cost of capital. Moreover, the market becomes inefficient because investors are allocating funds with limited information.This paper is designed to outline the current state of the IC. The importance of IC and compatibility with current accepted accounting principles will be discussed. The Edvinsson and Molone proposal for a “knowledge balance sheet” will also be analyzed.Definition of Intellectual CapitalThe terms "Intellectual Assets" and "Intellectual Capital" are both used to define intangible assets which are not reported in corporation's balance sheets but are a driving force in the creation of corporate wealth. The definition of Intellectual Capital (IC) is elusive. Since the study of intangible assets is a relatively new field, varying definitions appear.Steven Wallman, commissioner of the Securities and Exchange Commission, defines IC as the value of brand-names and the customer base of a firm, as well as the brainpower of the employees and the Research and Development of the firm. Similarly, according to Leif Edvinsson, co-author of the book Intellectual Capital, IC is broken into two main categories : 1. Human Capital: The combined knowledge, skill, and the ability of the company's individual employees to meet the task at hand. It also includes the company's values, culture, and philosophy. Human capital cannot be owned by the company, but the company’s training, support programs, and hiring policy contribute to human capital.2. Structural Capital: The hardware, software, databases, organizational structure, patents, trademarks, and everything else of organizational capability that supports the productivity of the employees. In a sense, structural capital is knowledge-based assets left at the office when the employees go home. Structural capital also includes customer capital, the relationships developed with key customers. Unlike human capital, structural capital can be owned and thereby traded.Thoma...
