Baruch Lev and Feng Gu, accounting professors, ask a simple question.
Why are managers and auditors so blasé about accounting for intangibles?
Lev and Gu, 2016, page 90
Intangibles are a mess in financial accounting. Everyone knows there are obvious problems. So who has an interest in changing accounting?
Intangible Assets And The Concept Of Matching
Accounting for intangibles violates the concept of matching. Matching means we should charge expenses to the profit and loss statement when what is “bought” is used up. Yet, we currently expense brand costs when they are spent. This is not when the brand is used up so it isn’t matched. This practice is clearly inconsistent with matching that is central to much accounting theory.
The classic defense to this violation of matching is that there is no problem-free solution. To be fair this argument is true. Whatever way we account for intangibles is going to encounter problems. That said Lev and Gu have a point when they say that accountants seem unwilling to even try and come up with a better way.
Who Has An Interest In Changing Accounting?
Lev and Gu argue that this lack of interest in even considering change is that change isn’t in managers’ or auditors’ interests. Managers don’t want intangibles on the balance sheet. This is because recorded intangibles can be a stark reminder of mistakes when managers make them. When there is an asset on the balance sheet a manager needs to explain what happened if it is impaired. — written down because they lost value). Managers at present can verbally justify spending on intangibles as an investment when it is made. Yet, no one sees a record of the investment. When the value of a brand is frittered away no one really needs to explain it. Similarly, auditors don’t want to add anything to the accounts that is hard to point to. Such values are likely to be tempting for lawsuits.
Lev and Gu seem to have a good argument to me. They argue the people who would benefit most from change are investors. In their view investors are being shortchanged in order to preserve a status quo that benefits managers and auditors.
Read: Baruch Lev and Feng Gu (2016) The End of Accounting and the Path Forward for Investors and Managers, Wiley
