If you’re in business today you’ll be faced with a conundrum: the financial statements of your company tell you that certain physical objects are the principal assets of your business; sadly that’s not what the market, or your gut, is telling you.
Business today is increasing reliant on nontraditional sources of value.
For example, most software companies rely on semi-official ‘communities of practice’, groups of interconnected specialists that are (often voluntarily) feeding new material into the software system, keeping it up-to-date on a continuous basis. Most of this value is in relationships that are undocumented and invisible to third parties.
However it’s not just new age companies that are impacted by intangibles. If you’re a manager in more traditional business you’ll be increasingly aware that your corporate reputation is a valuable asset, and – more importantly – in the socially connected world we operate in today your reputation can, like Facebook, be slammed at any moment.
Business under reports new sources of value on balance sheets: software, social media networks, apps
So, yes, things are changing in the world of business.
Intangible Assets vs Factory-Based Economy
Studies conducted by the World Bank and others suggest that intangible sources of value now contribute more than 80% of GDP in many developed economies.
While this newer intangible economy is growing, industrial-type manufacturing is in decline. Consider that between 1995 and 2002 developed economies in the West lost 22 million industrial jobs. In the last decade, the United States economy alone lost close to 25% ($4 million) of its domestic manufacturing jobs. Yet, despite the shrinking of their industrial workforces, the output in these countries as a measure of GDP increased by half.
And this is only the beginning; longstanding businesses like hotels, taxis and newspapers are facing massive disruption by digital competitors like AirB2B, Uber and Troy Media. Meanwhile, artificial intelligence will likely replace humans in the productive process in the not too distant future; it’s scary.
So, what’s going on?
The New Economy: Software, Social Media Networks, Apps
Simply put, the engine of growth in modern capitalism is in rapid transition from a factory-based economy that produced tangible products to a technology-driven knowledge economy that employs intangible inputs, in non-mechanical production processes. This new economy produces intangible (often digital) outputs like software, social media networks, apps and distributes them globally – instantly.
This new reality obliterates almost every conventional law of economics.
The thing that has changed most is the kind of economic capital being employed in the productive process.
It is commonly accepted among economists that economic value is created in an industrial economy through a process whereby capital (predominately mechanical) is combined with labour to create something of value.
The old industrial economy assumed that only tangible forms of capital are important. The modern intangible economy employs these six capital forms:
- Real capital (plant, equipment, machinery, etc)
- Financial capital (cash, stock bonds)
- Natural capital (natural resources)
- Human capital
- Intellectual capital
- Social & relational capital
Corporations: Under Reporting In-Kind Assets
These new sources of value are not only changing how the economy works but they are different ‘in kind’ to traditional assets. Not only are they nonphysical in nature, but they (generally) do not obey the Law of Scarcity, which essentially overturns the Laws of Supply and Demand.
Regrettably, the science of economics and our primary economic institutions are behind the curve in documenting these changes, and therefore corporations are under-reporting these new sources of value on their balance sheets. Regrettably, lacking formal visibility, these assets are often poorly managed and/or wasted.
This alternation in the fabric of capitalism is putting big challenges on corporate managers who now have to manage many new and unfamiliar classes of assets and develop vastly different strategies to compete in what is an increasingly erratic commercial environment.
So, this now begs the question, what is an intangible asset?
Ideally, this should be a simple question to answer. The accounting definition of an asset is: ‘something you own, from which you expect future economic benefits’. It ought to be simple to identify and document these new assets, but today, very few of the new intangible value drivers fit into the existing accounting framework.
This troubling development is affecting our national economic statistics; not capitalizing intangibles at the firm level means a vast under-reporting of intangible investment, which distorts GDP calculations and productivity analytics leading to wrongheaded policy in our national economies. Distortions at this level have consequences, adversely impacting capital markets and investment decisions.
In the ’60s Bob Dylan sang “The Times they are a Changing”; this truth was never more appropriate than it is today.
Sharon A.M. MacLean, Social Marketing Strategist/Experienced Magazine Publisher*Coach*Best Selling Author of Build to Grow.
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