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This research conducted on the valuation of intellectual capital has been conducted in order to measure the value of an enterprise, physical assets, various financial assets as well as intangible assets. As part of the intangible assets is the intellectual capital. As used by many financial analysts IC collectively refers to all the resources that determine the value and the competitiveness of a corporation (Ehin, 2002). Intellectual capital as part of the intangible assets includes as subset the attributes that concur to building all financial statements as well as balance sheet (Remenyi, 2005). This study thus has been put forward as a way of unearthing the level of intellectual capital exposure in one of the leading software company in the world; Microsoft Inc. In order to accomplish this, the study has focused on two years financial statement for Microsoft Inc. a thorough analysis of these financial statements is done by the use of content analysis methods. For any corporate head with the knowledge of how high stakes have become in order for the corporation to survive in the knowledge and information age, extracting and measuring the real value and performance of intellectual capital become an essential aspect (Abeysekera, 2008). However as the study suggest the fact that intellectual capital or IC is categorized among the intangible assets means that it is not easily translatable in financial terms. In addition to that, it is found that IC is mainly made up of elements that include employees' quality, or how reputable is a brand among certain consumers. Most of these elements even though are important to a corporation cannot be expressed in monetary terms. Thus in order to unearth level of IC in Microsoft Corporation, the study concentration is based on the non-financial assets of the firm as projected in their 2008 and 2009 financial statements.


This study begins with a brief introduction which is followed by a literature review on some of the similar studies done in the past. The methods used to gather the required information as well as methodologies used to come up to a sound conclusion. The research question as well as the rationale of the research is clearly stated at the beginning stages of the research. The analysis of the intellectual capital follows, which is also broken down into various parts and conclusion comes at the end of the study.

Literature Review

Many studies concerning intellectual capital have already been conducted. And as most of them have differing conclusion, the aspect of IC playing an important role in a corporation financial structure stands out. Bontis (1999) in his research came up with a conclusion that intellectual capital in contemporary business happened to be a commonplace by the end of the 1990s.

This however, has been countered by a contradicting research conducted by (Bryer, 2002). The duo came to a near conclusion that intellectual capital is still at its early stages, a study that caused corporations start to question Bontis study. In addition to that, strengthening of intellectual capital as Gary Becker found out in his research happens to be a critical factor for the economic success of a corporation (Baker, 2007).

However, as Ehin (2000) put out, the success of an organization does not solely depend on strengthening of the Intellectual Capital. Its management is a factor with equal importance too. On the contrary since IC basically focuses on physical assets it has become hectic job for the traditional accounting system to deal with its growth as measurement and disclosure is concerned (Abeysekera, 2008). Through Bontis (2001), it is found that, the recognition of the intellectual capital is to blame for the failure of the traditional accounting.

Apart from just recognition of the intellectual capital other this which includes identification, measurement and recognition have to be considered and thus these three when put together will lead to some of the information about intellectual capital hidden the financial statements of a corporation. According to Karier (2010) there is no doubt that the present period is different from the previous ones in many aspects. The shift from industry economy towards science oriented economy, fading physical and material economy, the focus on intangible assets such as human to form the intellectual capital has become far more important to many researchers (Lin & Edvinsson, 2010).

According to the journal of Intellectual Capital, imperial models to measure intellectual capital in a particular organization exist. The groundwork of intellectual capital management and measuring has attracted much attention form academics and practitioners (Jackson, 2008). In their research Jin and Co designed a measurement model and a quantitative index system of IC, so as to provide a good tool for corporations to manage their intellectual capital (Jackson, 2008).

Their study based on some reviews from several IC measurement models proposed by western researchers found that, IC is mainly classified into human capital, structural capital, innovation capital and customer capital (Goddard & Melville, 2004). In addition to that they can to a conclusion that a quantitative index system for the four elements can be designed the analysis of their content (Goddard & Melville, 2004).

On the contrary, in a pursuit of a 'Developing a hierarchical structure for assessing cooperative education programs for the intellectual capital perspective', Sullivan (1998) conducted a study that was based on the fact that prioritization of intellectual capital measurement indicators for businesses under uncertain condition were reported. In their study, an experiment was carried out to comprehend the use of rational capital for the assessment of cooperative education program (Chen, 2005).

In another study, Mouritsena, Larsena and Bukh (2001) found that in the new economy, knowledge is the key economic resource and perhaps the only source of competitive advantage (Minaxi, 2010). As intellectual capital is concerned, Malaysia has embarked on developing several strategies to accelerate its transformation to a knowledge-based economy (Minaxi, 2010).Their research was mainly conducted in the attempt of providing some insight in the extent to which Malaysian firms have adopted intellectual capital management (Mackey, Susan & Gass, 2005).

Since it was established that most of these studies are similar to what was intend to carry out, it is quite clear that most of the techniques that this will be incorporated in the study that has already been used before. My method of data collection and how the data is going to be analyzed afterwards will not consist of any new technique.

