Reporting of intangibles - FRC consultation

The Financial Reporting Council is considering responses to a consultation suggesting improvements that could be made to business reporting of intangibles: 'Business Reporting of Intangibles: Realistic Proposals'. 

Background to the proposals

The world has moved towards a fundamentally knowledge-based economy, with intangibles being the new driver of economic activity. Commentators propose that one of the key problems with current reporting requirements is that financial statements do not reflect many important intangibles, such as intellectual capital. There is therefore a need to re-assess the accounting for and narrative reporting of intangibles to improve relevance of information provided to the primary users of financial reporting.

The key objectives of the consultation are:

  • to explore the reasons why intangibles cannot be more fully reflected in financial statements without radical change; and 
  • to develop practical proposals for improvement in business reporting that can be expected to be implemented in the near future.

It should be noted that the paper addresses 'intangibles', which is a broader description than 'intangible assets' as defined in accounting standards.  The paper defines intangibles as: ‘intangible factors that are important to an entity in its creation of value, whether or not they are secured by legal means and whether or not they meet the current definition of an asset’.

Main proposals within the paper

  • An intangible should be recognised at cost only where:
    • costs to be incurred on development of an intangible asset can be estimated at the time when a project to develop an intangible is undertaken. The amount capitalised should not exceed these estimated costs; and
    • economic benefits to be derived from the intangible can be specified when costs are first incurred, and hence a relevant method of amortisation or monitoring for impairment can be established.
  • For intangibles where there is significant uncertainty in the measurement of fair value, the faithful representation of any estimate should be called into question.
  • In light of the above, the requirements of existing accounting standards should be reviewed.
  • There is a case for specific disclosures in relation to ‘future orientated intangibles’ (unrecognised intangibles expensed in the period expected to generate benefits in subsequent accounting periods). These should be clearly differentiated from expenses that unambiguously relate to the period and the cumulative amount of the expenditure and movements in it should be disclosed.
  • Management should select the intangibles that are discussed in narrative reporting, by reference to those that are most relevant to the entity’s business model. 
  • Narrative reporting should include suitably helpful metrics relating to intangibles, which should be reported for several reporting periods, so that the trend is clear. 
  • Management should comment on the factors that have caused metrics to change and compare the reported metrics with their realistic targets. 
  • Metrics could be standardised within specific industries.

There is currently no indication within the consultation document of how such changes in reporting requirements may be formally implemented.

If you have any queries, please contact Lee Marshall.