Umm, err?

Accountancy is riddled with intangible assets. And arbitrary valuations. I’m not seeking to get too technical here. What I am referring to are four basic categories of assets. Being more specific does not help the argument.

The first such asset is goodwill. This is the excess value paid when acquiring a business over the sum that can be attributed to tangible, physical assets that can be valued in their own right.

The second group of assets are legally constructed property rights. These are things like patents and copyrights that only have value by presuming there is a future income stream.

The third are those supposedly marketable assets that apparently generate an income but for which there is no current market and to which a value is attributed on a ‘mark to market’ basis using models that might be as accurate as a forecast that it will snow in the UK today.

And finally are assets created intra-group. These are investments, loans and liabilities created in an intense web of transactions that are in themselves likely to be largely commercially meaningless but which leave a trail of interdependencies that render the accounts that include them largely incomprehensible in themselves, but which are nonetheless declared to be true and fair.

You can argue there are more or fewer such groupings. You can discuss which is more or less esoteric. I have problems with them whichever way you address the issue. The problems are, essentially, twofold.

The first is that these assets may simply not exist. Indeed, in isolation, they do not. So, goodwill is not independent of the underlying entity; intra-group debt is only of worth if the whole group might be, but not even then necessarily, and copyright only has worth as long as the property it relates to is still seen, heard or read. So the fact that someone once paid for these things is proof of nothing more than potential misjudgement at some time in the past. Too often that is now proving to be true. Not always, I stress. But too often. Which suggests that unquestioning acceptance of valuations based on pure history or models is failing accountancy.

And second? The problem is in the income statement. We recognise income from these assets in many cases (intra-group debt often excepted). But when we do we do not apparently think it appropriate to recognise that in most cases we bought that income. In other words, goodwill simply represents a purchased income stream. And an acquired copyright had a cost to buying the future income. And I think it should be mandatory that the cost in question be written off against the income. In fact, it should be written off even when there is no or little income. But accountancy is far too lax on this now, albeit it once was not.

Accounts are riddled, in my opinion, with assets that do not exist because they are at best nothing more than purchased income streams whose cost should have been written off against that revenue.

Err, don’t we depreciate intangible assets?

21 comments on “Umm, err?

  1. I depreciate intangible assets. Probably not fast enough, but it is delusionary to keep them on the balance sheet for long.

  2. There was I thinking that goodwill was the difference between the purchase price and the book value of the target’s net assets. Thanks to the bloke in Ely, I now know better

  3. Does he supply an example of any company holding a patent or copyright on its books on which it generates no revenue?

    Re intra-group transactions, has he never heard of consolidated accounts?

    This is idiocy beyond the standard level. I wonder if anyone would care to capitalise it?

  4. Does it matter? If the accounts are in the public domain and investors think they’re overstated won’t they discount the share price?

  5. Let’s have a look at Glaxo Smithkline :

    “Intangible assets are stated at cost less provisions for amortisation
    and impairments.
    Licences, patents, know-how and marketing rights separately
    acquired or acquired as part of a business combination are
    amortised over their estimated useful lives, generally not exceeding
    20 years, using the straight-line basis, from the time they are available
    for use. The estimated useful lives for determining the amortisation
    charge take into account patent lives, where applicable, as well as
    the value obtained from periods of non-exclusivity. Asset lives are
    reviewed, and where appropriate adjusted, annually. Contingent
    milestone payments are recognised at the point that the contingent
    event becomes probable. Any development costs incurred by the
    Group and associated with acquired licences, patents, know-how
    or marketing rights are written off to the income statement when
    incurred, unless the criteria for recognition of an internally generated
    intangible asset are met, usually when a regulatory filing has been
    made in a major market and approval is considered highly probable.
    Acquired brands are valued independently as part of the fair value of
    businesses acquired from third parties where the brand has a value
    which is substantial and long term and where the brands either are
    contractual or legal in nature or can be sold separately from the rest
    of the businesses acquired. Brands are amortised over their
    estimated useful lives of up to 20 years, except where it is considered
    that the useful economic life is indefinite.
    The costs of acquiring and developing computer software for internal
    use and internet sites for external use are capitalised as intangible
    fixed assets where the software or site supports a significant
    business system and the expenditure leads to the creation of a
    durable asset. ERP systems software is amortised over seven to
    ten years and other computer software over three to five years.”

