It is becoming increasingly apparent that current accounting standards and financial reporting regulations are inadequate for reflecting the value of intellectually-capitalized firms of the knowledge economy. Critics of the current system are steadily on the rise, and their voice is constantly growing louder.
These rules and regulations are based on a system that was created more than a century ago, and its age is showing like never before. In select industries (think IT or any service-based field), the current financial reporting framework is teetering on the brink of irrelevancy in terms of providing meaningful information that reflects the value of a business.
Perhaps nowhere is this problem more evident than the reporting regulations for intangible assets. For example, accounting standards require the recognition of an intangible asset for the allocable cost attributable to a client list acquired as part of the purchase of a business. However, these same standards do not allow an intangible asset to be recorded for the inherent value of your growing client list that is created during the process of building a business.
Based on this definition, an internally generated client list is obviously an asset, and it undoubtedly represents valuable property of a business. Nevertheless, this item is not reported on the balance sheet, and its value is open for interpretation by way of a company’s annual earnings reflected on it’s income statement.
Within the realm of business property, digital assets represent the most dynamic class of intangible assets. These resources are used for a number of purposes, which include creating, storing, organizing, and sharing a firm’s intellectual property. What’s more, this class of intangible assets are constantly changing, and their roles in the corporate world are likewise evolving and expanding.
As a professional service provider in public accounting, I can attest to the significance of digital assets to my practice. I recognize the value of these assets, as well as, their importance to my practice’s operations, marketing, human resources, and management functions. These intangible assets, however, are nowhere to be found on the balance sheet, and this omission is more than a minor understatement of firm value. For this reason, I contend they should be reported as supplemental information to a company’s financial statements, and I submit the following data be provided for this asset class.
- Asset Value,
- Description, and
- Explanation of Asset Value
To demonstrate, I have included an excerpt from the supplemental schedule of my CPA practice’s financial statements. In the schedule below, I have collectively reported my website, blog, e-mail list, and social media accounts under the title Web-Based Communication Tools. I have provided a description of this asset class (taken as a whole), as well as, each individual component. Lastly, a brief explanation for estimating the value of this asset is given, and this amount ties to the asset value reported immediately following its title.
|Wright Accounting & Consulting, L.L.C.|
|Intangibles, Digital Assets & Key Performance Indicators (KPIs)|
|At September 30, 2015|
|** The supplemental information contained in this schedule is presented for purposes of|
|additional analysis and is not a required part of the basic financial statements.|
|Web-Based Communication Tools|
|Asset Value||$ 16,000|
|Description – at its most basic level, this digital asset is a|
|collection of multimedia content that is hosted on|
|numerous web servers and used for sharing knowledge|
|with members of my network. Individually, the tools|
|consist of the following:|
|Firm Website – I use the self-hosted version of|
|WordPress with domain wrightaccountingcpa.com.|
|Content is primarily static in nature, and it provides|
|detailed information about me, my services, pricing|
|philosophies, contact info., and links to my blog.|
|Company Blog – I use the self-hosted version of|
|WordPress with domain wrightaccountingblog.com.|
|The title of blog is “Young Professionals &|
|Entrepreneurs Blog”, and its content is dynamic and|
|updated regularly. Content is routinely shared via|
|social media accounts and e-mail list, and posts are|
|optimized for search engines using popular WP plugin.|
|E-mail List – E-mail remains a popular mode of|
|communication, and it is an effective method for|
|sharing important updates with my network. I use|
|mailchimp.com for maintaining my list, capturing|
|e-mail of blog users, and creating/sharing monthly|
|Social Media Accounts – Social media is a great way to|
|interact with, and stay connected to, my network, and|
|I use it to share industry developments and drive traffic|
|to my blog. Currently, I maintain accounts on the|
|following social media platforms:|
|Social Media Platform||Connections|
|Explanation for Determining Value – In estimating the|
|value of my web-based communication tools, I|
|identified the primary inputs required for creating|
|these assets and assigned a value to each, as follows:|
|Ø Registration, Hosting & Licensing Fees||$ 750|
|Ø Cost of Professional Labor||5,250|
|Ø Opportunity Cost of Management Time||10,000|
|Subtotal – Estimated Value||$ 16,000|
–When Buying a Business, Don’t Ignore Its Digital Assets by Christian Nellemann