot be sold disjointedly, but they might be acquired by means of franchising.
Thus, their valuation can be founded on anticipated flows of cash, from potential franchising.

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Certainly, the worth of certain intangible assets needs to be deducted from franchising value. In
order to solve the issue, MEEM might be utilized (Chahal and Bakshi 2015). However, in
different cases, these intangible assets normally have extremely low value for diverse other
business concerns.
Again, the second group is essentially generated by list of customer, databases and
pertinent information. In case if a replica is easily obtainable the fair value of customer list and
identical database is often approximated by essentially cost approach. In case if these databases
otherwise information are not properly reproduced or else they reflect an important benefit of the
business concern, the income approach might perhaps be more appropriate. Website as well as
domain name are engaged in the third set. As rightly indicated by(Bontis 1998), value relies on
utilization. However, Hejaziet al.(2016) suggest that income approach namely relief from loyalty
mechanism is applicable if the domain names are commonly the subject matter of licensing
agreements and if the business depends heavily on revenues from internet. However, in different
cases, particularly at the time when flows of financials do not subsist or else their approximation
is unfeasible, the value can be ascertained by cost approach (Zambon 2017). Commercial
software as well as information system can be considered as the substance of particularly the
fourth group. In essence, their valuation is normally founded on market prices
Relational Capital
As suggested by Garanina and Dumay (2017), relational capital comprises of different
associations with customers, diverse suppliers as well as partners, brand, loyalty of customers,
reputation, customer satisfaction, association with suppliers, channels of distribution, agreements
of licensing as well as franchising.

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There are several intangible assets and that cannot be easily transferred from one
particular entity into another one, particularly business associations with diverse other
parties(Subhash 2014). Fundamentally, it is said to be practically unfeasible to purchase them.
However, it is possible to try to approximate specific fair value by means of incremental flows of
finances otherwise or income mechanisms, but this task can be said to be demanding. Thus,
relational capital is normally enumerated by different financial indicators. Nevertheless, there are
certain mechanisms that can be utilized for the purpose of valuation (Nielsen and Farooq 2015).
Also, franchising along with licensing contracts can be valued by means of discounted
anticipated flows of cash or comparative models of valuation. Essentially, for valuation of brand
equity, Yuet al.(2015) assertdiverse models that are divided into three conventional groups based
on cost, market as well as income mechanisms. This helps in comparing income mechanisms
founded on different criteria and list their benefits as well as limitations. Fundamentally, final
choice of the mechanism relies on the objective of the valuation.
Essentially, valuation of firm’s reputation can be considered to be easiest in the area of
loss. Following scandals namely oil spills in Deepwater Horizon, drop in overall value of the
company mainly relates to the loss of the firm’s reputation (Berzkalne and Zelgalve 2014). It can
be hereby approximated from customer or else market surveys. There are customer as well as
market surveys, competitive evaluation and analysis of ROI that are specific mechanisms
suggested for enumeration of some part of relational capital.
Kamath (2015) recommends the valuation of different relational capital founded on the
relational investments. Particularly, relational investments are necessarily investments that can
help in building and sustaining network of suppliers. In essence, they comprise of investment to

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get competitive and innovative suppliers, institute associations, align business procedures, train
partners and when necessary handle conflicts and renew contracts (Purohit and Tandon2015).
There are various methods that can be taken into consideration for valuation of
intangibles. This is regardless of the fact that there are several mechanisms that have been
suggested for that reason. Purohit and Tandon (2015) presents three wide approaches for
approximating fair values and most used mechanisms for financial valuation of particularly
intangible assets, namely, market approach, income approach and cost approach. The market
approach refers to comparison methods in business sales transactions and the market multiple
mechanisms. Again, the income approach refers to relief from royalty mechanism, method of
comparative income differential, direct cash flow mechanism and the multi-period excess
earnings technique. In addition to this, there are cost approach that indicates towards
reproduction cost mechanism together with the replacement cost mechanism.
As suggested by Parr (2018), there are different market mechanisms that are founded on
current transactions along with market prices of identical intangible assets. Particularly, these
data are not often available, therefore, market approach is said to have limited usage in reality.
The reproduction cost mechanisms helps in the process of approximation of the costs
borne for reproducing firms’ intangible assets in the date acquisition and the method of
replacement cost reflects the costs incurred to acquire a substitute asset of relative utility. As
stated by Linet al.(2015), the cost approach is said to be comparatively less widely accepted in
comparison to the market as well as income approach, particularly as it ignore economic
advantages of the future period.

