Accounting for Intangibles: A Literature Review

The purpose of Financial Accounting is to provide users of financial statements with information that is useful for efficient decision making. According to the FASB [1978, par. 34], financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. Consequently, any event that is likely to affect a firm's current financial position or its future performance should be reported in its annual accounts. In order to provide the users of financial statements with relevant information for investment and credit decision making, standard setting bodies should develop guidelines for the identification of intangible elements, a set of criteria for their valuation and adequate standards for financial reporting. This paper intends to provide a starting point for that endeavor by reviewing the literature published to date in three areas: (i) the economic nature, definition and classification of intangibles, (ii) the relevance of intangibles for investment and lending decisions, and (iii) the ways in which the current accounting model may be modified in order to provide useful information on the determinants of the firms' financial position in their financial statements.

[1]  M. C. Jensen,et al.  THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE , 1976 .

[2]  U. Ben-Zion.  The R&D and Investment Decision and Its Relationship to the Firm's Market Value: Some Preliminary Results , 1984 .

[3]  J. Schumpeter.  Capitalism, Socialism and Democracy , 1943 .

[4]  Allan D. Shocker,et al.  Managing Brand Equity , 1991 .

[5]  R. M. Hall,et al.  A framework linking intangible resources and capabilities to sustainable competitive advantage , 1993 .

[6]  A. Jaffe,et al.  Evidence from Patents and Patent Citations on the Impact of Nasa and Other Federal Labs on Commercial Innovation , 1997 .

[7]  Dennis C. Mueller,et al.  Profit Rates and Intangible Capital , 1991 .

[8]  S. Gray,et al.  EC Accounting Harmonisation: An Empirical Study of Measurement Practices in France, Germany and the UK , 1992 .

[9]  K. Clark,et al.  Unionization and Firm Performance: The Impact on Profits, Growth and Productivity , 1982 .

[10]  Frederick D. S. Choi,et al.  Merger Premia and National Differences in Accounting for Goodwill , 1991 .

[11]  Richard Galdston,et al.  Mind over matter: observations on 50 patients hospitalized with anorexia nervosa. , 1974, Journal of the American Academy of Child Psychiatry.

[12]  P. Barwise.  Accounting for Brands , 1998 .

[13]  Stephen J. Brown,et al.  Use of R-Squared in Accounting Research: Measuring Changes in Value Relevance Over the Last Four Decades , 1998 .

[14]  Bernard Yeung,et al.  Why Investors Value Multinationality , 1993 .

[15]  R. J. Kirsch,et al.  Goodwill Accounting in Selected Countries and the Harmonization of International Accounting Standards , 1991 .

[16]  M. Power,et al.  Professional Research, Lobbying and Intangibles: A Review Essay , 1992 .

[17]  William S. Comanor,et al.  Advertising Market Structure and Performance , 1967 .

[18]  George Foster,et al.  The Customer Profitability Implications of Customer Satisfaction , 1997 .

[19]  Theodore Sougiannis.  The Accounting Based Valuation of Corporate R&D , 1994 .

[20]  A. Pakes,et al.  The Value of Patents as Indicators of Inventive Activity , 1986 .

[21]  Daniel A. Levinthal,et al.  Innovation and Learning: The Two Faces of R&D , 1989 .

[22]  M. Hirschey,et al.  Advertising, R&D Expenditures and the Market Value of the Firm , 1993 .

[23]  Steven Lustgarten,et al.  Mobility Barriers and Tobin's q , 1987 .

[24]  Jerry J. Weygandt,et al.  Amortization Policy For Advertising And Research And Development Expenditures , 1985 .

[25]  M. Malone,et al.  Intellectual Capital: Realizing Your Company's True Value by Finding Its Hidden Brainpower , 1997 .

[26]  A. Drejer.  Innovation and learning , 2003 .

[27]  Z. Griliches,et al.  Industry Effects and Appropriability Measures in the Stock Markets Valuation of R&D and Patents , 1987 .

[28]  James A. Ohlson.  Earnings, Book Values, and Dividends in Equity Valuation* , 1995 .

[29]  M. Hirschey.  Intangible Capital Aspects of Advertising and R&D Expenditures , 1982 .

[30]  G. E. Pinches,et al.  HOW THE MARKET VALUES THE DIFFERENT STAGES OF CORPORATE R&D—INITIATION, PROGRESS, AND COMMERCIALIZATION , 1996 .

[31]  R. F. Fowler,et al.  The economics of accountancy , 1933 .

[32]  W. Landsman,et al.  Cross-Sectional Regularities in the Response of Stock Prices to Bond Rating Changes , 1989 .

[33]  Len M. Nichols,et al.  Contributions of Diversification, Promotion, and R&D to the Value of Multiproduct Firms: A Tobin's q Approach , 1986 .

[34]  M. Trajtenberg.  The Welfare Analysis of Product Innovations with an Application to Ct Scanners , 1985 .

[35]  Robert G. Eccles,et al.  Improving the Corporate Disclosure Process , 1995 .

[36]  Sarah C. Mavrinac,et al.  Chapter 16 – Measures that Matter: An Exploratory Investigation of Investors' Information Needs and Value Priorities , 1998 .

[37]  Robert A. Connolly,et al.  Union Rent Seeking, Intangible Capital, and Market Value of the Firm , 1986 .