Case Study

Analysis of Intellectual Capital for Microsoft Corporation

Before the analysis of IC for Microsoft Inc., there are some things that I will need to put forward. It is more so imperative that know that as defined in the introduction, intellectual capital is nothing but a combination of knowledge, skills, talent and intelligence of a company's human force that differentiates it from its competitors (Banerjee, 2010). The intelligence of the company human force is what is sometimes is referred to as the brain power. Thus intelligent capital can be seen as the intangible asset that is used by a corporation to in the making of its products and services (Banerjee, 2010).

Having said that, it is important to note that, IC is the key aspect of a company's profit and loss statements as well as the balance sheet. The value of a company is thus comprised of its physical assets, its financial assets as well as its intellectual assets (Berry, 2004). Three elements make up the IC namely; the human capital, organizational capital and relational capital.

Human Capital

The human capital consists of the value that businesses employees provide through the application of skills know how and expertise (Bounfour & Edvinsson, 2005). This element of intellectual capital is not owned by the organization and thus when a person leaves a corporation and thus the human capital decreases. Human capital can be used to show how effective an organization uses its people resources as a measure of creativity and innovation.

Structural Capital

Structural capital includes the supportive infrastructure, processes and databases of the organization that enable human capital to function (King, 2003). Among the structural capital are the traditional things like buildings, hardware, software, processes and so on. In addition to that, structural capital also includes such things as the organization's image, information system and proprietary databases (Roos, Pike & Fernstrom, 2005). The diversity of structural capital requires it to be broken down into organization, process and innovation capital. The organizational capital includes the overall organizational knowledge such as its systems, intellectual property, and so on as well as the relational capital. This entailed its goodwill generated out of its relationship with partners, clients, agents and also the government and its brand image (Roos, Pike & Fernstrom, 2005).

Process capital includes the techniques, procedures, and the programs that implement and enhance the delivery of goods and services (Teece, 2002). Innovation capital includes the intellectual properties and intangible assets of a corporation (Remenyi, 2005).

Relational Capital

A company's trademarks, licenses and franchises belong to this category of the intellectual capital. Mostly, relational capital also includes those aspects of a business that are less definable such as customer interactions and relationships (Remenyi, 2005).

Thus to analyze intellectual capital all these aspects will have to feature in my analysis. For the sole purpose of grasping a better understanding on Microsoft Inc. intellectual capital, I am going to use the 2009 and 2008 financial statement for Microsoft for the year ended at 30 June.


In 2009, Microsoft recorded a figure of $1759 on its intangible assets. This figure was lower compared to that of 2008 which was at $1973. This shows that in 2008, Microsoft invested more on intangible assets as compared to 2009. However since that most of the intellectual capital is found in the intangible assets my assumption will mainly be based on figures that have been recorded in the intangible assets section.

Human Capital

Human capital is more important to Microsoft Inc. since as a software company, the knowledge of its employees and their skills are required to be off the charts. However, since the figure for the intangible assets for the company in 2008 seems greater than that of 2009, it is correct to assume that in 2008 Microsoft acquired more employees than in 2009 (Lin & Edvinsson, 2010). However, by looking at their research and development column of the income statement, 2009 recorded a greater figure compared to 2008. In 2009 the corporation recorded a figure of $9,010 which is some hundreds higher than that of 2008. In 2008 the figure was at $8,164 (Kwok, 2005). This shows that in 2009 Microsoft invested more in their research and development probably for the purpose of enhancing their employees' skills and ability to develop new products.

In addition to that, the company had a $330 employee severance while the figure for 2008 has been left blank. The employee severance for 2009 may be due to the hard work or the fact that they had to lay off some the employees in 2009. This may also be the reason why intangible assets in 2009 are less compared to that of 2008. However for both periods it is clear that Microsoft Inc. did spend a lot of money on their employees. The main reason for this assumption is the fact that at the period, Microsoft was busy with the development of their new operating system, Windows 7. This required not just a lot research and development but also employees with high skills in software programming as well as researching.

This is the time when a lot of University students with good programming skills are employed as interns at the company. However, since the 2008 is higher than that of 2009, it can be assumed that there was a lot of work to be done in 2008 compared to 2009 (Goddard & Melville, 2004). Probably the creation of Windows 7 was still at its initial stages where the company would have required employing extra workforce to do other simple tasks like data collection.

This aspect can also be seen in their expenses as their expenses for 2008 was at $38,149 which was higher compared to that of 2009. Expenses were not only recorded on things like research and development and the like but expenses were also recorded when they had to pay their employees. And thus by having a higher expense in 2008 compared to that of 2008 can still be used to justify the fact that their human capital in 2008 was higher compared to that of 2009.

However, this factor can be proved wrong by the revenue. Cost of revenue for 2009 was at $12,155 while that of 2008 was at $11598 (Ehin, 2000). The higher the cost of revenue can be linked to the fact that employees are working an extra mile to make more money for the company. Although the expenses for 2008 are more by a couple of hundreds, it can be argued that in 2009 employee capital was much greater in terms of revenue earned at the time. Thus until a model of measuring human capital is designed, this analysis will still be based on assumptions generated on observing the numbers recorded on the financial statement.

