Market Or Book Value: That Is The Question
Market or Book Value: That is the Question
In the last month alone, there have been multibillion dollar write-offs by Microsoft Corp., Hewlett-Packard Co. and Boston Scientific Corp. In addition, a Wall Street Journal analysis reveals six companies have more goodwill on their balance sheets than their companies' market values. What does that mean to you if you are not an accountant? I would suggest a lot about what goes unmeasured and unrecorded in our social age.
In short, market value reflects what investors believe a company is worth based its current and future cash flow, while Goodwill is the amount an acquiring company has paid for another company's hard assets, such as cash, factories and equipment - even if that is not what it was acquiring in the first instance (e.g. they were acquiring their employee and customer capital - which are not assets - to grow their top and bottom line).
Under today’s accounting rules, companies must review their goodwill balances at least annually and use projected future profits to determine if what they paid is greater than the fixed assets they acquired. A company is supposed to write down the value of the 'goodwill', booking an expense equal to the reduction in value - worsening its profit in that year.
Now this may all seem like gibberish to you. But I think it is critically important. In that if you are investor and you want to invest in this company – does it really make that according to accounting rules – that the only thing measured and reported as ‘assets’ are plant, property or equipment. Shouldn't you know the value of their customer, employee and social capital - if you are going to invest your hard earned dollars in this business.
With more than one billion of us sharing data socially, or 4 billion using mobile devices to learn what matters to us – is it possible that market value is a better arbiter than book value in today’s flat world. More importantly, is it possible that given that all the most important ‘assets’ of our time – our knowledge, relationships and interactions – don’t count? I hope not!
It's time to update the science of accounting, which is now almost 5,700 years old, so that it includes all the sources of value, not just the physical ones. In so, doing, companies, industries and governments will align their capital allocation (investments) with the things that truly matter today – the production and development of human and social capital.