Accounting for intangibles from goodwill to intellectual property rights needs to reflect the sustainable development agenda, argues Dr Janice Denoncourt, associate professor at Nottingham Law School
Inspired by the lyrics of British songwriter Stormzy, it is time for intangibles to shine.
One of the most problematic areas in 21st century accounting relates to the corporate reporting of intangibles and monopolistic intellectual property (IP) rights.
Dr Andreas Barckow, chair of the International Accounting Standards Board (IASB), stated that illuminating the non-addressal of self-generated intangibles in the accounts ‘was one of the biggest challenges and opportunities facing the IASB’, largely due to the decrease in relevance of financial statements.
A revitalised modern sustainable economy increasingly relies on ownership and control of a large variety of intangible corporate assets with sparse information consigned to footnotes in the accounts.
Fortunately, the 2022 COP27 UN Climate Change Conference held on 6-18 November in Egypt has shone a brighter light on the need for new critical discussions regarding the private sector and impact of companies’ activities on the planet.
The main types of intangibles for accounting purposes are goodwill, brand equity, intellectual property rights (trade secrets, confidential information, knowhow, patents, trademark, copyright and designs), licensing, customer lists. The larger the corporate group, the more assets (tangible and intangible) they own and control that must be reported.
As a result of new sustainability discourse, professionals in diverse fields such as accounting, economics, law, management, political science and policymakers are all waking up to the magnitude of corporate intangibles ownership – a sustainable development black spot.
Usually, the values of such intangible assets are not recorded in the balance sheet unless they meet strict recognition criteria set out in IAS 38 Intangibles. There is a window of opportunity to make corporate intangible assets more transparent and open.
International investors also seek high quality, transparent, reliable and comparable reporting by companies regarding their largely invisible intangible assets as well as ‘green’ brand credentials, climate and other environmental, social and governance (ESG) matters.
They are no longer blind to the need for corporate governance and reporting to link expenditure to intangibles assets and to curb greenwashing. They seek a better understanding of how this burgeoning asset class is deployed and contributes to the bottom line, innovation, technology, revenue generation, corporate growth and commercial stability.
Working at the Business School at the University of Gothenburg, Dr Jan Marton, in his 2022 article entitled, ‘Information - a solution to all accrual problems’ for Swedish accounting publication Balans wrote that the ‘work of the IASB is concerned about information and presentation rather than developing new complex standards…they look at increased demand on qualitative information to increase the reporting utility'.
Traditionally constrained by IAS 38, reliance on past transactions and providing mere notes to the accounts, standard setters and corporate regulators are being advised to embrace future-oriented complementary narrative, qualitative disclosures to provide shareholders, stakeholders and financiers decision-relevant information to inform sustainable investment.
The final declaration that emerged from the recent G20 meeting held in Bali, Indonesia on 15-16 November referred to ‘globally consistent data is needed to effectively address sustainability disclosures, with climate-related financial risks with the aim of ensuring interoperability across different disclosure frameworks’ (inferred to include corporate reporting frameworks).
To that end, accounting standard setters are spearheading public consultations and research reports to learn more and gather evidence about intangibles and how best to account for them to support responsible business and the global sustainable development agenda.
Led by Didrik Thrane-Nielsen, the European Financial Reporting Advisory Group (EFRAG) has an active research project on Better Information on Intangibles. This project is focused on information provided in the IFRS financial statements, including the notes accompanying the primary financial statements, and the management commentary. Thirty submissions to its discussion paper on Better Information on Intangibles: Which Is the Best Way to Go?. have been published here. These stakeholder responses indicate a broad consensus that there is indeed room for improvement regarding information on intangibles in financial reporting.
The UK Endorsement Board (UKEB), chaired by Pauline Wallace, a chartered accountant with several decades of experience, is currently undertaking a ‘comprehensive research project to consider how the accounting for, and reporting of, intangible assets could be improved to provide investors with more useful general purpose financial statements to assist them to make better informed decisions’. The project director is Matt Tilling.