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Review of pertinent empirical papers for supporting and refuting intellectual capital
valuation models
Methods on valuation of intellectual capital of a firm have been studied in detail by
several scholars (Tseng et al. 2015). Research works presented by prior scholars talk about and
propose over 60 different mechanisms of valuation of intellectual capital. In essence, some of
these works are mainly theoretical in nature whereas others are sensibly implemented in firms of
different types. As suggested by Su and Wells (2015), there are different valuation methods that
are founded on traditional financial themes. diverse methods present a range of opportunities,
and no one of the mechanisms that are published in academic literature is able to fulfill diverse
objectives that might perhaps have been placed, whilst a number of specific techniques valuation
of intellectual capital is said to be effective in definite industries or else just in particular firms
(Wang et al. 2015). Wang (2015) asserts that this happens owing to the intricacy of valuation of
intellectual capital as in the course of valuation one of the main difficulties is faced: the
distinction between intellectual capital along with other capital forms is time and again blurred
since intellectual capital is caught up in physical capital (That is to say, technologies along with
knowledge in a novel airplane) as value creation is based upon the dealings of intellectual with
physical capital. It is said that the powerful the relations become, the complicated it becomes to
identify intellectual capital and appraise the same as a separate business concern (Yaseen et al.
2016). Apart from that, when carrying out valuation of intellectual capital, it is important that
pointers founded on value creation in the upcoming period are regularly considered. However,
they are extremely dangerous since different projections and hypothetical data for the future
period are essentially suppositions that might dramatically fail if unforeseen alterations occur
(Yaseen et al. 2016). Again, there are many other issues existent in the process of searching

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methodologies of valuation of intellectual capital. This refers to different academic works that
reflect a trend of developing, although diverse new mechanisms, suggesting new classifications
and groups of pointers, overlooking completed theoretical work by now, suggesting “subjective
dimension”, and providing preference to different qualitative mechanisms and in maximum
number of cases do not seek universal suitability (Yu et al. 2015). For this reason, current
methods are difficult and restricted qualitative or else theoretical proposals having a narrow
evidence of application that essentially complicates process of development of a lone as well as
universal mechanism of intellectual capital valuation of business enterprise. Particularly, this is
demonstrated by the results of varied researches and prior studies that claim that no one of the
present mechanisms or else models has acquired a global recognition of theoreticians along with
practitioners, and, accordingly, no one is being implemented in business enterprises at the state
otherwise global level. Therefore, the subject matter has so far been not resolved. In particular,
this set of techniques, mechanisms and changes in function unquestionably complicate both
theoretical along with empirical studies in this particular field. Nevertheless, as said by Yu et al.
(2015) this might perhaps lead to development of a consistent system of valuation of intellectual
capital. In essence, the method would institute previously existing mechanisms or else build up
new ones. Also, the new mechanisms might perhaps be an amalgamation of different extensive
mechanisms else wise thoughts, and it can help in circumventing certain problems of the present
technique. As a consequence, the current research study intends to systemize and simplify
already undertaken hypothetical and experiential research study in a bid to evaluate, compare,
and categorize mechanisms of valuation of intellectual capital. This can help in contributing
towards procedures of generating this standardization scheme. At present, with no global or state
regulation of this procedure being employed, each and every concern has the need to decide

