VideoThis isn't news to most companies, of course. In fact, a 1998 PricewaterhouseCoopers survey of corporate executives found that only 38 percent thought that their financial statements were very useful in communicating the value of their companies. In the high-tech industry, the figure was an alarmingly low 13 percent. Little wonder that executives are increasingly embracing alternative metrics that provide insight into such factors as speed to market and customer profitability to get a broader picture of their performance.
At Dow, the effort began five years ago, when Oriel helped take inventory of the patents, licenses, and technologies produced from the company's R&D efforts. She then analyzed the research efforts in terms of whether they were oriented toward growth or merely toward value preservation. "We found that we were spending more on maintaining the status quo than on real growth opportunities," she says. "By making that visible, we've now flipped [it] completely around."
Oriel also credits an increased emphasis on intangibles with helping the company realize when it doesn't have the necessary assets and capabilities to bring a promising product to market. Two years ago, for example, Dow invented a superior version of an elastomer, a rubberlike material used for gasketing. DuPont, however, had the leading product on the market, with a strong brand name behind it. "At the old Dow, we would have just brought the product to market," says Oriel. "And five years later, we would have been saying, 'Let's cut our losses.'" Instead, Dow determined that despite having a superior technology, it lacked the other vital intangible assets to make the product profitable on its own. The solution? A joint venture. Dow and DuPont have been sharing the profits from their cooperative production of the material for the past five years.
Rockwell International faced a similar situation with a digital imaging technology it developed in 1995 called CMOS. Instead of spending potentially huge sums to enter new photography, office equipment, and medical imaging markets with the technology, Rockwell looked to develop relationships with companies already established in those industries. "There are times when you want to fight, and times when you want to partner," says James O'Shaughnessy, chief intellectual property counsel at Rockwell. And such a decision usually depends on organizational flexibility, market position, and human resources. Corporate managers understand this, and their success depends on being able to evaluate those intangible factors.
INTANGIBLE BARRIERS
For the most part, shareholders are denied access to such evaluations by management. "Investors are aware that companies are valuing their intangibles, but they can't get at [the information]," says consultant Herz. At least most of them can't. Institutional investors with enough clout to get an audience with senior executives have been asking about R&D productivity, market penetration, and customer retention rates for years. But given the introduction of the SEC's Fair Disclosure rule, even they may soon find that kind of information hard to come by.
The bigger roadblock to sharing information about intangibles, however, is the lack of workable reporting standards. The internal metrics currently used to evaluate intangible assets and capabilities are a long way from fitting the GAAP framework. How, for example, do you compare the customer loyalty of Microsoft software users with that of Wal-Mart shoppers? How do you compare the value of General Electric's management training investments with those of Amazon.com? Intangible assets are soft and fuzzy, and for a profession that likes its assets hard and well defined, that's a problem. "[Accounting for intangibles] introduces so much more uncertainty and judgment into the process," says Bob Willens, an accounting expert at Lehman Brothers. "It may happen from a managerial point of view, but it will never be GAAP."
Given concerns about the accuracy of reporting models for intangibles and fear of disclosing competitive information, there is certainly no groundswell among corporate executives to create such standards. Not only do they doubt the reliability of valuation methods for intangible assets, but they also fear the cost of the effort. "I've never been a fan of carrying intangible assets on the books," says Joseph Bronson, CFO of Applied Materials, a $9.6 billion semiconductor equipment company based in Santa Clara, California. "They're always going to be impaired." Mercedes Johnson, CFO of $1.23 billion Lam Research, another semiconductor equipment company, based in Fremont, California, adds: "Accountants have a hard enough time evaluating assets already on the balance sheet. It would involve very subjective information and could lead to wide variations in reporting."
She has a point. Consider again the new FASB proposal for goodwill. Currently, says FASB, the only intangible assets that can be separately recognized from goodwill are those in which "the future economic benefits of the asset are obtained through contractual or legal rights"- -namely, patents, licenses, and the like. Teasing out more intangibles from goodwill would involve some tricky judgments about how to allocate the premium paid over book value to individual intangibles. "We'd like to see it go that way, but it's a question of getting the metrics to value them," says Kim Petrone, project manager for FASB's business combinations proposal.
Reader Comments» Post a comment