We recently looked at some reasons why the accounting for intangible assets might be revisited in the foreseeable future,
These included a reference by the new Chair Andreas Barckow in an interview to the “the rise of self-generated intellectual property and its non-addressal in the accounts” as one of the key challenges to remaining relevant in an ever-changing environment.” Based on my highly incomplete survey of the comment letters received in response to the IASB’s recent agenda consultation, many would agree with him on that. This is Duff & Phelps, A Kroll Business (doesn’t exactly skip off the tongue, but that’s how they style it):
- It is critical to recognize that assessing the merits of an intangible asset solely through the lens of whether it can be sold or separated from a business, or transacted outside of a business acquisition, falls short of conveying the importance of the asset used in an ongoing operation. Such a narrow approach would fail to capture the economic value associated with many intangible assets.
- A prime example of an asset that falls in this category are customer intangible assets, which are key assets in many industries. Especially in the case of defense contractors, cable and technology companies, customer contracts are a critical intangible asset and the fair value of the backlog of contracts in place (and expected renewals) provide a meaningful indication of contracts in hand as opposed to those that have yet to be won. Customers in place are less risky than the future yet-to-be won (new) customers. Retention metrics are key operating indicators in these industries, and the data underlying these metrics is very robust. Thus, existing customer contracts and contract renewal expectations provide relevant and decision-useful information about expected cash flows and their risk. In addition, the way companies interact with their customers and leverage customer information has changed dramatically in the modern information age. For example, the retail and consumer products industry has been utilizing customer contact information (email and text) to track customer behavior to predict and drive future customer revenue.
- Recognizing intangible assets provides a perspective into assets that management has invested in. In many cases these investments are material. In the current knowledge-based economy, intangible assets provide insight into the value drivers of the company and manifest sources of competitive advantage. Subsuming such assets into goodwill (in a business combination) or expensing the cost of corresponding internally developed intangibles creates opaqueness.
Many respondents took the same broad view. Some respondents, such as Deloitte, put a separate emphasis on new forms of such assets, such as “cryptocurrencies and related transactions, commodity transactions and pollutant pricing mechanisms. These projects share the characteristics that they either involve a new form of asset or, in the case of commodity transactions, an existing form of asset used in innovative ways.” They suggest the following approach:
- First, the Board could consider if and when these new intangible assets are in the scope of an existing IFRS Standard (e.g. IAS 38 or IFRS 9). If not in the scope of an existing IFRS Standard, the characteristics of the items that belong to a different class of assets could be identified.
- For those items identified as belonging to a new class of asset, the Board could in turn address (i) recognition, (ii) initial and subsequent measurement, (iii) derecognition and (iv) lending transactions.
Some others placed greater emphasis on the disclosure side of the issue – for example, a Japanese “Data User Workshop Group” submitted the following:
- Most of our workshop participants expressed their hope for disclosure of explanations about intangible assets as a source of corporate value, being more interested in it rather than evaluation of intangibles by the company. Some participants felt that it is not enough and expressed their hope for additional disclosure of some numerical values with helpful metrics. They also suggested that it is good that because intangible assets are recognized as a part of BS, management accountability for evaluation is required. The amount of Goodwill is growing and the transparency of intangible assets is becoming increasingly important.
- At the same time, the non-financial explanation may be helpful especially when it becomes a link between financial and non-financial. Today, large portions of the company’s value come from intangible assets.
- Overall, we felt it is also important to clearly define the role of IASB in relation with that of (the future sustainability standards board), for the development of the disclosure of intangible asset.
Canada’s Accounting Standards Board acknowledged that while many may support doing something on this, they may differ on what that something should be:
- We note that there is still a great deal of debate as to which intangible assets should be recognized or disclosed in an entity’s financial statements. We think that this debate stems from balancing between the usefulness of information provided about intangible assets and the cost, complexity and reliability concerns related to valuing these assets. Therefore, we think it is prudent for the IASB to first undertake additional research in this area before moving forward with a standard-setting project.
I could go on citing other letters, all of which would provide a slightly different emphasis or sense of urgency, but you get the idea…
The opinions expressed are solely those of the author