The recent literature has started to pay increasing attention to intangible items. As discussed earlier, the new business measurement model must take into consideration a much wider set of assets such as intellectual property, human resources, brands, marketing investments, reputation and other items. However, many of these items should not be added to the traditional total assets figure, as their addition could result in a very misleading total assets figure. While we can estimate the value of cash fairly easily with a small expected variance , a much larger variance of the value can be estimated out of say inventory or property and a huge lack of reliability comes with the intangibles item of the balance sheet. Figure 1 illustrates the different levels of precision of the different items in the balance sheet and support the argument that these should not be added as this would lead to a total assets figure that is likely to be inaccurate..
Figure 1: relative precision of balance sheet items
New types of reports, which aggregate data with similar levels of accuracy, must be created. Research is needed to help the reporting agencies come up with methodologies that would adequately incorporate heterogeneous reliability measures that specify their components. Many of these “intangible” items, some of which are currently disclosed in the balance sheet and others just described in the body of a financial statement or in a report to other agencies that are not financial in nature, must not only be disclosed but should also presented in some form of comparable metrics. In this work the idea of POC’s (point of comparison) is suggested for these non-financial variables. These POCs will serve as the basis for disclosed relationships that link financial and non-financial variables of different companies.
Process or variable
Metric / point of comparison
Human resources
Pension retirement matrix
Summary of training and investment on HR
Brand
Brand value assessment and method
Intellectual capital
Number of patents granted and applied
Expenses in R&D
External valuation of IP
Method of valuation and estimates
Marketing
Market share
Industry ranking
Table 1: Points of Comparison
The creation of metrics that describe non-financial variables is fraught with concerns and potential inconsistencies. As it can seen above many of the measures are estimates of a very soft nature which will share the same problems that current financial estimates possess. Intangibles will have different measurement and valuation bases and an entire non-financial GAAP must be developed for their disclosure.
