ANALYSTS and chief financial officers want an overhaul of the way intangible assets are accounted for.
Intangible assets such as brands, people, know-how, relationships and other intellectual property make up a greater proportion of the total value of most businesses than tangible assets such as plant, machinery and property.
However, many directors, analysts, investors and other stakeholders have an inadequate understanding of how brands and other intangibles affect the value of businesses, according to research from consultants Brand Finance, produced with CIMA and the IPA.
The annual study of 57,000 companies – with a total value of $89trn (£61.6trn) – across 160 jurisdictions found a failure to regularly appraise intangibles. Not only that, it found internally-generated intangibles are generally not recognised at all.
Pricing shares with insufficient information about company assets leads to a broader, less helpful spread of values for analysts, while CFOs and boards can end up acting on incomplete information.
Around 50% of respondents felt brands were becoming increasingly important in risk management and lending decisions, while more than 70% felt brands were becoming increasingly important in M&A activity. Some 68% of analysts and 58% of CFOs thought all internally-generated brands should be separately included in the balance sheet and that all intangibles should be revalued each year.
CIMA executive director of external affairs Tony Manwaring said: “Before any decision can be taken, leaders need an understanding of all factors material to their business. CIMA believes therefore that we need to account for the business and not just the balance sheet, fully recognising the value of intangibles such as reputation, brand and relationships. After all, you wouldn’t want to be in a plane where the pilot was ignoring half the instruments.”
As the pressure of financial reporting grows and departments grapple with budget cuts, CFOs are feeling the crunch, leading to dangerous spreadsheet spirals
HMRC are cracking down on CFOs in big businesses over tax accounting procedures under the Senior Accounting Officer regime
Following BT's accounting nightmare, we take a look at why the errors occurred and outline the key takeaways for CFOs
In an era of modern finance, leadership is becoming digital leadership, explains Oracle