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whether the method optimally aligns with the purpose(s), state of affairs and requirements of
users of information. IN essence, history reflects that business concerns transformed their
mechanisms of valuation of intellectual capital, implemented the same in practice and also
handled the same to develop potency of intellectual capital (Zambon 2017). For this reason, the
purpose of this study is analysis of methods of valuation of intellectual capital and their
categorization, and the intention is to simplify a system of technique of valuation of intellectual
capital after having investigated and systemized mechanisms of intellectual capital valuation
presented in operations of different authors. In particular, the primary processes implemented in
the current study are necessarily synthesis along with generalization of educational writings,
counting content analysis. The consequences of the study and its closing stage are founded on
evaluation of academic investigations undertaken by varied authors and ensuing publications.
Educational writings present a variety of mechanisms of valuation of intellectual capital:
both financial as well as non-financial. This literature talks about implementing quantitative
otherwise more regularly, qualitative methods, both external as well as internal methods,
valuation of intellectual capital as a universality or statement of diverse separate elements, based
on conventional financial accounting of concerns or applying market pointers to recognize
instituted events in the market. Again, there are also different methods of management when
grounds of instituted situation are presented. In addition to this, there are different techniques
that present a methodical single index-manifested worth of particularly intellectual capital whilst
others think about multiple factors exerting influence on overall activity of a business concern
(Holmes and Maghrebi 2015). There are different authors, who, in a bid to systemize and
replicate specific features in different methods or else to recognize shared features, categorize the
same consistent with specific criteria. Generally, scholarly works at hand presents classifications

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founded on common valuation principles and distinguish four different methods (Fragouli 2015).
Again, another classification, that is considered to be the most frequent in areas of academic
studies, separates two different groups of mechanism of valuation of intellectual capital
concerning the valued substances (Garanina and Dumay 2017).
Another categorization that is presented in scholarly operation divides mechanisms
valuation of intellectual capital. This refers to utilization of monetary dimension unit into two
different groups: monetary as well as non-monetary (Dumay 2016). In essence, the fourth
categorization mentioned in academic literature indicates towards mechanisms of valuation of
intellectual capital in accordance with presentation of valuation outcome into four different types
(Chiucchi and Montemari 2016). A comprehensive scheme of categorization of valuation
mechanisms has been formulated for searching terminology most appropriate for pertinent
methodologies: financial valuation mechanisms also indicate towards quantitative monetary
mechanisms, whilst the entire group can be mentioned as evaluation technique. As rightly
indicated by Fragouli (2015), value measurement mechanisms can be referred to as quantitative
non-monetary mechanisms belonging to particular group of enumeration. Essentially, it has been
instituted that over and above 60 different mechanisms of valuation of intellectual capital of a
business enterprise are present. The outcomes of study reflect that these mechanisms are
categorized as per four different features. These features include general notions of valuation
(that is to say, capitalization of market, return earned on assets, firm’s intellectual capital and
scorecard mechanisms. There are diverse valuated object (for example, holistic along with
atomistic mechanisms that are separated); utilization of monetary unit present in the procedure of
enumeration. In this case, monetary as well as non-monetary stuffs are essentially highlighted
(specifically, presentations of valuation outcomes that include financial assessment, value

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enumeration, and value analysis and measurement mechanisms are presented) (Celenza and
Rossi 2014). In the same way, a categorization system of valuation mechanisms of intellectual
capital is formulated.
There are several authors who are interested in huge collection of intangible assets than
the onesbelonging to intangible assets that are identifiable as per“International Accounting
Standard 38”. Essentially, these assets are said to be classified into diverse categories
(Chiucchiand Dumay 2015).
There are several studies that points out towards influence of intellectual capital (IC) on
pecuniary in addition to market related performance of corporations. For most part, it can be
inferred that there exists a positive association between diverse components of intellectual capital
in cooperation with economic performance of firms. Essentially, similar studies were conducted
on a sample of around 75 firms that are listed under Johannesburg Stock Exchange (Cleary and
Quinn 2016). The results of the study reflected the fact that when survey was undertaken, the
nation South Africa depended heavily on mistreatment of natural assets and firms operating in
that region acquired competitive benefits out of it. Additionally, a research work undertaken in
the region of Taiwan showed positive impact of intellectual capital on overall financial
performance and that was denominated by VAIC (Fulmer and Ployhart 2014). Also, a research
work undertaken in the area Malaysia deals with examination of effectiveness of IC in mostly
banking division. Consequences of the research work indicated towards the fact that domestic
banks are normally less effective in the process of exploitation of Intellectual Capital (IC) related
to banks having greater part of foreign possession. Majority of investigation works indicated

