Accounting for intangibles: good for the public, or even for accountants?

The UK Endorsement Board recently issued Accounting for Intangibles; UK Stakeholders’ Views.

The report “summarizes the views of UK stakeholders and relevant literature about the accounting for intangibles in accordance with IFRS Accounting Standards.” The Board “will use these findings as an evidence base in its future work on intangibles, including future research work, developing its own views on accounting for intangibles and its engagement with the IASB.” It notes: “A key element for the UKEB when considering international accounting standards is an assessment of the UK long-term public good. This includes an analysis of whether the use of a standard is likely to have an adverse effect on the UK economy. This means that throughout its work, from research on accounting developments to adoption of a new standard, the UKEB must ensure it is aware of the implications for the UK long-term public good.”

The report sums up some common concerns:

  • Among the issues identified by stakeholders, a common refrain was that IAS 38 is no longer wholly aligned with the principles in the Conceptual Framework (2018) and is not reflective of advances in business that have given rise to new types of intangibles.
  • Beyond this, stakeholders were concerned that the current accounting potentially leads to accounts that are not comparable between businesses with different growth strategies, and more generally financial statements that make it harder to assess a company’s value. This was because:
    • The recognition criteria in IAS 38 often appear to be rule driven, with blanket prohibitions on the capitalization of certain expenditures, and a high threshold for recognition of development expenditures. As a result, certain expenditure that could potentially meet the recognition criteria for an asset in accordance with the Conceptual Framework (2018) is excluded from consideration;
    • The ability to recognize a far wider range of intangibles on the balance sheet when acquired through a business combination (and hence accounted for in accordance with IFRS 3) was frequently brought up by stakeholders. This approach seems to favour companies growing through acquisitions, rather than organically, when it comes to balance sheet presentation; and
    • Stakeholders indicated that there were elements of disclosure, both for capitalized and expensed intangible expenditure, that could be enhanced. The lack of disaggregation in expense disclosures, specifically those related to intangibles, was a common concern, especially for users who felt the information would be useful to allow them to develop expectations about the contribution of these expenditures to future cash flows.
  • It is important to note that some stakeholders expressed support for retention of the current accounting approach to intangibles. There were concerns that a move away from the current recognition requirements could lead to over capitalization in the financial statements. Some stakeholders also suggested that a move to enhanced recognition and disclosure could also introduce additional costs with limited benefit.

It follows that “some stakeholders showed appetite for recognizing more intangibles on the balance sheet. They acknowledged, however, that this would require increased judgement from both preparers and users of financial statements and there were concerns about the potential for reduced understandability of the resulting financial reporting.”

This is pretty well-covered territory by now; for example, CPA Ontario recently issued You Can’t Touch This: the Intangible Assets Debate, which identifies similar problems with the status quo, and some of the challenges in doing anything about it (I was briefly interviewed for and quoted in that publication). For example:

  • Those who support the status quo contend that accountants should not lend credibility to problematic valuations like those that include intangibles. Moreover, CPAs must meet their professional obligations by taking reasonable steps to ascertain the veracity of data going into intangible valuations. Valuing intangibles that might generate a fortune in revenue or nothing, akin to a lottery ticket, would require too much crystal-ball gazing for it not to be risky territory for the profession.
  • “Intangibles … are the sort of asset that 10 people could have 10 different opinions on,” says Associate Professor Matt Sooy at Western University’s Ivey Business School. “You’re not only betting on what you think the value will be, but you’re also betting on what the other 10 will think it might be. That kind of speculation is fuel for market bubbles.”

It seems to me clear enough that if one were creating an accounting framework for scratch with no pre-conceptions or pre-conditions, it would treat intangibles (and measurement in general) more coherently and uniformly than does the current model. But as that’s not the case and never will be, it’s reasonable to wonder whether any amount of conceptual enhancement would really make financial reporting more decision-relevant than it already is (especially to the extent that users will continue to focus for many purposes on adjusted EBITDA-type measures). The CPA Ontario publication notes the importance for the accounting profession of repositioning itself within a more intangible economy, which seems true enough, but will likely have to be achieved independently of any major standard-setting initiatives for the foreseeable future…

The opinions expressed are solely those of the author.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s