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Improving the business reporting of intangibles

08 March 2019

The Financial Reporting Council (FRC) is seeking comments on ways in which the business reporting of intangibles can be improved. This is a key area of research identified by accounting standard setters internationally. The purpose of the consultation is to influence the international debate and the International Accounting Standards Board (IASB) on the matter.

The discussion paper notes that as a result in the shifts in the economy towards ‘knowledge-based’ business, current financial reporting regimes fail to recognise knowledge-based intangibles. This is because many of these knowledge-based intangibles do not meet the definition of an ‘asset’ or the recognition criteria set out in The Conceptual Framework.

The consultation suggests that relevant information could be provided by increasing disclosures in the financial statements without recognising extra intangibles on the balance sheet. The paper asks for comments on a series of questions including: 

  • Is it important to improve the business reporting of intangibles?
  • Do the accounting standards need updating to improve the accounting for intangibles both in terms of when an intangible should be recognised at cost and if the use of fair value introduces too much measurement uncertainty?
  • Should there be specific disclosures for expenditure on “future orientated intangibles” relating to those expenses incurred with the expectation that they will generate benefits in future periods?
  • Can narrative reporting be used to improve the information on intangibles provided in the financial statements including the use of metrics?
  • How should those involved in business reporting contribute to the implementation of the proposals?

The paper asks these questions to explore why intangibles cannot be more fully reflected in annual reports without radical changes to the financial reporting regime whilst also seeking to develop practical proposals for the improvements to business reporting that could be implemented with relative ease.

The paper then suggests including additional disclosures on expenditure on unrecognised intangibles – for example, training costs where the benefit is expected to be obtained in the future. It also proposes several ways for expanding qualitative and quantitative information to assist the users’ understanding of an entity’s value.

However, the discussion paper does not cover the reporting of goodwill and its subsequent impairment.

Read the FRC’s full discussion paper – the deadline for comments is 30 April 2019.  

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