The production and consumption of information on intangibles

25 April 2023

ICAS has funded and published research, with support from EFRAG and EFFAS, into the production and consumption of information on intangibles.

The debate over the valuation and reporting of intangibles, and whether a compelling case exists for a change in the way they are reflected in corporate reporting, is by no means a new issue. Indeed, as the importance of service-based organisations, driven largely by data, information and intellectual property, has grown within the global economy, an increasing focus has been placed on the intangible drivers of value within companies and how these act as indicators of the future prospects and underlying value of a business.

This continuing debate has occurred against the wider context of concerns over the relevance of financial statements to meet their dual objectives of providing relevant information for valuation and stewardship assessment purposes, and a simultaneous rise in sustainability reporting, where ‘value’ is interpreted not just in traditional financial terms and relative to the interests of shareholders and investors, but also from the much broader and varied perspectives of other stakeholders impacted both financially and non-financially by companies’ operations.

Research aims

Against this background, this large-scale and ambitious study by Stefano Zambon, Giuseppe Marzo and Stefano Bonnini from the University of Ferrara and Laura Girella from the University of Modena and Reggio Emilia, used case-study based surveys and workshops to:

Analyse the production processes and the disclosure approach for intangibles by a representative sample of European preparers;
Investigate and understand the “consumption” processes of information on intangibles by the main capital market participants in European countries;
Understand the reasons behind those classes of professionals (preparers or users) not wanting intangibles recognised.

By addressing these objectives, the study aims to provide much-needed detailed empirical evidence on the preferences of users and preparers on the need for and decision-usefulness of information on intangibles, with a view to informing the continuing debate about how and where to provide more and better information on intangibles.

Key takeaways

Some of the key findings from the project were:

Professional role played by individuals and company size
In most cases, the current professional occupation significantly influences the responses provided, whilst other factors (educational background, etc.) do not have an impact, with the exception of age which appears influential on the cost-benefit assessment of information and the need for auditing of intangibles-related information. An agreement exists that there is generally not enough information provided, although which exact intangibles categories should be reported upon vary between users and preparers.
Cost-value benefit of providing this information
It is more of a concern to preparers than users, although both agree that commercial sensitivities are not necessarily a major issue.
Type of information
All agreed that information should best be reported through a combination of KPIs, narrative disclosures and financial numbers, although the preferred basis for measurements varies between preparers and users. Both sets of respondents however agree that the measurement basis should be driven by the types of intangibles considered.
Reporting tools and positioning of intangibles-related disclosures matter
Users and preparers agree that positioning is best in supplementary notes, integrated reports or non-financial statements, and that some level of standardisation would be welcome. They also generally agree with regards to the need for auditing, while no firm result emerged in relation to the positioning of intangibles-related information vs. ESGs.
Principle of decision usefulness and stewardship in relation to intangibles information
Preparers and users display a divergent behaviour on this, with users having predominantly a more optimistic vision on intangibles information as decision-useful and a stewardship indicator. The only exception is in relation to ‘stakeholder management’ information, viewed more positively by preparers than users.
Metrics
A general divergence of opinion emerges between users and preparers on the decision-usefulness of specific metrics, with exceptions for the following categories of KPIs: brands, R&D, software and information systems, strategy and planning, business model, training, and human capital.
Appetite for more measures and KPIs on intangibles
Preparers and users however also expressed appetite for more measures and KPIs in addition to those proposed in the research survey, especially those relating to business model, relationships with suppliers, training, organisational culture, and climate.
A recognised need for information
The wide acceptance and recognition by preparers and users of the need for information on intangibles may pave the way for policymakers towards gradually mandating intangibles-related metrics and disclosures in relation to the different categories of intangibles.
And a rising need
Information and reporting on intangibles is an area of increasing concern to preparers and users. Accordingly, policy makers and standard setters are very likely to be confronted with this information need, considering also the differentiated sensitivities on this topic between preparers and users that have clearly emerged from this study. There also appears to be a need for guidance and incentives for companies/preparers, who may need more support than users, taking into account the greater reluctance and the more acute inconsistencies shown in their responses.