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positive association between different elements of IC with other variables that were employed
(Nazari 2015). This is mainly used in enumerating performance along with the strong impact of
the individual elements of IC on the selected dimensions of business performance considerably
(irrespective of segment in which they operate), in spite of a comparatively large number of units
present in the sample.
With respect to Republic of Serbia, it can be said that there are six different empirical
studies were undertaken using different samples and considering different horizons of time, with
one general and common attribute. In essence, they all implemented identical research methods.
Essentially, studies have necessarily utilized the notion of enumerating overall efficacy of
utilization of IC by means of VAIC coefficient (Wang et al. 2015).
In essence, there are studies undertaken on companies operating in the BELEXI 15
group. However, the study failed to demonstrate overall subsistence of strong association
between the coefficient of VAIC(valuation of intellectual capital) as well as company
performance enumerated by ROE (return generated out of equity), ROA (return generated out of
firm’s assets) together with productivity of workers (Wang 2015). Ascertainment of nature of
association between return generated out of equity and return generated out of firm’s assets and
movement in VAIC in 15 different firms is considerably affected by structural capital and its
impact on ROE. Apart from that, impact of human capital on overall productivity of member of
staffs was ascertained (Chichi and Montemari 2016). With regard to banking division in the
region of Serbia, it can be seen that there are substantially significant influence on firm’s return
generated out of equity, productivity of workers, return generated out of firm’s assets with
different other components of intellectual capital. Nevertheless, this kind of correlation was not
recognized in the specific case of profitability of bank in the area of Serbia. Conversely,

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regression analysis showed the way to the specific conclusion that at the time when Serbian
banks are taken into consideration, structural capital has a dominant influence on corporate
performance, whilst the EP was more often than not affected by particularly human capital
(Giulianiet al. 2016). Again, operations of different top Siberian exporters, is close to banks
operating in Siberia bears the strongest comparative influence on financial performance
(enumerated by profitability, return generated out of equity as well as return generated out of
firm’s assets). In addition to this, human capital ascertains ROA along with EP. Also, physical
capital largely affected return generated out of equity and enterprise’s level of profitability.
There are 2 different prior research works conducted with real sector and with
corporations possessing highest level of net profit during the year 2010 and 2011. These studies
revealed that strong association between intellectual capital and economic performance of firms
could not be instituted. In essence, the outcomes of the two studies proposes the fact that success
of business enumerated by net income, operating earnings as well as operating profit is not
ascertained by components of intellectual capital (Roos and Pike 2018). Regrettably, this directs
the way towards inference that accomplishment/success is mainly caused by facets that do not
come under the class of existing practices and common methods. The present circumstances
working in the economy of Serbia replicates a state in which performance of corporations is
affected relatively less by level of expertise and competencies. Essentially, performance of firms
again relies on physical assets of a business concern, value of location, and prospective position
of market that has a trace of monopoly. Research was undertaken on a sample of approximately
54 firms listed under BELEXline index of essentially Belgrade Stock Exchange (Dumay 2016).
The outcomes divulged the fact that there subsisted a positive connection of human capital on
overall performance of the corporation in the market, whilst control of structural capital was