Structural Capital Discussed

To analyze the structural capital of Microsoft I am going to concentrate on such assets as long-term assets, goodwill and the rest. The aim is to find out how the company fared on in this sector the years 2009 and 2008. Thus when we look at the financial statement, Microsoft Inc. had a property and equipment that amounted to $7547 in 2009 and $6,302 in 2008 (Catty, 2010). The figure evidently indicates that there was a decline in the value of their property and equipment assets. Their property may include such things as working computers, buildings as well as the little things as touch pad that belong to the organization.

In the same years, it can be seen from the financial statement that there was a differing amount of goodwill that the company recorded. For 2009, it recorded goodwill of 12,503 which less by a couple of hundreds to the figure recorded in 2008. This clearly shows that the goodwill contributed in raising the structural capital for the organization. In the financial statement, there is also a figure that shows that Microsoft had quite a lot of assets in their long-terms assets. However, when the years are compared, in 2009 their long-term assets were lower compared to 2008. The long-term assets for 2009 were at $1,599 while that of 2008 were at $1,691 (Catty, 2010). This also shows that the company invested heavily on long-term assets which may include assets like buildings and the related. It is this assets and equipment together with other properties that enable the human capital for the corporation has the adequate knowledge required for them to carry out their tasks.

However, just like the human capital, it would not have been easy for the corporation to record high revenues in the two years without the help of structural assets. This aspect is not really shown in the financial statement, but by following the logic that states, structural capital helps human capital function to their level best, it means that having a lot of structural capital means high human capital as well increase in the level of knowledge the human capital can acquire.

Human capital and structural capital when these financial statements shows go hand in hand since when we look at 2009 financial income and the balance sheet for instance, the total assets were at $49,280 and the revenue was at $12,155 for the same period. On the other hand revenue for 2008 was at $11,598 while its total current assets were at $43,242 (Bryer, 2002). And thus by looking at this picture in means the more structural capital increases the more the human capital becomes stronger.

It is the human capital that drive the operations of a company and thus while Microsoft operational income increases thus one can conclude that the company invested heavily on human capital in order to reach that state. And while that is the case it can also be assumed that it is the availability of the structural capital or what others call the organizational capital that has caused the increase in revenue of the company.

Relational Capital

As we saw earlier, relational capital for a company refer to those things like trademarks, licenses and franchises. These things are not featured in the financial statement, but however, there presence can be felt. Microsoft has a lot of customer relationships which include corporations that used their products like windows server edition as well as office enterprise.

Despite that this form of capital is not recorded in the financial statement does not mean that it does not exist. Its existence can be found within investments such equity and other investment. The fact that these other investments have not been mentioned gives room for assumption that these investment may include such things like franchises and the like. Thus when we look at the figures for these investments, the figure for 2009 was at $4,933 which is less compared to $6,588 recorded in 2008 (Bryer, 2002).

Other investments just like the revenue and operations are very important since they help to contribute cash for driving the company forward. It is with no doubt that Microsoft has a lot of franchises all over the world as well as trademarks. And thus as these trademarks, franchises and other aspects like customer relations exist, the company will continue to record higher revenues.

Hence, as I have discussed on the three aspects of the intellectual capital for Microsoft, it can be assumed that all the three are interconnected. They all enable the creation of the balance sheet and the income statement of the company since without the intellectual capital, Microsoft would not have been enjoying its returns as Windows 7 is still selling high in the international market.

Measuring Intellectual Capital

Although I have used certain aspects of the financial reports to analyze the intellectual capital for Microsoft there is no evidence that that is exactly the case with this corporation. In actual sense intellectual capital cannot be given any monetary value which means that my analysis is based mainly on assumptions rather than actual facts.

The financial statement does not record any values that points out that either human capital for Microsoft at a particular period of time was for instance 70% nor the structural capital was 60% (Banerjee, 2010). It is the work of the corporation to actually come up with a way of measuring this capital. However, by looking at the financial statements and having in mind that it is within the ability of intellectual capital that a corporation is able to run efficiently that I am able to make the above assumptions about Microsoft as their financial statements for both 2008 and 2009 are concerned.


In a nutshell, the fact that intellectual capital cannot be assigned a monetary value also makes many financial analysts to have difficulty in measuring how a particular company is fairing on as this aspect is concerned. Most of the methods however that exist for measuring this aspect of a corporation are solely dependent on other factors like what the relationships of a company are to its customers and how many employees the company owns as well as are the employees well educated to cater for the need of that company?

Nevertheless, these difficulty does not really bar a corporation from the ability of measuring its intellectual capital since it is until a corporation knows how it is faring on in this area that it will be able to understand which direction it should take. Microsoft Inc. will require measuring its human capital in order to know if they should add more employees and if there is a need for that then which type of employees they should employ.

On the contrary, Microsoft too needs to measure their structural capital so that they should know if they really require adding new equipment to its firms. However, as much as we may find it had to measure this form of capital, the evidence in the financial statement still remains that this capital is a very important aspect of a corporation.

As many analyst have come to find out intellectual capital plays important role in the creation of a company's financial statement. This is seen in both the 2008 and 2009 financial statement for Microsoft, and as it required much analysis to understand it the fact remains that this form of capital is hidden in the financial statement.