Knowledge management 2.0 – financial accounting for intellectual capital as an information basis for intellectual capital management

„e-mentor” (polish scientific journal) just published interesting article entitled as this post. Here is its english summary:


In the last decade the development of the discipline of knowledge management has slowed compared to the previous successful period. Currently, this development can be accelerated again, because a new branch of post-industrial financial accounting adopted the concept of intellectual capital. The purpose of this article is to present the innovatory foundations of second generation knowledge management, which includes the latest developments in accounting theory and post-industrial financial analysis. Deductive thinking (drawing conclusions from previously accepted premises) was used as a research method. The basic premise was the traditional balance sheets extended with the categories of ‘competence assets’ and ‘intellectual capital’, which led to the introduction of the so-called ‘knowledge-based balance sheets’. In calculation example there were presented new quantitative tools designed for the intellectual capital manager, such as: an analysis of the knowledge-based balance sheets, the rate of return on knowledge, the degree of intellectual leverage. All they help to answer fundamental questions: what is the value and the growth of controlled intellectual capital resources and what is the effectiveness of their use in the enterprise. In the knowledge economy effective management of intellectual capital is a crucial factor of competitiveness. The research shows that top management equipped with the instruments
of post-industrial financial analysis are able to make more effective decisions on usage of intellectual capital. In addition, studies seem to open a new area of scientific inquiry in the field of quantitative recognition of intellectual capital resources for the purposes of management of the knowledge-based enterprise.” 

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Comment by Leslaw Niemczyk on May 31, 2014 at 3:28am

I sustain all my earlier statements about KM. Once again I would like to repeat my opinion there is no possibility to vitalize KM in the manner that you are trying, but I don’t want to stop you. Just go to do this somewhere else. You don't have to accept my point of view. But you should accept a fact that I will not agree with your emotional argumentation. For me your words are just some kind of "ars poetica". If someone wants to "buy" it, no problem, but I do not want!

You have written that „ALL doctors, nurses, lawyers are TOP knowledge professionals. They are hyper-innovators and knowledge creators.” If they ALL are hyper-innovators and knowledge creators, then you have to live in other planet or you are just completely disconnected from real world. Sorry, John, but our further discussion seams to have no sense. That is why I would like to kindly ask you: just go write on your own blog :-)

Comment by Leslaw Niemczyk on March 16, 2014 at 1:42pm

Probably because of my poor english grammar, you  didn’t understand an intention of my arguments. When I wrote "...a big hospital with highly educated medical staff and a big lawyer company. Both companies in current period don’t create any innovation.", I just would like to make a kind of theoretical assumption - I didn’t write about any real organisation, that I've known. In this manner I would like to built the abstract example or the linguistic base to demonstrate to you how I use basic words in our discussion. I can accept that medical doctors and lawyers are learning themselves by getting experience or even by training programs. But from my point of view, it’s not enough to say that in this way they create knowledge in objective sense or to say that they are innovative, because they are trying to master theirs skills. There is of course small exception – 1-2% of the best firms in these sectors. All the rest, that means about 98-99% just imitate knowledge and innovation, that someone else create! (I think that in such discussion we should first analise general meaning and after that we can go to the exceptions). But even this majority does not create new knowledge, I would say that they need „KM”.

I’m very glad that you are trying to vitalize the discipline of „KM” just as you are able to do it. I think that very important thing in this deed could be if you use the key words according to the meaning that these words has got in the closest disciplines of thoughts: economics, theory of management, sociology, theory of innovation etc. In my opinion just shifting (changing) the meanings of words and emotional argumentation could be insufficient.

The last thing that I would like to ask you is: how did you construct an assumption that I present „Western-Cartesian view of knowledge”. How did you get this about me? Do you have at least one logical premise? You know, I've read „few” philosophical books in my life and on this basis I can say that in my opinion Descartes is one of three the worst philosophers in history of human thoughts. In great brief – I am under influence of analytic philosophy, especially polish analytic philosophy better known as Lwow-Warsaw school of logic. I also read many books about metodology (Anglo-saxons name it „philosophy of science”) – in this area I respect R. Carnap, K. Popper and I. Lakatos and f.e. I do not agree with T. Kuhn. If you are able to answer me, will you also give me a feed back about your philosophical backgroud? (I would not be surprised if you liked Feyerabend’s philosophy of science and his „anything goes!”)

Comment by Leslaw Niemczyk on March 15, 2014 at 3:23am

Thank you very much for your interesting remarks. Let me do not agree with you that KM means „Knowledge creation”. I understand your way of arguing, but for me it’s too narrow.  Let’s discuss two examples: a big hospital with highly educated medical staff and a big lawyer company. Both companies in current period don’t create any innovation. They only „use”, „replicate” or „sell” a professional knowledge. Then – in your meaning – the term „KM” should not be used. In my point of view managing of this organisations require „KM”, inspite it can be done without formal tools, but only with good feeling or understanding of professional standards. People can differ in discussion.


Thank you for your explanation of ‘Management Discussion and Analysis - MD&A’. You know, I’m from Europe, so I’m not an expert in US law and GAAP. I just learn english from basic books about financial accounting (you have absolutly excellent books in this area). In my books I suggest to leave traditional balance sheets as a basic point of financial statments, as it is required by law and standards. But in so called „additional information” (which is an open form document) management is able to emit „knowledge-based balance sheets”. We also have to remeber that accounting is based on „substance over form” principle, which is essential for intellectual capital disclosing.


