11 Final Report – Accounting for Intangibles User Survey

| Usefulness of information under existing IFRS | Economic importance of intangibles
2.45These results may suggest that an expectations gap could exist among users.

2.46Only 35% of respondents who indicated that intangibles are 'extremely' economically important also indicated that they find the information disclosed under existing IFRS to be ‘extremely useful. So, 65% found the accounting proportionally less useful. (eight out of 23 respondents).

2.47Similarly, only 38% of respondents (six out of 16 respondents) who indicated that intangibles are ‘very' economically important indicated that existing IFRS information is as useful as they would expect. This indicates 56% of respondents who indicated that intangibles were very important indicated that existing disclosures were less than ‘very' useful for investment or lending decisions

2.48This pattern of responses suggests that a majority of users who view intangibles as important consider that the usefulness of financial statement information about intangibles could be improved.

2.49Though a number of users also felt that the value of intangibles is reflected in other elements of the financial statements. For example a respondent who indicated that they find the overall disclosures extremely useful stated:

2.50

"On the whole I do not like to see a big number for intangible assets as such assets are illiquid and valuations are subjective... Strong brand equity is manifested in sales and profits”. (Sell-side / broker dealer) (emphasis added)

Usefulness of current accounting requirements

2.51Respondents were asked to evaluate the usefulness of the accounting requirements under IAS 38 (and relevant parts of IFRS 3).

2.52Chart 5 provides a visual representation of these results.

Capitalise internally generated development and software assets

2.53When asked to indicate whether the recognition of internally generated development and software assets is useful for investing, lending or analysis decisions, a clear majority of respondents indicated that it was useful. 67% of respondents (30 individual responses) suggested that recognition of internally generated assets is either "very or extremely useful", with a minority of respondents (13%) indicating the contrary.

Expense all other internally generated intangibles

2.5451% of the respondents indicated that the requirement of IFRS accounting standards to expense all internally generated intangible item (other than development and software) is either “very or extremely useful”. That being said, 27% of respondents (12 individual responses) indicated that they do not view this IFRS requirement favourably and that expensing all internally generated intangibles, other than software and development, is not useful.

2.55Respondent's comments on this question indicated that they would like the accounting requirements for intangible items to be aligned with the Conceptual Framework (see discussion on the topic in the Qualitative Report, paragraphs XX-XX). There was also a clear call for enhanced disclosures, as a minimum. Additionally, some respondents mentioned that they would prefer accounting standards to be more consistent when it comes to recognition of internally generated and purchased intangibles (see Charts 5 and 7 and paragraphs XX-XX below).

Recognition and measurement: themes from the comment boxes

Inconsistent accounting

2.56One reason for investor concerns about the current accounting related to the inconsistent accounting requirements that apply to intangibles.

2.57An analyst noted that:

“Capitalising intangible assets is useful, but that usefulness is compromised where there is inconsistency in what is capitalised”. (emphasis added)

2.59

"Totally inconsistent and partial recognition of R&D spend is worse than useless. There is no good reason for capitalising certain R&D spend and not capitalising other spend. It does not help with comparative analysis. My preference is no capitalisation [of any intangibles] at all”. (emphasis added)

2.61

"Expensing all internally generated intangibles would seem to go against the conceptual definition of an asset. So, certainly capitalising those costs which meet the definition of an asset ... makes sense. Regarding recognising those on the balance sheet – this largely makes sense outside of those industries in which it is customary to recognise such costs and then regularly expense them due to failed trials (e.g., biopharma)”. (emphasis added)

2.63

"Recognition on the balance sheet is much less useful than understanding the cash being invested / expensed to create and preserve future operational cash flows. I value businesses using P&L and Cash Flow and rarely revert to the balance sheet except to look at solvency and maintenance of the physical estate. Capitalisation of intangibles is generally highly subjective and the value on balance sheet is not that useful. The only reason to have them on balance sheet is to get closer to the true ROI of the business”. (emphasis added)

Capitalise all acquired intangible assets

2.6470% of respondents (31 individual responses) suggested that the capitalisation of intangible assets acquired in a business combination is either very or extremely useful for investing, lending or analysis. By contrast, 13% of respondents (six individual responses) either did not find such capitalisation useful or not at all useful.

