Accounting describes measurable value

If an asset may be measured reliably, it belongs to Accounting. The dollar amount in the bank is accountable, for it has an exact value at any point in time. Property value is accountable, for the market estimate of its value may be reliably calculated. The right to be reimbursed for services is accountable, for the value of those services may be measured.

There are some assets which cannot be reliably measured and therefore do not belong to Accounting. The future value of employee labor is an asset, but it cannot be reliably measured when any employee may decline to give their labor (translation: leave the business) at any moment. The business' brand is an asset, perhaps one of the most valuable assets, yet it does not belong to Accounting because it cannot be reliably measured.

Knowledge of the assets that Accounting belongs to is crucial for the business to understand. Financial statements, a tool of Accounting, can never tell the entire story of a business' value because unmeasurable assets such as brand or customer loyalty are absent.

Were it possible, I believe Accounting would include the entire story of a business' value. The only reason it refrains from measuring every part, such as the value of the brand, is because the ambiguity these numbers would introduce makes the entire financial statement less reliable. This leads me to two conclusions: 1) that Accounting describes more of a business' value today that it did a century ago, and 2) that grave financial mistakes have been made by incorporating hard-to-measure elements into financial statements.

My first conclusion rests upon the growing ability to measure intangible assets. The advent of unimaginable amounts of data and new tools to interpret that data have given rise to reliable models of human behavior previously unavailable to business. For example, websites like Facebook can reliably measure their user’s preference for one button color over the next by presenting a green button to a subset of their users and a blue button to the rest, then measuring the number of clicks. If the blue button outperforms the green button, already you have assigned more value to the blue than the green. If that button can also be tied to a specific revenue, say it is an advertisement, then you might calculate the additional revenue gained from the blue over the green. Never before was an intangible asset like the look and feel of a website capable of being measured and valued.

My second conclusion is an extrapolation of the first. A business may quantify the value of their business' website asset on their financial statements. This number may represent a sizable portion of the business' assets and give the impression that the business holds more assets than it truly does. While the positive feeling that people have about a website does constitute an asset, this is so subjective that its number on the financial statement only confuses the reader. Because of the lack of clarity, the business may also fail to reduce the quantity of that asset when the popularity of their website declines. This hides the decline of the business in reality by reporting a false value in the financial statements and could ruin a business and its investors.

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