The production and consumption of information on intangibles: an analysis of some preliminary results
The production and consumption of information on intangibles: an analysis of some preliminary results.
Despite their universally recognised importance in company value creation, information on intangibles is one of the most problematic areas in today’s corporate reporting. These resources are considered by many as under-reported, owing to a large extent to the restrictive approach adopted by IAS 38.
A research team from the University of Ferrara (Italy) is undertaking an ICAS-funded project that focuses on two main general issues referring to both producers and users of corporate information on intangibles:
- The accounting treatment of certain intangibles-related expenditures, such as R&D and training, in financial reporting; and
- The measurement and disclosure of unaccounted/internally generated intangibles.
This academic research project is also jointly supported by EFRAG and EFFAS (European Financial Analysts) (see icas.com 15 January 2021).
Project Structure
The project is articulated around two steps: a large international survey on intangibles-related information in early 2021 which received 179 responses, followed by two international Focus groups discussions, for more in-depth debate on key questions, with ‘information users’ on one hand, and ‘information preparers’ on the other.
Preliminary Findings
Although the research analysis is still in progress, an initial high level examination of some of the key responses already provides some interesting insights.
What information is missing and how and why should it be measured
Financial statements are often criticised for neglecting some of the most important intangible assets upon which companies build on their economic value. Although overall users and preparers indeed agree that financial reporting is lacking adequate information on intangible assets, the considerable difference in proportion (61% of preparers and 92.9% of users) suggests a different perception between the two groups, which will deserve deeper analysis.
The two groups appear to be more convergent on the most essential intangibles-related information that is missing in today’s corporate reporting, even though some relevant divergencies appear between preparers and users’ opinions. This is particularly true for R&D, corporate reputation, customer satisfaction, relationships with suppliers, customer list, and training.
| Preparers | Users | |
| R&D | 68% | 38.50% |
| Human Capital (competences, skills, seniority) | 52% | 41% |
| Intangibles-related risks and opportunities | 48% | 43.60% |
| Corporate reputation and image | 44% | 33.30% |
| Brand(s) | 40% | 41% |
| Intellectual property and know-how | 40% | 48.70% |
| Business Model | 28% | 28.20% |
| Software and information systems | 24% | 28.20% |
| Strategy and planning | 24% | 25.60% |
| Organisational climate (employee satisfaction & engagement) | 24% | 25.60% |
| Relationships with suppliers | 20% | 33.30% |
| Customer satisfaction and loyalty | 12% | 38.50% |
| Customer list | 12% | 25.60% |
| Training | 12% | 23.10% |
| Other | 8% | 7.70% |
The interviewees were also asked to indicate if the missing information should be provided in financial terms or other forms, such as narrative or key performance indicators (KPIs). For the majority of preparers, financial measurement is considered appropriate only for corporate reputation and image (52%) and human capital (56%). The measurement in financial terms of the other “missing” intangibles is generally supported by less than 50% of respondent preparers. Results are even more surprising for the users group. According to most respondents, the only intangible that should be measured in financial terms is brands (56.4%). All the other intangibles, in the view of users, should be presented in narrative forms or KPIs.
Both groups agree (75.6% of preparers and 73.8% of users) on the potential importance of the missing corporate information on intangibles for assessing timing and amount of future cash outflows related to the replacement of these assets.
The particular case of internally generated intangibles
It is widely recognised, beyond our research, that internally generated intangibles represent another critical issue in accounting for intangibles. However, although 66.7% of users believe in a positive cost-benefit analysis in providing enhanced information on such intangibles, only 36.6% of preparers agree. The largest portion of preparers (48.8%), in fact, does not think that providing extra information on this kind of intangibles would necessarily generate more benefits than costs.
The two groups nonetheless concur that information on internally generated intangibles should be presented in the supplementary notes to financial statements (46.3% of preparers and 54.8% of users), whilst less than 30% of both groups (28% preparers and 20% of users) would like to have this information in financial statements.
Moreover, most of the respondents think that a combination of financial figures, narrative disclosure and KPIs would be the best way of disclosing information about internally generated intangibles.
Overlap with ESG?
Interestingly, to the question as to whether and to what extent there is an overlap between intangibles-related information and Environmental, Social and Governance (ESG) information, 49% of users replied that there is an overlap (of which 35.7% believe that it is greater than 50%), on par with 43% of preparers who also think there is an overlap, 26.8% of which believe is greater than 50%.
Assurance
Finally, 63.4% of the preparers and 64.3% of the users think that information provided on intangibles should be audited by an independent third party.
Next steps
The research team will continue to refine the analysis of results over the summer, with a view to identifying the key information that users and preparers would like to see reported on Intangibles, and, crucially, how best to report it. The resulting research report will include policy recommendations and will be available freely to download from icas.com later in 2021, and will form the basis of a presentation and discussion in a November webinar, which will include representatives from ICAS, EFRAG, EFFAS and the European Commission.
If you would like to find out more about this research project, please contact the ICAS Research Centre at research@icas.com.