2.6558% of respondents (25 individual responses) suggested that recognition of goodwill arising from a business combination is either very or extremely useful. A minority, 28% of respondents (12 individual responses), suggested that it is either not so useful or not at all useful.

The accounting for acquired intangibles: themes from the comment boxes

2.66With regard to externally acquired intangible assets, respondents highlighted the usefulness of current accounting practices, stressing the importance of information which allows investors to assess management's stewardship. The following statements were all provided by institutional investors:

1. "Intangibles can often be the key competitive advantage for a company and so, as an investor, I want as much information as possible about them. When companies acquire other companies, I want to make sure that they have not overpaid and so I pay particular attention to the intangibles which result from M&A, especially if those intangibles account for a significant proportion of assets. Again, I want as much information as possible about them". (emphasis added)

1. "Insights into ongoing investments in the creation of intangibles is useful, not least to hold management to account for those investments (or the lack of them). The incorporation of asset valuations is of less value, largely because the number included will always be wrong - again, management should be subject to being held accountable for expenditures, hence there is some benefit from the inclusion of acquired assets. The recognition of created assets is of less clear value".

2. "Acquired balances are useful to the extent one can hold management to account for their ROI reflecting M&A but usually the attribution between intangibles is not that helpful (nor is fair value of inventory). More important is an understanding of wasting vs organically replaced intangibles arising on M&A".

2.67With respect to goodwill, an equity/fixed income analyst noted:

2.68

"Goodwill from business combinations is another pointless asset to recognise on the balance sheet. If I want to assess the return on an acquisition, I would prefer to assess this as an independent exercise, rather than muddling acquired customer values, goodwill, and all other assets in one mechanically calculated figure for ‘capital' on which I calculate a return”. (emphasis added)

b) "Insights into ongoing investments in the creation of intangibles is useful, not least to hold management to account for those investments (or the lack of them). The incorporation of asset valuations is of less value, largely because the number included will always be wrong - again, management should be subject to being held accountable for expenditures, hence there is some benefit from the inclusion of acquired assets. The recognition of created assets is of less clear value".

c) "Acquired balances are useful to the extent one can hold management to account for their ROI reflecting M&A but usually the attribution between intangibles is not that helpful (nor is fair value of inventory). More important is an understanding of wasting vs organically replaced intangibles arising on M&A".

2.67With respect to goodwill, an equity/fixed income analyst noted:

2.68"Goodwill from business combinations is another pointless asset to recognise on the balance sheet. If I want to assess the return on an acquisition, I would prefer to assess this as an independent exercise, rather than muddling acquired customer values, goodwill, and all other assets in one mechanically calculated figure for ‘capital' on which I calculate a return”. (emphasis added)

2.69Note: Between 43 and 46 respondents provided answers for each of these questions

Core user group find current accounting less useful

2.70It should be noted that the core group of respondents indicated that they found the some of the accounting requirements somewhat less useful than suggested in the overall responses, mainly, requirements around the recognition of software and development costs and of acquired intangibles. These are:

a) 56% of the core group of respondents found the requirement of recognising of only software and development costs useful compared with 67% in the overall responses; and,

b) 57% of core respondents indicated found the requirement of capitalising of acquired intangible assets useful. This is lower than the 70% for respondents overall.

2.71As noted by an institutional investor, it may be that investors are more sceptical about companies approach to the capitalisation of intangible assets:

2.72“From an investor point of view, it is very useful to know what, why and how each intangible asset has been recognised on the balance sheet. Considering that companies are more likely to inflate assets rather than expenses, the concerns around valuation of intangible assets are likely to outweigh those in relation to research expenses”.

