Accounting for Intangible Assets: There Is Also an Income Statement
Accounting is often criticized for omitting intangible assets from the balance sheet. This paper points out that the omission is not necessarily a deficiency. There is also an income statement, and the value of intangible (and other) assets can be ascertained from the income statement. Thus, calls for the recognition of "intangible assets" on the balance sheet may be misconceived. The paper lays out the property whereby the income statement corrects for deficiencies in the balance sheet. It then explores the case where the income statement perfectly corrects for a deficient balance sheet and the case where it does so imperfectly. In the latter case, the paper then asks whether accounting in the balance sheet—by capitalization and amortization of intangible assets or carrying them at fair value—could remedy the deficiency in the income statement (or makes it worse). The investigation involves an analysis and valuation of Microsoft Corporation and Dell Inc., two companies presumed to posses a good deal of "intangibles assets." The paper is instructive, not only to those concerned with accounting issues but also to analysts attempting to value firms, like Microsoft and Dell, with assets missing from the balance sheet.
Penman, Stephen. "Accounting for Intangible Assets: There Is Also an Income Statement." Abacus 45, no. 3 (September 2009): 358-371.