The Golden Rule of the NEW ERA

Part I: The Knowledge Paradigm Shift: Knowledge is Wealth ( *Absolutely Virus-safe and FREE )

"A Wealth of Knowledge" Should Be on the Balance Sheet

Knowledge has been with us for a long time. It is just that our conventional accounting methods do not reflect them on the balance sheet. Any professional firm's services are intellectual rather than physical. An old law firm or accountancy practice with 50 years of history has almost no assets on their balance sheet; in particular their buildings, furniture, and equipment have all been written off. A young lawyer or accountant, having just resigned from an old firm to set up his own practice may have balance sheet assets many times that of his former employer, because the young man has just bought new premises, new computers, new furniture.

If we look at their balance sheets to value the two businesses it will be most misleading. The older firm has a wealth of knowledge of client cases. Such "cases" have been paid for by clients, but the knowledge is still with the firm. The processes and knowledge are still there. Knowledge of the client is still there. The list goes on. But the value of knowledge does not appear on the balance sheet. Sometimes goodwill may represent some knowledge, but it still does not represent anything that has been paid for.

With the high valuation of computer software, people are coming to realise that the software part in any businesses is actually an asset. It attracts little maintenance costs and can be used again and again to generate revenue, and it should carry a value. It is an asset which should be shown on the balance sheet, if the balance sheet continues to be the single most important basis for valuating a business.

Once again, readers are reminded that physical assets have a limit on their capacity, whereas the limit, if any, of intellectual assets is set by the size of the market, which grows on its own.

In Part Seven, greater details will be presented about Knowledge Accounting and how intangible knowledge assets are defined and categorized.

1.1 Knowledgization

Harnessing the Knowledge Componentis the New Basis for Wealth

What the new millennium brings is a new world waking up to a new basis. In the old days, physical assets actually have two components: the knowledge part and the material. A building comprises architectural fee, design fee, engineering fee, labour costs and so on, which are actually intellectual, and the costs represent the knowledge associated with the services. Accounting standard allows such costs to be capitalised as asset costs, hence building development costs comprise the total asset of the building. With gold, costs comprise all extraction costs and processing costs rather than just the mineral that is mined.

We are now awakening to the fact that every physical asset comprises two major components: its knowledge and its physical part. Knowledge is the new basis for wealth. This has never been true before. In the past, capitalists' wealth was their ownership of plant and equipment and natural resources. In the future when capitalists mention their wealth they will mean their control of knowledge. Even the language of wealth generation changes. One can talk about "owning" capital equipment or natural resources. The concept of "owning" is clear. But "owning" knowledge is not the same. Owning knowledge is an imprecise concept. The human beings who possess knowledge are not slaves, but can be bought in merger and acquisition of companies. Exactly how one knowledgizes to create value and who owns knowledge is in fact a central issue in a knowledge-based economy.

Not More Information, But Knowledge Assets

The current transformation is often misleadingly described as the information revolution, with society becoming the information society. It is much more. Faster or cheaper information isn't of much value in itself. Information is only one of many inputs used to build a different economy populated with very different products and services. More information is no more important than the new materials, biological entities, or robots building this new knowledge-based economy. More information just creates the new mess of information overflow. The new e-ra just creates e-nnoyance rather than e-fficiency.

Unless information can be properly knowledgized into a piece of knowledge assets which can then either generate income or create savings, the full value of information in itself cannot be reflected properly.

Internet Knowledge Equals Buying Power

The Internet is creating an environment where information abounds which can be Internetised into knowledge and hence wealth created. Take a simple example of the latest 1999 Christmas sales craze, where Barnesandnoble.com offered a $10 discount on any order over $40. Amazon.com outdid that by giving $10 off orders of at least $25, a deal matched by the music seller CDNow.com and the video site bigstar.com. Giftpoint.com offered $25 gift certificates usable in hundreds of on-line and off-line stores for $15. Petstore.com is promoting a $15 discount on purchases of at least $30 as well as free shipping, while the competing Petopia.com gives a $20 rebate on purchases greater than $30. The knowledge of such special offers means savings in Christmas seasons.

Internetise, And Then Watch Sales Soar

In the old days, consumers had to be directly solicited by the retailer to even learn of these deals. The Internet's new web sites quickly Internetised such news and gave away the passwords needed to get the discounts, a development which the retailers have decided consumers welcome.

As a result of such promotions, in the United States, for example, on-line retailers' trade association ship.org and Boston Consulting Group tracked on-line Christmas shopping this year and found 300 per cent more was spent in 1999 than a year earlier. They said more than US$10 billion was spent in November and December, and pre-Christmas estimates for holiday sales ranged from US$3.7 billion to $9.5 billion.

Below is a table which shows the top ten most popular e-commerce sites for the 1999 Christmas season:

Most Popular e-Commerce Sites for Christmas 1999

Source: Media Matrix

Elsewhere, the boom reflected a surge in on-line shopping in markets where Internet usage is high. In Australia, technology consultants www.consult said Australians spent about A$150 million (about HK$760 million) buying Christmas gifts from on-line retailers. Nearly 600,000 people had contributed to the boom * four times as many as in 1998.

It also found that about 35 per cent more purchases were made through Australian on-line retailers in 1999 than in 1998. Making use of such knowledge saves shopping across the board and hence the savings retained accumulate wealth. We are beginning to taste the sweetness of the Internet as a base for knowledge to create wealth.