VideoThe same difficulties apply to accounting for internally developed intangibles. In fact, attempting to isolate and value the intangible assets of companies may be counterproductive, according to the Brookings Institution task force, which was co-chaired by former SEC commissioner Steven Wallman. It concluded that the value of an intangible asset comes from its interplay with other assets--both physical and intangible--and that attempting to value it on a stand- alone basis is pointless. "Overall company value is driven by a host of interactive decisions and activities ... and any attempt to disaggregate this overall value into individual intangibles would result in arbitrary measures," the report said. For example, the value of a brand name depends on such variables as "product quality, price, distribution channels, dealer relationships, and other factors." And the contribution of brand name to overall corporate value depends on how well management integrates it with other elements of the business. In other words, trying to value the Coca-Cola brand name apart from the other assets that contribute to and benefit from it is a meaningless exercise.
FOR WHAT IT'S WORTH
Part of the problem is confusion between the investments made to develop intangible assets and the value resulting from those investments, says Jeanne DiFrancesco, a principal at consulting firm ProOrbis, in Wilmington, Delaware. Take, for example, technology capital. DiFrancesco contends that contrary to some assertions, the asset in question isn't the R&D efforts, but rather the fruits of those efforts. As a result, she says, capitalized R&D expenditures are not an accurate measure of a company's technology capital. Likewise, investments made to train employees or to acquire new customers are poor indicators of other intangible values in an enterprise. "It's not what it costs, but what it's worth," says DiFrancesco. "We have to shift the paradigm from costs to a sense of value."
The Brookings study came to a similar conclusion. Despite corporate executives' growing use of nonfinancial metrics in managing their businesses, most companies lack an adequate system for continually and accurately generating such information. The task force, after receiving feedback from preparers of financial statements, concluded that "internal efforts to track values of intangibles once the expenditures are made range from nonexistent to early stage." And until those efforts progress, little information about intangible assets will be showing up in 10-K filings, let alone as line items in financial statements.
In fact, the number of companies even willing to discuss their intangible assets can be counted on one hand. And those that are, such as Dow Chemical and Rockwell International, do so largely because they believe they are undervalued by the market. "We're a knowledge-based company," says Dow's Oriel, but it's valued like a company based on bricks and mortar.
The so-called revelation principle--which suggests that once some companies reveal new information about themselves, the market will force others to follow suit--hasn't kicked in here, either. The leaders of companies with the highest levels of intangible value--namely high- tech enterprises--have had little to gain from increasing their disclosures. At least until recently, Wall Street darlings like Microsoft and Cisco Systems were happy to let the market come to its own conclusions about their intangible value.
Moreover, corporate executives have no incentive to share the information they generate. Not only might they be held liable for errors, but sharing the information would further complicate investor relations as well. Shareholders are already crowding the kitchen when it comes to managing companies. If they had access to the inside information about intangible assets that managers have, it could only get worse. And given the inherent difficulty of accurately measuring intangible value, a new disclosure regime could be a Pandora's box for corporate executives.
That hasn't stopped the chorus of voices calling for a value-based accounting system. Baruch Lev, for example, argues that however difficult it might be to measure intangible values, it shouldn't preclude companies from disclosing information about their efforts to build it. "Accounting doesn't value anything anyway," he says. "It simply informs about assets and investments."
And the same treatment should apply to intangible assets, argues Lev. At a minimum, he says, companies should reveal what they spend on such items as employee training, customer acquisition efforts, and IT and Internet investments. In fact, he even believes that either the SEC or FASB should give corporations a push in that direction--not in the form of regulation, but by way of example. "If an authoritative body were to come up with a model of best practices," he suggests, "it would pave the way for improved disclosure."
If that comes to pass, accounting for intangible assets could become a very tangible new responsibility for corporate managers.
Andrew Osterland is a senior editor at CFO.
THE TERMS OF INTANGIBLES
THE FIRST STEP TOWARD managing intangible assets is to define the terms, says Jeanne DiFrancesco, a principal at ProOrbis, a Wilmington, Delaware, consulting firm. "We're not able to define the assets," says DiFrancesco. "Therefore, we can't determine the value, either."
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