2.73This may suggest that the core group of respondents expresses some more dissatisfaction about recognition criteria for intangible assets, as compared with other groups of respondents.¹²

Current recognition and measurement requirements for intangibles are largely seen as fine, with some exceptions

2.74Taken together, the qualitative data and quantitative responses suggest that: a) users believe some requirements of IAS 38 are inconsistent with the *Conceptual Framework

• and lead to inconsistent accounting;¹³

b) the subjectivity inherent in management's valuation of internally generated intangible items makes users (particularly investors) sceptical about companies approach to their capitalisation; and,

c) users were generally satisfied with the accounting for acquired intangible assets. They emphasised the benefit of acquisition accounting as it enables users to hold management accountable.

Disclosures

2.75Respondents were asked to assess the usefulness of disclosures in the notes to the financial statements provided under existing IFRS Accounting Standards.

2.76The existing disclosure requirements were separated into the following categories:

a) Quantitative disclosures, which refer to the useful life, amortisation and impairments, in the case of assets.

b) Qualitative disclosures, which refer to descriptions.

2.77Existing IFRS Accounting Standards encourage (but do not require) companies to provide disclosures about significant intangible assets controlled by the company but not recognised as an asset.

2.78Respondents were asked to rate the usefulness of each category of disclosures for both intangible assets and expenses, respectively.

2.79Respondents provided a strong indication that disclosures are a valuable source of information, irrespective of whether the disclosures are quantitative or qualitative.

2.80The majority of respondents (80% - 81%) indicated quantitative disclosures are significantly useful for investment and lending decisions.

2.81As noted by one analyst:

2.82"The more quantitative and qualitative information the better”.

2.83Respondents also indicated that they view disclosures for both intangible assets and expenses as equally and significantly important sources of information.

2.84Similarly, a majority of respondents (73% - 76%) indicated that qualitative disclosures are either very or extremely useful.

2.85Chart 6 provides a visual representation of these results. ¹⁴

2.69Note: Between 44 and 45 respondents provided answers for each of these questions

Comparing companies

2.86Due to the current requirements of IFRS Accounting Standards, the type and value of intangible assets reported on the balance sheet may differ significantly between companies that grow organically and those which have grown by acquisition. As a consequence, users may find it difficult to compare companies based on performance metrics such as earnings and return on assets (ROA).

2.87Stakeholders interviewed for the qualitative report emphasised that users of financial statements often need to adjust reported financial figures to create comparable sets of financial statements for investment or lending decisions.

2.88Based on these findings, survey participants were asked about the approach they take to compare companies that grow organically with those growing mainly through acquisitions. Respondents were asked to select from a range of approaches.

2.89The results are visually represented in Chart 7.

2.90Note: All 46 respondents provided answers to this question.

2.91Only 26% of the respondents indicated that they use figures reported in the financial statements without making any adjustments.¹⁵ The majority of users responding to the survey make some kind of adjustment to the financial statements.

2.92Of the respondents who make adjustments to financial statements to enhance comparability:

a) 33% disregard recognised intangible assets altogether;¹⁶

b) 26% estimate internally generated intangible assets by using granular intangible expenses (when reported); and,

c) 11% of respondents use a portion of administrative costs to estimate internally generated intangible assets.

2.93Respondents also indicated other approaches, such as:

a) Estimating unrecognised intangible assets by using comparable data from a competitor, since those numbers will need to be factored into a potential acquisition in any case.

b) Estimating unrecognised intangibles using expenses and further assessing the potential role for additional income and cash flow generation.

c) Only disregarding some assets classified as intangibles such as cryptocurrencies due to the volatility in market prices.

d) Relying on written narratives both outside of the financial statements and in the notes to the financial statements.

2.94An institutional investor caveated that “investors are rarely investing on balance sheet numbers; the income statement (and cashflow) are more decision-useful”.

2.95These responses suggest that there may be some discrepancy between general satisfaction with the current accounting requirements for intangibles, and the desire for consistency between companies that utilise different growth strategies.

2.96It also points to a range of strategies being used by investors and underpins their request for more detailed disclosures.

2.97It would be expected that the more economically important a respondent viewed intangibles to be, the more effort they would make to adjust financial statements information to facilitate comparisons between companies with different growth strategies. Table 4 below compares the responses to these two survey questions.

