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Group Reporting Challenges – More Than Intangibles

Financial Reporting Brief March 2021

Business combinations, goodwill on acquisition, intangible assets and other related matters continue to be subject to much comment, with some interesting developments debated in recent times. Those involved in the financial reporting process need to ensure that group reporting is carried out in a transparent manner which presents the overall picture of performance and financial position to investors and others in an understandable manner. Intangible worth is a major part of the continuing wider debate.

Merger and acquisition global activity in 2019 exceeded $4 trillion. While there was a substantial downturn in activity during the first half of 2020, there was a surge in the second half, making it the strongest consecutive half year in history. All told, the decline in M&A activity was less than ten percent against 2019 levels. There are positive indicators of high levels of activity continuing in 2021.

The significance of this to global markets is immense. The amount of goodwill and other intangibles which have been crystallised in value is similarly so. While M&A activity helps with crystallisation of the value of intangible assets in companies being acquired, there are substantial intangibles in other companies with little recognition and limited information disclosure.

The value of intangible assets has grown hugely over the years. A clear indication of this is that in 1985 the Standard & Poors Top 500 Index showed that the value of intangible assets as a proportion of total assets was 32%. This had grown to 84% in 2018 and continues to grow. The top ten companies show that in all but one case this relationship is in excess of 75%, with some much greater than that.

There is strong expectation that a consequence of the COVID-19 pandemic is that intangibles will grow by 10% upwards. The move towards home working and away from travel, both domestic and international, are just some of the factors that erode the importance of physical assets and increase digital assets generally.

The recent World Economic Forum has published its Global Risk Report with clear recognition of the following risks as being those of the highest impact for the next decade and going forward – infectious diseases and pandemics, climate and other environmental risks, livelihood crises and debt crises. It also highlights disruption of the IT infrastructure, and the digital divide, as potential critical risks. All are risks which threaten the fundamentals of how value is created and protected.

During these times of great uncertainty and market volatility, understanding what is driving and protecting a company’s profitability and growth potential is imperative for investors. When the world shifts on its axis, investors need to look far beyond past performance to gain an understanding of a company’s underlying assets.

Intangible Assets

The pursuit by investors of quality information and transparency in the messages being presented is significantly hampered by the general consensus of views that accounting standards have not kept up to date with the transformation from enterprise value where assets of physical/tangible value are dominant to where the most substantial component of enterprise value, by far, is intangible.

Intangible assets are holdings that don’t normally carry any physical or financial embodiment. Intellectual property, and computerized information such as data and software are just some of the many intangible asset classes. They now account for up to 90% of the global enterprise value of companies, but it is estimated that up to one third of that is not recognized in company financial statements.

Investment professionals agree on the importance of intangibles. In recent surveys, it was found that over 90% share the view that intangible assets contain crucial information about the future strength of a company’s business model, and that more transparency would be beneficial to their assessment of intangible assets. By undertaking rigorous analysis, investment managers may uncover hidden competitive advantages—and generate higher potential returns in the process.

IAS 38 ‘Intangible Assets’ was published in 2004, with some amendments since then. A research project into the feasibility of developing IAS 38 in various respects was commenced in 2011, but we await any published material from that research. Intangibles are not included in the IASBs current active projects.

The UK Financial Reporting Council has recently published a report on the feedback received to its 2019 Discussion Paper on ‘Business Reporting of Intangibles’. The majority of respondents acknowledged the limitations of the current reporting framework in capturing and presenting clearly the nature and value of intangibles and were supportive of efforts to address this issue, including strong support from investor respondents. A major concern expressed was with regard to identifying future-oriented expenditure and that efforts to provide greater transparency could lead to highly subjective disclosures and involve a high degree of management judgement.

Where ‘Reporting of Intangibles’ goes from here seems unclear, but it is clear that a solution to addressing measurement, recognition and disclosure issues continues to be some time away.

