Hodak - Measuring EP/EVA


	Investment in intangible assets
	The ultimate in conservative accounting is to expense investments. This treatment is standard practice when it comes to intangible assets, arguably the key investments in most companies today. These investments represent expenditures for future benefits that leave no wake on the balance sheet. Common examples include research and development, new product introductions, and branding. Similar investments in human capital are becoming increasingly important as well. Returns on those investments can eventually balloon to a considerable level. The "expense" treatment for such investments creates a strange pattern of EP that reflects poor matching of investments and returns. One sees a significant drop in Baseline EP when the investments are made, then significant growth when returns materialize. Since the investment is buried in the past (i.e., with no record in EP capital), one cannot tell if the swollen returns are sufficient relative to the capital expended to achieve them. Poor matching of investments with their returns can create a strong bias toward under-investment in intangibles that can undermine competitiveness or induce companies to discard their reported numbers as irrelevant instead of as a source of useful information about their performance.