2.98 2.99It is notable that among respondents who viewed intangibles as extremely economically important, a clear majority either disregard or attempt to estimate unrecognised intangibles by capitalising some intangibles expensed in the financial statements.

2.100Among those who viewed intangibles as very or somewhat important, a greater proportion use the reported information without adjustment, compared with those who viewed intangibles as extremely important.

2.101It would be expected that the more useful a respondent views the information on intangibles in financial statements to be, the more they would use or adjust it, not disregard it. Table 5 below compares respondents' answers to these two survey questions.

2.102Unsurprisingly, the less useful respondents thought the accounting information on intangibles was, the greater the proportion of them disregarded intangible assets when comparing companies.

2.103Among users who make no adjustment, there is a wide distribution of views on usefulness of information. However, it is the case that among respondents who view the information as extremely useful, the largest proportion of these make no adjustment to the reported information when comparing companies.

Concluding comments: current accounting

2.104Overall, the majority of survey respondents, irrespective of whether they were in the core or non-core group of users, viewed intangibles as making an important contribution to companies' competitive advantage and value creation, consistent with economic evidence drawn from the qualitative report.

2.105However, a smaller majority of respondents viewed the existing information provided in IFRS financial statements as extremely or very useful, indicating that there is an opportunity to improve the accounting for intangibles. The core group of respondents were less positive about the usefulness of disclosures than the overall responses indicate.

2.106The comments provided by respondents highlighted a number of concerns around the existing accounting for intangibles under IFRS Accounting Standards (both IAS 38 and IFRS 3), including the limited nature of some current disclosures, inconsistent categorisation of intangible assets by companies and concerns about subjectivity inherent in the measurement of some intangibles, including goodwill.

2.107Concerns were raised by respondents about the lack of comparability of intangibles recognised by companies acquiring them through business combinations, as opposed to the restricted capitalisation of internally generated intangibles. Consequently, companies growing organically tend to have much less significant recognised intangibles balances.

2.108Furthermore, three quarters of respondents reported making at least some adjustment to company financial statements when comparing acquisitive companies with those growing organically. Their answers suggested a range of strategies being used, which supports the need for further and more disaggregated disclosures in financial statements to assist users in making the adjustments they need to make to improve the comparability of information they are using in investment and lending decisions.

3. Survey results: Future Accounting

3.1The second half of the survey focused on potential alternatives to the current accounting rules that would provide relevant information for the respondents' decision-making.¹⁷ Respondents were presented with different recognition and measurement models for a broad range of intangible asset classes and asked to identify the most relevant for their decision-making. The survey also examined users' views on materiality.

Recognition and measurement of intangibles

3.2Interviewees for the UKEB's qualitative research report on the accounting for intangibles mentioned enhanced recognition and detailed disclosures as potential solutions to address the challenges associated with intangible accounting (see paragraphs 4.18 – 4.30 and 4.78 – 4.9X).¹⁸ Building on those findings, this survey gathered users' perspective on their preferred treatment of various intangibles.

3.3Survey participants were asked to indicate their preference for either expensing through P&L (either as a stand-alone item or aggregated with other costs) or capitalising on the balance sheet a variety of intangible expenditures. Their responses to this question are shown in Chart 8 below.

3.4Users preferred most internally generated intangible items to be expensed. Examples included advertising, research and training,

3.5Where capitalisation was preferred, it was for those internally generated intangibles that are already permitted to be recognised as assets under existing IFRS Accounting Standards. This preference was most stark for product and software development, items that are already required to be capitalised by the accounting standard.

3.6It appears that users had a relatively high preference for companies to capitalise internally generated intangibles which have clear contractual and ownership rights and for which costs can be reliably estimated. There may be a bias in users' responses towards existing accounting requirements, as users indicated that they would prefer to capitalise software and product development assets (as permitted under existing IFRS Accounting Standards).

3.7Note: Between 30 and 33 respondents provided answers to this question.

