Along with innovations in our rapidly changing economy, change and uncertainty are a feature of our world. Investing in new business models and intangible assets—like brands, technology, and customer relationships—are becoming increasingly important to drive value creation as companies explore new technologies, nurture customer relationships, manage their people, and more. But information about these important assets is often limited in the financial information that companies report to stakeholders.
Intangibles are often unique, but that doesn’t mean it’s impossible to include intangibles in reporting. The lens through which we view a company affects how we measure success. A more complete picture contributes to a more consistent understanding of values and, if used wisely, can be a clear signal for action.
So how is the situation and what can be done to improve things?
Why accounting is lagging behind
Historically, accounting standards have treated investments in tangible or financial assets very differently from investments in intangible assets. As a result, investments in internally generated intangible assets are generally not accounted for. This may have been fine at a time when companies created value through the use of vast collections of tangible assets, but today most companies generate much of their value from intangible assets. The absence of most intangibles from financial statements and footnotes can result in a large gap between the company’s book value and its market capitalization, as well as a GAAP earnings measure that does not reflect a complete measure of return on investments.
Approach intangible assets with the rigor of financial reporting
To increase the relevance of financial reporting, it must provide better insight into intangible investments. Submitting this information as part of the financial reporting process and not through other means subjects it to the rigors of the financial reporting ecosystem. The inclusion of information about internally generated intangible assets in addition to acquired intangible assets can help provide some measure of the value of intangible assets in an entity’s financial statements.
Don’t stop at ESG as things change around you
Investors are increasingly focused on a company’s ESG (environmental, social and governance) strategy, which emphasizes management’s responsibility for certain intangibles such as human capital. ESG is a lens that helps to understand operational and financial measures of impact and value creation. Operational and financial dimensions are linked—use both perspectives for a more comprehensive view of performance. ESG strategies and quality data can help you understand the impact of activities and trigger decisions, change and financial outcomes. Stakeholders today see and reward a stronger connection between ESG strategies and long-term value creation. Strategies and commitments need milestones and a well-considered selection of high-quality toughened safety glass Measures for performance communication. This ESG data often includes operational insights (such as customer retention rates) that translate into value (assessment of customer intangibles).
Standardized disclosure guidelines help here
Transformative changes to financial statements, such as B. the capture and disclosure of all or some internally generated intangibles will help the financial reporting process to keep pace with business innovations and stay relevant. Fortunately, the FASB and IASB recognize the need for action in this area. The FASB is in the early stages of a project and the IASB is asking for feedback from stakeholders to add one. In the meantime, it’s critical for boards to engage all stakeholders – from the C-suite to regulators, auditors and users – to gather all of their unique perspectives on how financial reporting best represents the value created by intangible assets can capture.
Ultimately, ensuring that stakeholders have visibility into management’s responsibilities for intangibles is crucial if financial reporting is to remain relevant in a world dominated by intangibles. While the best approach may not be a one-size-fits-all approach, any reliable attempt to integrate valuable intangible assets will benefit companies in the long run.
