Estimates Of Intangible Capital In Financial Statements

Abstract

This research implements an inquiry into theoretical financial models and their related applications to intellectual capital (intangible expenditures) in accounting financial statements. Intellectual capital differs from intangible property in that intellectual capital has not yet been documented in the form of patents, copyrights, trademarks, or other specific balance sheet assets (intellectual property). Intellectual capital is indicative of expenditures of a discovery or development nature that has yet to prove its usefulness to the corporation or its marketability to external parties. A random sample of 28 companies was selected from the top Fortune 100 as defined by revenues, using an Internet random number generator. Rather than using earnings to compute capitalization rates, cash flow from operations is used as the surrogate. The rationale is that cash flow is not as easily manipulated as earnings and is not subject to changing accounting rules. Cash flow is critical to corporate survival and so is its funding of development for intangibles. Stock prices are unstable; they even might be categorized as “chaordic.” Accounting information provides us with historical cost in a global economy where future inventions and implementations of creative, instantaneous ideas are the foundation for new wealth. Discount rates from four models (capital asset pricing model, weighted average cost of capital, Ibbitson, Black/Isom) are applied to the cash flow from operations stream of the sample firms to determine an estimate of the unrecorded intellectual capital.