3.8Respondents strongly supported expensing items like advertising, “blue-sky" (exploratory) research, employee training and public relations.¹⁹

3.9From the comments submitted, respondents indicated that they used several factors when deciding whether they would prefer a given intangible item to be expensed. Some of these factors included whether they perceived the expenditure incurred to be a cost incurred in the ordinary course of business, and whether a given intangible item had a finite useful life. For example, respondents preferred intangibles such as training and marketing to be expensed because they viewed them more as costs to business rather than investment as such.

3.10An institutional investor noted:

3.11"software development or purchased software for internal use (e.g., an Enterprise Resource Planning system), very clearly should be capitalised and amortised. When developed for external use [to generate revenue through sale], I want to know the amount spent, but I don't think it should be capitalised”.

3.12By contrast, users generally prefer capitalisation of purchased intangibles. Again, this is consistent with current accounting practice. The majority of respondents (>67%) indicated that they would prefer each intangible asset stated to have been acquired in a business combination to be recognised as an asset. Nonetheless, it is worth noting the apparent scepticism about capitalising purchased customer lists, with 52% of the respondents indicating that they would prefer this item to be expensed even if acquired in a business combination.

3.13Respondents indicated that they believe capitalising acquired intangible assets provides them with useful information about the future prospects of a company. It also helps them to assess managements stewardship of the company.

3.14An institutional investor for example noted:

3.15“I chose to have purchased assets which are either for investment purposes, or which are expected to contribute value to the business over the longer term (and which would be recognised as such in an acquisition) as balance sheet items. Purchases which I regard as part of the ordinary business of the company (training, software updates, advertising), I would put through the P&L".

Accounting for non-traditional intangibles

3.16Users were asked about the accounting for cryptoassets and emissions certificates, referred to as “non-traditional” intangibles in this report.

3.17Users did not express a strong preference for capitalising these items, even when they are purchased, with a relatively high percentage of respondents (between 32% and 43%) suggesting that they should be expensed. It must be noted that a relatively high number of respondents (16% and 21% of respondents) indicated that they were unsure about how to account for these items, even when purchased by the entity. However, it may suggest that users of financial statements see these items as particularly volatile, meaning that capitalisation alone may not provide particularly useful information, or that they are concerned about subjectivity in the valuation of these items, if they were to be recognised as assets.

3.18Speaking to these points, a financial professional stated:

3.19"Cryptoassets in particular need their own accounting standards and to be disclosed separately with detailed disclosure of what they are, what data used to determine fair value and volatility - but the information required should be obtainable and auditable - estimates are open to huge bias and are unhelpful”.

3.20With regard to both cryptoassets and emissions certificates assets, a sell-side broker dealer highlighted how they viewed the differences between these items and traditional intangible assets:

3.21"I think crypto assets and emissions certificates should not be conflated with intangible assets. While crypto and emissions may meet the definition of an intangible under IFRS, they are very different and require separate consideration. Intangible assets used in operating activities should be measured in the same manner as tangible fixed assets”.

3.22One analyst however stated that they view both emissions certificates and crypto assets as financial instruments, which may suggest they believe market values are reliable:

3.23"... I think of emission certificates and crypto assets as financial instruments not intangibles when done for investment or speculation".

3.24It should be noted that a US GAAP pronouncement has recently been issued relating to the recognition and measurement of cryptoassets.²⁰

Quantitative disclosures

3.25Users were asked if items should be disclosed separately on the face of the financial statements (either in the P&L or the Balance Sheet) or aggregated with other line items. Respondents were also asked to indicate whether reporting on the face of the financial statements should be accompanied by further disclosures in the notes.²¹

3.26Chart 9 below outlines respondents' preferences.

3.27For internally generated intangibles, the preference for most items is to have separate disclosure in the financial statements. Between 54% and 64% of respondents indicated that they wanted some level of disaggregated information for most internally generated items. Examples include advertising and applied research. There were however exceptions, such as data, public relations and employee training, which users indicated they would like to see aggregated with other expenses, as they see them part of ongoing business as usual.

3.28For purchased items, only data-related assets did not receive a majority preference for separate disclosure. For the intangible assets acquired in a business combination, between 70% and 80% of respondents indicated they would prefer some degree of disaggregation. Users want to see clear disaggregation (and in some cases greater note disclosure) on intellectual property assets, software and brands.

