Value of Internally Generated Intangible Capital

54 Pages Posted: 7 Sep 2021 Last revised: 3 Feb 2022

See all articles by Aneel Iqbal

Aneel Iqbal

University of Calgary - Haskayne School of Business

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Anup Srivastava

University of Calgary - Haskayne School of Business

Rong Zhao

University of Calgary

Date Written: January 2022

Abstract

Internally developed intangibles are not included in reported assets under U.S. GAAP. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis, conducted with book values of assets and equity. Recent studies attempt to overcome this deficiency by capitalizing selling, general, and administrative (SG&A) expenses, based on a one-size-fits-all mechanical rule of thumb that (i) treats a uniform 30% of SG&A as investments; and (ii) assumes the same life of SG&A investments across all industries. We estimate investment and maintenance portions of research and development (R&D) and MainSG&A (SG&A minus R&D), and their amortization rates, on an industry-year–specific basis. Our modified book value, inclusive of capitalized intangibles, exhibits greater association with future returns, investments, and bankruptcies, relative to as-reported and mechanically estimated book values. We provide a better estimate of book values of assets and equity for consumers of financial statements.

Keywords: Intangibles, Book Value, Financial Statement Analysis, Valuation

JEL Classification: M21, M41

Suggested Citation

Iqbal, Aneel and Rajgopal, Shivaram and Srivastava, Anup and Zhao, Rong, Value of Internally Generated Intangible Capital (January 2022). Available at SSRN: https://ssrn.com/abstract=3917998 or http://dx.doi.org/10.2139/ssrn.3917998

Aneel Iqbal

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Anup Srivastava (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

Rong Zhao

University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-2568 (Phone)
403-210-2217 (Fax)

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