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statistically insignificant. Particularly, the consequences of the study indicated that expertise,
competencies, eagerness along with different elements of human capital ascertained performance
of enterprise in the market as is articulated by market to book ratio. Conversely, physical capital
necessarily plays a significant role in attainment of performance of market. However, influence
of physical capital can be said to be comparatively more profound than the influence of human
capital (Chahal and Bakshi 2015). Therefore, the largest comparative contribution to generation
of value necessarily has physical capital, and human capital.
During industrial epoch, the important value-making procedure was necessarily proper
administration of firm’s assets of a business concern that were material in nature. This included
developing plants, specific sale points, management of levels of inventory, proper management
of different resources such as land, space for office along with different other financial
resources). Essentially, the procedure followed for creation of value in age of information is
appropriate managing of intangible assets possessed by the firm (Hejaziet al. 2016).
Accordingly, the content of different jobs has considerably altered during this information age.
Between the periods (1990 to 1999), overall fraction of workers (described as specialized
creative workforces) augmented from the level of 0.7% to approximately 5.7% (Kiantoet
al.2014). Resourceful workers produce and utilize IC and the specialized workforce includes
architect, mathematicians, professional in information as well as communication technology,
engineers, specialists from diverse social and natural sciences, planners of city, creative artists,
writers, entertainers, as well as athletes. Till the period 1999, roughly 7 million were engaged in
the U.S. market of specialized resourceful employees (Roos and Pike 2018). Essentially, the
greatest enhancement in the overall value of IC, along with the growth and development of its
influence on performance of business, became apparent during the middle of decade of 1980s,

24BUSINESS RESEARCH REPORT
with the beginning of huge “immaterial businesses. These industries include software industry;
businesses based on biotechnology, as well as internet founded segments. However, the
expansion, development and significance of IC have continued and sustained till the present
period. Investments made in intellectual capital are now regarded as a fundamental indicator of
vivacity of a business concern and an important dimension of performance in the upcoming
period (Nielsen and Farooq 2015). Thus, it can be hereby inferred that it is important to
incorporate valuation of intellectual capital for financial analysis of the firm.
This research study reflects that intellectual capital has considerable influence on
productivity development. In the USA, ever since the period of 1973 till the year 1995,
intellectual capital, on an average, put in 0.4 % points to the annual growth as well as
development of productivity of particularly human labor (Chahal and Bakshi 2015). Essentially,
this specific contribution has enhanced during the period ever since the period 1995 till the
period 2003 to roughly 0.8 % points. It can be hereby observed that in France, during the period
(1995-2003), intellectual contributed to a yearly enhancement in efficiency of human labor for
approximately 0.9% (Inkinenet al. 2017). Again, in the segment Germany, this specific input led
to roughly 0.59 p.c points. However, in the region of Italy there are 0.4 p.c, and in Spain there
are 0.19 p.c points. In addition to this, in the UK, during the period (1979-1995), intellectual
capital contributed towards enhancement in average efficiency of 0.39% every year recorded. On
the other hand, since the period (1995-2003) this specific number enhanced to 0.59 (Otcenášková
and Bureš 2018). In the area Finland, intellectual capital enhanced overall efficiency by a mean
of 0.6% every year during the period (1995-2000) (Tsenget al. 2015).

25BUSINESS RESEARCH REPORT

26BUSINESS RESEARCH REPORT
Review of intangible assets
Intangible assets refer to the kind of asset that is not in the physical form. Some examples
of intangible assets include goodwill, intellectual property like patents, copyrights, trademarks
and brand recognition. Intangible assets are opposite to tangible assets that include physical
assets such as vehicles, land, machinery and inventories (Bianchi 2017). In contrast to that
financial assets like bonds and stocks, which derive values from contractual claim, are termed as
tangible assets. Intangible assets can be either definite or indefinite. An example of indefinite
intangible asset is the brand name of the company. The brand name of the company persists with
the company as long as the company keeps working. Legal agreement that is drawn to work
under a company’s patent, having no plans for extending the agreement is an example of definite
intangible asset. Intangible assets though do not have a physical value but might prove beneficial
for long term success of the company. Consider the coca cola company for example. The
company’s profits would have been very low if the brand name of the company was not
associated. Thus, though brand value is not at all a physical asset which can be touches or seen
but then also brand name has a great impact in generation sales for the company.
IBM
The International Business Machine Corporation (IBM) is a multinational company thet
is headquartered in America. The company operates over 170 countries. The company
manufactures and sells the computer hardware products and also various software products. The
company first started in 1911. The company is also involved in various types of data analytics
and also builds gaming consoles like PlayStation, Xbox 360 and many others. IBM Watson is