3.29Interestingly, for non-traditional intangibles, while there was a preference for separate disclosures, it was more heavily weighted towards notes disclosure than other intangibles.

3.7Note: Between 30 and 33 respondents provided answers to this question.

3.30 The responses to the question on preferred accounting treatment of intangibles are compared with the views of respondents on the economic importance of intangibles in Table 6 below.

3.31 Overall, the chosen preferred accounting treatment for intangible items did not seems to be strongly related to their perceived economic importance. More in detail:

1. Most respondents (>80%) would prefer internally generated intangibles to be expensed irrespective of how economically important respondents perceive intangibles to be.
2. Preferences towards expensing versus capitalising were more evenly split when respondents were considering acquired intangibles, with a slight preference for capitalising among respondents who find intangibles "somewhat important" from an economic point of view²².
3. Preferences towards expensing versus capitalising were more equally split when respondents were considering non-traditional intangibles, with a slightly preference for expensing among respondents who find intangibles "somewhat important" from an economic point of view.

3.32 It should also be noted that respondents who answered that they found intangibles "not so important” or “not at all important” earlier on in the survey did not answer the question about preferred accounting treatment of the various items presented.

3.33 The responses to the question on preferred accounting treatment of intangibles were also compared with the views of respondents on the usefulness of intangibles information in financial statements in Table 7 below.

3.34 Again, the chosen preferred accounting treatment for intangible items did not seem to be related to the perceived usefulness of the disclosures. In more depth:

1. Most respondents (>80%) would prefer internally generated intangibles to be expensed irrespective of how useful respondents find disclosures about intangibles.
2. Preferences for expensing and capitalising are more split when it comes to both acquired intangibles and non-traditional intangibles, irrespective of how useful respondents find the current information in financial statements.

3.35 Taken together, from the quantitative results and the qualitative comments submitted by respondents, user preferences seem largely consistent with current accounting, although respondents would like to see granular information, either on the face of the financial statements (balance sheet or P&L) or in the notes.

Subsequent measurement approach

3.36 In interviews for the qualitative report, stakeholders expressed the view that capitalisation of costs would be generally suitable for the measurement of recognised intangible assets (similar to the treatment of internally generated development software costs under IAS 38). Only a small proportion of stakeholders, interviewed for the same report, also considered fair value to be appropriate for subsequent measurement.

3.37 To understand what measurement model users believe could be most suitable for different types of intangibles, respondents were presented with a range of intangibles and asked to select the measurement model they believe most appropriate. Respondents were told to assume that the intangible item was capitalised on the balance sheet.²³

3.38 The list of intangibles included a range of traditional internally generated and acquired intangible assets as well as non-traditional assets (e.g., cryptoassets and emissions trading certificates).

3.39 The following measurement models were provided as options for the measurement of each intangible asset:

1. Cost and amortisation with impairment;
2. Cost and impairment only;
3. Revaluation through other comprehensive income (OCI); and
4. Fair value through profit and loss (FVPL).

3.40 It is worth emphasising that this question was premised on items being capitalised, whether or not this was the respondent's preference for the intangible item.

3.41 A majority of respondents (>68%) indicated that they would prefer one of the cost models (as opposed to a fair value model) to be used for the subsequent measurement of both acquired and internally generated intangible assets.²⁴ This preference was consistent, regardless of whether the assets were developed for internal use or for sale. A clear majority of respondents indicated that they preferred a cost model which specifically included both amortisation and impairment elements for these assets.

3.42 However, for emissions certificates held to offset future emissions, 42% of respondents preferred fair value measurement, with 32% preferring a cost model and the rest being unsure. For emissions certificates held for other uses and cryptoassets, irrespective of use, a fair value model was preferred by the majority of respondents. This is reflective of current diversity in accounting treatments for these items, in the current absence of detailed guidance from International Accounting Standards.

