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.

• Title,
• 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.

Related Content:

–When Buying a Business, Don’t Ignore Its Digital Assets by Christian Nellemann