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"I guess it’s time to talk about Accounting for Intangible Assets: There is Also an Income Statement by Stephen Penman. When this new paper first came out from the Center for Excellence in Accounting & Security Analysis at Columbia University, I decided to ignore it as an apology for current accounting standards–which are completely inadequate for the knowledge era.
But now the paper is getting more attention so I feel the need to answer it."
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- Intangible asset is a “speculative notion” – This is a common problem for accountants. They cannot see an intangible so how can it be real?
- “Intangible assets involve using assets jointly” – This is a related problem. The utility of intangibles is related to their use in a system. (This is why we help companies model their IC as a system)
- The cost of intangibles “would be hard to identify” – This I don’t buy. Every day, accountants make a distinction between money spent on current operations (an expense) versus money spent on building future capacity (an investment).
- “Establishing an amortization schedule would typically be quite speculative” – He’s right. It would be. It’s one of the key reasons why we cannot create new accounting standards…yet.
Penman’s argument explains all the reasons that intangibles cannot and should not be booked to a balance sheet today. These include:
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But if I were an investor or an analyst, I would still ask the question: How are you spending your money on future capacity? How does your annual intangible capital expenditure break down?
"The Internet is ultimately about sharing knowledge, making connections and collaborating to put knowledge to work. This makes it the platform for much of what your organization will do in coming years. But the Internet is the exception to the rule as networks go. Most networks are smaller, with limited size and, usually, a specific purpose. Every organization today is itself a network that is made up of many smaller networks. This means that, without a doubt, you need to understand networks. "
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And you need to learn to think of your organization as a network, your people as participants in networks and your work processes as themselves as networks.
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This form of model shows the unique combination that your organization creates by connecting human and relationship capital through structural capital.
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Intellectual Capital (IC) - This is a phrase and a concept which was popularized in the 1990’s to explain the significant shift in our economy and businesses as knowledge became the key competitive advantage in the global market. The focus of IC is how intangibles are manifest in an organization. The field of intellectual capital has identified three main categories of intangibles, each of which has a different character. It is important to understand individual intangibles as well as how they work together as a whole:
* Human Capital - This includes all the talent, competencies and experience of your employees and managers. This is the intellectual capital that “goes home at night.”
* Relationship Capital - This includes all key external relationships that drive your business, with customers, suppliers, partners, outsourcing and financing partners, to name a few. This kind of capital also includes organizational brand and reputation. Due to the growing importance of networks in organizational structures, this is also sometimes called Network Capital.
* Structural Capital - This includes all knowledge that stays behind when your employees go home at the end of the day. There is significant structural capital in today’s organizations including recorded knowledge, processes, software and intellectual property.
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On average, roughly 80% of the value of today’s corporation is intangible.
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