Information economy: why the cost of technology companies is so high
Investors more often prefer to invest in intangible assets (intangible investment), rather than in companies that produce industrial equipment, equipment and other tangible assets (tangibles). Companies in the United States own intangible assets, the total amount of which exceeds $ 8 trillion . This is almost half the cost of the S & P 500 index at the time of the study.
Intangible assets consist of rights, relationships, and intellectual property. But among them stands out a special form - the development, resulting from the cost of research and development. They constitute the main income of any modern organization. This is confusing for the investor. The fact is that the operating mechanism cannot adequately link such benefits with the price of the company.
Accounting methods and valuation methods used in the 21st century are poorly suited for intangible assets and distort their value.
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The publication of The Market Mogul has published an interesting article on why capitalization of technology companies in recent years are at very high levels. We have prepared an adapted version of this material.
Accounting policies that organizations use to manage their economic processes are not suitable for modern intangible assets. This creates cause for concern when evaluating stocks. Regulatory instruments, such as IFRS, recognize intangible assets only at the time of the transaction , such as a purchase. This standard does not take into account the intangible assets of the company, which form its shareholder value. Significance increases when $ 30.1 trillion of an enterprise price of $ 89 trillion is considered “undisclosed value”.
In addition, the classification of costs may inaccurately display certain indicators that directly affect the estimate, such as discounted cash flow. The main costs that stimulate information development are R & D. In the financial statements, they are reflected as operating costs, although in essence they create long-term economic benefits. If you manually reconfigure profit and loss statements and spend R & D expenses as capital costs, a more accurate picture of the company's revenues is created.
The analyst may use several options for smoothing inaccuracies arising from improper accounting methods, namely, income and market approaches. The first one reveals additional cash flows that arise from the use of data in the production process. The second, in order to take into account the differences in intangible assets, considers transactions related to their transfer between firms.
However, when using these methods, it is difficult to understand how intangible assets affect cash flow. In addition, market data about them is not publicly available and is largely dependent on adjustments. This makes the assessment of modern companies all the more difficult. In the long run, a system is needed that will allow quantifying information, which leads to a side effect for the stock market.
The fundamental problem is the inability of the price mechanism to work with something unlimited. The modern economic system does not take into account that the cost of the data necessary for the production of goods will tend to zero . It costs companies nothing to recreate a few lines of code and copy the information. Consequently, natural market mechanisms cannot create price.
Although some studies show that data consume computational power when “ one bit ” is removed, a more reliable system is required to fix the value.
The solution is likely to lie in the classical theories of pricing associated with large calculations, which have become possible thanks to today's computing power. For example, approaches like the theory of value can be used to confirm profits and measure the effort involved in creating a product or service. The latter are considered to be spent on production hours or cognitive activity, which stimulates creativity, ingenuity and other emotions associated with work.
It seems that it is impossible to quantify brain activity, but modern advances in the field of neurotechnology allow this to be done using technical means. Thanks to them, such teachings as the theory of the value of labor can become fully functional.
In the short term, current approaches to accounting for companies are unlikely to change. But some countries are beginning to recognize the value of intangible assets within reporting. For example, China is gradually moving from capital-intensive industries to technology and services.
As a result, new installations are being introduced that allow us to capture external factors associated with intangible assets. This provides clarity, but does not create the reliable pricing system that the current business environment requires. Can the next long economic cycle provide what is required?
Intangible assets consist of rights, relationships, and intellectual property. But among them stands out a special form - the development, resulting from the cost of research and development. They constitute the main income of any modern organization. This is confusing for the investor. The fact is that the operating mechanism cannot adequately link such benefits with the price of the company.
Accounting methods and valuation methods used in the 21st century are poorly suited for intangible assets and distort their value.
')
The publication of The Market Mogul has published an interesting article on why capitalization of technology companies in recent years are at very high levels. We have prepared an adapted version of this material.
How a business valuation is formed in the 21st century
Accounting policies that organizations use to manage their economic processes are not suitable for modern intangible assets. This creates cause for concern when evaluating stocks. Regulatory instruments, such as IFRS, recognize intangible assets only at the time of the transaction , such as a purchase. This standard does not take into account the intangible assets of the company, which form its shareholder value. Significance increases when $ 30.1 trillion of an enterprise price of $ 89 trillion is considered “undisclosed value”.
In addition, the classification of costs may inaccurately display certain indicators that directly affect the estimate, such as discounted cash flow. The main costs that stimulate information development are R & D. In the financial statements, they are reflected as operating costs, although in essence they create long-term economic benefits. If you manually reconfigure profit and loss statements and spend R & D expenses as capital costs, a more accurate picture of the company's revenues is created.
The analyst may use several options for smoothing inaccuracies arising from improper accounting methods, namely, income and market approaches. The first one reveals additional cash flows that arise from the use of data in the production process. The second, in order to take into account the differences in intangible assets, considers transactions related to their transfer between firms.
However, when using these methods, it is difficult to understand how intangible assets affect cash flow. In addition, market data about them is not publicly available and is largely dependent on adjustments. This makes the assessment of modern companies all the more difficult. In the long run, a system is needed that will allow quantifying information, which leads to a side effect for the stock market.
Main problem
The fundamental problem is the inability of the price mechanism to work with something unlimited. The modern economic system does not take into account that the cost of the data necessary for the production of goods will tend to zero . It costs companies nothing to recreate a few lines of code and copy the information. Consequently, natural market mechanisms cannot create price.
Although some studies show that data consume computational power when “ one bit ” is removed, a more reliable system is required to fix the value.
The solution is likely to lie in the classical theories of pricing associated with large calculations, which have become possible thanks to today's computing power. For example, approaches like the theory of value can be used to confirm profits and measure the effort involved in creating a product or service. The latter are considered to be spent on production hours or cognitive activity, which stimulates creativity, ingenuity and other emotions associated with work.
It seems that it is impossible to quantify brain activity, but modern advances in the field of neurotechnology allow this to be done using technical means. Thanks to them, such teachings as the theory of the value of labor can become fully functional.
Conclusion
In the short term, current approaches to accounting for companies are unlikely to change. But some countries are beginning to recognize the value of intangible assets within reporting. For example, China is gradually moving from capital-intensive industries to technology and services.
As a result, new installations are being introduced that allow us to capture external factors associated with intangible assets. This provides clarity, but does not create the reliable pricing system that the current business environment requires. Can the next long economic cycle provide what is required?
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Source: https://habr.com/ru/post/335492/
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