How did intangible assets come to play such a central role at so many companies?
It began to happen–and not so gradually–about 15 or 20 years ago. The reasons include a significant increase in competition brought on by globalization and deregulation of major industries. Innovation became a matter of life and death, and you get innovation by investment in R&D, people, and processes. Physical assets generally don’t create value. Just compare the physical assets at two pharmaceutical companies, such as Merck & Co. (MRK ) and Pfizer Inc. (PFE ) When it comes to lab equipment or buildings, there’s really no difference between the two. All companies buy the best there is. Value is the ability, say, to get a drug through the Food & Drug Administration process more quickly than others [can]. This is a huge intangible, which creates additional yields. Q: How does accounting enter this discussion? A: Accounting hasn’t kept pace with the rise of intangibles. The reason is that accounting is based on transactions–purchases, sales, and capital expenditures–which were mainly
