Beyond balance sheets Lev agrees that intuition may allow observers to generalise about these elusive assets. But they certainly deserve sharper focus from a company's own finance department, if only to help explain today's spiralling market values. A broad proxy for knowledge capital is the subtraction of book value from market value. The resulting figure overstates knowledge assets and understates the value of book assets. Moreover, because it is a stockmarket-based measure, the knowledge capital value fluctuates from moment to moment, in a manner not related to the underlying value of the assets.
Lev takes a different approach.
To assist financial managers in grappling with knowledge assets, CFO Europe presents our first annual Knowledge Capital Scoreboard. This is an expansion of research carried out by Lev and Marc Bothwell, vice-president and portfolio manager at Credit Suisse Asset Management, and first published in CFO, our American sister publication. In this European version, the methodology, designed by Lev, aims to help managers on this side of the Atlantic see intangible assets in a new and useful light. Without any hard and fast rules for computing normalised earnings, the Scoreboard relies on three years of historical profits through to 1999, plus Wall Street's consensus estimates of earnings through to 2002. In profitable, growing companies, normalised earnings usually exceed earnings attributable to book assets.