3.43 The responses to these questions can be seen in Charts 10 and 11 below.

3.44 Human capital was the only internally generated intangible asset which had a significantly different response from the other types of internally generated assets. Most respondents indicated that they were not sure or did not know what the best measurement model would be. Just over half of respondents (52%) selected “I don't know or I am not sure” in response to which measurement model they would prefer. 39% of responses instead suggested a cost model, with 10% suggesting one of the fair value models.

3.45 Two respondents declined to provide a preferred model for measurement. In their comments they made it clear that, from their perspective, the inclusion of human capital on companies' balance sheets would not convey meaningful information to users of financial statements.

3.46 An analyst stated: “I do not think human capital should be accounted for on the balance sheet".

1. An equity/fixed income analyst expressed concern around the measurement of certain intangibles: “I decline to give an answer on human capital and databases as this will never be meaningful information".

3.47 Note: Between 30 and 32 respondents provided answers for each of type of intangible.

3.48 Note: Between 5 and 28 respondents provided answers for each of type of intangible.

3.49 A number of interesting issues were raised by users in their comments, regarding cost and fair value models.

3.50 Respondents highlighted the importance of distinguishing wasting intangible assets from organically regenerative intangible assets and the useful lives of each intangible.

3.51 An institutional investor noted that:

3.52

"...in the hypothetical situation where all intangibles are recognised on the balance sheet, the key assessment to be made is whether individual assets are wasting or have an indefinite future life... I am not sure how one would expect users to take this information and they will simply migrate to cash flows from P&L".

3.54 An analyst noted:

3.55

"No intangible assets have an infinite life in real life and hence anything capitalised on the balance sheet should be amortised in my personal view. I also think it is a bad idea to allow recognising valuation gains via P&L".

3.57

"Brand and customer life are harder to amortise as these can last for decades and are tied very closely to the performance of the business as you review them with a DCF [Discounted Cashflow] model for the revenue earned from that brand or customer list. Therefore, it makes more sense to assess annually with an impairment review. This may lead to large assets that never get impaired as it is easier to justify with forecasts and historic data that a revenue stream is still profitable above an asset's value. ...I don't think there is enough challenge on these areas from auditors and therefore, I am less comfortable with this outcome".

3.59

"Most [intangibles] should be amortised over the useful life when it likely to be an asset of use to the company i.e., they intend to use it for a period of time or in the case of emissions at a point in time in the future so in line with their expected usage of the certificates. Any item that is acquired for speculation and/or has a highly active market where you can reasonably estimate its fair value should be valued at its latest valuation. This may result in extreme swings in the income of an investment company in a crypto asset – however that is an accurate valuation of their unrealised gains /losses for a period and should be valued as such”.

3.61 At least one retail investor supported using a fair value approach, citing in their comments the requirements of IFRS 13:

3.62

"After spending a number of years thinking about the accounting for and reporting of intangible assets under both IFRS and US GAAP, the case for allowing these assets' value to move up or down in accordance with how their value actually moves has become more compelling... I have had the opportunity to work extensively with both ASC 820 and IFRS 13 requirements for sometimes difficult to fair value assets. These two standards are remarkably robust, in my view, and with some relatively minor adjustments could be modernised and made even more effective".

3.64

"...the revaluation through OCI model can provide quite a poor representation of economic and accounting meaning, and this is only made worse as innovations and emerging technologies create new methods and requirements around asset creation, classification, measurement, and valuation; like impairment, revaluation through OCI should be revisited as a cross-cutting issue”.

Disclose intangibles' effect on performance

3.65 Although respondents indicated that the disclosure requirements of existing IFRS Accounting Standards are generally beneficial, some indicated that additional, targeted, disclosures would be advantageous. This view aligns with findings from the UKEB's qualitative report (paragraphs 4.78 – 4.99).

3.66 To investigate users' views of possible ways of enhancing disclosures, respondents were presented with a set of suggested disclosure items, some of which are not currently required by IFRS Accounting Standards, with the objective of identifying the type of disclosure considered most important by users.

3.67 Respondents were asked to choose the three disclosures that they find most important for their investment/lending decisions from the list provided to them.

