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Stefano Zambon on why intangibles are central to assessing business value

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By CA magazine

1 December 2021

New ICAS-funded research identifies a pressing need for mandatory reporting of intangibles. Lead author Stefano Zambon tells David Craik why this area is becoming central to assessing business values

Read December/January's CA magazine now

Intangibles have a long history. Picture the medieval merchant wanting to trade around the Mediterranean. All they had as a guarantee, when making loans or agreeing contracts, were pieces of paper and that oldest of human and social collateral, trust and reputation – or intangibles.

Intangibles is an area which has been neglected for many years because it is difficult to report on.

“Intangibles have always been important, but they are a rich and complex family,” says Professor Stefano Zambon of the University of Ferrara, Italy and lead author of the forthcoming ICAS-funded report The Production and Consumption of Information on Intangibles: An Empirical Investigation of CFOs and Investors.

"Over time tangible assets such as machinery have been deemed more important and easier from an accounting point of view to be presented in financial reports. Intangibles is an area which has been neglected for many years because it is difficult to report on."

Times though are changing, with a renewed interest among financial institutions, investors, financial officers and accountants to gather more and better information on intangibles. ICAS is one of many professional organisations to have backed research in this area. The IASB is already indirectly addressing the topic of disclosures on intangibles in its ongoing Management Commentary project.

The aim is not just to cover intangible assets already represented on the balance sheet, such as patents and brands, but a wider interpretation taking in reputation, customer satisfaction and organisational climate. “These are vital in making any business work but often we don’t even consider them,” says Zambon. “But intangibles have taken over the value of companies. Look at the big tech titans who are made up of intangibles such as knowhow, patents and reputation. It is a considerable factor in their market value being so much higher than their book value. It is a huge gap which should be reported on in corporate reports.”

The research, which couldn’t rely much on previous empirical enquiry or any existing database, as they appear to refer only to some financial numbers, is focused on two main areas: the accounting treatment of certain intangibles-related expenditures, such as R&D and training, in financial reporting; and the measurement and disclosure of unaccounted intangibles in financial reports, management commentary and integrated reports.

It involved a survey of more than 300 users – investors and financial analysts – and preparers – chief financial officers and chief accountants. The research found that many respondents said intangibles were important and were missing from today’s company accounts and reports. Users were the most enthusiastic for more extensive reporting, with 93% seeing the value compared with 61% of preparers.

Preparers stated that human capital and intangibles-related risks and opportunities were the most relevant information currently not included in reports, while for users it was intellectual property, knowhow, customer attrition rates and brand strength.

The most relevant current frameworks or standards for the measurement and disclosure of information on unaccounted/internally generated intangibles were, according to the research, the integrated reporting framework, a revised version of IAS 38 and the EU NFRD/CSRD. When it comes to the form of disclosure, Zambon says respondents opted for a combination of KPIs, narrative disclosures and financial figures. Again, there was a split in the response, with 70% of users wanting the combination against just 60% of preparers. “Brands can perhaps be represented in financial figures, as could research costs,” says Zambon. “Others, such as customer satisfaction, could be reported using KPIs.”

Preparers aged 40–49 proved the most conservative when asked whether the extra information on intangibles would successfully overcome a cost benefit analysis. Nearly 67% of users said it would be worth it, with most arguing that it would also improve their perception of a company’s market value.

One of the key findings was that both users and preparers believe that intangibles currently outside financial statements should be subject to standardisation and/or mandatory guidance and be audited. Indeed, Zambon says this was one of the clear policy recommendations and implications from the research. “The overall message is that this is an area where policymakers should intervene. Some form of mandatory reporting or change in accounting standards is clearly required,” he says.

The authors believe that, in the first instance, intangibles-related information could be requested only of large and listed firms with sufficient guidance and incentives. SMEs and unlisted firms may have less incentive to disclose and perhaps less time to do so.

“If this does become mandatory then some simplified standards should be considered for SMEs,” Zambon says. “But they should realise that their hidden wealth is in intangibles such as their knowhow and patents. It could help them with bank lending and private equity investment. It is in their interests to provide some information.”

As for the next steps, Zambon hopes other researchers can build on this first large-scale empirical research on preparers and users in this area. “This is a subject which will move very fast. We’ve shown that people know something is missing,” he says. “Intangibles are core to financial and non-financial reporting.”

Further reading on Stefano Zambon’s report

Read December/January's CA magazine now

CA magazine: December 2021/January 2022

By Sarah Speirs, ICAS Executive Director of Member Engagement and Communica

1 December 2021

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