Question: The importance of painting a portrait that fairly presents the
financial health and future prospects of an organization. Many companies develop copyrights and other intangible
assets that have incredible value but little or no actual cost. Trademarks provide an excellent example. The golden
arches that represent McDonald’s must be worth billions but the original design cost was probably not significant
and has likely been amortized to zero by now. Could the balance sheet of McDonald’s possibly be considered as
fairly presented if the value of its primary trademark is omitted?
Many other companies, such as Walt Disney, UPS, Google, Apple, Coca-Cola, and Nike, rely on trademarks to
help create awareness and brand loyalty around the world. Are a company’s reported assets not understated if the
value of a trademark is ignored despite serving as a recognizable symbol to millions of potential customers? With
property and equipment, this concern is not as pronounced because those assets tend to have significant costs
whether bought or constructed. Internally developed trademarks and other intangibles often have little actual cost
despite eventually gaining immense value.
Answer: Reported figures for intangible assets such as trademarks may indeed be vastly understated on a
company’s balance sheet when compared to their fair values. Decision makers who rely on financial statements
need to understand what they are seeing. U.S. GAAP requires that companies follow the historical cost principle in
reporting many assets. A few exceptions do exist and several are examined at various points in this textbook. For
example, historical cost may have to be abandoned when applying the lower-of-cost-or-market rule to inventory
and also when testing for possible impairment losses of property and equipment. Those particular departures from
historical cost were justified because the asset had lost value. Financial accounting tends to follow the principle
of conservatism. Reporting an asset at a balance in excess of its historical cost basis is much less common.
In financial accounting, what is the rationale for the prevalence of historical cost, which some might say was an
obsession? As discussed in earlier chapters, cost can be reliably and objectively determined. It does not fluctuate
from day to day throughout the year. It is based on an agreed-upon exchange price and reflects a resource
allocation judgment made by management. Cost is not an estimate so it is less open to manipulation. While fair
value may appear to be more relevant, different parties might arrive at significantly different figures. What are the
golden arches really worth to McDonald’s as a trademark? Is it $100 million or $10 billion? Six appraisals from
six experts could suggest six largely different amounts.