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

Accounting for Intangibles – The Income Statement is Not the Answer

I guess it’s time to talk about Accounting for Intangible Assets: There is Also an Income Statement by Stephen Penman. When this new paper first came out from the Center for Excellence in Accounting & Security Analysis at Columbia University, I decided to ignore it as an apology for current accounting standards–which are completely inadequate for the knowledge era.

But now the paper is getting more attention so I feel the need to answer it.

We are not talking about some theoretical accounting issue.  70% of the value of the average M&A deal is intangible. 60% of the average corporate investment is intangible. 50-80% of the average public company is intangible. That means that intangibles are ignored by accountants (the only real exception is in the case of a merger, when the lack of understanding ends up as 50% of the purchase price going to goodwill). None of this is helpful to the cause (and stated mission of Columbia’s center) of “excellence in accounting and security analysis.” Read more