Week 5 Assignment 2

For this assignment, research two contemporary accounting topics, such as valuing intellectual capital and International Financial Reporting Standards (IFRS), and how these standards differ from Generally Accepted Accounting Principles (GAAP), and sustainability and environmental accounting.

There are several articles and one video in this week’s recommended resources section of the course guide that can help get you familiar with these terms and aid in your research. 

In your paper,

· Define and describe the topics, citing real-life examples of their uses.

· Critique the pros and cons of the topics.

· Assess the popularity of the topics and what type of global companies or individuals use them.

· Hypothesize the future use of the topics; be sure to support your position with facts.

The Contemporary Global Accounting Topics Paper

· Must be five pages in length (not including title and references pages) and formatted according to APA Style 

· Must include a separate title page with the following:

o Title of paper

o Student’s name

o Course name and number

o Instructor’s name

o Date submitted

· Must utilize academic voice. 

· Must include an introduction and conclusion paragraph. Your introduction paragraph needs to end with a clear thesis statement that indicates the purpose of your paper.

· Must use at least four credible sources in addition to the course text.

· Must document any information used from sources in APA style 

o Direct quotes are a great way to strengthen our assertions and provide support. However, be sure to avoid using excessive direct quotes in lieu of original thought. Direct quotes will not meet the requirement for analysis, application, and critical thinking. Please ensure to not overuse direct quote, so that you can avoid losing points for this.

· Must include a separate references page that is formatted according to APA style 

· Carefully review the Grading Rubric for the criteria that will be used to evaluate your assignment.

RECOMMENDED RESOURCES ATTACHED BELOW:

Reference:

McCann , D. (2016, December).

Intellectual capital: The hidden talent metricLinks to an external site.

. CFO, 18–19. Retrieved from https://www.cfo.com/

Did you know that assets comprising 86% of the
market value of Dow Jones Industrial Average compa-

nies are not reported in financial statements? Perhaps not,
if you think of company value strictly from an accounting
standpoint. ¶As the late Roger Sinclair forcefully argued in
three articles on CFO.com, it seems crazy that accounting

››

PENSIONS

an idea that has two main components:
(1) key talent is the only thing that
drives the creation of intellectual capi-
tal; and (2) because internally created
intellectual capital isn’t in the financial
statements (only acquired intellectual
capital is, in the form of goodwill),
executives don’t pay enough attention
to developing key talent.

So, CEOs and CFOs don’t under-
stand that critical roles—like product
development talent at pharmaceutical
and technology companies or market-
ing talent at consumer products com-
panies—are enormously valuable?

“I think that intuitively they do,”
says McGuire. “But because those

rules still prohibit companies from in-
cluding the value of internally created
intangible assets alongside tangible
assets in their financial statements.
After all, there’s no debate that today,
a majority of most companies’ market
value derives from brands, patents,
technologies, and other intellectual
capital. That wasn’t the case when the
process of standardizing accounting
practices began hundreds of years ago.
It wasn’t even the case, for the most
part, 30 years ago.

Sinclair was a brand valuation
expert who largely spent his later
years beating this drum. Put simply, he
wanted the value of brands to be more
visible to investors.

Another party beating the drum
these days, but with a somewhat
different purpose, is a firm called
Talent Growth Advisors. The firm
specializes in helping companies build
talent strategies that link to business
value. Its co-founders and managing
directors are Tom McGuire, a former
CFO of Revlon who also worked at
Coca-Cola in finance, marketing, and
talent acquisition, and Linda Brenner,
a former human resources executive
who also is CEO of HR technology
solutions firm Skillsify.

Brenner and McGuire are pushing

values aren’t on the balance sheet,
because they don’t put dollar signs
beside those assets, they don’t have a
metric that drives the right behaviors.”
McGuire and Brenner have created a
metric that, they say, achieves that end.

“The cost of developing and main-
taining intellectual capital assets,”
McGuire continues, “is recorded as an
expense on the income statement—
along with all other people costs like
those for ‘HR director’ and ‘accounts
payable clerk,’ which truly are ex-
penses—rather than as an investment
in those critical assets.”

For decades, says Brenner, compa-
nies have been failing at understand-
ing the important difference between
key talent and everyone else.

For example, a large company
typically has a recruiting department
that may be responsible for filling
thousands of jobs per year. “There
is typically no framework for saying,
‘Let’s fill this job differently than that
one,’ or ‘Let’s put our best recruiter on
this one,’” says Brenner.

“The same is true for performance
management: it’s the same process for
everyone,” she adds. “But no game will
be won in this knowledge economy by
spreading limited resources as thinly
and evenly as possible in this way.”

Quantifying Intangibles
Given the failure of accounting rules to
account for the value of intellectual cap-
ital, McGuire and Brenner have created
what they call a “workaround” metric.

