ACCOUNTING FOR INTANGIBLES: THE GREAT DIVIDE BETWEEN OBSCURITY IN INNOVATION ACTIVITIES AND THE BALANCE SHEET

Abstract

This paper analyses descriptive data from a discretionary accounting setting and several generic properties of innovation activities to explain why intangible assets are grossly under-recognized in company balance sheets. Existing literature and publicly available data indicates the increasing significance of intangible investment in the growth and development of firms and the stock of knowledge. However, a systematic framework to reliably quantify the stock of intangible assets remains elusive. This paper contributes to the debate surrounding recognition of intangible assets by demonstrating how economic attributes of intangible assets arise from generic features of innovation activities, and identifying the nature of the mis-match between accounting principles and the economic attributes of intangible assets which serves to reduce the relevance of accounting information. It is argued that accounting has become inwardly focused on the internal consistency of accounting relative to an outdated set of principles. Before an accounting asset can be recognized financial reporting systems typically require a 'cost' verifiable from a past transaction which the firm can directly link to expected future revenues. This narrow accounting approach is inconsistent with the properties of intangible investments in the knowledge-based economy.