Intangibles

The increasing importance of intangible assets to the modern economy is ubiquitously acknowledged, as demonstrated by the numerous academic papers and books written on this topic. As noted by CPA Ontario “Today, intangible assets are recognized as the key source of innovation and growth, an economic golden goose”.

At the same time there is significant discussion about the shortfalls of IFRS Standards in relation to accounting for intangible assets. Steve Cooper, an independent analyst, co-author of The Footnotes Analyst blog, and former IASB Board Member, has stated that, “the current inconsistent and limited recognition of intangible assets causes analytical challenges for investors… We think that investors would greatly benefit from improvements to both the narrative reporting and financial statement data regarding intangibles.”

• These concerns have been echoed in surveys of users. For example:
• In 2019 the FRC published a consultation “Business Reporting of Intangibles: Realistic Proposals”. They noted when reporting the feedback received from UK investors that they “were unanimous in their support for improving the quality of reporting on intangibles”
• Research currently being funded by ICAS has noted that 93% of users surveyed thought that “financial reporting is lacking adequate information on intangible assets”, though they also note that this view was only shared by 61% of preparers surveyed.
• A worldwide survey of 170 senior investment decision makers commissioned by Columbia Threadneedle Investments concluded that, “There is agreement that analysis of intangibles provides a competitive advantage to investors, and recognition that intangible research is increasingly important in analytical work. However, while investors find information about intangibles readily available, they believe that it is often unreliable, incomplete or inaccurate.”

The IASB has acknowledged these concerns about intangible assets. In one of his first public statements the new chair of the IASB, Dr Andreas Barckow, stated that “the rise of self-generated intellectual property and its non-addressal in the accounts” was one of the biggest challenges and opportunities facing the IASB.

Staff papers presented to the IASB summarising the feedback it received on its Third Agenda Consultation indicated that most respondents rated intangible assets as a high priority area. Respondents believed any review should:

• modernise IAS 38 Intangible Assets, to better reflect the ever-increasing importance of intangible assets in today’s business models, particularly for unrecognised internally generated assets;
• address new types of intangible assets, which were not envisaged when IAS 38 was developed (such as cryptocurrencies and emission rights) to ensure it results in useful information to users of financial statements; and
• improve comparability between companies that grow organically and those that grow through acquisitions.

Based on that feedback we expect intangible assets to form a key part of the IASB’s agenda for the next five-year period. A pro-active thought leadership project on intangible assets will enable the UKEB to fulfil its responsibility to proactively participate in the development of high-quality accounting standards by leading the UK debate on accounting and reporting of intangible assets as well as contributing to and actively participating in the international debate on a timely basis.

The UKEB published its report Accounting for Intangibles: UK Stakeholders’ Views seen below on 22 March 2023. It sets out stakeholder views on the accounting for intangibles under International Accounting Standards within the context of the wider economic impact of intangibles in the UK.

The UKEB published its report Accounting for Intangibles: A Quantitative Analysis of UK Financial Reports seen below on 15 May 2024. It provides an overview of the nature and extent of current reporting of intangibles by UK listed companies. The report:

• analyses the current reporting practice among listed companies, to examine how they account for intangibles (including capitalisation and expensing), together with any associated disclosure;
• looks at the relationship between acquisitions and intangible assets recognition, providing evidence on the extent to which intangible assets are recognised, predominantly as a result of business combinations
• provides an estimate of intangibles expenditure potentially not recognised as assets by UK listed companies.

The UKEB published its report Accounting for Intangibles: A survey of users’ views seen below on 15 May 2024. It explores, by means of a survey, users’ perspectives on the accounting for and reporting of intangibles in financial statements. The survey addressed the economic importance of intangibles before examining in detail users’ reviews of the current IFRS accounting for, and reporting of, intangibles.

It also examined possible future accounting by presenting respondents with a range of different types of intangibles and considering possible future accounting treatments and disclosures. The findings provide evidence about the views of investors and other users of financial statements, building on the earlier qualitative analysis report.

The UKEB Chair, Pauline Wallace, introduces the reports in a short video.

The UKEB has published a summary brochure which provides an overview of key findings from the three reports.

UK Intellectual Property Office Event: “Investing in Innovation”

Seema Jamil-O’Neill, Technical Director at the UKEB, was a keynote speaker at the UK Intellectual Property Office’s “Investing in innovation” event on 19 March 2024 (the full text of the speech). The event was hosted and addressed by the UK’s Minister for AI and IP Viscount Camrose at the House of Commons, and explored topics including IP financing and investment in the UK. Seema discussed the UKEB’s intangibles research project and the role of accounting in unlocking IP finance in the UK. It was clear from the discussion that followed that there is broad interest in the reporting of intangibles in the UK, and the work of the UKEB.