December 26, 2020
Today, enterprise value is largely dominated by intangible assets. However, intangibles are recognized on the balance sheets only under some well-defined circumstances. Most internally generated intangible assets are expensed in the income statement, not showing their real value on future earnings.
In the last years, many authors called for a recognition of intangible assets on the balance sheet. Irrespetive if they emerged from acquisitions, or if they were internally generated.
Four top-level authors now combined their experience and views in their recent must-read paper “Accounting for Intangible Assets: Suggested Solutions“. They emphasize the importance of the income statement in the double-entry accounting system.
According to the authors, asset recognition in the balance sheet must consider the effect on measurement in the income statement, for the income statement conveys value added to investment on the balance sheet. A determining feature is uncertainty about investment outcome and how that affects the income statement. Additional features include investment expenditure for balance sheet recognition, and identification of expenditure separately from transactions.
The authors include Richard Barker of Oxford University, Andrew Lennard of FRC, Stephen Penman of Columbia University, and Alan Texeira of Deloitte/University of Auckland. The full paper is downloadable here.