The production and consumption of information on intangibles: A new research project funded by ICAS
Professor Stefano Zambon introduces an ICAS-funded research project which considers the production and consumption of information on intangibles and explores how organisations could report on those resources.
Intangibles are fundamental for explaining the company value creation process. In their simplest form, they are defined as the ‘non-physical resources which either alone or in conjunction with other tangible or intangible resources can generate a positive or negative effect on the value of an organisation in the short, medium and long term’1. Notwithstanding their relevance, they however largely don’t appear in financial statements or in the related disclosures, especially if they are internally generated.
In August 2019, ICAS issued a publication titled “Intangibles”, which combined a positioning paper and a call for research aimed at stimulating the submission of proposals directed to unveil and explore how organisations do and could report information on those resources.
Grounded largely on literature findings, the ICAS positioning paper maintains that, despite a large amount of research on intangibles, these resources are still ‘problematic’ from a reporting standpoint. Indeed, although a large amount of accounting and reporting literature deals with intangibles, many different aspects still call for further analysis and deeper understanding.
In particular, what clearly emerges from an academic literature review for EFRAG on unaccounted – i.e. internally generated – intangibles2 is that there are critical gaps in our knowledge and comprehension of what are the measures and disclosures on unreported intangibles that are considered critical by the primary users of this information (professional investors and financial analysts). Furthermore, the use of this elusive information – if and when available – and the perception of its decision-making relevance and its stewardship function, are other topics that remain to be better understood.
A similar question also regards the information on intangibles that is published in financial statements, such as R&D and training expenditures, but that it is treated as cost rather than investment.
At the moment, therefore, we only have limited evidence as to how investors and financial analysts view and utilise the above types of information, especially on unaccounted intangibles.
On the other hand, the producers’ (i.e. Chief Financial Officers – CFOs) view of this information on unaccounted intangibles is also vital. Even though new reporting tools have been implemented recently by companies, such as sustainability and integrated reporting, which should drive the production of information on intangibles outside financial statements, these resources remain under-reported as yet.
IAS 38 Intangible Assets
IAS 38 ‘Intangible Assets’ is certainly one reason for this reporting gap. Indeed, this IASB standard requires all internally generated intangibles not to be recognised on the face of the balance sheet, with the only exception - when certain requirements are met - of development expenses. Only externally acquired intangibles can be recorded at cost or fair value. All the investments in internally developed intangibles are to be expensed immediately, this creating an imbalance between assets (underestimated) and expenses (overestimated), which in turn depresses the year’s profit and the company accounting capital structure. This situation is particularly damaging for research- and knowledge-based SMEs.
Similar issues can also be noted regarding companies' integrated reports, where intangibles-related capitals (intellectual, relational and human) are generally under-represented owing to the lack of ad-hoc information and metrics.
Hence, some questions arise: what is the perceived importance by preparers of this class of information regarding the different classes of unaccounted intangibles (separable and inseparable, marketable and not marketable)? In the view of CFOs, what are the technical, managerial and “political” difficulties in producing this type of information or for a different classification of it (e.g. R&D and training expenditures)?
Since 2020, the above issues have begun to attract the attention of various international accounting institutions and bodies. In addition to ICAS, EFRAG, FRC, EFAA, WBCSD, WICI and the French ANC have projects on better accounting and reporting on intangibles. Further, the IASB, the FASB and the IIRC have plans in the short term to explore these issues linked to accounting for intangibles. In particular, the IASB is already indirectly addressing the topic of disclosures on intangibles in its ongoing Management Commentary project.
University of Ferrara research
In light of the above, the research team of the University of Ferrara (Italy) received funding from the ICAS Research Centre to carry out a project that will focus on two main general issues referring to both producers and users of this type of information:
- 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.
The project will essentially focus on large listed companies and IFRS adopters. However, it will not concentrate on traditional accounting only. It will also include non-financial/narrative information on intangibles, focusing on these value drivers (creation/destruction of value for the business).
From a methodological standpoint, the project will utilise mock case studies that form the basis of questionnaires to be addressed to producers and users of intangibles-related information. In the second part of the research, focus groups will be set up to explore in more depth the controversial issues that will emerge from the questionnaires.
The research project is also supported by EFRAG, EFFAS (European Financial Analysts), and WICI Europe.
The first results will be available in late Spring this year.
If you would like to find out more about this research project, or if you are interested in participating as a respondent in this research, please contact the ICAS Research Centre at firstname.lastname@example.org.
 WICI Intangible Reporting Framework definition.
 Zambon et al., 2019 - https://www.efrag.org/News/Project-403/Literature-review-on-intangibles.