The International Accounting Standards Board’s (IASB) comprehensive review of how companies account for intangibles in financial statements is, in part, mulling the potential to amend International Accounting Standard (IAS) 38: Intangible Assets, which sets out the accounting requirements in this area.

Currently defining its terms, the project – known as the ‘intangibles project’ is set to pick up in earnest next year. With that in mind, ICAEW invited members of its Corporate Reporting Faculty to join senior figures from the IASB and the UK Endorsement Board (UKEB) at a special event to explore the future of this important area of reporting. 

In the first of two articles, we take a look at the key issues the IASB and UKEB have been investigating, while in the second we will explore some of the comments and suggestions that members and other stakeholders provided.

Achilles’ heel

Today’s range of intangibles has broadened significantly, from the more ‘tangible’ intangibles through to ‘intangible’ intangibles and everything in between. The category includes all the key fields of intellectual property, such as patents, brands and copyright holdings – but also covers computer software, licenses and import quotas, along with harder-to-define matters, such as customer relationships and technical developments. 

In addition, there are important emerging intangibles to consider, such as cryptocurrencies, big data, human capital, and emission rights used in carbon trading – plus the nebulous concept of ‘goodwill’. 

IAS 38 is now more than 26 years old and generally thought to be no longer fit for purpose. Many of the items noted above were not envisaged when it was developed – and in today’s business models, intangibles are a surging force. UKEB data shows that although intangibles form a deceptively narrow 3% of items recognised on UK companies’ balance sheets, the carrying value of those assets in 2021 was £351bn. 

The data further shows that the average growth rate of intangibles in the UK from 2011 to 2021 was 8% – far exceeding not just inflation in the same period, but growth in total assets. And while 79% of UK companies had at least one intangible on their balance sheet in 2021, the largest 25% held 97% of the total value of all recognised intangibles. As that value came mainly from acquisitions, evidence suggests that intangibles have cemented themselves as powerful drivers of M&A activity.

Some stakeholders argue that financial statements need to better capture the value that intangibles generate for businesses. ICAEW Head of Corporate Reporting Strategy Sally Baker hinted in her opening address at the event that this area of reporting has been a long-standing problem area. 

Citing ICAEW’s 2017 thought leadership paper What’s Next for Corporate Reporting, Baker noted that some stakeholders who provided input went so far as to dub intangibles the “Achilles’ heel” of reporting. The paper also called for more ambition in efforts to solve the intangibles problem. “Over the years, ICAEW has repeatedly highlighted the need to resolve inconsistencies and improve comparability in this area,” Baker said.

Mixed views

IASB Member Nick Anderson explained that the intangibles project arose from feedback to the Board’s 2022 Third Agenda Consultation. The majority of respondents to the consultation – including many users of financial statements – had cited intangibles as a high priority for the IASB’s research project pipeline.

In particular, the IASB heard that users need better information about recognised and unrecognised intangible assets, and that IAS 38 requires modernisation – not just to cope with the growing importance of intangibles in today’s business models, but to include newer intangible asset types. Respondents further pointed out that the standard’s recognition criteria and prohibitions prevent financial statements from providing users with the information they need. 

They also expressed concerns over the lack of comparability between companies that grow organically and those grown through M&A: while IAS 38 recognises many acquired intangibles on the balance sheet, it permits only very few internally generated intangible assets to be capitalised – with goodwill falling among its exclusions.

Since the project’s launch, initial research gathered from national standard-setters has highlighted a range of stakeholder concerns, including an insufficiency of data in financial statements on unrecognised, internally generated assets. There were mixed views on how to remedy that, Anderson said. 

“Some stakeholders said more internally generated assets should be recognised on the balance sheet. Others said the IASB should focus on improving disclosure requirements for unrecognised, internally generated intangibles, and provided different suggestions for further data that could be disclosed. In fact, stakeholders often suggested improving disclosure requirements as a starting point.”

The research also uncovered a demand for more consistent terminology to assist understanding of the types of intangibles that companies possess. “We found that in discussing this topic, we can often be talking at cross-purposes with each other,” Anderson said. “I may have cryptocurrencies in my mind, while you are thinking of patents or brands. So, when expressing views on this subject, a degree of precision is important.”

Recognition gap

When the IASB commenced its project, the UKEB was already in progress with its own stream of research on accounting for intangibles. In March 2023, it published a qualitative report, based on interviews, to get a sense of stakeholders’ main concerns. That was followed in May this year by a survey of users and a quantitative analysis of actual accounts.

UKEB Chair Pauline Wallace picked out some key findings featured in the reports. Users, she said, had cited disclosure issues “not so much around recognised intangibles, but around intangibles-linked expenditure that did not give rise to recognised assets”. Those users requested more granular information to make the distinction clearer. 

For many users, qualitative and quantitative types of information are both essential for making materiality judgements on intangibles. Users also expressed a preference for relevant data to appear in the notes to the financial statements – or in the statements themselves – rather than other reports, as this would reassure them that the information has been properly audited.

In addition, Wallace noted, UKEB economic analysis suggested that the difference between recognised and estimated unrecognised intangibles could indicate the existence of a “very significant” recognition gap. “That doesn’t mean that we think those intangibles should be on the balance sheet,” she said. “But I think it’s interesting to understand what’s underpinning some of the expenditure that companies are incurring.”