Accounting’s Future Hinges on Better Intangible Asset Reporting

The Financial Accounting Standards Board and the International Accounting Standards Board are beginning projects on intangible assets such as software, research and development, brands, and even crypto. The smartest path forward is to improve disclosures of these intangibles.

To do this, standard setters are going to need to shift their mindset from a manufacturing tangible asset model to an intangible asset and valuation model—and bring an accounting profession focused on tangible assets along.

Research released in March by the CFA Institute found more than 60% of respondents, from a global poll of portfolio managers and analysts, are concerned that a lack of accounting for intangibles is causing financial statements to become less relevant.

However, both investors and standard setters lack sufficient insight into the creation of intangibles to move immediately to recognition of such intangible assets. Only 39% of investors surveyed were satisfied with current disclosures regarding intangibles and their creation.

Investors especially seek better intangible asset disclosures in the notes to the financial statements, better distinctions between investments, and expenses on income statements and statements of cash flows.

This makes sense. Standard setters, like investors, can’t solve the lack of accounting for intangibles without better insight into their creation, which means starting with better disclosures.

We’ve seen this phased approach before. Significant accounting shifts—such as those for stock-based compensation, pensions, and fair value measurements—all began with enhanced disclosures before recognition was implemented.

Why Intangibles Matter

In 1979, the world’s largest publicly listed companies were dominated by energy, industrial, and financial firms with large bases of tangible assets. Today, top companies such as Apple Inc., Microsoft Corp., and Amazon.com Inc. derive the vast majority of their worth from intangibles.

Despite this shift into intangibles, accounting rules largely treat intangibles as expenses, not investments. This means few disclosures are required, and there is little recognition of their value on the balance sheet.

Consider Apple, which shows no intangible assets on its balance sheet and devotes just three footnote sentences to research and development, despite innovation being its primary value driver. This level of disclosure is all perfectly compliant, but it’s not enough to be decision-useful for investors.

Disclosure Comes First

Intangibles is an area where financial reporting is showing its advancing age. Financial reporting rules must evolve to keep pace with the changing nature of business, capital markets, and technology. Otherwise, they will become increasingly irrelevant.

Investors mostly agree that intangible assets should be recognized in financial statements, and that the inconsistent treatment between acquired and internally generated intangibles creates distortions that make meaningful comparisons difficult. But there is no clear consensus on whether or how intangibles should be recognized on balance sheets.

Even among those who support balance sheet recognition, there is no agreement on how to measure intangibles. Should companies use historical cost, tracking actual expenditures? Or should they apply fair value estimates, which would introduce substantial subjectivity? Our research found investment professionals had no clear preference for either method.

Many investors believe that expanding recognition could invite abuse, as management would have significant discretion in capitalizing or expensing. Others argue that capitalizing more intangibles—such as R&D and brand equity—would better reflect true economic value.

This is where disclosures come in. Investors need disclosures to hold management accountable, and the research from CFA Institute shows that more than 80% of investor respondents say they want better disclosures of intangibles.

There’s also a lack of disaggregation, as companies don’t break out intangible-related expenditures clearly enough across financial statements—and investors want improvements there as well. This is where disclosures are useful—they make the invisible visible.

The relevance of financial reporting depends on progress in better accounting for intangible assets. Both the FASB and IASB have significant work ahead in scoping their projects and deciding which intangibles they should focus on.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sandy Peters is senior head of global advocacy at CFA Institute.

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