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Intangible assets: change is needed
It’s time for a revolution in the reporting of intangible assets, says David Haigh
Intangible assets such as brands, people, know-how, relationships and other intellectual property make up a greater proportion of the total value of most businesses than tangible assets, such as plant, machinery and property. The current international consensus among auditors and accounting standards setters is that all acquired intangibles should be recognised on the balance sheet, but that internally generated intangible assets, in almost all circumstances, must not be. In Brand Finance’s view, this creates a blind spot for accountants, investors and other stakeholders and disadvantages companies that create value rather than just acquire it.
The present situation does at least represent some form of progress. It was only in 2001 that FAS141 introduced the requirement for US companies to capitalise acquired intangibles following an acquisition. Under the standard, intangible assets should be separately disclosed on the acquiring company’s consolidated balance sheet. It was even later (2004) that IFRS3 introduced the same requirement as a global standard and a further year hence when, in 2005, all listed companies in EU member countries adopted IFRS.
Step in the right direction:
At present, approximately 90 nations have fully conformed with IFRS, with a further 30 countries and reporting jurisdictions either permitting or requiring IFRS compliance for domestic listed companies. This is a step in the right direction and the widespread adoption of IFRS accounting standards means that the value of disclosed intangible assets is likely to increase in the future.
However, the present situation remains far from ideal. Brand Finance produces its Global Intangible Finance Tracker (GIFT) report annually, examining 57,000 companies (with a total value of US$89 trillion) across 160 jurisdictions. The study reveals a number of potential pitfalls arising from inadequate reporting of intangibles.
From the perspective of analysts, pricing shares with insufficient information about company assets leads to a broader, less helpful spread of values. Investors acting on the incomplete information (and the analyst reports that draw upon it) are in effect, forced to act with one eye closed. In turn, this has a host of negative effects for those responsible for managing the businesses. Share price volatility is one, affecting the stability and sustainability of finance. Hostile takeover is another significant risk. Lack of information about the true value of their assets leaves boards and shareholders in a naïve position, prone to acquiesce to acquisitions that should not take place or to sell individual assets at less-than-competitive prices.
This even has implications for national economies. Whether at the government or corporate level, intangible assets are ‘undisclosed’ on balance sheets and are all too easily overlooked by those who should be protecting them. There are many keen to exploit this lack of vigilance. Markets are erratic and a dip in share price leaves companies open to opportunistic bids, potentially snuffing out a nation’s pioneering brands in lucrative, tertiary industries. Ownership, profits and expertise may flow out of the country as a result, or worse, the acquisition may be by asset strippers with no concern for the long-term interests of the business, its employees or the country.
In Brand Finance’s view, a commitment to undertake an annual revaluation of all company assets, including tangible assets, acquired intangibles in previous years and internally generated intangibles, would be a boon for boards, accountants, investors, analysts and even governments.
'Fair value reporting’:
In effect, under this scheme of ‘fair value reporting’ management would be required to report its assessment of the total value of the business at each year end together with supporting assumptions. The transparency and clarity this would afford would enable boards to make more effective use of their assets, accountants to have a truer picture of asset values, and investors and analysts to more accurately price shares.
There is clearly a strong and growing appetite for this. As part of the GIFT report, Brand Finance, CIMA (the Chartered Institute of Management Accountants) and the IPA (Institute of Practitioners in Advertising) recently conducted survey of Equity Analysts and CFOs. Over 50% felt brands were becoming increasingly important in risk management and lending decisions and over 70% felt brands were becoming increasingly important in M&A activity. Some 68% of analysts and 58% of CFOs thought all internally generated brands should be separately included in the balance sheet and that all intangibles should be revalued each year.
There is clear evidence that both producers and users of financial accounts want to see a radical change in the antiquated way intangible assets are reported. With US$30.5 trillion in intangible value undisclosed and growing annually, a revolution in the reporting of intangible assets cannot come a moment too soon.
• David Haigh, Brand Finance
This article first appeared in NQ magazine, August 2016. To read NQ magazine go to issuu.com and search for NQ magazine
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