The UKEB’s draft report: Intangibles Qualitative Research involved over 30 in-depth interviews with stakeholders and is in the process of receiving feedback from the board’s advisory groups as to common themes, observations, insights and conclusions.
IP rights monopolies
Turning to corporate IP rights monopolies, it is well understood that relying on accounting figures alone does not give holistic insights regrading IP rights; their non-financial value to the firm; the content of corporate IP policies that impact inventors, creators; or the stance on wider ethic IP issues related to access and licensing, for example.
Should accounting inform ethics and IAS 38 Intangibles? Perhaps. A new ethical accounting theory could support firm integrity, especially for professionals dealing with access to and disclosure of sensitive commercial intangibles information. From a corporate governance perspective this influence creates the potential for abuse and manipulation of numbers to enhance perceptions of corporate value.
What is the impact of the intangibles black spot? Information asymmetry across intangibles and IP rights is increasingly a serious corporate governance problem. At which point will lack of recognition on the balance sheet result in a disclosure deemed to be misleading? A misleading disclosure can be the result of a misstatement or an omission.
In Intellectual Property, Finance and Corporate Governance (2018) Routledge Research in IP, I observed that the 'lack of quantitative and qualitative public information about the growing magnitude of corporate IP assets makes it difficult to assess quantitative as well as strategic value and whether company directors’ stewardship of those assets is adequate’. Now we must include assessment of stewardship ‘in a sustainability context’.
The scope of the incoming EU Corporate Sustainability Reporting Directive (CSRD) covers climate change, pollution, water and marine resources, biodiversity, resource use and circular economy, social (workforce, workers across the value chain, affected communities, consumers and end-users), and governance (risk management, internal control and business conduct).
Importance of transparency
Corporate accountability is impossible without transparency. Transparency in the new sustainability era will depend on evolving interplay of corporate governance norms, accounting standards, corporate and sustainability reporting mandatory legal requirements to enhance trust and de-risk intangible assets and IP rights.
Additional qualitative information is needed to assess negative environmental, social and technological impacts. Where possible, linking to the quantitative data in traditional financial statements to qualitative narrative statements is desirable to triangulate the reported information with actual events leading to decision-useful information as to future value.
Currently, the interdisciplinary European Accounting Association (EAA) Working Group on Intangibles and professor Clemence Garcia of Gakushuin University in Japan is researching how to link and faithfully represent expenditures specific intangibles.
Non-financial narrative information that shines a light on, for example, the technological capability and readiness of innovations and signalling to the market the patent-protected inventions needed for a healthier planet, is another aspect being examined by myself.
Our world is increasingly fragmented in the UK given Brexit, Covid-19, war between Russia and Ukraine, changes in government, and economic crises. Understandably, sustainable development is being prioritised by the wider community and in turn by responsible business.
Going forward, mandatory corporate reporting needs to be designed so that it is at least capable of producing a more complete, contemporary version of the ‘true and fair view’ standard the firm’s store of intangible wealth demanded by shareholders and stakeholders.
Elevating the status of non-financial information to capture and report better non-financial information on intangibles and IP rights is a long-awaited and crucial step change.
The work of accountants and lawyers (professional cousins) will progressively overlap in the corporate sustainability space. The proposed corporate reporting changes being considered by standard setters will likely play a role in re-shaping the presentation of information in annual reports to reveal more about elusive abstract intangibles and IP rights, with a view to reporting what is meaningful and what is not.
Well known, German legal theorist Niklas Luhmann (1927-1998) called this process of reproduction from elements previously filtered from an over-complex environment autopoiesis. In simpler terms, the approaches that seek to unbundle the largely hidden, wide variety of intangible corporate assets, should reduce abstraction to create enhanced communication primarily with shareholders, but also stakeholders and the wider community.
About the author
Dr Janice Denoncourt BA McGill (Canada), LLB (Western Australia), PhD Nottingham (UK) is associate professor at Nottingham Law School, UK and leads its IP Research Group. She conducts cross-disciplinary research and public policy work on corporate governance and intangibles, sustainable finance, ethical and inclusive emerging technologies, ESG, CSR, responsible business, often with a legal history dimension.
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