Financial Accounting: In an Economic Context

INTANGIBLE ASSETS

In Chapter 5 we noted that the value of a company as measured by the balance sheet (total assets – liabilities) rarely reflects its market capitalization value (value of a company as measured by the stock market). As of September 30, 2009, for example, the balance sheet value of Emerson Electric was $8.6 billion, while the stock market valued the company at $30.1 billion. The difference, $21.5 billion in this example, is often referred to as “intangibles,” referring to those features about the company that are valued by the market but ignored by the balance sheet. These intangibles include the quality of a company's management, the value of its brands, good relationships with its customers and suppliers, and other factors that are important to the company's future but very difficult to measure. Certainly, the absence of these kinds of “assets” is a balance sheet weakness, and many argue that for a variety of companies, especially those in the Internet sector where “knowledge” is a company's most important asset, that weakness is quite significant. At present, neither U.S. GAAP nor IFRS allows the recognition of these kinds of assets. The principle of objectivity is just too strict. Consequently, analysts reviewing companies traded on U.S. markets must be content to rely on financial statements that do not capture some very important information.

In this section we discuss intangible assets, but only those that can be measured objectively. They are characterized ...