re amorotization:
Based on your comments that amortization is stupid and your belief that a food company is an example of that. You must believe that advertising dollars spent developing a brand name such as Doritos have no value in contributing to future sales. Therefore, why would a food company buy another food company? Why not just make a triangle shaped chip and put it in a bag?
The truth is it costs millions of dollars to create a brand with name recognition, and that multi million dollar investment brings recurring revenue.
When you buy a food company you pay them for the value of that brand which will continue to drive recurring revenue once you acquire it. You make a significant cash expenditure for the brand name which will continue to drive future revenues. It make complete and logical sense that you should match that expense against future revenues that will benefit from that cash expenditure. What doesn't make sense is to ignore that cash expenditure which has value towards future sales as if it never occurred.
Furthermore, it costs money to establish customer relationships and contracts with those customers. Saying that you aren't buying new customer relationships makes no sense. What do you consider sales and marketing expenses? Customers don't line up because you open your door. Those expenses are part of daily business expenses. When you buy another business you are paying them for the expenses they incurred in developing those relationships. Those relationships will continue to drive revenues after the acquisition. Thus, it makes perfect since that you should match that expenditure against those future revenues.
You state that amortization makes sense for a drug company.
What about a contract with a customer that makes you an exclusive supplier to that customer for a period of five years?
What about a backlog order to produce x amount of goods for a company in the future?
What about a license that generates royalties for a company? There are all kinds of licensing agreements (fast food, brand names, technology, drugs, etc).
Lets say that a license generates $10m a year for the next decade? Doesn't that have value that you would pay for as part of an acquisition? Why wouldn't you match what you pay for that license against the future royalties? You're certainly not getting it for free.
I can go on, but I don't see identifiable intangible assets any different then the concept of depreciation. You pay for an asset that has value in generating future revenues. Therefore, that expense should be matched against the revenues that they generate.
I guess we will have to agree to disagree.
AI
