There is no larger controversy in accounting or investment circles today than the treatment of intangible assets. Economists and investment analysts may debate what is new about the "New Economy", but one thing remains clear, intangible assets are assuming a critical role in the creation of wealth.
Non-physical sources of value, intangible assets are generated by innovation, unique organizations and human resource practices. This asset class often interacts with tangible and financial assets to create shareholder value and stimulate economic growth. Yet they remain conspicuously absent from required disclosures.
Baruch Lev argues in this book that his lack of public information results in improved management of corporate assets contributes to a higher cost of capital and affords abnormally large gains to insiders at the expense of outside investors. To level the playing field, Lev proposes companies periodically release, in addition to the required income, balance sheet and cash flow statements, quantitative and standardized information most relevant to the company value chain or business model.
Specifically, he would require three classes of timely disclosure on what he calls the innovative and successful company's lifeline: Discovery and Learning, Implementation and Commercialization. Under Discovery and Learning, he would require disclosure of internal renewal, acquired capabilities and networks. For Implementation, required disclosures would include intellectual property, technological feasibility and Internet metrics. For Commercialization, required disclosures would include data on customers, performance and growth prospects.
These disclosures will transform the accounting profession from one that is essentially backward looking - how much was sold at what cost - to a forward looking - the creation of value enhancing assets. This recognizes that in the current knowledge-based economy, value creation or destruction precedes transactions, often by years.
Lev's proposed disclosures would compliment current disclosures, providing a reality check on the system of value creation or destruction as products, services and processes move along the value chain.
