Intellectual capital is the technical expertise and process knowledge contained within an organization. If intellectual capital gives an organization a significant competitive advantage, it is entirely possible that a large portion of the firm's valuation is derived from this expertise and knowledge. Examples of intellectual capital are the expertise needed to process a complicated production procedure, the development of a secret recipe for a food product, and a high level of business training given to a consulting firm’s employees.
If a firm does not recognize the value of its intellectual capital, it may engage in adverse personnel management practices, triggering an outflow of valuable employees. Conversely, a management team that is determined to maximize its use of intellectual capital will follow a detailed plan for focused knowledge acquisition and employee training, while also converting it into specific competitive advantages.
The cost of acquiring intellectual capital is derived from excellent hiring practices, as well as a deep investment in employee training. The costs of hiring and training are considered to be period costs, and so are charged to expense as incurred. This means that an organization does not capitalize the cost of its intellectual capital.
When a firm with a large amount of intellectual capital is acquired, the acquirer will likely pay a high price for the business. If so, a portion of the purchase price is assigned to the assets and liabilities of the acquiree. The remaining unallocated amount of the purchase price is assigned to the goodwill asset. This means that the intellectual property of an acquiree is essentially being recognized in the goodwill asset of the acquirer.