This week, we’ve been talking about collecting data on intangibles investment.
This discussion seems to beg the question of how it will be used. In contemporary accounting, the investment by an organization in tangible assets is “capitalized” on the balance sheet and depreciated over time. This serves as a way of keeping non-operating expenses (that is, not related to the current year’s operations) out of the income statement. It also serves as a way to track the cumulative effect of investing in a company’s capacity over time. As we have explained in previous posts, this model is not used for intangibles.
So if we recommend tracking intangibles investment, does that mean that we think intangibles should go on the balance sheet? Read more
Last week, in my interview of Alan Anderson and Chuck Hulten on accounting and intangibles, Alan made a statement that has stuck with me: That in all his travels in his own business and through his activities with the AICPA, he has never heard people say that they use their GAAP statements to make business decisions.
But businesspeople use their accounting information all the time. They just use it for presentations and analyses that better suit their needs. This is often called managerial accounting as opposed to statutory reporting (which conforms with GAAP or IFRS).
This post is about just such a use. It is about tracking the amount of money that you invest in intangibles each year.
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.
- 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.
- 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.
- 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
The internet television video company Hulu is reportedly considering an IPO. But, reports the NY Times, the company “evidently makes little in profit.”
I am not privy to their numbers but I can tell you from experience that their income statement is probably full of “expenses” that are actually investments in their intangible productive capacity (also called intangible capital). These include investments in some investments in processes, training, networks, and other forms of organizational knowledge. Read more
At least once a week, I see articles or blog posts bemoaning goodwill. One of the latest was an article in Business Week entitled Magic Tricks on the Corporate Books. This article is typical in its interpretation that goodwill represents funny money. It is often also assumed that management teams are playing games with goodwill. While this may sometimes be the case, goodwill usually represents actual, identifiable value. The problem is that no one really knows when and where this value exists. The accountants could produce data but they don’t. Read more