Changing World of Intangible Asset Recognitionor Don t Judge a Cover by Its Book
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In the year 1494, when Luca Pacioli published his Summa de Arithmetica, Geometria, Proportioni et Proportionalita, value was easily measured and understood. An Italian nobleman or merchant of the day could see it, touch it, feel the weight of it in his hands.
Five hundred years later, the system remains essentially the same, yet much of what drives business today is ethereal, with no physical substance. Valuation issues are now more complex than ever before.
According to economist John Kendrick, within the 20th century alone, the ratio of intangible to tangible business capital went from 30/70 in 1929 to 67/37 in 1990.1 Another indicator of this shift toward greater reliance upon intangibles is the market-to-book ratio of the S&P 500, which rose from around 1.5 to 1 in 1977 to more than 6 to 1 in 1999, meaning that the balance sheet represents only about 15% of the perceived value of these companies.2
Measuring Goodwill and Other Intangibles
Goodwill represents the difference between what is paid for an acquisition and the fair value of its net assets. It should be attributable to the future value of difficult-to-measure things such as customer loyalty or market reputation.
Very often, companies combined goodwill with other intangible assets, making it difficult for analysts, creditors and investors to determine precisely how much goodwill was on the balance sheet...