Accounting Paper

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Introduction In recent decades, the global economy has undergone a rapid transformation, from an economy driven by “traditional hard assets- plants, warehouses and the like”, to an economy driven by patents, software, intellectual property, and brands. These items fall into a category that has become hugely important in the world of financial reporting, “intangible assets”. Increasingly, the value of a firm is derived not from its tangible assets such as stock, property, plant and equipment but by its knowledge capital, its employees, even by its business processes. As Baruch Lev notes in 2001: “Pfizer’s value comes from its discovery activities (drug development, patents, trademarks), and from an unusually effective sale force…show more content…
They were able to conclude that “the usefulness of reported earnings, cash flows, and book (equity) values has been deteriorating over the years”. The decline in the usefulness of accounting is a result of the difficulties in measuring an internally developed intangible asset, firstly how does one assign a value to knowledge capital, secondly, what is the fair value of this capital if no exchange has taken place? In the interest of conservatism and reliability, regulators require all investments in R&D to be immediately expensed. This creates a problem since the benefits of this research are not realized until a later period, thus the concept of matching goes out the window. This increased expenditure resulting from R&D expenditure distorts earnings on the income statement. In the event of a merger or an acquisition (M&A), in accordance with APB Opinion 17, any excess amount paid over the book value for a firm would be listed under the catch-all term goodwill which was amortized over 40 years. As a result of these regulation standards, the gap between the market value of technology firms and their book value became ever larger. Efforts to Improve Financial Reporting The dangers of this ineffective accounting for intangibles were brought into a stark light in 2001 following the collapse of energy giant Enron, which once had been widely considered to be one of

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