The metric is calculated first by
coming up with a company’s “enter-
prise value”—market capitalization,

Intellectual Capital:
The Hidden Talent Metric
Talent is what drives intellectual capital, but neither are well-reflected
in corporate books. By David McCann

18 CFO | December 2016 | cfo.com

HUMAN
CAPITAL

Thinkstock

those companies are undervalued?”
says McGuire. “I don’t want to say
that. It can be one conclusion.”

Among the 25 companies evaluated,
the average ICI was 0.86. The lowest
ICI was registered by Caterpillar, at
0.48, followed by American Express
(0.52), Wal-Mart (0.57), and Cisco
(0.64). (See the complete list, left.)

However, McGuire cautioned that
a company with a higher ICI than one
in another industry is not necessarily a
“better” company. Rather, companies
should only be compared with others
in their industry.

“For a company with a high ICI,
its worth certainly depends more on
intellectual capital and thus on its
talent,” he says. “But every company
should take the numbers in its indus-
try and use them to develop talent
strategies that maximize the value
they get from talent.”

McGuire expects that when he
performs calculations for the entire
Fortune 500, those in the Dow 30 will
tend to be the leaders in their respec-
tive industries. “In each industry there
will be a range,” he says. “If you’re at
the bottom of the range, it will tell you
where you could be and point you to-
ward strategies that could let you get
the most out of your position.”

Talent Growth Advisors also listed
the 25 companies according to intel-
lectual capital value per employee. In
that category, one company, Visa, was
an extreme outlier at more than $14
million per employee. Next was Apple,
at just under $4.5 million.

Visa had relatively low head-
count—about 11,000 employees for a
$14 billion business—and very little
investment in tangible assets, Mc-
Guire notes. Apple, by comparison,
had about 10 times as many employees
but 16 times greater revenue and far
greater tangible assets. “We will see
others with similar characteristics as
Visa in the Fortune 500, but I have a
feeling Visa will still be at the top of
the heap,” says McGuire. CFO

plus outstanding debt and market-
able securities, minus cash and cash
equivalents.

From that value, the adjusted book
value—for purposes of this calculation,
total shareholders’ equity, again ad-
justed by adding debt and subtracting
cash and cash equivalents—is subtract-
ed. The resulting value thus consists
purely of internally created intellectual
capital that’s not on the books.

To that resulting value, the calcu-
lation adds in the value of intangible
assets that are recorded on the books,
including goodwill (i.e., the value of
acquired companies’ intangible assets)
and trademarks. The result is called
the “intellectual capital value.”

Finally, an “intellectual capital
index” (ICI) is calculated by dividing
the intellectual capital value by the
enterprise value. The index shows
how much of the company’s value is in
its intellectual capital.

McGuire hopes to position the ICI
as a tool that companies will actually
use. “The ICI will help companies man-
age the development of those internal
assets and value them, even though
they are not on the books,” he says.

Calculating ICI
So far, while McGuire intends to cal-
culate an ICI for all Fortune 500 com-
panies, he’s done so for only the Dow
30 companies—as of the end of their
2015 fiscal years—except for the five
that are in either the financial services
or petroleum industries.

Four of the 25 companies—Boeing,
Pfizer, Apple, and United Technolo-
gies—had an ICI of greater than 1.0,
meaning that the value of their intel-
lectual capital was actually greater
than their enterprise value. Their ICIs
were 1.04, 1.04, 1.04, and 1.01, respec-
tively. Each company has made acqui-
sitions that provided enough goodwill
that, when added to their internally
developed intellectual capital, the com-
bination outweighed their net equity.

“Some have asked, does that mean

19cfo.com | December 2016 | CFO

ICI*Company

Measuring Intellectual Capital
The higher a company’s
Intellectual Capital Index
(ICI), the more its enterprise
value comes from its brands,
patents, technologies,
and key talent.

*The ICI is calculated by dividing a company’s
intellectual capital value by its enterprise
value. The intellectual capital value is calcu-
lated by subtracting adjusted book value from
enterprise value and then adding the value of
goodwill and trademarks.

Source: Talent Growth Advisors

Boeing 1.04

Pfizer 1.04

Apple 1.04

United Technologies 1.01

United Health 0.98

Visa 0.98

Johnson & Johnson 0.98

Procter & Gamble 0.97

Microsoft 0.93

Dupont 0.93

3M 0.91

Nike 0.91

Merck 0.89

Home Depot 0.86

IBM 0.86

Coca-Cola 0.85

Disney 0.83

McDonald’s 0.83

Intel 0.72

General Electric 0.71

Verizon 0.70

Cisco 0.64

Wal-Mart 0.57

American Express 0.52

Caterpillar 0.48

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