Intellectual capital

Intellectual capital is the intangible value of a business, covering its people (human capital), the value inherent in its relationships (Relational capital), and everything that is left when the employees go home(Structural capital), of which Intellectual property (IP) is but one component. It is the sum of everything everybody in a company knows that gives it a competitive edge. The term is used in academia in an attempt to account for the value of intangible assets not listed explicitly on a company's balance sheets. On a national level intellectual capital refers to National Intangible Capital NIC.
A second meaning that is used in academia and was adopted in large corporations is focused on the recycling of knowledge via Knowledge management, Intellectual capital is used in the context of assessing the wealth of organizations. A metric for the value of intellectual capital is the amount by which the enterprise value of a firm exceeds the value of its tangible (physical and financial) assets. Directly visible on corporate books is capital embodied in its physical assets and financial capital; however all three make up the value of an enterprise. Measuring the real value and the total performance of intellectual capital's components is a critical part of running a company in the knowledge economy and Information Age. Understanding the intellectual capital in an enterprise allows leveraging of its intellectual assets. For a corporation, the result will optimize its stock price.

The IFRS (International Financial Reporting Standards) committee developed the International Accounting System 38 with the purpose of prescribing the accounting treatment for intangible assets. IAS 38.8 defines an intangible asset as an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity as the result of past events (for example purchase or self-creation) and from which future economic benefits (inflows of cash or other benefits) are expected.

Intellectual capital is normally classified as follows:

For a business, translating the potential of its intellectual capital is crucial. Works that focus on the subset, namely the patents, copyrights, and trade secrets ignore the benefits of their use with the business. The term "intellectual capital" is not yet common; other terms include "intangible assets". While corporate reports often stress the value and the know-how of its staff, this crucial asset cannot be considered property. A term "Workforce-in-place" can be used as a category when companies with their staff are purchased. Without that category, most of the excess purchase price over the tangible book value would just appear as goodwill. In order to profit from intellectual capital, knowledge management has become a task for management. Often, intellectual capital, or at least rights to it, are moved off-shore for exploitation, which entails risks that are hard to value. The transfer of rights to intellectual capital to offshore subsidiaries is a major enabler of corporate tax avoidance.

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