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It is a common view that government institutions lag the private sector in the application of cutting-edge practices. But, says Professor Baruch Lev, in the field of accountancy that is not always the case. According to Lev, who has been named by Accounting Today as one of the 100 most influential people in the accounting profession, when it comes to recording intangibles there are world-class best-practices to be found in the US national income accounts.
Lev, a professor at New York University Stern School of Business and author of many books on accountancy – including Winning Investors Over published this month – says total investments in intangible assets represent around 15% of US GDP while investments in tangible assets total only 10%. It is a gap which is “constantly growing”, he says. As a result, Lev has been urging businesses to account fully for intangibles on balance sheets since before the millennium.
Lev believes the Bureau for Economic Analysis’ (BEA) 1999 decision to recognise software as an investment on the national income balance sheets places it way ahead of the private sector. When national accountants began to do it, he says, “The Economist ran an article saying we now have a different view of the US economy. Somehow,” he adds, “the view changed but, of course, this was because the accounting was improved.”
Echoing Andrew Sherman’s comments to IAM last week, Lev believes disclosing the value of the intellectual capital developed by a business is key to attracting investment. Current accounting means acquired intangible assets, including all types of IP and intellectual capital, are recorded, whereas internally generated intangibles are only recognised as costs. Lev states that this has long kept the full value of many businesses hidden from potential investors. “Disclosures are really the most important thing that investors need,” he says. Furthermore, he states, the information provider generally reaps the most benefit “because it reduces the uncertainty of investors… which reduces the cost of capital to the company, the cost of doing business and the cost of investment”.
Lev suggests that some methods used by companies today on a voluntary basis are good examples of how intangible assets can be disclosed. Product pipeline information, customer acquisition costs (a measurement utilised by Amazon to outline the intangible value of its customer base) and the churn rates disclosed by many entities in the telecoms industry to indicate subscription loss and gain, are examples of good practice that help investors unlock crucial information. However, such disclosures only become truly meaningful if everyone makes them; because it is only then that investors can make proper comparisons and measure one company’s performance against another’s.
Lev says it is “telling” that the BEA has not veered from its novel accounting path this past dozen years. What may be even more revealing is the BEA’s plan “to incorporate R&D as investments into the national accounts in 2013”. If the US government can do this, it does beg the question as to why others cannot. More than this, though, if the US government thinks it is important to do it, why isn’t it insisting that the practice is adopted across the board? At a time when growth is slowing and investors are nervous, the more accurate that company accounts are, and the more information that is disclosed, the better. There has never been a more pressing need to get intangibles – or some of them, at least – onto the balance sheet.
IP management, IP politics, Brands, IA management, Patents, IP finance, IP valuation