Accounting for intangibles – a critical review of policy recommendations

Abstract

I review and critically evaluate the arguments in favour of reforming current accounting and disclosure practices related to intangibles. I argue that the case for reform is actually rather weak. Proponents of reform provide little cogent evidence in support of claims that current practice is having adverse capital market effects. In fact, theory and evidence from corporate finance suggest that capital markets perform well in financing investments in innovative, high‐technology activities. I discuss why mandating additional disclosure in this area is unlikely to be successful and that proposals to recognise intangibles are also flawed.

Key words:

• intangibles
• accounting reform
• accounting standards

Notes

The author is John P. and Lillian A. Gould Professor of Accounting at the Graduate School of Business, The University of Chicago, 5807 South Woodlawn Avenue, Chicago, Illinois 60637, USA. E‐mail: dskinner@chicagogsb. edu. He received useful comments from professional staff at the ICAEW, from participants at the conference in December 2007, and from the editor and a referee. Support from the ICAEW and the Graduate School of Business, The University of Chicago, is gratefully acknowledged. Eugene Soltes provided useful research assistance.