The principles of accounting were always faster then governements and lawyers. Medieval merchants used double-entry bookkeeping few hundreds years earlier then it was required by the law (I could be wrong but the first kind of "accounting act" was french „Ordonnance de commerce” from 1673; the first guide books about accounting principles are from 1458 and 1494! And the oldest historic double-entry book is from 1278! – city of Genoa). Merchants used accounting beacuse it helped in managing trade company. Today financial accounting of intellectual capital is also able to improve management of knowledge-based company, inspite it's not currently regulated by european IAS, GAAP or other US law.

Comment by Leslaw Niemczyk on March 8, 2014 at 4:56am

Excellent questions, Kenan! Post-industrial accounting is a coherent system respecting all principles of traditional financial accounting, but also it adds some new principles and tools. Imagine a traditional balance sheet of your company. Then, add to this balance sheet a new part based on a basic principle "competence assets = intellectual capital". The competence assets should have got following positions. The first posibility: knowledge, skills, experience and research projects. The second posibility: trade competences, production competences, administrative competences, "XYZ" competences and research projects. You can choose between these two posibilities according to your management needs. The intellectual capital should divide to: intellectual capital received, intellectual capital generated, experience capital. If you do this, you will achieve the knowledge-based balance sheet for your company. Then chief accountant should create the book of competence with new accounts (the names of the accounts are mentioned above as the new elements of the knowledge-based balance sheet).

In the next step, imagine that the chief accountant of the company requires from everyone knowledge workers or qualified workers a traditional CV complemented of new simple tool: personal knowledge balance sheet (in this tool "assets" means "competence": knowledge, skills, experience; and "liabilities" means "funding sources of competences": owner’s intellectual capital, outside intellectual capital, experience capital). Try to prepare the personal knowledge balance sheet for yourself starting from valuation of your all education expenses.

Now we are able to return to your questions. When your company send you for traning, then accountant should record in a general journal following entry:

1a) a debit to Cost and a Credit to Accounts Payable,

1b) a debit to "some" Competences (or Skills) and a Credit to Intellectual Capital Generated. The company makes cost, but doesn't lose this value as long you work there. (It also influence on your own personal knowledge balance sheet. Try to figure out how? For this matter you don't need accounts. Also try to find as accountant the entry in general journal of company, when you quit this job).

When your company finances research project (not development project), then accountant should record in the general journal following entry:

2a) a debit to Cost and a credit to Accounts Payable,

2b) a debit to Research Project and a credit to Intellectual Capital Generated. (because research projects are very risky, in the system should be two accounts: Research Projects and aditional account with the name „Write-downs of Research Projects”).

Post-industrial accounting is not obligatory for this moment. But in the next 10-20 years... who knows? Post-industrial accounting has got one significant advantage over traditional accounting: a possibility of creating the true and fair view of knowledge-based enterprises.

So, Kenan! Now you are the first post-industrial accountant in Washington, DC ;-)

Comment by Kenan Jarboe on March 7, 2014 at 3:00pm

Thanks for the additional clarification. It seems to me that accountants are still struggling with how to fit intangibles into their framework. As you point out with your reference to IAS 38, IASB is aware of the issue (and has once again put the issue on the research agenda). But conceptually they still have a long way to go. For example IAS 38 still requires research to be treated as an expense (development costs can be treated as an asset) and training costs as a expense. How are they treated in the knowledge-based balance sheets?

knowledge-based balance sheets
Comment by Leslaw Niemczyk on March 7, 2014 at 3:11am

Thank you very much for your kind interest. In the post-industrial accounting system the intellectual capital is the one of the reporting position in so-called knowledge-based balance sheets. We use this new name to separate the basic instrument of post-industrial accounting from the traditional balance sheets prepared on a base of GAAP or IAS (as you know neither GAAP nor IAS don't use the terms of "competence assets" or "intellectual capital"). So, the knowledge-based balance sheets go further and are based on the latest developments in accounting theory. Yes, yes, accounting has got its own scientific theory built on infallible axioms; accounting is not just a boring work of accountants with tons of papers, because it has got very deep and important theoretical sense.

You are right that post-industrial accounting is very close to terms of "patents" and "developement projects" - but we should not forget that this is area of traditional accounting regulated in Europe by IAS 38 "Intengible assets". Please, check carefully IAS 38 paragraphs 8, 51-58, then you find out that also accountants know that something's up. Theory of post-industrial accounting goes further in clear manner using terms of "intellectual capital" and extremly logical ways how to measure it. But that needs new forms of accounting documents... and change in the way of our thinking. From logical point of view it's something very, very simple, but from cultural point of view it's kind of revolution (a change or a problem shift of paradigms).

You also asked a question about financial analysis. The article is also about post-industrial financial analysis of enterprise (microeconomic scale). I am sure that you know how to count the traditional analysis indicators: ROA, ROE, ROI, ROS or degree of financial leverage. But probably you are not able to count indicators of return of knowledge or degree of intellectual leverage, because you don't know basis of post-industrial accounting. Aren't you?

I think that clever "wolfs from Wall Street" also don't know (and don't want to know) how to count return of knowledge or degree of intellectual leverage, because mentally they live in industrial era and they use an industrial tools of analysis ;-)

Sorry for my english :-)

Comment by Kenan Jarboe on March 6, 2014 at 6:59pm

Interesting -- thanks for posting this.  It raises an important question however.  Is the concept of intellectual capital (or intangible capital) really a form of post-industrial financial accounting and analysis?  Or is it something that goes beyond financial analysis?  My sense is both. 

There are some who would like to use intellectual capital as a way of bringing certain assets into the accounting system.  On the micro side, this is the advances in accounting to try to value patents, for example.  On the macro side, it is the work of the BEA on incorporating R&D and artistic works into the GDP and the path breaking C-H-S framework.

However, frameworks such as Integrated Reporting and I-Counts don't try to necessarily describe intangibles/intellectual capital in financial terms - but in management terms.

I wonder if the full article addresses this differentiation?

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