Author Archives: Tim Worstall

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?

It should come as no surprise to anyone that UK chief excutive pay has risen by 11% in the last year. This, of course, vastly outstrips the rate of increase for almost anyone else. It is also wholly unrelated to any real-world performance, except growth in share prices.

The company is run for the benefit of the shareholders. This seems like a reasonable connection for pay to make therefore.

But let’s be clear. Many of these chief executives help rig share prices through their share buyback schemes that are intended to keep shares in short supply, and so prices high. This makes the CEOs look good. And it increases the value of the CEO’s share options. They have every incentive to play this game.

Bit behind the times there, CEOs tend not to get paid in share options but in restricted stock. Nothing like being up to date, is there?

And despite protests, there is no reason for them not to do so. Shareholders still cannot constrain pay. There is no maximum pay law. Whatever is paid to a CEO is considered a legitimate tax-deductible expense in the accounts of the company that pays it. And the pension industry – stacked full, as it is, by sycophants who want to ‘make it in the City’ – by and large never says boo to a goose.

So what is happening? Rent extraction is happening. These CEOs do not earn their reward. Nothing says they are worth the sums paid. They are paid this much because they can take this much. And this is what economuc rent is. It is the amount paid for a resource in excess of that needed to secure its use in a process.

All of which rather fails. Private equity doesn’t suffer from any of those power or institutional problems. And yet they pay CEOs more than public companies do.

And yes, that makes me angry.

Ignorance should make us all angry, no?

Is China showing us the way to go green?

??

Perhaps:

It is only fair to add that Larry and I are both members of the Green New Deal group, but this, as far as I know, has no influence on what he is writing here.

What he is saying is pretty fundamental. It’s not just that the model of capitalism we have is bust. We all know that. But he is suggesting there is a compelling reason for changing it.

People can, and do, live with bust relationships for years. We are with Anglo Saxon capitalism. People do that because they cannot think of anything better. So they live with least worst.

But Larry is saying there may be something better. I am not wholly convinced China has all the answers. I very much doubt Larry does either. But the point is that there has to be something a lot better than what we have now. And climate change gives us every reason to change.

So, how would we test this? CO2 emissions by country.

1995 2000 2005 2010 2013 2014 2015

China 3303544.09 3631896.98 6174716.60 8986614.44 10503137.04 10711036.75 10641788.99
USA 5294648.43 5873867.33 5886317.61 5519483.81 5255530.16 5312226.27 5172337.73

Oh, maybe that Anglo Saxon free market capitalism stuff does work then? Looks like the supporters of the Curajus State will just have to fin another reason for fascism then.