3.68 Among the proposed disclosures, quantifying the expected contribution of a company's intangible assets to revenues was ranked as the most important type of disclosure for investment or lending advice. 52% of the respondents suggested that this type of disclosure is important for investment or lending purposes.

3.69 Respondents appeared to have a particularly positive view on other disclosures which provide users with insights into the anticipated financial impact of intangibles on a company's revenues. These included:

1. Qualitative descriptions of the expected contribution of intangibles to a company's revenue. This was considered to be important by 45% of the respondents.
2. Disclosures about the risks associated with the expected future revenues, which was chosen by 42% of the respondents.
3. Disclosures about the relevance of intangibles to the business model which was selected by 45% of the responses.

3.70 The amortisation schedule of companies' intangible assets was suggested to be important by 42% of the responses.

3.71 Disclosures which were selected by fewer respondents included:

1. Disclosing the portfolio of underlying projects (such as the number and scope of R&D projects), which was selected by 26% of respondents.
2. Breaking down current investment versus maintenance expenditures, which was selected by 26% of respondents.
3. The degree to which rights are legally enforceable, which was selected by 10% of respondents.

3.72 The results are represented in Chart 13 below.

3.73 Taken together, these results suggest respondents consider forward-looking disclosures, about how intangibles will generate value as being most important for investing and lending decisions.²⁵

Preferred sources of information

3.74 Academic research, as well as interviews conducted for the qualitative research report on intangibles, highlighted that to ascertain the benefits of intangibles to an individual company, users often resort to sources of information outside the financial statements. The reason for this is often stated to be the gap that exists in what is presented in financial statements and what information users need.²⁶

3.75 Findings from the results of this survey indicate that sources other than the financial statements are often used to gather information about a company's intangible assets. However, users would prefer additional information on intangibles in the financial statements too.

3.76 Users were asked to select all the information sources which they use / have used, to gather information on individual companies' intangibles, (e.g. front-half of annual report, company website etc.)

3.77 The most common responses were:

1. the front half of the annual report, which 74% of the respondents selected; and,
2. reports prepared by equity analysts, which 63% of the respondents selected.

3.78 The responses are shown in Chart 14 below.

3.79 Note: All 46 respondents provided answers to this question.

3.80 Sources of information prepared from within a company, such as corporate websites and press releases, were also used by a substantial proportion of respondents. 50% of respondents suggested they use companies' websites to obtain information on intangibles and 48% of respondents indicated they used companies' press releases.

3.81 The remaining information sources which were relatively popular included data providers (such as Bloomberg) (43%), news outlets (37%), trading updates (37%), and investor roadshows (30%)

3.82 However, when asked whether they would prefer to have additional information on a companies' intangibles in the financial statements or in the front half of the annual report, 67% of respondents suggested they would like to see it in the financial statements, while 32% of respondents suggested they would prefer additional information in the front half of the annual report.²⁷

3.83 Chart 15 reports these results.

3.84 These responses suggest that while users of financial statements often make use of other sources of information outside of the financial statements to obtain a more holistic view of a company, they would prefer this information to be in the financial statements. The reason for inclusion in the financial statements seems to be driven by a preference for this information to be audited and integrated with other financial information.

Intangible materiality

3.85 As shown in paragraphs 2.11-2.14 of section 2 of this report, the importance of intangibles for companies' performance is broadly agreed on by respondents. Greater disclosure related to intangibles in the financial statements would, however, increase the volume of information presented. Interviewees for the UKEB's qualitative research report on intangibles emphasised the importance of disclosing material information to users of financial statements.

3.86 Therefore, survey participants were first asked to what extent they believed qualitative versus quantitative factors were important when considering the assessment of the materiality of intangibles, whether capitalised on the balance sheet or expensed through P&L. Perhaps unsurprisingly, a large majority of respondents (84%) suggested that both quantitative and qualitative factors are

Chart 15: Preferred location for additional information

A bar chart showing the preferred location for additional information.

• In the financial statements themselves: 67%
• First half of the annual report (i.e., management report): 33%

Note: 33 respondents provided answers to this question.