Accounting scholars Baruch Lev and Feng Gu found that the value of tangible assets and earnings explained more than 80% of companies’ value when entering the stock market from 1950 to 1959, whereas the figure over the period 2000 to 2013 plummeted to just over 20%. More recently, EverEdge Investments estimated that 87% of companies’ value is found in intangibles. The shift to intangibles explains how WhatsApp, a company with a few dozen employees and $10 million in revenues, could be bought for $22 billion, or why the most important aspects of financial reporting for pharmaceutical companies aren’t their income statement or balance sheet, but movement of their product pipeline through regulations.
DOD pricing and reimbursement policies disincentivize firms from investing in intangible capital [e.g., software, data, product design, supply chains, training, etc.] and instead focus on direct charging of labor hours and materials. As a result, the price of goods and services bought by the government increases relative to average prices in the economy where firms are able to make the investments. For example, between 1994 and 1999, aviation spare parts prices managed by the U.S. Navy grew at an annual rate of 12%. Over the same period, producer prices for civilian aircraft parts and equipment grew at just 2%. Similarly, the Congressional Budget Office estimated that the cost per flying hour for defense aircraft has grown between 5% and 9% each year. By comparison, airline fares paid by civilians have grown at just 1.5% over the same period between 1999 and 2016.
That was an excerpt from my NCMA Magazine article, Pricing Innovation–Century Old Cost-Basing Doesn’t Work. Read the whole thing. Shout out to Anne L for editing and making it happen!
Leave a Reply