VI.2
The economic asset-based accounting system

Nobel laureate Milton Friedman once remarked that the only concept/theory which has gained universal acceptance by economists is that the value of an asset is determined by the expected benefits it will generate (a liability is symmetrical--its value determined by expected sacrifices).
This, almost tautological asset concept was also adopted, in principle, by FASB:
Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events…. Assets may be acquired without cost, they may be intangible, and although not exchangeable they may be usable by the entity in producing or distributing other goods or services….legal enforceability of a claim to the benefit is not a prerequisite for a benefit to qualify as an asset…
The common characteristic possessed by all assets is “service potential” or “future economic benefit”.[1]
In practice, however, accountants subjected the above definition of an asset to an array of vague and largely unoperational conditions of “reliability” and verifiability:
To be recognized [as assets in financial reports], information about the existence and amount of an asset, liability, or change therein must be reliable [representionlly faithful, verifiable, and neutral].
Reliability may affect the timing of recognition [of assets].
The first available information about an event that may have resulted in an asset,…is sometimes too uncertain to be recognized:
it may not yet be clear whether the effects of the event [e.g., R&D investment] meet one or more of the definitions or whether they are measurable, and the cost of resolving those uncertainties may be excessive.[2]

Concern with uncertainty, objectivity and reliability of information in financial reports is understandable, but these concepts are vague and attempts to operationalize them were largely unsuccessful.
As reflected in the second orbit of the New Accounting (Figure 2), I propose to adopt the economic definition of an asset, which is also promulgated by accounting Concept No. 6 (quoted above), without any of the reliability/verifiability restrictions:

An asset is thus a claim by the enterprise (not necessarily in the legal sense) to an expected benefit (the definition of a liability is symmetrical, substituting a sacrifice for benefits).
The distinction between assets and expenses is sharp:
an expense is not expected to provide any benefits beyond the accounting period.



Three ways give rise to assets:
(a)
Investments (transactions)- -the traditional means of creating assets, such as investment in property, plant & equipment, R&D, acquired technology or brands. The value of these assets will initially be based on actual cost.
(b)
Internally created assets--unique organizational designs (e.g., Dell’s web-based distribution system, Cisco’s Internet-based product installation and maintenance system), knowledge-creating systems (e.g., Xerox’s Eureka/communities of practice system for sharing and coding the experience of maintenance personnel),
and other managerial innovations (e.g., Enron’s exchanges-markets in energy and bandwidth).
Unique human resource practices (e.g., employee training devices and systems) creating sustained benefits also qualify as internally-created assets.[3] Common to all these assets, often termed “structural capital,” is the absence of a transaction, an explicit exchange of property rights when they are created. Recognizing internally-created assets will avoid serious inconsistencies in GAAP.
For example, when Ford buys car dealerships, the investment is recognized on its balance sheet, while Dell’s web-based distribution system, accounting for over 40% of its sales, is not recognized as an asset
(c)
Externally created assets--primarily induced by government or judicial activities and by significant technological changes.
The telecommunications deregulation, for example, opening the regional telephone markets to competition and abolishing the assured-return regulatory system, had a significant adverse impact on the values of the regional telephone companies (Baby Bells), thereby creating a negative asset.[4]
The adoption of a significant technology, such as pharmaceutical applications based on the government – sponsored Genome project, may qualify as an externally – induced (not the result of an explicit transaction) asset.
The economic asset-based information system will be maintained in the double-entry manner along with GAAP.
Assets will be debited, by the full investment for the first class of assets--investments (e.g., all
R&D, internal and acquired will be capitalized, as will be customer acquisition costs and brand creating expenditures).
The present value of estimated benefits will constitute the asset-base for the other two classes of assets (internally and externally created).
Deferred benefits accounts will be credited against the assets.
As the benefits from the assets will be realized, say from an R&D alliance, the accounting records will be reversed, yielding the amortization charges of the assets or liabilities.
Occasionally, once in two-three years, the assets/liabilities will be subjected to an impairment test, similar to that required by GAAP for physical assets (FASB statement 121,
).
The proposed, economic asset-based system (middle orbit in Figure 2) will thus be closely integrated with the GAAP system.