​Video: Big Changes Are Coming!​

Earlier this year, FASB sent a survey to professional investors asking their opinions on the accounting for intangible assets. They asked, “if you were provided additional information on intangibles in the financial statements, how would it affect your ability to analyze companies?” Their questions, such as would it be valuable if assets like trademarks, patents or copyrights were on the balance sheet, imply change is coming to a financial statement near you. 

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And we believe the changes may be profound. 

If intangible assets were capitalized instead of expensed, equity or book value would increase, particularly for those companies previously considered “asset light” or more innovative. We estimate that simply capitalizing R&D as well as advertising expense for the S&P 500 would increase book value well over $1 trillion with the capitalization of other intangible expenses pushing that number much higher. While all companies would see price-to-book (P/B) values decline, the impact on the most innovative companies would be most profound, turning style classification, which depends on this metric, on its head. In fact, an academic study by Baruch Lev found that about half of stocks classified as growth or value (the top or bottom 30% ranked by P/B) would change classifications if intangible assets were reflected on balance sheets!

It’s not just balance sheets and style classification that would be impacted. We estimate that capitalizing intangible assets would increase S&P 500 earnings per share (EPS) by over 10%, potentially significantly changing asset allocation decisions that are calculated based on historical price-to-earnings ratios.

The bottom line is that recent steps by the accounting standards body seem likely to culminate in a dramatic change to the accounting of intangible assets. This will alter balance sheets and income statements, valuation metrics like price-to-earnings and price-to-book ratios, and style classifications. It may impact trillions of dollars of asset allocation and in the process bring economic reality out of the shadows of accounting and into the light so investors can better understand the true economics of the companies in which they invest.