True and the things accountants do would cause most attorneys to lose their license or worse.

Nice one dimensional thinking WS. The company can have another company do the manufacturing and increase their profits and their ROI, since their manufacturing side is not really adding value.

So, if 50% of my revenue comes from IP and 50% from manufacturing and manufacturing costs me money, I could stop manufacturing and retain 50% of my revenue?

The IP is a necessary but not sufficient requirement for production. Its costs do not scale with quantity like manufacturing. Similarly my revenue scales with manufacturing quantity. Doubling my quantity will double my revenue (if I can sell it all).

While accounting for revenue based on IP will emphasize the importance of IP, it will distort the production and revenue process because revenue really does come from manufacturing and selling goods.

You reminded me of a meeting I was in at the last company I worked for.
The marketing manager wanted to brainstorm ideas for increasing market acceptance and penetration of our new and allegedly promising technology.
Lots of ideas were offered up. Finally, I said that we should GIVE lots of systems and software to Colleges and Universities' computing schools.
The 'kids' would love to be Part Of Things and provide fresh eyes for innovations and debugging, AND when they graduated and entered "the real world," they'd be more comfortable and familiar with the benefits of OUR product.
Well, that was like tossing a baked-dry meadow-muffin against the side of a barn. Didn't stick at all, and to my non-surprise, the long term result was a very mediocre acceptance (and success) of those products in the overall market.
Such is Life In The Big City... and in Big Corporations.

Dale, I have told you what I know about how the process works. If you want to make changes to the accounting rules, good luck. There are optional reports that are allowed. Some companies provide additional information when they think it advisable. Usually the accountants have a disclaimer about the additional reports.

If I invent a better mouse trap, I don't get money. In order to get money I either have to license my patent in which case I don't do any manufacturing and the issue is moot, or I make mousetraps and sell them. And no, the world will not beat a path to your door, you have to sell them.

The money I get comes from the manufacturing and sale of mouse traps, not from the patent which, without manufacturing creates no revenue. The patent gives me the right to do this, it makes the business possible but not profitable.

It's vitally important that unlike the famous Lucille Ball episode, your manufacturing costs do not exceed your sales price. Accounting helps you with this.

I agree that the valuation of the company needs to take into account the value of the patent, but that's incredibly hard to judge. You never know when someone is going to invent a new way of catching mice. The RoboCat will completely destroy your IP value.

Clear away all the crap.
Clear away all of the obtuse methodology.
Clear away all the twisted economic systems.
The facts are simple. Our entire economic system including accounting methodology is not based on tangibles, but on intangibles. Our economic system(s) have become more of a religion than an accounting method whose very foundation is faith. It would be funny if it weren't so sad.

First of stick to the subject at hand. Accounting systems should allocate revenue to their inventions. A simple way to allocate return to inventions versus manufacturing is based on the companies valuation. If the market valuation shows 50% of the value cannot be accounted for because of hard assets then 50% of the return is from inventions.

From a balance sheet point of view only assets that you can own should be on the balance sheet, so that means inventions that are patented or have a copyright or are a trade secret.

The problem is in measurement in the first place. I am not arguing with you the necessity of intellectual innovation. The problem lies in the ease of measurement and the inherent uncertainty in dealing with projections. The other problem is that many do not differentiate between the two very different skills of 1) leadership and 2) management.

Managers depend on measurements to get anything done. Most managers don't get to their positions as department heads, etc. based on "I think I can do that", but rather "I DID do that". One is ambiguous, the other concrete. Can it be measured easily and concretely: Did the project get completed? How many widgets did we sell last month? These can all be specifically and precisely measured. Accountants and managers operate on measurement - on history being used to portray a picture of the future. Their tools are based on the same.

Leaders are much more rare. Leaders are the ones who see the valuable potential in a course of action. Potential, however, is not quantifiable with any degree of precision or accuracy (being used in the scientific definitions). You can't budget around potential. It's almost impossible to get an operating loan from a bank based on potential. So how do you build tools around the unknown? I work in IT and this is our constant battle. And no one is ever satisfied with "I don't know" even though it is the most common answer we have to give!

Yes, focusing on historical, quantifiable measures tends to lead to laying out budgets and future business plans based on those measures. I agree. The question is whether or not the head of the company is a leader who can not only envision the future but sell that future to the company in terms which translate the abstract into the concrete enough to get someone to believe and follow that vision. I know you're going to hate the analogy, but it fits: management is like science - it deals with empirical evidence. Leadership is like religion, because it deals with a vision of the future and relies on the faith of the follower.

Your complaint is that many companies don't continually invest in visionary leaders. That's a valid concern IMO. And it becomes even more difficult to retain a visionary leader as a company becomes successful and goes public because now there is a more concrete expectation of return on investment, which shifts the focus away from the novel and visionary to the stable and strategic. I look at Steve Jobs as a visionary and his problems with Apple Computer over the years as a perfect example of this.

The article was not clear on this point. It is just wrong that accounting systems attribute all returns to manufacturing and none to inventions. In fact, most of the profit of most companies today is because of their inventions not their manufacturing.

Then present an objective way to change reporting that protects the interests of the accountants, the analysts, and the manipulators on Wall Street who write the rules you object to.

