The End of Accounting and the Path Forward for Investors and Managers

Chapter 8The Rise of Intangibles and Fall of Accounting

In which we present the first reason for the waning usefulness of financial (accounting) information—the surge of intangible (intellectual) assets (patents, brands, information technology)—to become the prime value creators of businesses. We document empirically that the failure of the accounting system to reflect the value of these assets in financial reports, to properly account for their impact on firms’ operations, and to provide investors with information about the exposure of these assets to threats of infringement and disruption, is a major cause of accounting’s relevance lost. How ironic (or sad) that largely irrelevant assets to companies’ growth and competitive edge—like inventory, accounts receivable, or plant & machinery—remain prominently displayed on corporate balance sheets, whereas patents, brands, IT, or unique business processes are accounting MIAs.

The Intangibles Surge

Figure 8.1, which traces the pattern of US corporate investment in tangible (plant, equipment, inventory) and intangible assets over the past 40 years will surely surprise you. What you see is truly a tectonic economic shift: The rate of investment in what many people still think of as the real assets—physical capital—fell by 35 percent over the period, whereas the rate of investment in intangibles—what Alan Greenspan called conceptual assets—increased by almost 60 percent, and keeps rising. Note, in particular, the continuously ...