Intangibles and research – an overview with a specific focus on the UK

There were four papers presented at the 2007 Information for Better Markets Conference on Intangibles and Research. Basu and Waymire (2008) express extreme scepticism as to whether balance sheet recognition of intangibles is possible. Their argument, at least in part, is that intangibles are not separable from tangible assets. Further, the value of intangible assets, whether singly or in combination, is best judged by emphasising the forecasting of future profit streams, as opposed to explicit balance sheet recognition. As stated by the authors, ‘[v]aluing accounting intangibles on a stand-alone basis requires heroic assumptions about separability, highly uncertain estimates of ambiguous future benefits, and arbitrary allocations of jointly produced income. ’ Further, intangible assets, when assessed at the macro-level for countries, are linked to government policies with respect to activities such as education and, as a consequence, it is difficult to identify them with specific firms. Skinner (2008) evaluates policy proposals and concludes that private incentives to disclose information about intangibles, over and above that disclosed in the US, are the best solution, with regulators, at best, providing guidance as to the forms that these disclosures could take. This is based upon an analysis that critically evaluates whether current US accounting can be associated with the claimed difficulties in the US (e.g. under investment, difficulties in raising capital, etc., primarily related to technology firms and research and development (R&D)) – he argues it cannot. Wyatt (2008) provides an extremely comprehensive analysis of the associations between financial and non-financial information on various types of intangibles and market value or returns (a real boon to academics! ) – the work surveyed is global, although much of it emanates from the US. Whilst making recommendations for future research, she suggests, amongst others, that regulators might do better if more discretion were given to managers to recognise intangible assets (as in the UK and Australia prior to IAS adoption). She also suggests that disclosures could be enhanced to include more broad categories of expenditure. Ittner (2008) considers whether internal measurement systems for intangibles, primarily for reward and performance evaluation purposes, are associated with superior performance. He finds some evidence that the measurement systems are associated with superior performance – including stock market performance – but little evidence about particular measures. His review suggests the complexity of business models within which wealth generation is achieved via expenditures on activities thought to have the potential to generate intangible assets. Overall, the contents of the four papers suggest little reason to fundamentally change recognition practices, although arguments for small changes at the margin could be made (i.e. the allowing of discretion with respect to categories of development expenditures). Arguments are put forward for enhanced disclosure requirements with respect to items such as advertising expenditures. Voluntary disclosure mechanisms are seen as the most viable mechanisms for disclosures relevant to understanding the wealth creation possibilities of expenditures on potential intangible assets, if only because of the complexity and heterogeneity of the business models within which such activities are set. In this context, an argument could be made for accounting standard setters to provide general frameworks within which such voluntary disclosures can be made. Because much (but not all) of the evidence and arguments in the papers presented comes from the US, I will focus on the UK, particularly UK evidence that is available, and applying some of the arguments and recommendations to the UK. I will also focus on financial reporting and mandatory and voluntary disclosure possibilities and practices. Accounting and Business Research, Vol. 38. No. 3 2008 International Accounting Policy Forum. pp. 275-285 275