The new New Economy Analyst Report – October 30, 2001

Juergen Daum’s new New Economy Best Practice service

©2001 Juergen Daum. All rights reserved.




The book of the month: “Intangibles: Management, Measurement, and Reporting” by Baruch Lev

News categories: the New Economy economics, strategic enterprise management and business performance management, value based management


“Whether perceived as old or new economy, an enterprise’s competitive survival will depend on smart deployment of intangible assets, leading to innovation and effective commercialisation. By using the Value Chain Scoreboard, both managers and investors can attain a comprehensive portrayal of a firm’s innovation capabilities and success in creating economic Value."

              Baruch Lev


Wealth and growth in today's economy are primarily driven by intangible (intellectual) assets. With the arrival of the new information technologies, the structure of enterprises have changed dramatically within the last decade, and intangibles represent today often the major assets of these corporations. Physical and financial assets are rapidly becoming commodities, yielding at best an average return on investment. Therefore, it is hardly surprising that in recent years intangibles have captured interest by the academia, managers and the investors. Corporate success today is not based any more on production facilities, financial capital and ownership, but on invisible and untouchable” values - intangible assets -, such as relationships with business partners, brands, ideas, business processes, corporate culture, know-how and innovation force. But unfortunately traditional accounting is not able to capture, measure and report on intangible assets – forcing investors, but often also managers, to act in the dark. This book is the first comprehensive, scientifically based study of the nature and impact of intangibles with the focus is on improving external information communication.

"Intangibles: Management, Measurement, and Reporting” is a study of the nature and impact of intangible assets. The book evaluates the importance of intangibles to corporate performance, economic growth, and overall social welfare. Based on robust empirical studies, Baruch Lev establishes an economic framework for analysing managerial and investment issues concerning intangibles. His study surveys the effects of intangibles on corporate performance and market value, including managerial challenges in handling risk, protecting property rights, encouraging marketability, and monitoring the cost structure of intangibles. The book also addresses information deficiencies associated with intangibles and offers recommendations for improved financial disclosure and comparability. Most important, Lev sets forth a new and comprehensive information system, called the Value Chain Scoreboard- aimed at satisfying the needs of both managers and investors- to reflect the impact and value of intangibles within the context of enterprise performance.

Lev got interested in intangible assets a decade ago, when he was teaching at Berkley University and consulting about valuation issues that arose in the course of litigation. The New York University offered him to set up an accounting research institute, from which he sends out a fast-moving stream of research work – which was condensed now in this book. In "Intangibles: Management, Measurement, and Reporting” he is criticizing the actual accounting and disclosure practice related to intangibles. One of the major problems from his point of view with today’s accounting systems is, that they are still based on transactions, such as sales. But in the current, knowledge-based economy much of the value creation or destruction precedes, sometimes by years, the occurrence of transactions. The successful development of a drug, for example, creates considerable value, but actual transactions, such as sales, may take years to materialize. Until then, the accounting system does not register any value created in contrast to the investments made into R&D, which are fully expensed. This difference, between how the accounting system is handling, or better not handling, value created and is handling investments into value creation, is the major reason for the growing disconnect between market values and financial information.

Baruch Lev argues that this lack of public information contributes to a higher cost of capital and affords abnormally large gains to insiders at the expense of outside investors. To level the playing field, Lev proposes companies periodically release, in addition to the required income, balance sheet and cash flow statements, quantitative and standardized information most relevant to the company value chain or business model.

He specifically recommends that companies should report about their innovation process, because this is where economic value is created in today’s knowledge based businesses from nearly all industries. By innovation process, he means the fundamental economic process of innovation that starts with the discovery of ideas for new products or services or processes, proceeds through the development phase of these discoveries and the implementation stage and establishment of technological feasibility, and culminates in the commercialisation of the new products or services. And he also describes how a related reporting system should be conceived: the so called Value Chain Blueprint. Lev’s Value Chain Blueprint is a measure based information system for use in both internal decision making and disclosure to investors, that reports about every step of the innovation process.

He believes that the Value Chain Blueprint is a good starting point, but that is it not the end. In addition he is convinced, that improved recognition of intangible assets in the accounting system itself is required. He explains, that the broad denial of intangibles as assets detracts from the quality of information provided in the balances sheet. Even more serious is its adverse effect on the measurement of earnings. The matching of revenues with expenses is distorted by front-loading costs by the immediate expensing of intangibles and recording revenues in subsequent periods unencumbered by those costs. What is therefore required is a significant broadening of the recognition of assets in financial accounting and reporting. And the author also outlines some ideas and concepts for that.

This landmark book represents the most comprehensive and thorough scientifically based economic analysis of intangibles to date. Building on the author's high-impact research and first-hand experience working with executives, consultants, and regulators, the book offers a coherent framework for understanding the fundamental economics of intangible assets. Baruch Lev identifies attributes of intangibles that are different from tangible assets (property, plant, and equipment), by focusing on their distinctive role in value-creation. He highlights the most critical issue concerning intangibles: the need to make relevant information available to outsiders. Although the focus is on improving external information communication, its mission of reflecting the valuation-creation process of intangibles makes the system potentially useful for managers who want to monitor the performance of investment in intangibles.

This book is recommended not only to someone who has an MBA, but to anyone who is interested in the broader economic issues of today. 


About the author:

Baruch Lev is professor of accounting and finance at New York University and the director of the Vincent C. Ross Project for Research on Intangibles. He is the award-winning author of several books and numerous research studies published in the leading accounting, finance, and economic journals. He can be reached at

See also the interview with Baruch Lev and Juergen Daum.



Intangibles: Management, Measurement, and Reporting 
by Baruch Lev
Paperback - 150 pages (June 2001)
Brookings Institute; ISBN: 0815700946


The method Lev is proposing to value “knowledge assets” - intangible assets - of companies (called by him “Knowledge-Capital Earnings”), was described in my new New Economy Analyst report from July 26, 2001.


More about about New Economy Economics and Management Best Practice in general, and about other related topics will be continued here in my newsletters and will be presented in my own forthcoming book on intangible assets, related management challenges and solutions.. To subscribe for my free-of-charge e-mail push newsletter click here. 


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©2001 Juergen Daum. All rights reserved.

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