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 / Autumn 2008 / Issue 52(originally published by Booz & Company)


The Real Value of Intangibles

But in the U.S., where the issue briefly caught the attention of sev­eral government and finance organizations at the beginning of the decade, efforts to address intangibles not associated with acquisitions have petered out. “They talk about needing to move to more future-­oriented indicators, but no one is looking specifically at intangibles,” says Ken Jarboe. As Karl-Erik Sveiby puts it, “The U.S. has zero interest in this — and I mean 0.0.”

One explanation for this attitude is that executives don’t believe the risk of disclosure is worth the benefit. “When you ask companies to disclose this information, they immediately say, ‘Why should we give away proprietary information? This is competitive advantage.’ Of course, companies have been saying that for centuries about everything,” says Jarboe. And the flip side is that companies may not want to reveal their competitive disadvantage. Who wants to disclose a worthless patent portfolio?

Shareholder liability issues make U.S. companies even more squeamish. Because lawyers representing shareholders can work on contingency and have been known to troll for companies to sue, public firms will often disclose only what they absolutely must. Most experts on intangibles agree that liability issues are stopping even companies that would like to disclose their intangible assets from doing so. As the Value Measurement and Reporting Collaborative’s Rob McLean says, “The only way a new approach can work is by safe-harbor legislation. Companies that put forth their vision of the future by valuing their intangibles should not get sued when — surprise, surprise — life doesn’t happen exactly as they modeled it.”

It would be naive to overlook the role that today’s “objective” and “factual” financial statements played in recent corporate scandals. In reality, financial statements are often the worst kind of fiction — the kind that pretends to be truth. Books are legally cooked with regularity as numbers are shuffled and accounts are juggled to put the best possible face on quarterly earnings reports or to present an acquisition in the most flattering light.

Whether companies’ reasons for avoiding the intangibles issue are valid or not, they may not be able to bar the door from dis­closure much longer. In part that’s because investors are exerting increasing pressure on executives to provide them with performance indicators for these assets. Thus it is to no one’s advantage for there to be a lack of reporting standards or audits for intangibles and for disclosure to re­main voluntary. No matter what the state of a company’s intangible asset portfolio, its reputation is likely to take just as hard a hit for withholding disclosure once its competitors have laid their own intangibles on the table.

But it’s time to stop looking to the accounting profession for the leadership required to deal sensibly with intangibles. As distasteful as the suggestion might be in a cor­porate climate, where any government intervention or regulation is suspect, it is likely that the only way to ensure that intangible assets are represented fairly and accurately is for government to play an active role in the process. And it seems likely that that change will come from those who study the econ­omy at large and work down into the ranks of individual financial officers. “Macroeconomists are the ones who are going to make the change,” Jarboe declares. “GAAP is the last thing the sell-side analysts look at anyhow. They know better. They know that corporate financials are either faulty or, if not a de­liberate exercise in ‘earnings management,’ that they’re incomplete without intangibles anyway.”

In April 2007, the Bureau of Economic Analysis (BEA), which produces GDP data for the United States, announced that it was looking into intangibles as well as “the broader world of in­novation.” The BEA has been ac­quainting itself with such issues for some time now; it has designed a set of re­search and development satellite accounts to supplement the GDP accounts. It is also shifting R&D from an expense to an investment for ac­counting purposes.

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