The power of Google is no secret. Apart from creating a huge amount of wealth for shareholders, Google has had a profound influence on how people use the internet. And given its market position (it has more than 50% of the US search market, and is believed to have as much as of 90% in the search market in the UK and Australia) if a business can achieve a high ranking on Google, the difference to sales and profit can be enormous.

High Google rankings don’t generally happen by accident and the key for businesses to maximise their ranking is a process known as “search engine optimisation” or SEO. Essentially, Google ranks a page highly when it has other pages linking to it. The better the page which links to your page, the higher your page will rank on a Google keyword search. Weight is also given as to where certain keywords appear on the page.

London-based SEO guru, Phillip Berryman of Simply Business, explained that “to secure high positions for competitive terms takes a combination of search engine friendly HTML code and high quality external links pointing to the site. [As such] a new domain may take as long as six months before it ranks for any of the sites key terms (an effect known as ‘The Sandbox’). However, once a high position has been achieved, as long as moderate maintenance is done, the high position should be maintainable for long periods. The hard part [for the SEO] is going from nowhere to the top three.”

A top ranking position on Google can literally be the difference between business having millions of dollars of sales or a pittance. A top Google position is the 21st century equivalent of Times Square shopfront. So given the massive importance of a business’ Google position, a key question for investors and lenders arises – how can you account for a top ranking on Google?

AASB138 is the accounting standard which deals with intangible assets. Common intangible assets include “licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles)”. To fit within the definition of an “asset”, under AASB138, it is essential that the entity has “control”. For example, intellectual property (such as licences or even brand names) can be controlled by patents or trademarks. AASB138 notes however that “relationships with customers or the loyalty of the customers to the entity, the entity usually has insufficient control over the expected economic benefits from customer relationships and loyalty for such items (e.g. portfolio of customers or customer relationships) [fail] to meet the definition of intangible assets.”

Under the current standard, due to the control requirement, a high Google position cannot be considered an asset to a business in an accounting sense (it is comparable to “internally generated goodwill”). This is because even though a company can do its best to obtain a high position, essentially, the ranking is controlled by Google’s mysterious algorithms. Therefore, even if a high Google position is the sole driver of a company’s sales, under accounting standards the ranking would not be considered an “asset”.

If for certain businesses, the sole generator of revenue and profit isn’t considered an asset – what value can investors or lenders place on traditional balance sheets?

Widespread acceptance of the internet has changed the way companies do business. Instead of a shopfront, businesses have a website. Instead of a Collins Street address, a web-based business merely needs a high Google position. Unless the accounting bodies recognise this revolution and act accordingly, the way accountants and investors value business will continue to diverge in the years to come.

Peter Fray

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