Baruch Lev exploded accounting myths. Anthony Carey assesses the impact of his Leake lectures

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His research is driven by a concern that the impact of change in the business environment on companies' operations and well-being is not adequately captured by our present reporting system. He believes that financial statements have become much less useful to investors because expenditure on creating a new broad range of "soft" intangible assets, such as patents, brand names, software and customer bases, is generally written off as incurred, rather than capitalised and amortised over the asset's useful life.

Unravelling the effect of such an approach on corporate earnings and net assets is practically impossible. Clearly the high-technology, research-intensive industries such as pharmaceuticals, telecommunications and software development are affected more than others. The critical point, however, from a stock market valuation perspective is that the impact on a sector varies over time and between individual companies within it. When a firm or industry is young, a policy of capitalisation will tend to increase income in absolute terms and the return on equity as earnings will generally rise proportionately more than equity.

By contrast, later on in the life cycle, increasing amortisation charges from the capitalised assets will more than offset the earnings enhancement effect from capitalising new expenditure such that the policy of immediate write-off then has a flattering effect on earnings. Earnings trends are distorted and useful information is denied to investors.

Lev's research into the accounting treatment of software expenditure by more than 160 companies suggests users do find the information provided by assets being capitalised helpful even though significant subjectivity surrounds figures.

Professor Lev has also speculated on why analysts are not pressing for capitalisation. He mentions the traditional view that well-connected analysts can obtain information directly from management on products under development and, therefore, are not worried about the disclosure of headline information in the form of balance sheet carrying amounts. In addition, he suggests there may be anxieties about capitalisation as it makes it harder for them to predict earnings reliably since the amortisation charge is determined by fairly volatile factors such as the anticipated profit on new products.

Lev argues that standard-setters should remove one of the principal barriers to the capitalisation of intangibles by providing additional guidance on when there is the necessary certainty that the expected future benefits from intangibles will be realised. He goes on to suggest, more contentiously, that the focus should be on intangibles passing specified technical feasibility tests. If they do, they should be required to be capitalised, ending the present practice of leaving many off-balance sheet in the shadows, thereby avoiding the risk of an amortisation charge at some future date. Those with memories of Rolls-Royce's problems two decades ago may feel proper attention also needs to be paid to commercial feasibility as this may well be the stumbling block to a technically excellent product being taken into the marketplace.

It is not necessary to share Professor Lev's conclusions in full to welcome this important contribution to the debate on how we account for what are many businesses' most valuable corporate assets. Accounting for intangibles is about shades of grey, rather than black and white. It is about the trade-off between relevance and reliability and between what information should be provided on intangibles in the management discussion and analysis section of the accounts to enable users to understand them properly whilst at the same time recognising the commercial sensitivities of some disclosures. The real worry, as Professor Lev points out, is not that many directors are refusing to disclose relevant information about the management of their intangibles, but that they do not themselves possess it.

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