Proceedings of the 3rd European Conference on Intellectual Capital

Nellija Titova
W+I+DP+D+T+M+R (equation 7a – gross VA) or S-B+Inv-DP=W+I+DP+D+T+M+R (equation 7B –
net VA). Theoretical arguments have been forwarded supporting both approaches. Empirical research
indicates both methods have been used in practice (Anggreni T. 2008). The Japanese Ministry <strong>of</strong>
Finance uses ano<strong>the</strong>r way to define <strong>the</strong> value added <strong>of</strong> firms: salaries and wages + interest and
discounting + rental or leasing expenses for fixed and liquid assets + taxes and public charges + net
operating income (operating income-interest and discounting expenses). Japanese approach seems
to be ra<strong>the</strong>r suitable for a process or cost oriented (manufacturing firms) philosophy and less for a
market or value (trade and service sector) oriented valuation.
3.2 Calculation <strong>of</strong> CIV
1. Calculate <strong>the</strong> company‟s average pre-tax earnings for <strong>the</strong> latest three years. (a)
2. Calculate average year-end tangible assets <strong>of</strong> <strong>the</strong> company (b) for <strong>the</strong> latest three years (i.e. all
<strong>of</strong> <strong>the</strong> „Assets‟ from <strong>the</strong> financial statement except „Intangible Assets‟).
3. Divide <strong>the</strong> earnings by <strong>the</strong> tangible assets and you get <strong>the</strong> company‟s return on tangible assets
(ROA) (c): c = a/b
4. Calculate <strong>the</strong> average ROA for industry (alike <strong>the</strong> ROA for <strong>the</strong> company) for <strong>the</strong> latest three
years. (d). If and only if <strong>the</strong> return on tangible assets <strong>of</strong> <strong>the</strong> company is greater than <strong>the</strong> return on
tangible assets <strong>of</strong> <strong>the</strong> industry, c>d, executing <strong>the</strong> method can be continued.
5. Calculate <strong>the</strong> “excess return” by multiplying <strong>the</strong> industry ROA by <strong>the</strong> average year-end tangible
assets <strong>of</strong> <strong>the</strong> company. Subtract <strong>the</strong> result from <strong>the</strong> pre-tax earnings <strong>of</strong> <strong>the</strong> company. Multiply this
by <strong>the</strong> following clause: 1 less <strong>the</strong> three-year-average 3 income tax rate <strong>of</strong> <strong>the</strong> company:
Excess_return = (a-d*b)*(1-_average_income_tax)
6. Finally, divide <strong>the</strong> after-tax number by an appropriate percentage, e.g. <strong>the</strong> company‟s cost <strong>of</strong>
capital.
CIV = ((a-d*b)*(1-_average_income_tax))/ <strong>the</strong> company’s cost <strong>of</strong> capital
3.3 Data
Annex 1 presents <strong>the</strong> summary <strong>of</strong> <strong>the</strong> data obtained from <strong>the</strong> 23 researches worldwide on <strong>the</strong>
application <strong>of</strong> VAIC and CIV methods. It is important to mention that although <strong>the</strong> fiscal periods and
number <strong>of</strong> sectors/enterprises are different <strong>the</strong> results and especially <strong>the</strong> VAIC values allow a
justificatory benchmarking even as a snapshot.
3.4 Research hypo<strong>the</strong>sis
Annex 2 presents <strong>the</strong> <strong>the</strong>oretical framework for developing research hypo<strong>the</strong>ses <strong>of</strong> <strong>the</strong> studies
summarized, where:
Return on Assets (ROA) is an indicator <strong>of</strong> how pr<strong>of</strong>itable a company is relative to its total assets.
ROA reflects firms‟ efficiency in utilizing total assets, holding constant firms‟ financing policy. The
formula used by Chen et al (2005) is used to eliminate <strong>the</strong> tax effect for <strong>the</strong> calculation <strong>of</strong> ROA.
ROA = Pre-tax income / Total Assets
Return on equity (ROE) represents returns to shareholders <strong>of</strong> common stocks, and is generally
considered an important financial indicator for investors. (ROE) = pre - tax income / average
stockholders‟ equity.
The productivity level (P) is <strong>the</strong> turnover <strong>of</strong> assets <strong>of</strong> a company (ATO). It measures a firm's
efficiency at using its assets in generating sales or revenue. P = ATO = Sales Revenue/Book
Value <strong>of</strong> Total assets
Market-to-book value ratios <strong>of</strong> equity (MB) is ratio <strong>of</strong> total market capitalization (share price times
number <strong>of</strong> outstanding common shares) to book value <strong>of</strong> net assets <strong>of</strong> <strong>the</strong> firm;
Growth in revenues (GR) measures <strong>the</strong> changes in firms‟ revenues in this case, from year to year.
Increases in revenues usually signal firms‟ opportunities for growth. Growth in revenue is
measured by dividing firm‟s revenue from <strong>the</strong> latest financial report by <strong>the</strong> previous year‟s
revenue. This variable is used as a proxy measure <strong>of</strong> pr<strong>of</strong>itability. GR = ((Revenue t / Revenue t-
1)-1) x 100%;
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