The accounting profession is failing to recognise the importance of intellectual capital - or the need to value intangible assets to provide a true valuation of a company, - according to a newly published book, Measuring the Value of Knowledge by David Skyrme.
Skyrme points to the widening gap between companies, book values and their share values. He quotes Microsoft's share price rising to 14 times its book value, and Glaxo Wellcome having a market value of pounds 40bn, of which only pounds 1bn represents tangible assets. While the British Technology Group was losing pounds 4m on a turnover of pounds 40m it had a share value of pounds 1.2bn, because of its ownership of 3,000 highly regarded patents.
One of the most worrying developments, suggests Skyrme, is the inconsistency of auditors in their treatment of intellectual assets. Grand Metropolitan's accounts show a valuation for the acquired Burger King brand, yet McDonald's more profitable brand shows no value in its accounts. It is peculiar, he implies, that only brands that have been purchased are usually given a value in the balance sheet.
Canada's accountancy profession is treating valuation of intellectual assets as an important issue but it is not a priority in Britain, despite the increasing globalisation of the capital markets.
The issue is of growing importance because of the increasing significance of knowledge industries, at the expense of traditional manufacturing. Booming share prices have occurred in biotechnology and software companies, whose real value is represented by their patents and copyright and the skills and knowledge of employees, not by their fixed assets.
Nestle's acquisition of Rowntree's in 1993 raised questions, as the $4bn purchase price was twice the value placed by most city analysts, reflecting the higher valuation Nestle gave to various Rowntree brands.
Skandia, the Scandinavian financial services company, is praised by Skyrme, not just for undergoing a fundamental corporate re- engineering to make its intangible assets work harder, but also for producing annual reports on its intellectual assets in parallel with its financial reports. Skyrme argues that this has given shareholders a more transparent view of Skandia's real worth, and encouraged the company to focus on its wealth- generating activities, leading to its jumping from 300th to No three in its world market sector within five years.
But many accountants in Britain believe that existing practices are adequate. Ken Wild, director of the National Accounting and Auditing Department at Deloitte & Touche, says: "The role of the accounts and the accountant is to give good information on what has happened to the company. The value of the company is all about the future, and the accounts are all about the past. Otherwise it is about judgement. We have reservations about doing the job of analysts. There is a feeling, not just among accountants but in the market as well, that it is not our job. …