The End of Accounting(Wiley, 2016) is a recently published book critical of current GAAPand the related financial statements. The book notes the wideningdifferences between book value per share and market value pershare. That is, book to market ratio is increasing over time asbusiness has changed over time. Chapter 6 states that intangibleassets (e.g., patents, brands, information technology) are theâprime value creators of businesses.â Of course, internally createdintangible assets are not reflected on the firmâs balance sheet.For example, Disneyâs Mickey Mouse, Googleâs algorithms andFacebookâs data mining abilities are not reflected on their balancesheet.
Explain whether a residual earnings model is effective forvaluing companies with substantial amounts of internally createdintangible assets not reflected in its book value.