Some investors and business experts believe now may be a good time to debate whether intangible assets - such as research and development, brand recognition, software, customer lists and employee training - should be counted the same way as equipment and buildings on corporate balance sheets.
Intangible investments, in R&D and advertising, for example, are counted as routine expenses under generally accepted accounting principles, which is set by the Financial Accounting Standards Board (FASB). The FASB started investigating whether businesses should do a better job of recording their intangibles in 2002, when tech stocks were plummeting, but the project was shelved two years later.
The way it works now, businesses must recognize intangibles as assets when a company is purchased and the buyer pays more than the cost of equipment and factories - the physical operation of the business. The Chicago Tribune gave this example: If you bought Coca-Cola Co. you would have to pay far more than the cost of the company's physical assets. You would have to pay for the Coke brand. However, the intangibles cannot be counted as an asset on the balance sheet.
By contrast, the International Accounting Standards Board has adopted a standard for recognizing intangible assets that are created inside the business, as well as intangibles obtained through an acquisition.
Leonard Nakamura, an economist at the Federal Reserve Bank of Philadelphia, told the Tribune that roughly half of the $2 trillion businesses invest each year represents intangibles, with about a third of the $1 trillion in software; one third in intellectual property, such as R&D; and one-third in advertising and marketing.
"Although, in the short run, people are being more suspicious of intangibles," Nakamura said, he expects heightened interest in disclosing the full range of assets that CEOs are supposed to manage over the long term.
A recent study of Canadian brand values shows that 75 percent of overall assets are considered intangibles for Canadian technology, financial, communications and noncyclical consumer companies, the April issue of CA magazine reported.
Determining the value of intangibles is a tricky business, made even more tricky if it is a family business, Financial Executive magazine said in an April article. Authors Harry J. Smith and Timothy F. Smith wrote, “In family businesses, the factors that give rise to this value are so crucial to success and so susceptible to loss that they require special analysis.”
They went on that family business owners “should be encouraged to think through categories such as key customer and vendor relationships, image and brands, management culture and processes, key employees, human resource systems and trade secrets, then to assign value to each critical success item such that the total intangible asset has been accounted for.”