Financial Alchemy: Changing Costs into Assets
In a stroke of modern day alchemy, today’s accountant knows how to cause expenditures to mutate into wealth.
Take the case of the buyout of a company where the purchase price is greater than the sum of the fair value of its net assets. Where does the buyer record the difference? And how does one arrive at a value for this premium that was paid?
This type of intangible can be booked as an asset plus it can be amortized and therefore deducted for tax purposes according to the Internal Revenue Code bring yet more tangible benefits from an intangible asset.
The established practice of deducting over time the amount one pays in an arms length transaction holds true for real property such as machinery and equipment and even real estate for example, so why makes this concept so difficult to embrace insofar as the buyout of a business is concerned? Simply put, because unlike tangible property where comparable values are available between an actual willing buyer and seller, the valuation of a business is difficult to measure.
There are numerous categories of intangibles that are as much a factor at determining the purchase price of a going concern as the tangible assets of the business themselves. These would include, but are not limited to: Trademarks, customer lists, royalty agreements, leases, franchise agreements, patents, computer software, databases, and even pictures, photographs and works of art. And some of these intangibles can be recorded irrespective of a buyout of the company itself. They can be internally generated.
Modern capitalism is as much about earning, saving and spending as it is about investing, valuing and amortizing. For those who are willing to negotiate the risky field of establishing market values based on the expert analysis of hypothetical buyers and sellers the benefits can be substantial.
When contemplating the purchase of an enterprise or when launching a project in which there are costs involved for intangibles, a virtual gold mine of value lies deep in the heart of a mountain of expense.
