A Rejoinder to Douglas Skinner's 'Accounting for Intangibles - a Critical Review of Policy Recommendations'

Summary

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Douglas Skinner summarizes his criticism of the various empirical studies suggesting that the current accounting for intangibles is harmful by: 'There is no evidence that the accounting or disclosure treatment of intangibles in and of itself results in systematically lower valuations for these firms.' This sweeping conclusion is not supported by Skinner's arguments. Two things the author thinks should be done to improve the reporting of intangibles are capitalization of certain investments in intangibles and facilitation of improved standardized disclosures about intangibles. The rejection of the balance sheet's relevance will come to the Financial Accounting Standards Board (FASB), among others, as a great surprise. Considerable evidence indicates that disclosure about intangibles, not necessarily their value, is highly relevant to investors. It would be highly beneficial if an authoritative body, such as the FASB or the Securities and Exchange Commission, will develop templates for disclosure about intangibles, leading to the dissemination of standardized and comparable information about these all-important assets.

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Extract

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A Rejoinder to Douglas Skinner's 'Accounting for Intangibles - a Critical Review of Policy Recommendations'

1. Introduction

In a thoughtful critique of various proposals to change the current financial reporting of intangibles and their consequences, Douglas Skinner concludes '... the case for reform is surprisingly weak, ... capital markets actually function rather well, ... an approach to intangibles that involves mandating more extensive disclosure in this area is likely to be unsuccessful, ... there are marketbased incentives for companies to voluntarily provide this disclosure, ... proposals to modify the current accounting model ... are flawed ...'. The following brief comments make it clear why I take exception to these conclusions, and yet I commend Skinner for urging researchers and policymakers to base their recommendations on solid research.

2. M...

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