Accounting for Intangible Assets: There Is Also an Income Statement

Accounting is often criticized for omitting intangible assets from the balance sheet. With value in firms of today flowing less from tangibles assets and more from so-called intangibles -- brands, distribution systems, supply chains, "knowledge capital," "organization capital" -- accounting is seen as remiss, with high price-to-book ratios as evidence. The remedy often proposed involves booking these intangible assets to the balance sheet. This paper makes the point that accounting is not necessarily deficient in omitting intangible assets from the balance sheet: there is also an income statement, and the value of intangible (and other) assets can be ascertained from the income statement. For example, although The Coca-Cola Company does not report its brand asset on its balance sheet (and trades about five time book value), earnings from the brand flows through its income statement. Thus the firm is readily valued from its earnings; the income statement remedies the deficiency in the balance sheet. Accordingly, accounting that calls for the recognition of "intangible assets" on the balance sheet may be misconceived. The paper explores the case where the income statement perfectly corrects for a deficient balance sheet, and the case where it does not. It then explores whether, in the latter case, accounting in the balance sheet -- by capitalization and amortization of intangible assets or carrying them at fair value -- could remedy the deficiency in the income statement (or makes it worse). The investigation involves an analysis and valuation of Microsoft Corporation and Dell, Inc., two companies presumed to possess a good deal of "intangibles assets." The paper is instructive, not only to those concerned with accounting issues, but also to analysts attempting to value firms with assets missing from the balance sheet. It shows how to handle the accounting information in valuation and how to deal with the perceived deficiencies, real or imagined, with respect to intangible assets. In the case of Microsoft and Dell, the reader can observe at how close one comes to their market valuation by using valuation techniques that use accounting information currently provided by GAAP

The role of vegetation in soil water problems

RESP-597

Fair Value Accounting in the Banking Industry

This paper studies the application of fair value accounting in bank holding companies in the United States with the purpose of evaluating the effects of expanding fair value accounting in the banking industry. The paper documents the current application of fair value accounting in the industry, showing what proportions of recognized assets and liabilities of bank holding companies are at or close to fair value on the balance sheet, have related unrealized gains and losses in income, or have fair values disclosed in the footnotes. In each case, it evaluates the advantages and disadvantages of the current treatment and makes an assessment of the magnitudes of economic assets and liabilities that currently are omitted from the balance sheet. Turning to the issue of the likely impact of expanded application of fair values, the paper asks how large are the actual and potential differences between fair values and book values of various assets and liabilities and how credit, interest rate and prepayment risks are likely to determine those differences. It considers the availability of market-based information for measuring fair value and evaluates the correlations between fair values of economic assets and liabilities due to natural hedges, asset-liability management, and changes in asset values affecting the risk and value of liabilities. It also addresses the issue of how a switch to fair value accounting would mitigate or, alternatively, facilitate earnings management activities. The primary conclusion of the analysis is that expanding fair value accounting is not likely to significantly improve the information in bank financial statements and, in some cases, may introduce distortions that reduce accounting quality. The analysis is pertinent to bank analysts and investors for it not only documents the impact of fair value accounting on banks but also informs about the drivers of value and risk on which accounting should report

Debt vs. Equity: Accounting for Claims Contingent on Firms' Common Stock Performance with Particular Attention to Employee Compensation Options

This paper lays out a comprehensive solution to the problem of accounting for claims based the performance of a firm's stock price. The accounting covers employee stock options, stock appreciation rights, put and call options, convertible debt and preferred stock, warrants, and other hybrid securities. This issue has vexed the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) who have approached the problem on a piecemeal basis, leading to inconsistent treatments of claims that in substance are very similar

Germination responses of a dry sclerophyll forest soil-stored seedbank to fire related cues

Fire is an integral component of many ecosystems worldwide. Many plant species require fire-related cues, primarily heat and smoke, to trigger germination. Despite the importance of this process, the responses of many Australian species to these cues are unknown. Without this knowledge fire management strategies may be developed that are inappropriate for individual species and vegetation communities. In this study we examined the responses of a dry sclerophyll forest seed bank to heat and smoke germination cues. Analysis was possible for 48 taxa within the soil seedbank with 34 of these showing a response to one or both of the germination cues. 10 species responded to the heat treatment, 11 species responded to the smoke treatment and 13 species responded to both the heat and smoke treatments. Germination cues acted independently for all species considered. Results in this study were consistent with published reports for most species, although some differences were seen at the species and genus level. The study highlights the importance of fire-related cues in enhancing germination of a large proportion of the species occurring in dry sclerophyll forests

On the Balance Sheet-Based Model of Financial Reporting

The FASB adopted a balance sheet-based model of financial reporting about 30 years ago, and this model has been gradually expanded and solidified to become the required norm around the world today. Currently, the FASB and the IASB are re-considering their Conceptual Framework, and this is the right time to have a much-needed debate about the proper conceptual foundations of accounting. This paper argues that the balance sheet orientation of accounting standard-setting is flawed, for the following reasons: 1. Accounting is supposed to reflect business reality, and thus the essential features of the financial reporting model need to reflect the essential features of the underlying business model. However, the balance sheet orientation of financial reporting is at odds with the economic process of advancing expenses to earn revenues, which governs how most businesses create value, and which represents how managers and investors view most firms. 2. The adoption of the balance sheet approach was driven by conceptual considerations; standard setters argued that the concept of assets is more fundamental and logically prior to the concept of income. However, this paper argues that the concept of income is clearer and practically more useful than the concept of assets, especially with the recent proliferation of intangible assets. 3. Earnings is the single most important output of the accounting system. Thus, intuitively, improved financial reporting should lead to improved usefulness of earnings. However, the continual expansion of the balance sheet approach is gradually destroying the forward-looking usefulness of earnings, mainly through the effect of various asset re-valuations, which manifest as noise in the process of generating normal operating earnings. During the last 40 years, the volatility of reported earnings has doubled and the persistence of earnings has gone down by about a third, while there is little change in the properties of the underlying business fundamentals. 4. The balance sheet approach has pushed accounting into incorporating more and more valuation estimates into financial reports, creating tautological and dangerous feedback loops between financial markets and the real economy. The paper concludes with two suggestions about a "good" model of financial reporting. The first suggestion is that accounting needs to make a sharp theoretical and practical distinction between operating and financing-type activities and assets, and this distinction needs to be reflected in all financial statements. The second suggestion is that for most firms the accounting for operating activities needs a renewed emphasis on the principle of matching of expenses to revenues

Public Attitudes About Normal and Pathological Grief

Determining public expectations of grief is an important contributor to the debate differentiating normal from pathological grief. An international sample of 348 participants was randomly allocated to 1 of 12 conditions comprising a bereavement vignette and self-report items measuring grief expectations and social distance. Participants expected grief to decrease steadily between 2 weeks and 6 months then stabilize; however, time did not affect social distance. Gender of the bereaved and circumstances of death did not influence expectations, but did interact to influence social distance. These factors must be accounted for in determining a deviation from the norm in diagnostic nosology