Dear Mr. Niaz,

A good thoughtful question. Since it might highlight the contribution by the managers who are employed by the shareholders. Fund providers give capital, so they are happy with the return ON their capital, and return OF their capital. The goal of Financial Accounting is essentially to facilitate this for the fund providers by giving them an account of Financial position and Performance of a company to suit the fund providers' requirements.

If one changes the perspective and objectives of financial statements then this can be accommodated. One major issue with intangibles is the difficulty in measuring them in a deterministic way. Intangible valuation is based on perspectives, and hence their value generated is extremely probabilistic and a function of several factors. This much of leeway to accountants can give rise to more complications to the existing EARNINGS MANAGEMENT menace.

Management Accounting and Management Control System domains consider this aspect. Any way super normal profits method used to estimate goodwill can be thought of valuing intangibles again depending on the nature of the intangible.

the value of an intangible asset finds a place in the financial statements. Revenue generated due to the use of this asset finds a place in the financial statements. If you want to seggregate the value generated by the intangible asset and that by other tangible assets then financial accounting as a body of knowledge can't help. All analysts and corporate valuation experts do this themselves.

Intangibles in the financial statements

Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. Measuring and reporting of intangibles in financial report of the company is mostly given by the limitation for recognizing them that is done by the financial accounting regulation - international as well as national.

In the international level there is regulation by International Financial reporting Standards (IFRS/IAS) and related Conceptual Framework (a lot of countries have adopted them).

Conceptual Framework says:

"An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity." [F 4.4(a)]  "An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably." [F 4.44]

So we can see 4 basic conditions for recognition the item as an asset reported in the balance sheet (more formally called Statement of Financial Position):

1) the item resulted from past events - usually there is no doubt about it;

2) the item as an resource (i.e. assets) controlled by the entity - it means, the company desides about how and for what purposes it will use it;

3) reliably measurement of the item - there is no doubt about the value of the item, if the company aquired it by the purchase from other "creator" or if the company developed it by own activity with the purpose to selling it: the value is certain because it is "done" by the market. If the company developed anything which have no physical substance and it will not to sell it and, it is quite unique item incomparable with other (in the market) we are not able to determine certain value of such item and, it will not be reported in financial statements. This is that we apply the conservatism / prudence principle. 

4) future economic benefit will flow to the entity - it means, that the company could gain some amounts by the sale of this item, incomes or reduce of cost are certainly expected in future.

The intangible assets is than defined by IAS 38. There is determined next criterion for recognition the intangible item: identifiability.

An intangible asset is identifiable when it: [IAS 38.12]

• is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or
• arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

When the item meets all criteria mentioned above it could be reported by published financial statements of the company (namely in the balance sheet).

Best regards, Olga

Just to add on these elements, there is the typical moral hazard problem. Suppose banks provide loans to a firm. In case of problems, the banks are entitled to the collateral (assets) before the owners are. If intangible assets are capitalized, these results in profits which may be dictributed to the owners, and in this way, these possible future revenues can to some extent be distributed to owners. It is questionable whether it is a valuable collateral in case of default leaving the banks with less certainty. Some of these may not be sufficiently hard for the bank to serve as collateral so that allowing firms to capitalize will actually result in higher interest rates (as the risk for the lender increases). This is even more so because of the fact that valuation of these is often subjective (which indeed can lead to earnings management). So it is questionable whether it is preferable for firms. Actually, more conservative accounting may reduce interest rates on loans (see the paper of Zhang 2008 'The contracting benefits of conservatism to lenders and borrowers').

[As a note in addition: for valuation, you may think of the Ohlson framework (1995) in which the value of a firm is written as the book value of the firm (book value of equity) plus the present value of residual income. The latter is income in excess of the return on capital. If you realize that capital is indeed estimated 'too' low (as intangibles are not included), then return on this capital is low which implies that in expectation earnings will exceed this return on the (low) book value. This is the residual income (or abnormal earnings). If you earn money based on e.g. the value of your brand name, this leads to higher earnings than just return on capital. This is included in the value of the firm as the present value of this future residual income.]