Intellectual Property

The FASB and IASB are taking time to look at their future agendas once the convergence efforts around revenue recognition, leasing and financial instruments are complete.  I cringe at the thought of the Boards once again taking up the subject of financial statement presentation, but I am pleased to see the FASB dusting off their long dormant disclosure framework project.  Although, I do have to wonder if it’s just one more attempt to put on the show that they now “get” private company issues while in the end not really doing anything for private company reporting.

Cynicism aside, there is one project I wish the Boards would add to their agenda – accounting for intangible assets.  Some want to expand it even more and go after intellectual property, but I disagree.  intellectual property would seem to include things like the value of a company’s workforce which I do not believe are accounting assets of a company.  One of the most important qualities of an asset is the ability of the company to control it.  Control includes the concept of selling it to someone else.  That idea simply doesn’t apply to employees, at least not in this or any other country that bans slavery.

But even when you limit the discussion to intangible assets, it is clear our current accounting model is woefully underdeveloped.  The Boards are making a big point in their leasing discussions that they believe it is important for economically similar transactions – lease versus a financed purchased – should be reflected in a similar manner in the financial statements.   It would seem to me that current standards for Intangible Assets are at least as egregious as the leasing standards.

Take the case of two companies.  Both make $1 million investments in a patent.  The first company spends the money on an internally developed patent.  What do they have to show for this investment?  $1 million in expense.  The second buys a patent from another company.  What do they have to show for their deal making prowess? A $1 million asset.  Assuming the patents have equal value, economically, both companies are in the same position.  The same cannot be said on for current or future year financial results.  The current year expense and asset differences are only the start.  In future years, the companies will show different return on asset ratios, different net income margins and so forth. 

Obviously there are a number of potential issues with taking on the accounting for intangible assets, the most important of which is valuing all of the intangible assets created and maintained each year.  The continued evolution of fair value accounting is forcing all CPAs to become at least proficient if not highly skilled in valuation techniques.  If you don’t believe me, just check out the SEC’s recent discussion on the use of pricing services – if you don’t understand the assumptions and models used by the pricing services than you have a control deficiency as a preparer and an audit deficiency as an auditor.  I guess if they are going to force us to become experts in valuation of assets, we might as well use those talents for something that truly improves financial reporting like finally addressing the inconsistency in accounting for intangible assets.

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