27BUSINESS RESEARCH REPORT
also a technology that is very useful in various machine learning to extract large chunks of
unstructured data.
The impair accounting of a business involve considerable assumption and estimates. The
acquisition practice of the company is subject to fail value estimation of assets acquiring
identifiable intangible assets, assumed liabilities and other non-controlling interest payment.
Testing impairment of assets except good will and other indeterminately lived intangible assets
needs cash flows to be allocated to the group of assets and if required fair values of the assets are
recorded. Estimation of the company is based on reasonable but unpredictable or uncertain
assumption. The valuation to assets requires the company to apply assumption of the
management practice that would not indicate unpredictable circumstances that might occur.
Goodwill is one of the significant intangible asset of the company. Every year the
company take reviews of the goodwill of impairment. The company also reviews the changing
circumstances or event indicating possibility of non-recovery of the carrying value of intangible
assets (Su and Wells 2015). In the last year, the company identified the qualitative risk factor
with the objective of identifying circumstances where the reporting value of the asset fall short of
the carrying amount. The table below shows reporting of intangible assets in IBM for the three
consecutive years of 2015, 2016 and 2017.
Table 1: Intangible assets in IBM
IBM
Particulars 2017 2016 2015
Intangible asset class
Capitalized software $810 $876 $767
Client relationships 1278 1602 929
Completed technology 1210 1654 1563

28BUSINESS RESEARCH REPORT
Patents/trademarks 413 525 193
Other* 31 31 35
Total 3742 4688 3487
As shown from the table, the total valued intangible assets increases from $3487 million
in 2015 to $4688 million in 2016 (ibm.com 2018). The asset value again declined in 2017 with
asset value being $3742 million
Dow Chemical
Dow Chemicals is an American multinational corporation which is headquartered in
Michigan, United States. The company is the world’s second largest chemical company. The
company is very diversifies in nature. Water purification, performance plastics, agricultural
science, performance chemicals, basic chemicals and hydrocarbons energy all these products are
manufactured by the chemical company. In the middle phase of 19th century the company was
also involved in manufacturing of nuclear weapons. The company also helped the United States
military to manufacture napalm bombs that were very crucial for the Vietnam War.
Dow Chemical considers durable assets and identifiable intangible assets for evaluation
of impairment in where there is possibility of non-recovery of the assets. The company reviews
the goodwill in situation where purchase price for different business combination exceeds the net
fair value of the required tangible and intangible assets. Goodwill is tested annually or more
frequently the reporting value does not tend to hit below the carrying value. For impairment
assessment of goodwill, the qualitative factors are taken into consideration. Additional
quantitative tests are performed if the reported unit has a carrying value higher than its fair value
estimates. Once the quantitative testing indicates that goodwill is impaired then the carrying

29BUSINESS RESEARCH REPORT
value is reported as the fair value (dow-dupont.com 2018).Cash flow methodology is primarily
used by the company to compute the fair value of the reporting units.
The recorded units of different categories of intangible assets of Dow Chemical from
2015 to 2017 is presented in the following table
Table 2: Reporting of intangible assets in Dow Chemical
Dow Chemical
Particulars
2
017
2
016
2
015
Intangible assets with finite lives:
Developed technology
5
793
1
871
Software
6
40
6
40
6
25
Trademarks/tradenames
1
218
1
93
2
25
Customer-related
1
2386
3
239
1
798
Microbial cell factories
3
91 _
Favorable supply contract
4
78 _
Other
5
37
2
2
8
92
Total other intangible assets with finite lives
2
1443
5
965
3
540
Intangible assets with indefinite lives
In-process research and development ("IPR&D")
7
10
6
1
7
7
Germplasm
6
265
Trademarks/tradenames
4
856
Total other intangible assets
3
3274
6
026
3
617

