For many companies, particularly in the technology space, the main means of production isn't an assembly machine, whose cost is capitalized and offset over time by the revenue it generates, but intellectual capital, which must be reported as a current expense.

Tech executives have long complained about this inability in GAAP reporting to account for how the typical company grows into a profitable business today.

To compensate, finance leaders have tended to use non-GAAP, off-the-books descriptions to show the relationship between their investment in intellectual capital and the company's growth path.

But there might be a way to change that, says Marvin Weiss, retired professor of accounting at the New York Institute of Technology.

Since the basic concept underlying accrual accounting is the matching of revenue and expense, standards might be changed to allow finance teams to record internally generated intangibles such as intellectual capital at actual outlay cost rather than as current expense.

"I believe that this would be a vast improvement over existing practice," Weiss writes in Accounting Today. 

Cost vs. value

GAAP, like its predecessor standards, treats internally generated intangibles such as intellectual talent as a cost to be expensed as incurred. That's because GAAP doesn't focus on value; it measures cost.

"Outlay cost is objective," Weiss said. "Value is not." 

This made sense in the past, he says, because maximizing profits was the only goal that governed decision-making, and capital investment and productivity were the drivers that led to profit growth.

But today, much of the traditional means of production occurs outside the United States, while the intellectual work remains here, and profit is no longer the only goal that company's set for themselves. Increasingly, they're adding environmental, social and governance (ESG) goals to meet expectations of investors, activists, governments and communities.

"We are now in a new era in which knowledge and skills have become the key drivers and ... more corporate managers embrace the concept of ... ESG investing," Weiss said.

Accounting for value

Attracting and retaining a talented person results in an expense that produces no immediate revenue, he says. Similarly with ESG expenditures to reduce carbon footprint, increase diversity, or develop mentoring programs for underserved populations.

These expenses are incurred with the idea they'll generate revenue in the same way as a traditional capital outlay.   

"Are these really a current expense, since they produce no immediate revenue, but rather focus on multi-period growth?" he asks. "Perhaps doing 'good' now leads to increased future profits in a highly competitive environment." 

Weiss says capitalization of talent, ESG and other internal intangible assets would become more acceptable if the focus in accounting standards shifted to cost, or actual outlays, for things that produce value, whether its future profits or social goods.

As a case in point, he points to a large bank that was embroiled in a fake-account scandal, a description that matches Wells Fargo's recent experience.

If the bank's recruitment, training and other non-direct-revenue-producing costs were capitalized rather than expensed, and written off as a loss whenever an employee departed prematurely, or amortized using the same actuarial base used in a typical pension plan, the resulting amount wouldn't be measurable as value. But it would show something else, he says.

It would "give a very clear picture of how this or any other company is retaining or expanding its employee base," he says. "That is information not available in existing GAAP."

And that type of information, he said, would be measurable and valuable in financial reporting.

"When it was reported that before and during the bank's false account scandal, turnover in the retail division was close to 50%, that information would have been of great use to a prospective investor," he says.

That's something the Financial Accounting Standards Board (FASB), which oversees GAAP standards, and its sister organization, the International Accounting Standards Board, should consider as they update standards to reflect today's globalized environment.

"The treatment of internally generated intangibles will be a major issue," he says.