The Goodwill Problem

Everyone loves to hate goodwill. It’s this amorphous, misunderstood number that sits on many companies’ balance sheets and causes headaches year after year when it has to be adjusted.  People assume that  represents an over-payment by the acquirer. And accountants look at you with a straight face and say that the entire value could go away in a moment.

Goodwill is created when a company buys another company and has to bring the acquired company into its accounting. There isn’t a lot of good data about this but there is one great study from a few years ago from Ernst & Young that tells us that the average deal is 47% goodwill. The rest of the deal is booked as 23% named intangibles and 30% tangible assets. The total intangibles are thus 70%.

Believe it or not, that 70% intangible figure was less than the 80% average intangible value in public companies in that same time. So, rather than having some wildly optimistic value that it is often painted to be, the average acquisition is in line with (or more conservative than) prevailing corporate valuations. Read more

Four reasons why the old accounting models don’t work and won’t ever be enough to measure the intangible economy

Today’s accounting systems keep track of certain types of financial transactions. (and mis-reports intangible financial transactions). There is a need to get good financial information about intangibles. But knowledge intangibles are a different kind of asset. It is hard to imagine a time when financial metrics alone will be adequate on their own to measure the health and performance of intangibles. There are several reasons for this: Read more

Intangible Investment Builds Value – A not so surprising review of the research

Intangibles are a class of asset that has always existed. But the importance of intangibles now eclipses all other asset classes because of the shift in our economy from the industrial to the knowledge era.

New things make people nervous. And the easiest way to dismiss something that makes you nervous is to ask for proof. So for all you doubters out there, here’s some proof. But I have to tell you that there’s nothing here that surprising. In fact, there is nothing here that good old common sense wouldn’t tell you. Thank goodness, there are academics out there willing to invest their time in making sure that our common sense is right. Read more

Facing the Facts: You are already spending a lot of money on intangibles

We can say with great confidence that you are already spending a lot of money on intangibles. How do we know? Academics have been looking at the question for quite awhile. Here are places they have looked:
Read more

Why are intangibles not on the balance sheet?

Up until the 1970’s, the consumers of financials—managers, analysts, investors and bankers—had a much easier job. They had three sets of information by which to measure their investments.

1. Balance sheet. In those days, balance sheets did include all the important assets of a corporation and looking at the balance sheet gave you a good idea of the corporation’s capacity to grow and thrive in the future.
2. Cash flow statement which showed you the investments (capital expenditures) the company was making in its future. This was a critical statement for us when we were bankers because it showed the split between short- and long-term spending and financing.
3. Third was the income statement, which told you how the company was putting its assets to work from year to year. The income statement also includes depreciation and amortization, which expense a share of the cost of capital investments each year over the useful life of the asset.

The rise of the knowledge economy has broken this model. The balance sheet does not include intangibles. Investments in intangibles instead are mixed in with current year operating expenses. And no one knows how much is spent on building intangibles within an organization. Read more

Measuring Intangibles: The Simple and Elegant Answer

A few years ago, a colleague from the Institute of Management Consultants, Michael Egan, approached me after I gave a keynote address on intangibles at the Institute’s annual conference. Michael’s firm built a platform a number of years ago that is used by industry association members to anonymously report benchmarking data. The postings by individual member organizations are reported back to everyone in the system with useful averages so they can see how their organization compares to industry norms. Michael was sure that there would be opportunities for reporting on intangibles.

Our first response was the standard response of everyone in the accounting and the intangible capital communities, that you cannot really measure intangibles in dollar terms. But we kept thinking about it and then one day a light bulb went on. Read more

I-Capex Is the New Capital Expenditure

Capital expenditure (capex) is an accounting concept that has ingeniously supported the tangible economy for centuries. It allows a company to apply to its balance sheet the cost of investments in its future productive capability. This is called “capitalizing” an expense. Then the cost of this investment or capital is depreciated over a period of years. This is an extremely important feature that helps companies avoid having to show decreased earnings in a period where they make large investments. It is through a corporation’s capex that the tangible production value of the company (and by extension, its balance sheet) is built and maintained.

The idea of capital expenditure is actually very relevant to intangibles. U.S. businesses are already investing as much or more on their intangibles as they are on tangible investments in property, plant, and equipment. We know this from macroeconomic data. And we can see the benefit of it in stock and valuation data. But we don’t really know on the individual company level because no one counts it. That’s right. No one really knows how much is being spent on intangible capital expenditures (i-capex) by American companies to build their knowledge infrastructure. Read more

The New Accounting

The accepted wisdom inside the IC world is that we should ignore accounting and accountants—they will never “understand” what we are doing. I went along with that for a number of years, accepting the view of many that IC is special, it cannot be truly measured, that it must be appreciated.

Well, I am way beyond that now. And I feel that the only course of action is to talk very explicitly about the link between accounting and the group of knowledge assets known as intangible capital.

Once you have come to understand your business as a knowledge factory and understand the management implications of this new operating model, you are find yourself needing an intangibles information set. The information set you will need is not that different from the set you would use to operate a tangible factory. You just need to learn some new techniques for generating it. Read more

Finally! A discussion of accounting for intangibles

I am thrilled to be part of the upcoming Rutgers University program on accounting for intangibles called Comprehensive Firm Valuation Symposium: Intangibles Come to Age.

This is an important first step to raise the level of the conversation about intangibles in the U.S. I will be talking about intangibles measurement along with

• Baruch Lev, NYU;
• Stefano Zambon, University of Ferrara;
• Amy Pawkicki, AICPA;
• Miklos Vasarhelyi, Rutgers

This symposium is open to the public but has limited seating. More information

The Dangerous Secret of Our Economy: The Intangible Information Gap

Although intangibles are more and more important, few companies can provide a description of their own knowledge factory. Nor can they provide an inventory of its critical components. How much it cost to build, maintain, and operate the factory. How well it is performing. The knowledge factory is essentially invisible in most companies.

Experts estimate that easily half, probably much more, of the value of American companies is held in this knowledge factory. This factory has been built through steady investments that were at least equal to the investments made in tangible production capacity in recent decades—and probably much greater.  Read more

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