30BUSINESS RESEARCH REPORT
Coca Cola
Coca Cola is a soft drinks company. The Coca-Cola Company is the largest beverage
company of the world with a choice of more than 3,800 beverages. The company is estimated to
be 20 billion dollar brand including Diet coke, Coca-Cola zero, Sprite, Fanta, Minute Maid, Gold
Peak, Dasani, Del Valle, Georgia, and PowerAde. The company provides more than 1.9 billion
of these items to the consumers over 200 countries ("Financial Data", 2018). The company
employs more than 700,000 employees and is considered to be among the world’s top 10 private
employers (2018).
The intangible assets are categorized under three groups- assets that have definite values and
assets that have indefinite lives and not subject to amortization and goodwill. For definite valued
intangible assets, with presence of necessary condition test for asset impairment needs to be
conducted. The impairment test more frequent for intangible assets with indefinite lives and
goodwill. In situation where facts and circumstances suggest that the asset value cannot be
recovered then the management assesses recovery of the carrying value in reference to sales
volume, gross profit and cash flows. The company tests intangible assets to find out the useful
lives which include franchise right, goodwill, trademarks. Based on this the company determines
frequency of testing impairment (coca-colacompany.com 2018). Coca Cola performs review of
the annual impairment on the first day of company’s third fiscal quarter. The company uses a
variety of methods for impairment assessment. Discounted cash flow model is one way for
impairment assessment. The table below presents different intangible assets of Coca- Cola.

31BUSINESS RESEARCH REPORT
Table 3: Reporting of intangible assets of Coca-Cola
Coca Cola
Particulars 2017 2016 2015
Definite-Lived Intangible Assets
Customer relationships $62 $207 $294
Bottlers’ franchise rights 61 106 192
Trademarks 109 164 167
Other 30 121 37
Total $262 $598 $690
Indefinite-Lived Intangible Assets
Trademarks
$6,7
29
$6,0
97
$5,9
89
Bottlers’ franchise rights 138 3676 6000
Goodwill 9401
1062
9
1128
9
others 106 128 164
Total
$16,
374
$20,
530
$23,
442
Total intangible assets
$16,
636
$21,
128
$24,
132
Telia
Telia is Swedish Telecom Company that operates in the Eastern Europe region. The company
also extends its services in central Asia, northern Europe and south Asia. The company has a
12.25 percent share in Afghanistan. One of the major telecom company that is analyzed in the
report.
The company estimates fair value of the acquired assets. The intangible assets are recognized
at their fair values that are subject to impairment (teliacompany.com 2018). The table below

32BUSINESS RESEARCH REPORT
shows goodwill and other acquired intangible assets of the company for three consecutive years
from 2015 to 2017.
Table 4:Reporting of intangible assets of Telia
Telia
Particulars 2017 2016 2015
Goodwill 60984 57923 54938
other intangible assets 15668 13024 12995
Total 76652 70947 67933
Tobin’s Q
The Tobin Q’s theory of investment estimates the ratio of market value of a company’s
total existing share to the total value of the asset. James Tobin is the developer of Tobin model.
The model states that investment is a function of quantity q. The q is the ratio between the
market value of the capital and the replacement cost of the capital. The major factors that affect
the market value of the capital is the expected returns and interest rate. These two factors should
be analyzed when considering the acquisition cost. Mathematically, the equation for the Tobin’s
Q model can be shown as follows,
Tobi n' s Q= MArket value of capital
Replacement cost of capital
A low ratio lying between 0 and 1 indicates that replacement cost of the company is higher
than its stock value. This in turn indicates undervaluation of the company’s stock (Peters and
Taylor 2017). The higher value of Tobin’s Q implies company’s stocks are valued greater than
the cost of replacement indicating overvaluation of assets.

33BUSINESS RESEARCH REPORT
Table 5: Tobin’s Q for IBM
IBM
Y
ear
Number of
shares
Stock
Price
Total market
value
Total asset
value
To
bin q
2
015 978744523 137.62 1.34695E+11 1.10495E+11
1.2
2
2
016 955422530 165.99 1.58591E+11 1.1747E+11
1.3
5
2
017 932828295 153.42 1.43115E+11 1.25356E+11
1.1
4
For IBM, Tobin’s Q for all the three year (2015-2017) is greater than 1. The value of
Tobin’s Q greater than 1 implies that the stocks are overvalued which are not good from the
perspective of the investors. The Tobin’s Q has increased from 1.22 in 2015 to 1.35 in 2016. In
the next year, following a lower stock price, the computed Tobin’s Q declined to 1.14.
Table 6: Tobin’s Q for Dow Chemical
Dow Chemical
Y
ear
Number of
shares
Stock
Price
Total market
value
Total asset
value
To
bin q
2
015 1130100000 51.51 58211451000 67938000000
0.8
6
2
016 1108100000 50.55 56014455000 79511000000
0.7
0
2
017 1579800000 62.04 98010792000 1.92164E+11
0.5
1
For Dow Chemical Tobin’s Q for the three years are less than 1. This indicates that
stocks of the company are undervalued. This provides opportunity for further growth is share
price. The ratio of market value to total assets was 0.86 2015. This was declined to 0.70 in 2016
and further to 0.51 in 2017.

