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Knowledge Accounting

Knowledge Accounting. Mohammed Aldaghir Abdulrahman Aseery Mike Abernathy Alan Brady. Presentation Outline. Introduction Existing knowledge accounting Determinants of the value of accounting information Why does accounting prefer reliable information? Alternative accounting models

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Knowledge Accounting

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  1. Knowledge Accounting Mohammed Aldaghir Abdulrahman Aseery Mike Abernathy Alan Brady

  2. Presentation Outline • Introduction • Existing knowledge accounting • Determinants of the value of accounting information • Why does accounting prefer reliable information? • Alternative accounting models • The future of knowledge accounting • Prospects and possibilities for knowledge accounting

  3. Introduction - Studies have shown that financial and managerial accounting failed the knowledge management revolution. - Two main points that criticisms center on: 1) Knowledge is the engine of economic productivity in new economy. 2) Traditional financial and managerial accounting consider physical capital is the primary productivity enabler.

  4. Existing Knowledge Accounting • Financial accounting distinguish between physical and intangible assets: - Physical assets: valued on balance sheet at their purchased price less accumulated depreciation. - Intangible assets: expensed as incurred. - In the short term, earnings of companies investing in intangible assets will be lower than earnings of companies investing in physical assets.

  5. Determinants of the value of accounting information • Information relevance: - Timely, predictive and has feedback • Information reliability: • unbiased, complete and verifiable • Any accounting system must trade off relevance against reliability

  6. Why does accounting prefer reliable information? • Accounting issues: - Definition of asset - Objectives of financial statement • Business issues: - Manager’s incentive - Liability from shareholder litigation

  7. Accounting Issues • Definition of Asset: - Asset is owned property that was obtained at arm's length and has probable future economic benefits. • Definition issues: - It excludes important components of knowledge accounting (e.g. employees) - Purchased assets vs internally constructed assets

  8. Accounting Issues • Objectives of financial statement: • Information must be quantified in monetary terms - Non-financial information is NOT included

  9. Business Issues • Manager’s Incentive: • Financial incentives motivate managers to systemically bias performance measures - Knowledge management initiatives are NOT sufficiently reliable to be auditable

  10. Business Issues • Liability from shareholder litigation: • Auditors are often sued by investors who lose money • U.S. legal environment demands knowledge accounting measures that are verifiable to help auditors defend themselves • Legal threats exist to management for making non-mandatory disclosures

  11. Measuring Knowledge (Knowledge Accounting Approaches) Six alternative KA approaches: Total Value Creation (TVC) Accounting for the Future (AFTF) Balanced Scorecard Skandia Navigator Intangible Asset Monitor Value Chain Scoreboard

  12. 1- Total Value Creation (TVC) • Source • Canadian Institute of Chartered Accountants (CICA)(2000) • Characteristics • Discounted Cash Model of Value Creating Activities. • Supplements existing financial reporting systems. • Financial and non- financial information.

  13. 2- Accounting for the Future (AFTF) • Source • Nash(2000) • Characteristics • Discounted Cash Model of Value Creating Activities. • Physical & Intangible Assets Valued at present Value of Future Cash Flows. • Replaces existing financial reporting systems. • Financial but no Non- Financial Information.

  14. 3- Kaplan's Balanced Scorecard • Source • Kaplan & Norton ( 1992, 1999, 2000) • Characteristics • Measures drive form management's strategic objectives. • Supplements existing financial reporting systems. • Focuses on performance in four areas: financial, customer, internal processes, and innovation and learning. • Financial and non- financial information.

  15. 4- Skandia Navigator • Source • Skandia ASF (1998) • Characteristics • Measures drive form management's strategic objectives. • Supplements existing financial reporting systems. • Focuses on performance in five areas: Financial, customer, process, and Renewal and Development. • Financial and non- financial information.

  16. 5- Intangible Asset Monitor • Source • Sveiby (1997, 1999a, 1999b) • Characteristics • Builds upon Skandia approach. • Supplements existing financial reporting systems. • Financial and non- financial information.

  17. 6- Value chain Scoreboard • Source • Lev (2001) • Characteristics • Ten step Model of the Process by Which Innovation Creates Value. • Criteria for Choosing among Measures. • Supplements existing financial reporting systems. • Financial and non-financial information.

  18. Comparing Knowledge Accounting Methods • Both TVC and AFTF use a discounted PV method. • The Balanced Scorecard, Skandia Navigator, and the Intangible Assets Monitor are all very similar.

  19. The future of and Prospects for Knowledge Accounting • The primary virtue of existing Knowledge Accounting is reliability. The primary deficiency is existing Knowledge Accounting is its irrelevance and inconsistencyin accounting for intangible and physical assets.

  20. Conclusion • The primary virtue of the alternatives to existing Knowledge Accounting is relevance. The primary deficiency of these alternatives is a lack of reliability. • Thus, all existing and proposed solution to Knowledge Accounting are imperfect.

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