Research has shown that between 50 to 75% of the market value of public companies reflect intangible assets such as innovation processes, patents, brands, trademarks, customer databases and other forms of Intellectual Capital. The traditional accounting system is ill equipped to capture and record the value of these assets since often their value changes without a transaction having taken place, whereas the entire accounting system is predicated on the concept of recording movements in money by recording each and every monetary transaction. The annual report containing the balance sheet, statement of profit & loss and cash flow shows the changes in money stock and flows during the year. Yet more often than not shareholders have to make their own assumptions on how such changes must have impacted the Intellectual Capital of the company.
And this is for those who are bold enough to try. Most do not bother making the effort. If it be true that intangibles contribute up to 75% of the market value of companies, then it is up to the company to ensure that interpretation of the changes in Intellectual Capital of the company is not left to chance. The best way to achieve this is to publish an additional chapter in the annual report containing an Intellectual Capital Report - a statement of changes in the intangibles of the company. An Intellectual Capital Report is a balance sheet of the intangible assets of the company. And it is the best way to communicate to shareholders and other stakeholders how the company is sustaining and generating its value creating processes.