Accounting’s 21st Century Challenge: How to Value Intangible Assets [WSJ]
If you're looking for a new professional challenge, I suggest diving into the guesstimation game of valuing intangible assets. The assets are more interesting — brands, databases, algorithms, etc. — plus no one really knows what they're doing:
Assigning a value to a physical asset like a store or equipment is relatively easy. But, in the murky world of intangible assets, the calculations are squishy. The problem of how to value such assets has vexed accountants for decades.
Under current accounting rules, U.S. companies don’t record those items on their books as assets. “It’s 19th-century accounting,” said Baruch Lev, an accounting and finance professor at New York University’s Stern School of Business.
The absence of abstractions like brand value on corporate balance sheets prevents investors from properly gauging their risks, said Mr. Lev. “It’s an incredibly important issue,” he said. “Investment in intangibles is almost completely obscured from investors.”
One economist puts intangible asset values at $8 trillion and another says, "Companies invested the equivalent of 14% of the private sector’s gross domestic product in intangibles in 2014" while investment in physical assets is about 10% of GDP. But while that seems to illustrate the importance of intangible assets, the FASB is only "considering adding the topic to its rule-making agenda." A spokesman said the Board "hasn’t been able to find a solution in which the benefits of reporting intangibles outweigh the costs," which isn't a very satisfying explanation especially if you consider that intangibles are important in valuing businesses, bankruptcy proceedings, providing collateral for loans, etc. However!
Some investors and analysts say they don’t need to know the specific value of intangible assets like data. They say a company’s stock price reflects the market’s appraisal of those assets.
The FASB could do worse than pointing to "market efficiencies" as a good reason not to focus on intangible asset valuation. However, the opposite of that argument is, "You’re leaving a lot to the imagination,” as one of those economists put it. And some people have vivid imaginations.
You may have noticed my obsession with Big 4 firms elbowing their way into the global legal space so you'll humor me as I share the news of EY's further expansion of its legal business in Western Australia:
EY has bought WA’s top tax law firm, Norton & Smailes, giving its Perth practice a firm foothold in the legal space as the Big Four accountancy groups widen their reach in search of new revenue.
“There is an obvious compatibility between much of the work professional services firms do and legal services,” its Asia-Pacific law leader, Howard Adams, said. “That is what is driving this expansion.”
EY’s Perth tax leader, Scott Grimley, said the firm had launched its legal division from its tax business, initially focusing on tax disputes. The Norton & Smailes acquisition offered not just new tax expertise but “the build-out, particularly in Perth, of a commercial law offering”, Mr Grimley said.
This is a hyper-local instance, of course, but that only illustrates the Big 4's determination to go to every corner of the earth to sap up legal work. Global law firms won't and can't do that. It's pretty diabolical. Or competitive. Whatever.
The number of employees working in finance departments is expected to fall an average 2.7% in 2016, according to the Hackett Group, a consulting firm. Finance-department head count fell 1.6% last year and declined 0.6% in 2014.
It's hard telling how soon Johnny Five could take your place, but "The pressure on the finance function has been relentless," says a Hackett director.
Previously, on Going Concern…
I wrote about Valeant's 8-K. And in Open Items, someone is deciding between risk advisory and audit.
In other news:
- States begin adopting new partnership and corporate return deadlines
- Borneo Industrial Fishery Corp Inc. changed their auditor.
- Empty Dutch prisons.
- A close comet fly-by.
- Men's body spray sends people fleeing from Seattle church, daycare
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