INTHEBLACK February 2022 - Magazine - Page 44
F E AT U R E
// I N T E L L E C T U A L P R O P E R T Y
Probably not, until you’re ready to properly announce
that to the market.”
Davern says not recognising intangible assets on a
balance sheet may be fundamentally wrong, but the
dilemma is to find a realistic value.
“The question comes from an investor perspective,
which is ‘Who we are trying to serve, ultimately, in
reporting?’ Is this something that we leave to investors
to work out from other sources?
“The annual financial statements are not just
relevant, they’re the trusted number.”
WHY INTANGIBLES SHOULD BE CAPITALISED
Yet, there are divergent views in the accounting world
on how useful and accurate financial results statements
and balance sheets are in helping individuals make
informed investment decisions.
Baruch Lev, professor of accounting and finance
at New York University’s esteemed Stern School of
Business, says the treatment of intangible assets is at
the heart of the issue.
Lev is co-author of the controversial 2016 book,
The End of Accounting and the Path Forward for
Investors and Managers.
“It’s not the intangible assets themselves, but the
clumsy treatment by accountants of intangibles,
the mindless expensing of all internally generated
intangibles, and the capitalisation of singular acquired
intangibles,” Lev says.
He notes that 70 per cent of all high-tech and
science-based companies in the US report losses, even
though the economy is doing well, and most of these
companies have large valuations in the market.
“The reason they report losses is because of this
expensing of intangibles. Half of this 70 per cent of
the companies that report losses, if they didn’t expense
intangibles, they would have reported profits.
“For me, I’m satisfied with just capitalising those
intangibles. You capitalise investment in a building.
Why shouldn’t you capitalise investment in a patent?”
Lev says all identifiable intangible assets should be
treated in the same way as ordinary assets.
“Capitalise the cost, put it on the balance sheet and
if, for example, in three, four years nothing comes out
of it, then write it off.”
44 ITB February 2022
“THE QUESTION
COMES FROM
AN INVESTOR
PERSPECTIVE,
WHICH IS, ‘WHO
ARE WE TRYING
TO SERVE,
ULTIMATELY, IN
REPORTING?’
IS THIS
SOMETHING
THAT WE LEAVE
TO INVESTORS
TO WORK OUT
FROM OTHER
SOURCES?”
PROFESSOR MICHAEL
DAVERN FCPA, UNIVERSITY
OF MELBOURNE
RELEVANCE VERSUS RELIABILITY
Davern has a contrarian view on the recognition of
intangibles.
“Do we want to compromise the reliability of
financial statements by introducing a valuation that
may be a more representative number of what the true
value might be? But it could be wrong.”
Davern says there is an ongoing relevance versus
reliability trade-off in the financial reporting of
intangible asset values.
“My view on that is that we want to be as relevant as
we possibly can, but we shouldn’t throw the baby out
with the bath water.
“Because, in the market for information, what we are
providing in financial statements is the one reliable,
trustworthy, credible source of information.
“If we sacrifice that in trying to increase the
relevance of what we’re doing, then we’re in real
trouble.”