[38]  Brett Trueman,et al.  The Eyeballs Have it: Searching for the Value in Internet Stocks , 2000 .

[39]  Jeffrey L. Callen,et al.  Opportunistic underinvestment in debt renegotiation and capital structure , 1991 .

[40]  D. Austin,et al.  An Event-Study Approach to Measuring Innovative Output: The Case of Biotechnology , 1993 .

[41]  D. A. Egginton.  Towards Some Principles for Intangible Asset Accounting , 1990 .

[42]  Mark S. Klock,et al.  The Impact on Intangible Capital on Tobin's q in the Semiconductor Industry , 1993 .

[43]  The financial implications of advertising as an investment , 1996 .

[44]  Manuel Trajtenberg,et al.  The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners , 1989, Journal of Political Economy.

[45]  L. R. Dicksee,et al.  Goodwill And Its Treatment In Accounts , 1906 .

[46]  Michael L. Davis.  THE PURCHASE VS. POOLING CONTROVERSY: HOW THE STOCK MARKET RESPONDS TO GOODWILL , 1996 .

[47]  Josef Lakonishok,et al.  The Stock Market Valuation of Research and Development Expenditures , 1999 .

[48]  D. Larcker,et al.  Are nonfinancial measures leading indicators of financial performance? An analysis of customer satisfaction , 1998 .

[49]  L. Soete,et al.  Recent comparative trends in technology indicators in the OECD area , 1991 .

[50]  Wesley M. Cohen,et al.  Empirical studies of innovation and market structure , 1989 .

[51]  John A. Elliott,et al.  Accounting for Research and Development Costs: The Impact on Research and Development Expenditures , 1980 .

[52]  B. Lev,et al.  Value-Relevance of Nonfinancial Information: The Wireless Communications Industry , 1996 .

[53]  John W. Kensinger,et al.  Corporate research and development expenditures and share value , 1990 .

[54]  J. Woolridge.  COMPETITIVE DECLINE AND CORPORATE RESTRUCTURING: IS A MYOPIC STOCK MARKET To BLAME? , 1988 .

[55]  Bronwyn H. Hall,et al.  The Value of Intangible Corporate Assets: An Empirical Study of the Components of Tobin's Q , 1993 .

[56]  F. Narin,et al.  Science and Technology as Predictors of Stock Performance , 1999 .

[57]  B. Lev,et al.  The capitalization, amortization, and value-relevance of R&D , 1996 .

[58]  Tadeusz Banek,et al.  Management of Intellectual Capital , 2003 .

[59]  Bronwyn H. Hall,et al.  The Stock Market's Valuation of R&D Investment during the 1980's , 1993 .

[60]  Mary E. Barth,et al.  Share repurchases and intangible assets , 1999 .

[61]  A. Shleifer,et al.  Management Ownership and Market Valuation: An Empirical Analysis , 1988 .

[62]  Z. Griliches.  Market Value, R&D, and Patents , 1981 .

[63]  M. Hirschey,et al.  Goodwill, profitability, and the market value of the firm , 1994 .

[64]  Andrew M. Rosenfield,et al.  The Durability of Advertising Revisited , 1994 .

[65]  Manuel Trajtenberg,et al.  Market Value and Patent Citations: A First Look , 2000 .

[66]  The Market Valuation of R&D Expenditures , 1999 .

[67]  Baruch Lev,et al.  Penetrating the Book-to-Market Black Box: The R&D Effect , 1999 .

[68]  B. Lev,et al.  The Value-Relevance of Intangibles: The Case of Software Capitalization , 1998 .

[69]  Dennis C. Mueller,et al.  Industrial Research and Development, Intangible Capital Stocks, and Firm Profit Rates , 1978 .

[70]  Robert A. Connolly,et al.  Firm size and R&D effectiveness: A value-based test , 1990 .

[71]  Michael L. Davis.  Goodwill Accounting: Time for an Overhaul , 1992 .

[72]  D. Aaker,et al.  The Financial Information Content of Perceived Quality , 1994 .

[73]  Orace Johnson.  A Consequential Approach to Accounting for R & D , 1967 .

[74]  Bo Mikael Hansson.  Personnel Investments and Abnormal Return: Knowledge‐based Firms and Human Resource Accounting , 1997 .

[75]  Daniel W. Collins,et al.  Changes in the value-relevance of earnings and book values over the past forty years , 1997 .

[76]  J. Francis,et al.  Have financial statements lost their relevance , 1999 .

[77]  Mary E. Barth,et al.  Analyst Coverage and Intangible Assets , 2000 .

[78]  Paul Zarowin,et al.  The boundaries of financial reporting and how to extend them , 1999 .

[79]  George Foster,et al.  Brand Values and Capital Market Valuation , 1998 .

[80]  M. Power.  The politics of brand accounting in the United Kingdom , 1992 .

[81]  Jayne M. Godfrey.  Accounting for Intangibles , 2001 .

[82]  Lorne N. Switzer,et al.  The stock market's valuation of R&D spending and market concentration , 1992 .

[83]  A. Hodgson,et al.  Accounting for Intangibles: A Theoretical Perspective , 1993 .

[84]  Z. Griliches.  Patent Statistics as Economic Indicators: a Survey , 1990 .