Intangible assets have long been the engine for value creation in the world’s developed economies. The investment in intangible assets, both internally generated and through acquisition, is critical to an enterprises’ capital allocation process. Similarly, investors’ ability to identify those enterprises best able to translate such investments into long-term returns is equally as critical.
Despite the importance of intangible assets to the capital markets, only a small percentage are recognised on balance sheets, typically via acquisition from a third-party transaction.
In order to support public discussion on this topic the IVSC is publishing a multi-part article series exploring certain fundamental questions in this area.
The limitation of current accounting standards to convey value creation and preservation activities is largely because the prevailing value creation strategies that existed when the standards were enacted decades ago, have evolved. As many current business models have evolved over decades, namely, to rely more heavily on intangible assets at the expense of tangible, the standards and the economics have become misaligned. This article series looks to contribute to realigning accounting and reporting standards with the value creation and preservation strategies utilised in modern business models. To do this, we plan to explore key questions that must be addressed, including:
- What should be the goal for an enhanced intangible asset framework? Is the goal to better identify value creation activities for future cash flow estimates, the ability to more accurately measure ROI akin to economic value-added (EVA) principles, and/or the ability to better assess managements’ stewardship of capital?
- What are the intangibles that could be subject to an enhanced intangible asset framework and what investments/costs result in their creation?
- Should an enhanced intangible asset framework be based on 1) enhanced disclosures, 2) capitalisation, or 3) value creation concepts and measurement?
We plan to help answer these pressing questions through a series of articles, the first of which is available to download here: