Company balance sheets are full of judgements. Some entries – such as cash, deposits, receivables and payables – are easier to measure. Others – such as pensions, financial instruments, loss provisions, and deferred tax assets and liabilities – are open to significant accounting estimates and interpretation.
Perhaps the toughest judgement call for any business is its intangible assets. This is hard enough for a brand-driven company such as Kraft Heinz (US:KHC), which was forced to make an $8.3bn (£6.8bn) goodwill impairment on the carrying value of its brands earlier this year. But when the entire value of a business is made up of non-physical, sometimes ephemeral and often hard-to-trade resources, the work of the fundamental investor can feel almost impossible.
In the past two months, the issue of subjective accounting has been big investment news. At the root of fund manager Neil Woodford’s fall from grace are questions over the numerous illiquid and highly speculative companies in his investment portfolios.