Are Our Accounting Systems Innovation Killers?
from author Robert Brands:
"Halling says, “Our present accounting systems never show [that] internally funded inventions produce any value.”[1]To illustrate this point, he uses the example of a new cellular telephone that has come about due to millions of dollars worth of investments in numerous inventions. Even with the case of a new cellular telephone where most of the phone’s profits are based on its inventions and not to manufacturing, our present accounting systems “only allocate a return for the manufacturing of the phone and nothing for the inventions that made the phone possible.”[2] This seems perverse as the massive difference in price between the latest and greatest cellular phone and a cellular phone with old and outdated technology is due to the inventions in the new phone, not to manufacturing."
Interesting article with some interesting solutions. Check out his blog :)
"Halling says, “Our present accounting systems never show [that] internally funded inventions produce any value.”[1]To illustrate this point, he uses the example of a new cellular telephone that has come about due to millions of dollars worth of investments in numerous inventions. Even with the case of a new cellular telephone where most of the phone’s profits are based on its inventions and not to manufacturing, our present accounting systems “only allocate a return for the manufacturing of the phone and nothing for the inventions that made the phone possible.”[2] This seems perverse as the massive difference in price between the latest and greatest cellular phone and a cellular phone with old and outdated technology is due to the inventions in the new phone, not to manufacturing."
Interesting article with some interesting solutions. Check out his blog :)
Previous comments... You are currently on page 3.
The problem is one of interpretation, many expect accounting numbers and reports to do what they cannot do, that is, tell the future. Financial reports have a limited role. They look back.
The standards require the stated value of assets to reflect with high certainty a monetary value - on the market or sometimes as a income stream.
While the cost of research and acquiring rights as described is easy to quantify, the future benefit will always be subject to uncertainty especially with hi tech and inventions. So, the standards are correct in treating such costs as operating and not as capital.
The solution is as savvy investors know, look at the financial reports - yes. But look more carefully at those other assets, this requires expertize in the field and good judgement.
While I am rambling, accounting reports have three functions:
demonstrate fiduciary duty and legal compliance,
provide information for management decisions,
and sometimes, for behavior modifiction.
They do not and can not provide all information needed by a prospective investor.
The point that inventions and IP assets are a core value for a company is certainly valid. They provide for future growth and survival. They don't, on the other hand, provide cash for this weeks' payroll. That has to be in the bank.
I would suggest that accounting is a short term management tool and an understanding of your IP and other assets is a long term management tool.