First off, accounting is limited in what it can measure, viz., only those things that can be counted; most of the most important things are immeasurable. Aside from innovation, what is the cost of a dissatisfied customer? So, there's your first problem. Secondly, as a result, a lot of the accounting data must be ignored in favor of a strategic vision that drives the company forward. This is, in the end, a measure of the quality of your management team. How to measure that? This is often accounted for in accounting by so-called "good will." Clearly, innovation will lead to good will, but how can you measure it? Until a product or service is in the market, earning revenue, innovation is a cost center, after which some of it can be amortized over the life of the product or service. At one time, one might expect to be able to amortize innovation over years or decades. Now, it must be done over no more than a year or two, due to rapid obsolescence. If we want to reward companies for their innovative efforts, it's difficult to do so, particularly since we don't know which efforts will pay off. The fall back position must be what shows up in the marketplace, and call it a day.

Not the point. If you measure the wrong things, you get the wrong answers.

Yes it is the accounting systems. They show companies make money from manufacturing, when they really make money from their inventions. How hard is that to understand?

The accounting systems are meant to measure certain aspects of the business. When it measure the wrong things then you get the wrong answers. They don't measure the right things. It's like when the government measures government spending as production in GDP. How Stu___

I would suggest that it isn't the accounting or its tools per se which are the problem, but rather the way that compensation plans are structured. In large corporations, these are notoriously short-sighted. Take the record of one Carly Fiorina - erstwhile CEO of Lucent before manning the helm at HP. Her compensation plans were focused on the short-term return to the company and as a result, she made short-term decisions to ramp up marketing and kill R&D because this emphasized more current sales and lower current costs which translated into higher profits - all of which came at the expense of long-term corporate profitability. It also encourages mergers and acquisitions for the same reason, as well as layoffs (aka "right-sizing").

Look at the startup companies which have gone big, like Google or Facebook. They started out where the compensation plans were wholly dependent on the long-term and largely unknown intellectual capital being put into each. Only after they started seeing market success could their true value start to be calculated (with past returns being used to estimate future growth and profitability). It's one of the reasons Google still rewards risk-taking and side-projects with no quantifiable future value - because they recognize that they don't know how to quantify the future.

we understand this-we also run a business. gah

Yes, read the article. You want to change the ethics of the people that use the data.
Its not the accounting rules that are the problem. Yes, valuations are not accurately allocated, but I don't see any solution being presented that accountants and users will accept. Yes, the data is manipulated.
The people that publish these documents don't actually want the reports to be better so there is no demand to change them. Analysts use other sources of data to estimate value and don't want the public to have easy access to that data. Most of the public doesn't do due diligence so they don't care. Accountancy historically prefers to be "conservative" in valuing things that aren't easy to quantify. The accountants are at risk of suit by company and shareholders if they don't.

Better to try to break the securities rules that allows only "approved" firms to sell company equities in volume.

Yes, we did -- and some of us run businesses. One of the things you need to separate is strategic planning and cash. Investing money in R&D is a near term expense. You might come up with a really great invention that will make you billions in the next decade, but today it's an expense.

Which is why valuing a company and managing it looks beyond accounting -- if you are doing it right.

accounting systems are required by LAW. and crony systems which affect how costs are "expensed" play a deep role into how companies look at their capitalization. did anyone read the damned article?!

well of course the company will do what it needs to do ongoing concern. Part of the problem is securities laws and yes, GAAP very definitely affects how a company is used to thinking-esp if large. after all, a SARBOX will look at two sets of books as suspect. The more GAAP aligns with IRS rules and securities regs, the more it bleeds into how a company thinks long term. We have represented many fortune 500 companies, we are intimately aware of how this works. Dale has worked as an R&D engineer for McDonnell Douglas and represented as a patent atty to Ameritech, Cypress, Motorola, Boeing...I can go on. and I find your argument a little disingenuous since your company is not willing to pay for IP ...

Accounting systems are tools.
Blame the people who unethically or ignorantly manipulate them, not the tools.
We in the Gulch don't blame guns for homicides either.

Well, I'll agree with you there, but I don't think the problem is the accounting system. I think it's operating properly. I think the problem is idiots who look only at near term financial projections in making business decisions. Sadly, your observation that large corporations are full of such idiots is right on.

But blaming the accounting system is like blaming the hammer for not working well with screws. You use the wrong tool and you get the wrong results.

In business, I've often used the metaphor of an airline flight. You plan your course and destination. To succeed you need to be able to hit your destination. However, it's not enough to follow the right course. You're altitude must always remain positive or you won't get there even if your course is right.

Accounting is the altimeter.

william, in large corporations decisions are based on accounting systems. and as GAAP oozes into internal accounting systems (companies working from 2 sets of books) there is fatigue. You end up having marketing and accting teams making decisions on the move forfard. It often leads to mature cycles. Keeps an IBM from inventing, for example. R&D is essential to the log life of a company. where is that in the books? it isn't. and it would be an objective move to the long life of a company. so resources moving through different depts tend to first stop at manufacturing, then marketing, last R&D. of course, unless the company is focused highly on invention.

I think Lucky did a better job of describing the same thing that I did. Accounting systems are not a be-all and end-all of corporate analysis. They have their purpose and it's an essential one. It is necessary to accurately report financial transaction. Valuing a business as a whole is more complex than just accounting.

My company utterly relies upon a software product that we've created as the core of its business. Any valuation of our company would have to take that into account as well as the potential of the customer base in terms of volume and location. None of that matters on a day to day basis.

On a day to day basis, what matters is what money we spend and what we spend it on and what money we get and where it comes from. This is the realm where accounting is king. While our program is a valuable asset, it doesn't allow us to pay people. Selling licenses and installing systems does.