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September 23, 2007

Comments

Victor Cook, Jr., New Orleans, Louisiana

Jonathan,

Thanks once again for your thoughtful comments. Your first point of clarification, that the $5.6bn of disclosed goodwill includes only acquired assets, is sufficiently important that I will add it to the original text.

The second point of clarification, that the accounting profession recognizes only the first two of the three "accountable" assets in my post, begs more answers to the question: Why? I understand you answer: most companies feel that the advantages of putting homegrown brand assets on the balance sheet are outweighed by the disadvantages: explaining the methodology; annual impairment reviews; and the risk of write-downs. But are there not advantages to shareholders beyond the possibility of asset appreciation?

Finally, your suggestion that I look into the importance of each of the seven categories of intangible assets by industry is excellent. In a small way the piece I will post later today moves in that direction. It may come as a surprise that even in a tech driven company like Microsoft, the dollars consumed by sales and marketing begin to approach twice the amount of those consumed by research and development! I definitely will pursue this line of investigation further in coming posts.

~V

Jonathan Knowles

Hi Vic
Your latest post continues your tradition of thoughtful, provocative commentary. There are three points that I would like to add - two are points of clarification, and the third is a suggestion for where to focus further analysis.
The first clarification point is that none of the $5.6bn of disclosed intangibles on Microsoft's balance sheet relates to the Microsoft brand (you will remember from my earlier response that disclosed goodwill relates ONLY to acquired assets, not homegrown assets like the Microsoft brand).
The second clarification point is that the accounting profession only recognizes two classes of assets for reporting purposes - tangible assets and disclosed intangibles. There is no general recognition of the Interbrand brand values even though the wording of the FAS rules (141 [dealing with the accounting for goodwill] and 142 [dealing with impairment reviews for goodwill]) appeared to create the opportunity for putting homegrown brands onto the balance sheet. My observation is that most companies feel that the advantages of doing so are outweighed by three disadvantages (having to explain the methodology; having to do annual impairment reviews; and creating the risk of having to do an asset writedown if the valuation shows a decline).
My third point is to reinforce the importance of the task you identify in the final section of your post - how to explain the difference between the observed market value of a company and the value of its physical assets. In your post of September 16 you note that 7 categories of intangible assets have been suggested. How does the importance of each category vary by industry? My guess is that technology is a huge portion of the intangible value of Microsoft but a relatively small proportion of the value of Coke.
Do you have the appetite for an analysis of how intangible value varies by industry sector?

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