12: Brainpower on the Balance Sheet
It may be a strange time to say this, just when the world is clamoring for truth in accounting. But what companies really need is greater tolerance of uncertainty. They should be allowed to assign dollar values to intangible assets such as patents, brands, and customer lists. With a better grasp of invisible assets, investors can make wiser decisions--though accounting authorities may not come around to this notion for another 20 years. This fictional balance sheet shows one possible approach, toting up intellectual property alongside plant and property.
As the embodiment of ideas, intangibles are what drive growth in an information economy. Baruch Lev, an accounting professor at New York University, reckons that in the late 1990s, businesses invested approximately $1 trillion per year in such assets. Taken together, intangibles comprise well over half the market value of public companies. Yet, with statements prepared under U.S. generally accepted accounting principles (GAAP), investors can only guess at their value or makeup. Current reporting practices "fail to provide adequate guidance to managers, investors, or public policymakers," says Lev--though he does not expect a sea change any time soon.
In order to better milk their patents and brands, some companies do attempt to measure their worth. But such numbers are rarely for external consumption. Even when used internally, they can cause problems. If you miscalculate the future income from a patent, you may commit to building a new plant that you can't afford. Fortunately, measuring tools are improving. And as a result, many countries are becoming comfortable with intangibles. Already, a dozen or so nations, including Britain and France, permit the recognition of brands as assets on the balance sheet. Intellectual property could be next.
Yet for most U.S. companies, the risks of such disclosure still outweigh the benefits. With intellectual property, for example, how do you price a batch of freshly minted patents that have yet to produce revenue? "Companies worry that inaccurate measurements or surprise writedowns [of intangible assets] will get them sued," says Halsey Bullen, senior manager of a project to study intangibles at the Financial Accounting Standards Board. FASB agrees that greater disclosure is the way forward. Just where to record intangibles is another question. "Maybe in the footnotes," Bullen offers. Okay, that's a start. In small print or large, these assets deserve to see the light.
By Adam Aston