Earlier this year, the International Accounting Standards Board (IASB) launched a comprehensive review of how companies account for intangibles in financial statements.

Currently defining its terms, the ‘intangibles project’ will pick up in earnest in 2025. One topic it is very likely to explore is the potential for amending IAS 38 Intangible Assets, which sets out relevant accounting requirements.

Ahead of the project’s full commencement, the Corporate Reporting Faculty invited its members to join senior figures from the IASB and UK Endorsement Board (UKEB), which is carrying out its own research on intangibles, to help inform the project’s direction.

The standard-setting bodies outlined the case for reform before providing members with an opportunity to add their thoughts to the IASB’s preparations.

Surging force

In her opening address, ICAEW Head of Corporate Reporting Strategy Sally Baker suggested that intangibles have long been a problem area. Citing ICAEW’s 2017 thought leadership paper, What’s Next for Corporate Reporting, Baker noted that some stakeholders who provided input dubbed intangibles the ‘Achilles’ heel’ of the reporting process.

Yet the challenge is only intensifying. According to IASB member Nick Anderson, the body’s initial research has flagged up a host of issues.

Most pressingly, IAS 38 is now more than 26 years old – and the range of intangibles is now much wider than when the standard was first introduced. Alongside key types of intellectual property, such as patents, brands and copyright, the term covers software, licences and import quotas, plus harder-to-define matters such as customer relationships and technical developments. In addition, new intangibles are emerging all the time. Cryptocurrencies, big data, human capital and emission rights are among those that the profession must now decide how to account for.

Responses to an IASB consultation of 2022 criticised IAS 38’s tight recognition criteria. Concerns were also expressed over the lack of comparability between companies that grow organically and those grown through mergers and acquisitions. While IAS 38 recognises many acquired intangibles on the balance sheet, very few internally generated examples are permitted to be capitalised – goodwill being an example.

Meanwhile, according to data presented by UKEB Chair Pauline Wallace, intangibles are a surging economic force. While they form a deceptively narrow 3% of items recognised on the balance sheets of UK companies, their carrying value in 2021 was £351bn. Plus, from 2011 to 2021, the average growth rate of intangibles in the UK was 8% – outstripping not just inflation in the same period, but total growth across all asset classes.

Broad spectrum

Attendees were divided into groups and first asked to provide input that could help shape the scope of the IASB’s intangibles project.

A common theme was consideration of how accounting standards could enable the production of clearer, more granular information, in a way that would smooth the process for preparers and users alike.

One group observed that the term ‘intangibles’ comprises a broad spectrum of asset types that are currently addressed by just a single standard. In a similar vein, whether under one standard or several, another proposed that the IASB could parcel out asset types into different categories, determined by shared elements, and provide stakeholders with requirements for each.

Some attendees criticised IAS 38 for creating unfair disparities between companies of different types. As one member put it: “Businesses can sometimes feel like they’re being penalised for trying to generate assets internally, as the asset essentially has no recognised value until it’s sold.”

Others highlighted a need for improved narrative disclosures that would show how intangibles support business growth. However, one group representative pointed out: “We need to be careful that we’re only producing material that users find relevant, rather than data that’s merely produced as part of a compliance exercise.”

Residual standard?

Attendees were then asked which of three potential approaches the IASB should take to deliver the intangibles project. The choices were:

• All in one: The IASB would research all the issues that stakeholders have identified at once, then seek views on potential solutions in a single consultation document.

• Early evaluation: Issues would be ordered by priority at the outset, with research moving forward on only the highest-priority topics.

• Phased: Topics would be split into stages, with each stage addressed in a separate consultation.

One group favoured the all-in-one approach. “With early evaluation,” its representative said, “there’s a sense that you can select priority topics now – but what if you then realise that those are unsolvable problems? Also, by solving just a limited number of problems, you would likely create inconsistencies.” 

However, there was nervousness in the room about how long it would take to deliver on the all-in-one approach.

Another group’s representative came up with a thought-provoking point. “The problem with IAS 38 is that it’s a residual standard – it deals with things that are ‘left over.’ But perhaps some emerging assets shouldn’t just be considered as leftovers. Whether they’re investment assets or new financial products, they may fit better in different standards altogether. So, let’s start with early evaluation of whether assets with certain characteristics should clearly be scoped as something else. Then we can look at IAS 38.”

One point that attendees unanimously agreed on, though, was the importance of ensuring that any eventual solutions are aligned with the IASB’s Conceptual Framework, which sets out the core principles that underpin all IFRS Accounting Standards. Highlighting the need for clarity in the overarching objective of the IASB’s review in her closing remarks, Wallace stressed that working from the foundation of those principles will be critical when developing solutions.