With the International Accounting Standards Board (IASB) in the early stages of reviewing the topic of accounting for intangibles and the UK Endorsement Board (UKEB) producing its own research, the message from both preparers and users of accounts is that requirements need an urgent update. 

In the first part of this mini-series of articles, we heard that ICAEW’s Corporate Reporting Faculty held a special event at Chartered Accountants Hall recently to explore the complex field of accounting for intangibles.

IASB member Nick Anderson told attendees that the standard-setter’s initial stakeholder research has flagged up a range of issues. For example, the current International Accounting Standard on the topic – IAS 38: Intangible Assets – is old and intangibles are now a much more powerful economic force than they were when it was introduced 26 years ago. 

The standard’s recognition criteria, favouring assets garnered through acquisition rather than those that companies generate internally, may be preventing users of accounts from getting all the information they need. New types of intangibles – sometimes with their own complexities, such as crypto assets – are emerging all the time. And stakeholders are eager for consistent terminology that would promote more precise discussions of the differences between various asset types.

Given those concerns, the IASB is in the process of defining the problems to be solved and the focus of its intangibles project, which will ramp up next year. The body was interested in hearing thoughts and perspectives from attendees: members of ICAEW’s Corporate Reporting Faculty.

Broad spectrum

Attendees were divided into groups and first asked to provide input that could help shape the scope of the IASB’s intangibles project.

A common theme was consideration of how accounting standards could enable the production of clearer, more granular information, in a way that would smooth the process for preparers and users alike.

One group observed that ‘intangibles’ comprise a broad spectrum of asset types that are currently addressed by only one standard. In a similar vein, whether under one standard or several, another proposed that the IASB could parcel out asset types into different categories, determined by shared elements, and provide stakeholders with requirements for each.

Some attendees criticised IAS 38 for creating unfair disparities between companies of different types. One member pointed out: “Entities can sometimes feel like they’re being penalised for trying to generate assets internally, as an asset essentially has no value until it’s sold.” Referencing IAS 38’s criteria for capitalising development expenditure, another queried whether a company’s lifecycle can skew its reporting. “If you’re a startup with no track record of success in certain types of projects,” they asked, “where does that leave you versus a much longer-established business with a more storied reputation?”

A group comprised entirely of preparers from a range of different industries took that even further, highlighting the “capitalisation hurdle” for business innovations. As the group’s representative noted: “The challenge is technological viability: is it going to work? You don’t know that until you’ve done your testing. So, if you can’t clear that hurdle – or can’t have a mechanism for clearing it before you get there, in terms of capitalisation or cost accumulation – what do you do?”

For others, disclosures were a critical area of focus. While some highlighted a need for better narrative information that would show how intangibles support business growth, others took a more cautious tone over the potential for creating too much data. In the latter camp, one group representative pointed out: “Extra information could well be useful for supporting narrative disclosures. But we need to be careful that we’re only producing material that users find relevant, rather than data that’s produced as part of a compliance exercise and isn’t actually used by management.”

A residual standard?

In the second stage of discussions, attendees were asked which of three, potential approaches the IASB should take to deliver the intangibles project. The choices were:

• All in one The IASB would research all the issues that stakeholders have identified at once, then seek views on potential solutions in a single consultation document.

• Early evaluation Issues would be ordered by priority at the outset, with research moving forward on only the highest-priority topics.

• Phased Topics would be split into stages, with each stage addressed in a separate consultation.

One group expressed a preference for the all-in-one approach. Its representative pointed out: “With early evaluation, there’s a sense that, yes – you can select priority topics now. But what if, along the line, you realise either that those are unsolvable problems, or that other problems could have been solved along the way? Also, by solving just a limited number of problems, you would likely create inconsistencies.” 

However, there was nervousness throughout the room about how long it would take to deliver on the all-in-one approach.

A group inclined towards early evaluation came up with a thought-provoking point. “The problem with IAS 38 is that it’s a residual standard,” its representative said. “It deals with things that are sort of left over. But there’s a feeling in this group that some emerging assets shouldn’t just be thought of as leftovers. Whether they’re investment assets or new types of financial products, they may in fact fit better in different standards altogether. So, let’s start with an early evaluation of whether assets with certain characteristics should clearly be scoped as something else. Then we can look at what could be done with IAS 38.”

Some members expressed similar views. One suggested that the IASB could adopt a more iterative approach by assessing new types of intangibles as they emerge, refining accounting standard requirements in response. Another ventured that in the short term, perhaps the IASB could produce guidance on how best to apply the current requirements, while awaiting stakeholders’ thoughts on how to modernise the standard.

Illustrating the complexity of the problem, one group was split three ways. From an implementation standpoint, some members backed the all-in-one approach as everything would be covered at once and the outcome would be more cohesive. 

Others felt that a phased approach would be more useful, starting with a look at recognition and measurement principles and building up to separate pieces of application guidance for different types of intangibles. The third segment, meanwhile, favoured tackling disclosures first of all, to stimulate a flow of information that would help to inform the IASB’s work on recognition and measurement.

One point that attendees unanimously agreed on, though, was the importance of ensuring that any eventual solutions are aligned with the IASB’s Conceptual Framework, which sets out the core principles that underpin all IAS standards. Highlighting the need for clarity in the overarching objective of the IASB’s review in her closing remarks, UKEB Chair Pauline Wallace stressed that working from the foundation of those principles will be critical when developing solutions.