    Looking at the accounts they had intangibles other than goodwill of £27bn at 31/12/2017.

    Total amortisation and impairments of £9bn.

    In the year the amortisation charge was £934 million and £22 million was written off as impairment.

    Given that these assets are sometimes as old as me, a 30 year life seems pretty reasonable to me.

    Clearly he is not after Big Pharma here. Surely he can’t still be banging on about Starbucks, can he?

  6. No wonder he failed as an accountant. A trainee with 6 months under their belt would be shown the door if they came out with guff like that.

  7. Obviously economics wasn’t the only subject he ignored/walked out of in college.
    I admit that intangibles can be a bit torturous, but in order to achieve a ‘true and fair’ view you have to put something in for them, he is in fact arguing to make accounts less true and fair, and clearly he’s never done a set of consolidated accounts outside an exam question a long time ago.
    Does he claim he’s still practicing, some old clients he’s doing a go out for, if so then maybe the association should check on his CPD status

  8. @Diogenes,

    Tons of patents are filed but not the underlying tech is not exploited. No idea how they’re treated in the accounts, but just in terms of owning but not exploiting, that’s very much a thing.

  9. “These are things like patents and copyrights that only have value by presuming there is a future income stream.”

    Why else would you own them? And it’s not a presumption – it’s a continual assessment of probabilities and the valuation of those probabilities.

    It’s technical stuff that tends not to happen in the day job, especially if you’re employed inside a company rather than as an auditor/consultant. I’m a qualified accountant with nearly 30 years experience and I haven’t done this particular exercise more than a handful of times. We’re more concerned on a daily basis with the veracity of the book-keeping, correct accountability, budgetary control and longer-term planning.
    Valuing intangibles? Not the kind of skill a small company would keep in-house. They’d farm it out to their pet accountancy firm. Which is why Mr Murphy should know a lot more about it than he’s displayed here.

  10. Why else would you own them?

    Cos you might maybe exploit the underlying tech later.
    Cos someone else might maybe exploit the underlying tech later.
    Cos you might have a bulk patenting strategy for marketing reasons (“We’re so innovative, just look at the number of patents we’re filing”!)
    As a “vanity patent”, for marketing / pride reasons.
    To put as an asset on the books desipte it having little real value e.g. for justifying a higher sale price if you sell the company.
    As a bargaining chip in negotiations.

    I have seen all of these in practice.

  11. All fair, Abacab, but a lot of that can be labelled under “future income stream” and some of the others, such as “vanity” or bumping up the books for a sale valuation, I might object to as an accountant, (depending on the specific circumstances, of course).

  12. You do not need to depreciate intangibles. You have to review the valuation against discounted cash flows from the cashflow generating unit.

    I worked for a company that had a billion pounds of goodwill from an acquisition. To avoid an impairment the cashflow generating unit was chosen to be at a high level unit (thw whole company not the acquisition). When the acquisition was sold the auditors insisted that the goodwill was kept in the balance sheet as they said it applied to cashflow generating unit not the acquisition. So the FTSE100 company still has a billion pounds of goodwill relating to an acquisition it no longer owns

  13. Ok, it’s more than 20 years since I did my Accountancy For Small Businesses course, but I thought legally constructed property rights was bricks’n’mortar stuff, copyrights and patents were a classic example of intangibles.

  14. “Nothing now requires that goodwill be written off”.

    Er, except an entire fucking accounting standard that specifically requires goodwill be written off if it’s impaired (IAS 37).

  15. It’s all just wibble. Accounting for consolidated goodwill has changed over the years. In general it’s not something accounting understands. There were plenty examples in the 80s of bright sparks who realised assets valued under accounting rules were worth considerably more commercially, if… They were called asset strippets. They brought companies cheap and made their fortunes realising that hidden value. To a statist like Murphwibble that is incomprehensible.

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