CFA calls for improvement of intangible assets disclosures

Accounting standard-setters should pursue a disclosure-first approach to make progress on the recognition of, and accounting for, intangible assets, The CFA Institute Research and Policy Center has suggested.

According to a new report, by CFA Institute Research and Policy Center, investments in intangible assets, such as patents and brands, now exceed tangible asset investments in developed markets. 

This shift has contributed to rising price-to-book ratios and a concentration of high-value companies in intangible-intensive sectors.

Under current accounting standards, acquired intangible assets are capitalised, while internally developed ones are expensed. Limited disclosures leave investors with little insight into these crucial business investments. 

The survey highlighted concerns that intangibles are underreported, with over 70% of respondents believing companies’ most valuable assets do not appear on balance sheets. Only 39% found current disclosures useful, and more than 80% called for improvements. 

In addition, investors broadly favour disclosure-based reforms over drastic accounting changes, and opinions are mixed regarding the recognition of internally generated intangibles, with some supporting recognition while others fear earnings management risks.

Sandra J. Peters, CFA, senior head, global advocacy, CFA Institute, said: “The central message emerging from our work is that improved disclosures and better disaggregation are necessary to understand the investments made in the creation of intangible assets before considering their recognition on financial statements. 

“Without more information, investors do not have insight into the specific intangible assets they know exist, and standard-setters lack insight on how to best approach changes to recognition. Without better disclosures, neither investors nor standard-setters can properly define and scope the issue they are trying to solve.” 

Matthew P. Winters, CFA, senior director, global advocacy, CFA Institute, added: “In the current environment, where the prevailing mood tends toward fewer, not more disclosures, the debate around the accounting of intangibles is controversial, despite clear evidence that financial statements are missing important assets.

“Many of the stakeholders – mostly investors – who try to solve this conundrum want broader capitalisation of intangibles to properly reflect companies’ sources of value on balance sheets and to treat intangibles more consistently with tangible assets. However, others disagree. They believe that capitalisation would not provide more useful information than expensing, and that the conservatism and uniformity of the current rules are good things. Opponents also argue that granting companies more flexibility in capitalisation could have the perverse effect of greater earnings management.”

He continued: “To move the debate out of the cul-de-sac and to inform the FASB and IASB with investors’ views, we surveyed our membership of predominantly portfolio managers and financial analysts regarding how the accounting for intangibles could be improved. More than 80 percent of responding investment professionals want better disclosures and more disaggregation of investments in intangibles across financial statements.”