The Relevance of Intangible Assets in the Context of the Managerial Accounting Decision Making Process

The current framework of financial accounting does not allow internally developed intangible assets to be reported on balance sheets. Expenditures incurred to develop these assets are expensed in the period in which they are incurred thereby negatively impacting net income. Consequently, managers may not be motivated to invest in these intangible assets. Since many companies' values are internally generated, they may be placed at a disadvantage from a financial reporting perspective.;This issue raises the research question: Does the current accounting treatment for intangible assets affect management behavior? For extension, the following additional questions are posited: (1) Does management value all expenditures for intangible assets as equally important or only those that are capitalized? and (2) What type of information about or factors regarding intangible assets impact the managerial decision making process?;An experimental approach is used for this study. Subjects indicate their willingness and confidence of making an investment in a patent intangible asset under three randomly assigned cases. An additional manipulation for compensation is included. A 3x2 analysis of covariance (ANCOVA) is performed on responses of MBA students. Analysis of mean responses and the expected directions are assessed by individual t-tests. Subjects also ranked information items deemed most important for their decision. Crosstab chi2 and Wilcoxon signed rank tests are used to test for statistical significance. Additional analyses on demographic data and validity checks are performed.;The ANCOVA revealed that the accounting method significantly impacts subjects' decisions. The covariate for subjects' self-assessed level of accounting knowledge is significant. Analysis of the means shows a tendency for subjects to be more willing and confident when making riskier investments, which is consistent with Kahneman and Tversky's reflection effect deviation from utility theory. The compensation manipulation and interactive effects are not significant. Analysis of the demographic data did not improve the ANCOVA model. Tests for data validity find that subjects' responses exhibited behavior showing proper utilization of information in the experimental materials.;The overall conclusion is that the accounting treatment for intangible assets does impact managerial decisions. These results provide support for additional reporting of internally developed intangible assets.