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September 10, 2007
Valuing intangibles - NY Times
Sunday's New York Times had a story article on something that a regular reading of this blog would already understand: the problem with accounting for intangibles. According to the story (When Balance Sheets Collide With the New Economy):
Today's sophisticated knowledge economy is stuck with the equivalent of an abacus for measuring the actual financial value of corporate assets and liabilities.
At issue is a growing collection of crucial resources known as intangibles: assets or liabilities that have no obvious physical presence, but that represent real value or vulnerabilities.
Patents, trademarks, copyrights and brand recognition are most commonly recognized as intangibles. But as the nature of doing business has changed, the list has grown.
For example, the most valuable assets of an innovation-based company today — its intellectual property, software investments, staff and managerial expertise, research and development, advertising and market research, and business processes — have no natural home on the balance sheet.
The story mentions the work of the Intellectual Asset Finance Society and Social Venture Technology Group. There are many groups and organizations working on the issue of measuring and valuing intangibles. Included in that list are the International Accounting Standard Board (IASB) and the Financial Accounting Standards Board (FASB) -- the two organizations (international and US respectively) who draw up the accounting rules. Current accounting rules require the disclosure of intangible assets acquired in a business combination (see FASB’s Statements of Financial Accounting Standards (SFAS) 141 and 142 and IASB's International Financial Reporting Standards (IFRS) 3 and International Accounting Standard (IAS) 38). IASB and FASB are in process of defining a joint project to extend those rules to internally generated intangibles. And a few years ago, the SEC issued guidance to allow for greater disclosure of non-financial information in companies' financial statements.
Still, the issue of valuation and measurement continues to be problematic. Since many intangibles are not easily transferred, it is hard to determine their market value. Even those which are transferable, such as patents, markets are relatively thin. In the absence of market measures, standard methodologies are needed. Valuation measures and methodologies currently exist, but they are seen as too broad in their range of estimates. And there is no general agreement on which non-financial measures are the most appropriate. As the Times story points out, much more work is needed.
For more, see two Athena Alliance working papers: Reporting Intangibles: A Hard Look at Improving Business Information in the U.S. and Measuring Intangibles: A Summary of Recent Activity.
Posted by Ken Jarboe at September 10, 2007 8:57 AM
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