Value of Internally Generated Intangible Capital

43 Pages Posted: 7 Sep 2021

See all articles by Aneel Iqbal

Aneel Iqbal

University of Calgary - Haskayne School of Business

Shivaram Rajgopal

Columbia Business School

Anup Srivastava

University of Calgary - Haskayne School of Business

Rong Zhao

University of Calgary

Date Written: September 5, 2021

Abstract

Based on the current U.S. GAAP, internally developed intangibles are not included in reported assets. Omission of an increasingly important class of assets reduces the usefulness and relevance of financial statement analysis, conducted using book value. Recent studies attempt to overcome this deficiency by capitalizing the outlays reported in selling, general, and administrative (SG&A) expenses and reestimating book values with capitalized intangibles, using a perpetual inventory model. However, those studies rely on one-size-fits-all mechanical rules of thumb, such as treating a uniform 30% of SG&A as investments and assuming the same life of SG&A investments across all industries. We propose a new method to estimate the industry-specific capitalization and amortization rates for research and development and SG&A outlays. Our modified book value exhibits greater association with future risk-adjusted returns, future investments, and bankruptcy probability as per the Altman Z-score model, relative to both as-reported book values and the mechanically adjusted book values. We contribute to the literature by proposing a new method for estimating intangible investments and by providing a better estimate of book value that can be used by 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 (September 5, 2021). 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 Business School ( 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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