By Brad Minor, M.Ed. in Human Resource Development, Peabody College of Vanderbilt University
Phillips (2002) says, “Intangible assets are key to competitive advantage in the knowledge era and are invisible, difficult to quantify, and not tracked through traditional accounting practices” (p. 3). It is fairly common to divide intangible assets into three categories: research and development; intellectual assets; and knowledge, a category which is then subdivided into tacit and codified knowledge (Phillips, 2002, p. 4).
One popular method that requires the evaluator to place dollar values on intangibles is the Phillips ROI Methodology (Phillips, 2005), which is especially popular for calculating the ROI of training and development initiatives, though it can also be applied to many other types of programs. “ROI” stands for “return on investment.” Phillips views ROI as a fifth level that should be added to Kirkpatrick’s Four Levels of Evaluation (Phillips, 2005), though Jim Kirkpatrick, the originator of the Four Levels of Evaluation (reactions, learning, transfer, and results) disagrees; Kirkpatrick’s company is now pushing the “Return On Expectations” method, or “ROE,” (not to be confused with the unrelated “ROE” of the finance field, which stands for “Return On Equity”) as a direct competitor with the Phillips method. (Side note: Both of these companies are, of course, in the business of selling certification courses, videos, books, job aids, evaluation instruments, and speaking engagements.) The ROE method does not place dollar values on intangibles, so we will focus this discussion only on the ROI method.
Phillips (2005) uses the following formula to calculate ROI: ROI (expressed as a percentage) = (Net Program Benefits / Net Program Costs) x 100 (Phillips, 2005, p. 2). This seems fairly simple and straightforward until one examines the way that program benefits and costs are calculated. This method goes beyond calculating only the items that are already expressed in dollars; it requires a conversion of intangibles to monetary values. So how do we do this? In sum (this is a bit of a purposeful oversimplification) we do the following (adapted from concepts in Phillips, 2005):
- Ask stakeholders how much they think something is worth in dollars
- Ask the same individuals to express, as a percentage, how certain they are of their estimates
- Convert the percentage to a decimal
- Multiply the dollar figure (perceived value) by the decimal (level of certainty)
- Arrive at a conservative conversion estimate (in dollars)
- Qualitatively report any unconverted intangibles along with the ROI figure
This method is clearly not completely accurate, but it is a common method for reporting the ROI of programs that have intangible benefits. With this understanding, though, it is easy to understand why accountants, who are concerned with the accuracy and reliability of reported numbers, are often concerned with the use of such methods; this might, in turn, help us understand why such conversion methods have not been adopted into the generally accepted accounting principles (hereinafter referred to as “GAAP”) that govern financial reporting in the United States.
So how does GAAP treat intangibles? Basically, the only intangibles that are addressed are ones that deal with “intangibles acquired in a business combination” (Foster, Fletcher, & Stout, 2006), with the most common being the monetary value of intellectual property, particularly in companies whose money is derived from the sale or exploitation of it; in the knowledge era, this is becoming increasingly common. Goodwill, which might be explained as brand power and reputation, can also be reported under GAAP guidelines. The monetary value of various aspects of human capital, such as specialized knowledge that is not patented, synergy, training processes and capabilities, effective leadership, and corporate culture, cannot currently be reported on standard financial statements. The United Kingdom’s former Secretary of State, Patricia Hewitt, created the Accounting for People Task Force to address these issues in that country (Weiss & Finn, 2005); perhaps the United States will eventually follow suit, if we haven’t already instigated such an initiative.
Another way that intangibles are handled is by conducting what Ulrich (2005, p. 52) refers to as “intangibles audits,” which are composed of qualitative measures of intangible performance factors and ultimately end with action plans for the future improvement of those measures. The burning question, though, is this: Are qualitative measures really enough? Might it make sense to figure out a standard, GAAP-approved method for the valuation of intangibles, in addition to these qualitative reports?
Foster, B., Fletcher, R., & Stout, W. (2003, October 3). Valuing intangible assets. Retrieved 12 12, 2010, from:
Phillips, P., & Phillips, J. (2002). In Action: Measuring Intellectual Capital. Alexandria: ASTD Press.
Phillips, P., & Phillips, J. (2005). Return on Investment (ROI) Basics. Alexandria: ASTD Press.
Ulrich, D., & Brockbank, W. (2005). The HR Value Proposition. Boston: Harvard Business School Press.
Weiss, D., & Finn, R. (2005). Hr metrics that count: aligning human capital management to business results. Human Resource Planning, 28(1), 33-38.