Giuseppe Marzo

Exploring intellectual capital management in SMEs: an in-depth Italian case study

Purpose – The purpose of this paper is to analyse intellectual capital (IC) in SMEs. In particular two research questions are posed: how SMEs acquire or develop knowledge and intangible resources; and how they manage and exploit IC. Design/methodology/approach – An in-depth case study of an Italian SME operating in the automobile industry is carried out in order to answer the two research questions. Findings – The case study evidences the impossibility to sharply divide all of the knowledge-related elements of a firm into the three generally accepted categories of human, organisational (structural) and relational capital. The analysis of IC as a set of stock of resources is important but really partial due to the fact that IC and knowledge continuously change. In this light, the focus on activities and processes help in understating how the firm manages IC. In the studied SME, formal and informal knowledge coexist but in different areas of the firm. Again, the relationships with external stakeholders, sup...

The market-to-book value gap and the accounting fallacy

Purpose – The purpose of the paper is to offer some advancing in the understanding of the market-to-book value (MBV) gap (or ratio) as the symptom and the metrics for intellectual capital (IC) value, and to discuss the major criticisms against it. The original contribution of the paper lies in developing the analysis of the meaning of the MBV from a theory-of-the-firm perspective. Such an approach is employed to shed light on the two sides of MBV: book and market values. Design/methodology/approach – The paper reviews research on MBV and the theory of the firm, employing a deductive approach that explores criticisms and advantages of the use of the MBV gap as the symptom and the metrics of IC according to a specific theory of the firm. Findings – The paper finds that the presumption that an “accounting fallacy” exists, which refers to the gap between market and book values, must be revised depending on the chosen theory of the firm. In fact, depending on the theory of the firm to which IC scholars refer, ...

A Commentary on ‘Contextualising the Intermediate Financial Accounting Courses in the Global Financial Crisis’

The global financial crisis (GFC) in which we are still living has forced all of us to critically re-consider the ways in which markets, policy-makers, governments, and companies have operated until now and, in some cases, are continuing so to do. Since the beginning, a large debate arose aimed at discussing a possible exit from the GFC and policies to avoid other similar phenomena. Academics can contribute to this debate in many ways. As researchers, a great stimulus exists to uncover the possible causes of the GFC in order to arrive at a better and deeper understanding of the mechanisms generating such crises, the final goal being to avoid future events of this nature. The research on the causes and the impact of the GFC is clearly a basis for Governments and policy-makers since it supports their actions in order to shape institutions in ways to prevent the emergence of a new crisis, and it is therefore, a fruitful contribution which academia can give for a better world. However, a stronger impact can be achieved by improving consciousness and awareness of people who, in the future, will operate in the economic system. In this respect ethical aspects of the profession and technical considerations can be jointly discussed and analysed in order to encourage the development of more ethical and healthier behaviours. Therefore, as educators, academics can play a more relevant role in order to protect society’s economic welfare. Accounting does not merely concern itself with measurement and valuation. Since accounting is a social science, it influences the same phenomena which it studies, thereby having a high impact on society’s beliefs and behaviours. Therefore the way it is taught and the content of accounting courses are to be assessed not only on the basis of their compliance with ideal measurement systems, but also on the basis of how they contribute to the shaping of human behaviour. From this background I approached the very interesting paper by Bloom and Webinger (2011). The paper offers many interesting insights, starting with the basic idea it promotes (that is, the integration of GFC topics within accounting courses), the way in which this idea can Accounting Education: an international journal Vol. 20, No. 5, 511–514, October 2011

Intangibles in the Theories of the Firm

This paper elaborates on the fundamental role that a theory of the firm can play in order to enhance coherence in research on intangibles. Departing from the identification of possible inconsistencies in research on intangibles, the paper presents an analysis of intangibles-related issues within the theories of firm, namely the Agency Theory, the Property Rights Theory, the Transaction Cost Economics, the Resource-Based View and the Dynamic-Capabilities View of the firm.So doing, the paper demonstrates that defining, valuing, managing and reporting on intangibles strongly depend on the conceptualisation of the firm, and also urges more caution in performing empirical analyses, since they could unconsciously merge inconsistent approaches from different theories.

Commentary on “Accounting for Value” by Stephen Penman

Abstract “Accounting for Value” by Stephen Penman is thought-provoking in its challenge to mainstream in both finance and accounting. This fosters a reflection on models and tools employed for valuation. Some points about the book should be underlined. Penman states that he adheres to finance theory principles, but he moves away from them, as he offers a complete reinterpretation of such principles from a fundamentalist perspective. He also puts a distance between the finance theory approach and his own. Value is about business, he says, not about paper. The finance approach is focused on paper (stocks, bonds) and neglects business. Knowledge about business and prudence should be adopted by analysts in order to challenge market prices and find profit opportunities. Accrual accounting should be used instead of the discounted cash-flow approach, he says, and therefore “accounting for value” is not only about value but about accounting too. However, Penman argues, good accounting is not the one currently proposed by accounting standards.

