Appendix A. Accounting

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 496-506

APPENDIX A

ACCOUNTING

Corporate nancial reports are the basis for stock and bond investment. They are of vital

interest to lenders. Corporate decisions and strategies, such as mergers and acquisitions,

are dependent on corporate nancial reports. Retirees look to these reports for assurance

that their dividend income is safe. Income statements, balance sheets, and cash ow state-

ments are the lifeblood of investment decisions. Unfortunately, accounting standards have

not really changed all that much in over 100 years. Balance sheets are still dominated by

commodity assets like real estate, buildings, machinery, cash, and inventory. These are

assets that anyone can possess and do little to propel earnings and growth. Absent from

nancial reports are details about the driving forces of value—intellectual property.Rarely

do nancial reports provide details about brands, technology, patents, customer retention

rate, powerful joint ventures, or key license agreements. As these assets drive value, nan-

cial reports largely ignore them. It gets worse. Intangible assets can be found as a line

item on balance sheets but only when these assets have been acquired. Internally devel-

oped mega-star intellectual property is not reported on balance sheets. The world famous

Coca-Cola brand is not reported in the Coke balance sheet, but if Coke acquired Pepsi, the

value of the Pepsi brand would be reported, not as an independent line item but grouped

into one line item called Acquired Intangible Assets. So, even when intellectual property

and intangible assets are vaguely reported, the amounts reported are completely misleading.

In Coke’s instance, the value of the Pepsi brand would be stated but the iconic Coca-Cola

brand value would be absent.

The absence of intellectual property and intangible assets from balances sheets is

startling. Recall Chapter 1, where a graph showed the accelerated importance of intangible

assets. It is repeated here as Exhibit A.1.

Intellectual property and intangible assets overwhelmingly dominate the value of corpo-

rations. In 1975, 83% of the assets of a corporation were hard assets (i.e., cash, inventory,

and facilities). Today, only 16% of the value of major corporations is associated with hard

assets. Intellectual property and intangible assets overwhelmingly dominate, but hard assets

still receive the lion’s share of attention on balance sheets. In support of the phenomenon

depicted in Exhibit A.1, consider that the rate of investment in physical assets between

1977 and 2013 fell by 35% while investment in intellectual property and intangible assets

increased by 60%.1

In August 2016, a share of Microsoft common stock was priced in the market at $57.90.

With nearly 7.79 billion shares of stock outstanding, the equity of the company had a

1Baruch Lev and Fene Gu, The End of Accounting and the PathForward for Investors and Managers (Hoboken,

NJ: John Wiley & Sons, 2016), p. 87.

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