Of note is a recent meeting of the International Forum of Accounting Standard Setters (IFASS). Standard setters from Canada, Germany, Japan, the UK and the US had different perspectives on accounting for intangibles, with widely varying views on how financial reporting might recognise the difference between book value and market value.

In these unsatisfactory circumstances, companies must take measures to ensure that investors and others do have an awareness and understanding of their intangible worth.

Preparers and investors may find it helpful in their considerations to refer to 'Setting a New Agenda for CFOs — Understanding the role of Intangibles in Value Creation', published in draft by the World Intellectual Capital/Assets Initiative (WICI) in June 2020.


Business Combinations

The IASB is active in relation to Business Combinations and Goodwill, with the publication of a Discussion Paper in March 2020. A wide range of comments has been received with much of those comments supportive of the IASB considerations. However, they also suggest that more needs to be done on identifying specific needs as to what investors and others need to have clarity on regarding a company’s acquisitions. The need for solutions to current accounting problems, particularly those relating to goodwill, is also recognised.

The DP has two main themes – (1) Disclosures about Acquisitions; (2) Goodwill and its Impairment.

1. The IASB's project aims at improving the information companies provide to investors, at a reasonable cost, about the businesses those companies buy, and help to hold management more accountable for decisions made to acquire those businesses. Acquisitions do not always perform in subsequent years as well as management initially expected. Investors would like to know more about how an acquisition is performing in relation to such expectations. 

Some practical issues to consider include disclosures about the strategic rationale for the acquisition model, management’s objectives for a particular acquisition, and synergies. While much information may already be included in the ‘front half’ of annual reports, there remains scope for additional information specific to acquisitions. The question remains of whether disclosure within the structures of financial statements could bring a more rigorous process for informing investors and others.

2. A concern of many in relation to the currently used goodwill impairment model is that recognition of impairment is too little and too late. It is considered that recognition in many cases has been long after the period in which the triggers of impairment could have first been identified. There is consideration of changes that could possibly be made to the impairment model, with concerns expressed that any changes should not reduce the rigours of the current model when correctly applied.

The limitations of the impairment model, leading to its clear failure in some instances to recognise losses on a timely basis, is being met with a belief by at least some that amortisation should be re-introduced.

Other matters considered in the DP are:

  • Require companies to present on their balance sheets the amount of total equity excluding goodwill; and
  • No change to the range of intangible assets recognised in a business combination.

Our Need to Know addresses the key concepts in the DP.


Post-Implementation Review

The IASB has also commenced a post-implementation review of three Standards which relate to business combinations, including:

  • IFRS 10 Consolidated Financial Statements
  • IFRS 11 Joint Arrangements
  • IFRS 12 Disclosure of Interests in Other Entities

A Request for Information (RFI) has been issued to the various interest groups, with the comment period ending on 10 May 2021.

The IASB RFI seeks comments from stakeholders to identify whether the Standards provide information that is useful to users of financial statements; whether there are requirements that are difficult to implement and may prevent the consistent implementation of the standards; and whether unexpected costs have arisen in connection with applying or enforcing the standards.

Information currently available to the IASB indicates that many stakeholders believe that the standards work. However, IASB stakeholders have also indicated that there are areas where the standards might benefit from improvements, and the IASB have agreed on a range of matters to be examined in the RFI process.

Our Need to Know publication helps to gain an understanding of the matters that are in question in the RFI.

The IASB has also published a DP on combinations of businesses under common control, to which we may return in a separate article.

Our Need to Know addresses the key concepts in the DP.



Business combinations represent a huge part of global economic activity and it is essential that investors are provided with transparent information critical to their understanding of the key elements of measurement, recognition and disclosure. Of similar importance is that an understanding is given of the importance of intangible assets to a company’s worth even if they are not recognised in the financial statements.

The pandemic exerts substantial pressure and financial stress on many companies. The importance of the message to investors has never been greater and that message must include how successful companies have been with acquisitions made including whether the value of goodwill continues to be sustained.

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