Problem 1: Recognition and Measurement of Intangibles

A friend who likes to invest in the stock market made the following statement to you recently, I dont invest in entities that operate in service or knowledge-based industries because their financial statements dont really reflect the true value of the entity. This makes it very difficult for me to make informed decisions about whether to invest or not.

Discuss why an investor may arrive at the conclusion that the financial statements of entities operating in service and knowledge-based industries are not useful for making investment decisions

Explain the recognition criteria that prevent human capital being recognized as an asset in the financial statements.