Investment Project Valuation from the Entity-Firm Perspective

The paper offers some considerations on investment project valuation from an entity-firm perspective. Once recognised the role of firm’s complementarities, uniqueness, path-dependent decision-making, bounded-rationality and organizational processes, a different approach to investment projects valuation and selection management arises, which is different than that proposed by standard finance theory and based on CAPM. Standard finance theory, according to CAPM, identifies risk as the standard deviation of a project’s expected returns, and claims that only systematic risk must be considered. The entity-firm perspective, on the contrary, defines a different concept of risk (the Negative Whole Risk) and calls for considering the whole risk of the project and the expandability of the firm’s opportunity set. A Minimum Acceptable Rate of Return for alternative investment projects must be set, that takes into account a project’s whole risk and the expandability of the firm’s opportunity set. A role for active risk analysis and management processes is clearly recognised, and the innovative capabilities of the firm are introduced so superseding the market completeness assumption upon which is based the standard finance theory. An analysis is offered, that focuses on the main determinants of the Minimum Acceptable Rate of Return for investment project valuation. From the entity theory perspective a new interpretation emerges of some phenomena, such as the role of financial slacks, the underinvestment effect and the importance of the whole risk related to the project. In the new perspective Minimum Acceptable Rates of Return are endogenously and subjectively set, and they act more as organizational control tools than as a tool for the fair valuation of investment projects. Finally, different rates act as reference points for the investing side and the financing side.

Accounting for Intangibles and the Theories of the Firm

This paper elaborates on the fundamental role that a theory of the firm can play in order to develop a clear and consistent proposal on accounting for and reporting on intangibles.Departing from some criticisms addressed against IAS/IFRS and SFAS, the paper analyses how intangibles could be consistently accounted for and reported on within four different theories of the firm, namely the Agency Theory, the Transaction Cost Economics, the Resource-Based View, and the Dynamic-Capabilities View of the firm.The paper focuses on some specific problems related to the definition and identification of intangibles, to their recognition and finally to their valuation and measurement, and offers a critical understanding of the different proposal on accounting for intangibles developed within the five theories of the firm.So doing, the paper helps to better understand some critical issues, such as the different importance of internally generated intangible asset, their fair-value versus cost-based valuation, and the relative importance of balance sheet and income statement.

Can Depreciation Be a Variable Cost? A Comparison between the Straight-Line Method and the Units of Production Method in a Lean Company Context

International Accounting Standard 16 states that tangible assets’ depreciation method shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Moreover, it allows a variety of depreciation methods, including the straight-line method, the diminishing balance method and the units of production method, according to the expected pattern of consumption of the asset.While in principle the three methods are expected to generate depreciation consistent with the consumption of asset, they strongly modify accounting numbers. The choice of depreciation method is expected to influence both the managers’ decision making and financial reporting figures.This paper focuses on the units of production method (UPM) in order to highlight the effects on both financial figures and managerial decision-making. The paper shows how the UPM transforms depreciation into a quasi-variable cost, therefore affecting volume-based decisions, and finally the break-even point of the firm.Using a simulation model and comparing UPM to the common straight-line method (SLM), the paper also shows UPM’s effects on financial statements. Depending on market conditions, different return ratios, leverage, and variance in financial indicators are expected, so leading to potential differences in investors’ and financial analysts’ decisions. Also impairment test is modified by the different depreciation method used, both in magnitude and in the time of its occurrence.Finally, the paper presents the Brevini Power Transmission Group (BPT) case study, an Italy-based company operating in the power transmission industry, with plant in Italy, Germany, and China. The rationale for the analysis of the BPT case study is threefold. Firstly, BPT is a capital-intensive company, and therefore the choice of a depreciation method is of a paramount importance for the effects it can produce on the decision-making process as well as the accounting figures and results the company discloses.Secondly, BPT employs the Overall Equipment Effectiveness (OEE) as one of the most important KPIs for efficiency improvement within the lean manufacturing system BPT has implemented over the last years. It qualifies to apply UPM thought the weekly calculation the hours worked by each machine.Finally, BPT has recently adopted IAS/IFRS choosing the UPM for the depreciation of work centers where it manufactured and assembled his components and whole units. This has led to great differences with respect to the Italian GAAP previously adopted. The choice has impacted on administrative and IT process, and their link to the Manufacturing Information System.The main contribution of the paper to the extant literature is the focus on the effects that different methods of depreciation have on financial decision-making. At the same time it explores a little employed method for depreciation, comparing it to the widespread SLM.The paper is also beneficial for practitioners since it integrates a theoretical approach with both simulation and the study of a real company using UPM.

Making Strategic Investment Decisions - Real Options Theory and Strategic Cost Management: Two Bottles for the Same Wine?

Since the end of the ’70s, many researchers have been pointing out some criticisms to the application of advanced financial techniques (e.g. Internal Rate of Return and Net Present Value) for valuing strategic investment decisions: a) their inability to take into account the value of managerial flexibility; b) their poor relationship with strategy. Real Options Theory (ROT) and Strategic Cost Management (SCM) have been proposed as the solutions for the two criticisms. The purpose of this paper is twofold. Firstly, it offers a fully-comparison between ROT and SCM articulating around a series of differentiating elements: 1) the relationship with the firm strategy; 2) the epistemological models surrounding SCM and ROT; 3) the way they focus on the risk and the uncertainty inherent in the decision; 4) their incentive towards an active management of the strategic investment; 5) the degree of formalisation of the structure of the two approaches; 6) the scope of their applicability; and 7) the most prominent difficulties linked to their implementation. Secondly, the paper examines whether ROT and SCM can be seen merely as two competing methods for firm decision-making, or if some integration between them is also possible. The underlying idea which is here purported is that ROT and SCM can be combined into a unitary and hybrid model for valuing strategic decisions, where the major advantages of the two techniques can be strengthened through their integration.