This article was originally published in the Brand Finance GIFT™ 2024 report.
Valuation Director,
Brand Finance
As Brand Finance continues to promote the importance of intangible asset value, we are working in tandem with organisations including the Institute of Practitioners in Advertising, (IPA) International Valuation Standards Council (IVSC) and World Intellectual Property Organisation (WIPO) to promote better monitoring and understanding of intangible assets. For example, intangible asset intensity of nations as measured by the Brand Finance GIFT™ study has been included as an indicator of innovation productivity within the UN-backed WIPO Global Innovation Index.1,2
The silent challenge
Previous GIFT™ reports and consultation by Brand Finance have outlined the limitations of accounting and reporting standards, and the resulting challenge of low disclosure in intangible assets. Financial statements need to be fit for purpose and useable by investors, lenders and others to mitigate risk and allocate capital efficiently to maximise their return on investment.
Our 2024 study estimates that 79% of global intangible asset value is not disclosed in balance sheets. This is due to the historic limitations set by the accounting standards boards which state that internally generated intangible assets, such as brands, cannot be disclosed in a company balance sheet.
The resulting void between disclosed financial statements and the reality of company value is so large that balance sheets are increasingly redundant for those evaluating the performance of the biggest, most innovative, and most valuable companies in the world.
Regulatory progress
IASB adopted IAS 38, the landmark accounting standard on intangible assets, in April 2001. Since then, total global intangible asset value has grown from $20trn to $79trn, but IAS 38 has not been substantially revised. However, that may no longer be the case.
To the great excitement and anticipation of intangible asset specialists, IASB added an intangible assets project onto their research agenda in December 20203. They’ve released their summary4, and their next steps are surveys of stakeholders, including a separate survey of users of financial statements. The updated summary inclusive of this research will be presented at a future IASB meeting – date TBD – followed by an IASB analysis of that feedback and evidence. Finally, the Board will present recommendations on the project objective, scope, and a tentative plan.
A review of IAS 38 is likely complex due to the materiality of intangible assets, and because the project is interrelated with other ongoing standard revisions and developments, particularly in the areas of management commentary and sustainability disclosure. Given this expected complexity, the project scope could be limited to updating IAS 38 within its current paradigm of focus on acquired intangible assets.
However, the IASB appears open minded. It is possible that the scope of the research project could extend to cover investments into internally generated intangible assets. This would mean that a company could disclose the value of its own brand which it has built, as well as any brands it buys as part of any M&A activity.
The implication is that expenditure on brand marketing could be considered capital expenditure, rather than operating costs, a huge benefit for firms seeking an incentive to invest in long-term brand building, or to marketing teams seeking internal understanding and approval of long-term investments.
The project covers a broad spectrum of intangible assets, including software and R&D, and should the project scope extend to cover intangible assets held for investing, it would include cryptocurrency. The result would be an evolved balance sheet that is a relevant source of information for investors.
Intellectual property momentum
In addition to this landmark review, there is evidence from intellectual property office agendas that we’re moving toward a better understanding of intangible asset value.
Intellectual property offices are actively working with stakeholders such as valuers, standard-setters, auditors and tax authorities to identify routes to unlock value and access to finance for intellectual property-rich entities.
Banks including RBC, JP Morgan, NatWest and HSBC now offer loans using intellectual property as security, a particularly attractive option for startups and scaleups seeking finance to leverage their unique intangibles.
Actions to take now
Given intangible assets are on the agenda of standard setters, intellectual property offices and financiers, it’s clear that CFOs should ensure they are prepared to take advantage of the changes on the horizon. CMOs are also stakeholders, as guardians of brands, one of the most stable and significant intangible asset classes.
For both CFOs and CMOs, we recommend the following actions, to prepare for future evolutions in intangible asset reporting requirements, and to leverage the benefits of intangible asset management:
- Identify the key intangibles of the entire business, both internally generated and acquired.
- Seek expert advice on the value of those intangibles, and consider sharing this in the notes to your financial statements.
- Monitor the businesses’ various intangible assets and what drives their value.
- Take action to optimise those drivers, build long term intangible asset value, and enhance overall business performance.
Brand Finance continues to support its clients in bridging the gap between marketing and finance and we look forward to assisting others seeking to maximise and leverage the value of their brands.
