Cost of Intangibles Investment
I just posed a question on hybridvigor about whether it is correct for accountants to focus on cost or value of intangibles:
Companies (and their accountants) are not in the business of “valuing” assets…Think about it. When a company builds a new manufacturing plant, the analysis is not around the value of the plant. It is about the expected cost and return. No one around the table says, “this plant will have a great re-sale value.” The important questions are about how to use the plant to create revenues and profits for the company. The accountants book all the investments and expenses at cost…Treatment of intangibles should be the same.
What do you think? Read the post and be sure to share your thoughts through the comments.
Comments
3 Responses to “Cost of Intangibles Investment”
The dilemma of the 21st century organizational reality. Your statement is correct and pretty much how we are allowed to recognize “assets” and their value is determined by accounting standards (FASB or IASB or others). Standards do allow for some level of recognition of intangibles but guided by the principle that they must be able to be valued in terms of future worth and / or income stream. The majority of important intangibles fall outside this (relationships, processes, people etc) and therefore this precludes valuation especially as these assets are being created. (in fact it is pretty insane when the expenditures being incurred to create these intangibles are treated as expenses and create losses against income. Huh?) However when someone actually pays cash for them - such as a merger and sale - then there is a value and its called “goodwill.” In my view it is not the accounting model that is broken but the corporate governance one. Accounting does not equal accountability and that’s where the issue rests. Corporate reporting should start to require some recognition of these items - and to some degree they are with new models like the GRI and the UK based SIGMA model. The challenge for acountants is that we are getting better and better at reporting what is less and less relevant. Until corporate shareholders wake up to the fact that they are missing a whole chunk of information that determines the worth of their investment, we will not be able to address this.
Thanks Nick for great observations! Do you have links where folks could learn more about GRI and SIGMA. Let’s get both kinds of information: the cost and also the context to help shareholders see the full picture…
Here is the web site for GRI
http://www.globalreporting.org/Home
and here for SIGMA
http://www.projectsigma.co.uk