34BUSINESS RESEARCH REPORT
Table 7: Tobin’s Q for Coca Cola
CocaCola
Y
ear
Number of
shares
Stock
Price
Total market
value
Total asset
value
To
bin q
2
015 4352000000 41.33 1.79868E+11 89996000000
2.0
0
2
016 4317000000 43.62 1.88308E+11 87270000000
2.1
6
2
017 4272000000 44.09 1.88352E+11 87896000000
2.1
4
A very high Tobin’s Q ratio is obtained for Coca Cola. For 2015, the computed Tobin’s
Q is 2.00. The ratio increased to 2.16 in 2016. The ratio slightly declined to 2.14 in 2017.
Table 8: Tobin’s Q for Telia
Telia
Y
ear
Number of
shares
Stock
Price
Total market
value
Total asset
value
To
bin q
2
015 4330100000 42.19 1.82687E+11 2.54017E+11
0.7
2
2
016 4330100000 36.71 1.58958E+11 2.5343E+11
0.6
3
2
017 4330100000 36.55 1.58265E+11 2.43845E+11
0.6
5
Tobin’s Q for TeliaCompany for the three years is less than 1 indicating undervaluation
of stock. The q ratio in 2015 is 0.72. This declined to 0.63 in 2016. The q ratio slightly increased
to 0.65 in 2017.
Limitation of Tobin’s Q

35BUSINESS RESEARCH REPORT
The theory of Tobin’s Q was not supported empirically. The real world evidences
suggests that there are several other factors except stock market’s value. There are several lagged
values that affect the investment decision as well. The Tobin theory states that investment should
be undertaken when the change in market value of capital stock due to the investment exceeds
the cost of creating it. In real world, the marginal Q differs from average Q which plays an
important role in investment decision (Holmes and Maghrebi2015). There exits an or ordering
and delivery time lag which intervenes the decision of a firm regarding the time when investment
is profitable and the time of delivery of investment good. Imperfect capital market is another
factor that limits application of Tobin’s Q.

36BUSINESS RESEARCH REPORT
Conclusion
The above mentioned study helps in gaining deep insight regarding measurement,
recognition as well as disclosure of intellectual capital in reporting. Also, the study helps in
understanding importance of measurement and incorporation of intellectual capital in the
financial reports for appropriate financial analysis. Furthermore, the study helps in understanding
different methods of valuation of intellectual capital and presents competing reviews from prior
literature on valuation of intellectual capital. Thereafter, evaluation of intangible assets of the
firms Coca Cola,Telia, Dow Chemical and IBM are presented that helps in understanding
importance of evaluation of both tangible and intangible assets for assessment of market value of
companies. The reporting of intangible assets is analyzed and Tobin’s Q is calculated for all the
four firms. Tobin’s Q for Telia Company indicates undervaluation of stock. A very high Tobin’s
Q ratio is obtained for Coca Cola indicating overvaluation. Tobin’s Q for Dow Chemical
calculated to be less than 1for the three years indicates that stocks of the company are
undervalued. For IBM, Tobin’s Q for all the three years is greater than 1 implying that the stocks
are overvalued. Tobin's q influenced by intangible assets helps in understanding the intellectual
capital of the firms that is to say, the unregistered contribution of particularly, technology,
knowledge as well as goodwill, in addition to other intangible assets.

37BUSINESS RESEARCH REPORT
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