- Research reveals overwhelming demand for major accounting reforms
- Over US$30 trillion on undifferentiated, undisclosed value on balance sheets
- 68% of analysts and 58% of CFOs want all intangibles to be recognized
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, as important as these intangible assets are, many directors, analysts, investors and other stakeholders do not have an adequate understanding of how brands and other intangibles impact the value of businesses.
The Brand Finance Global Intangible Finance Tracker (GIFT™) report (produced with CIMA and the IPA), is the world’s most extensive research exercise into intangible assets. The comprehensive annual study of 57,000 companies (with a total value of US$89 trillion) across 160 jurisdictions highlights how a collective blind spot for business decision makers and policy makers has been allowed to develop.
At issue is a failure to regularly appraise intangibles. Even more critical however, is the fact that internally generated intangibles are (as per current accounting standards) generally not recognized at all.
From the perspective of analysts, pricing shares with insufficient information about company assets leads to a broader, less helpful spread of values. Investors acting on the incomplete information (and the analyst reports that draw upon it) are in effect, forced to act with one eye closed. In turn, this has a host of negative effects for those responsible for managing the businesses. Share price volatility is one, affecting the stability and sustainability of finance. Hostile takeover is another significant risk. Lack of information about the true value of their assets leaves boards and shareholders in a naïve position, prone to acquiesce to acquisitions that should not take place or to sell individual assets at less-than-competitive prices.
Brand Finance CEO David Haigh comments, “Lord Leverhulme, the founder of Unilever, once said that he knew half his advertising was working, he just didn’t know which half. Since then, our ability to assess advertising effectiveness and intangible value has come on leaps and bounds, yet accounting standards and practices have not reflected this. If he were alive today he would probably observe that he knew half of what his business was worth but not the most important half – the brands.”
In Brand Finance’s view, a commitment to undertake an annual revaluation of all company assets, including tangible assets, acquired intangibles and intangibles generated internally, would be a boon for boards, accountants, investors and analysts. The transparency and clarity this would afford would enable boards to make more effective use of their assets, accountants to have a truer picture of asset values, and investors and analysts to more accurately price shares.
There is clearly a strong and growing appetite for this. As part of the GIFT™ report, Brand Finance, CIMA and the IPA recently conducted survey of Equity Analysts and CFOs. Over 50% felt brands were becoming increasingly important in risk management and lending decisions and over 70% felt brands were becoming increasingly important in M&A activity. 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.
Brand Finance CEO David Haigh continues, “There is clear evidence that both producers and users of financial accounts want to see a radical change in the antiquated way intangible assets are reported. With US$30.5 trillion in intangible value undisclosed and growing annually, a revolution in the reporting of intangible assets cannot come a moment too soon.”
Says Janet Hull OBE, IPA Director of Marketing Strategy, “It is arguably irresponsible for balance sheet accounting to omit half of the value created in a business. Now, more than ever, we need a new framework for setting expectations of short, medium and long term value creation to guide investment and management decision making.”
Tony Manwaring, CIMA Executive Director of External Affairs comments, “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.”