The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Conclusion

This chapter examined the two key issues we face when valuing firms with substantial intangible assets. The first is that the accounting treatment of what comprises capital expenditures at these firms is inconsistent with the accounting treatment of capital expenditures at manufacturing firms. R&D expenses, brand-name advertising, and employee recruitment and training expenses are treated as operating, rather than capital, expenses. As a result, both the earnings and book value numbers at these firms are skewed, and using them in valuation can lead to poor estimates of value. We examined ways of correcting for this accounting inconsistency and the resulting effect on value. In general, firms that can convert R&D expenditures more ...