Goodwill Accounting I

The implications from applying simple inalienable rights arguments are far reaching. Take for example the requirement of worker profit appropriation. In a firm, only the current workers (members) are allowed to appropriate the profit. This has dramatic implications regarding the valuation of businesses. Standard finance theory teaches that the present value of a business equals the discounted future stream of profits. But this assumes the current “owners” are going to appropriate the future profits, not the current members at that time. Clearly the profits from the future labor of workers cannot be owned in the present, so the standard valuation method is not correct. If the future profits cannot be owned in the present, then what is the value of a business? The only possible answer is that a firm is worth its net asset value, or the value of its assets minus its liabilities. This is sometime approximated at the book value of a firm for accounting purposes. The supposed value of a firm above its net asset value is called goodwill. Goodwill is an intangible asset, and as we have seen it can’t actually exist if member are to appropriate profit. Generally goodwill is linked to the reputation of the firm, its brand name, or customer loyalty which is assumed to enhance future profits. Whether these profits materialize is uncertain and in any case cannot be appropriated in the present before they are earned. In our “market” economy the sale of goodwill through equity trading is actually the prearranged theft of the labor of future workers, in violation of their inalienable rights. Accounting practices are inconsistent on the issue of goodwill. Earned goodwill is not permitted as an asset on a firm’s the balance sheet. This makes sense because a firm can’t record its future expected profits as a current asset. Yet purchased goodwill (when another firm is acquired for more than its net asset value) is counted as an asset. Something than cannot be earned in the first place obviously can’t be sold, but this is exactly what the accounting permits. For illustrative purposes, take the example of a sole proprietorship, a single person firm. Let’s say the sole proprietor built up a good reputation and decided to sell their firm under the current valuation methods based on the expected future stream of profits. After the sale the sole proprietor (also the sole employee) decides to quit. The firm’s value immediately collapses to the net asset value since there are no longer any expected future earning. Adding employees and wrapping the firm in a formal legal entity has allowed the underlying transactions to be obscured. The inalienable rights arguments dictate that future earnings must be appropriated by the current workers, so the value of all legitimate (worker owned democratically managed) businesses should be their net asset value.   Were inalienable rights of workers to be protected, the value of common stock would be converted to debt equal to the net asset value of the businesses and stripped of voting rights. Of course enormous reparations to past workers should also be paid.

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