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Accounting Reporting in an intangibles-driven economy

economy

PHOTO | SHUTTERSTOCK

In the last few decades, economies have witnessed a shift in value from tangible assets to intangibles. It is a phenomenon taking place within organisations as well. In this same period, organisations have seen a steady rise in intangibles and a noted decline in tangible assets on their balance sheets.

Numerous research studies indicate that tangible assets such as land, building, machinery and motor vehicles account for less than 10 percent of the total assets on an organisation’s balance sheet today.

Intangibles in this context refer broadly to an organisation’s competencies, brand reputation, innovation and many more. Some have referred to intangibles as the knowledge economy of ideas, relationships, and integration, sometimes fuelled by investments in research and development.

The shift in economies to intangibles is aptly captured in the book by Jonathan Haskel and Stian Westlake titled Capitalism without Capital.

Many big organisations today rely on not just their stock of financial capital but also a host of other intangible capital such as brand reputation promise, software development, patents, know-how, relationships, and goodwill, to name a few.

From a financial reporting perspective, organisations have a framework under IAS 38, Intangible Assets, on how to account for and disclose information on intangible assets. However, there are noted limitations to this framework. For example, it prohibits an organisation from recognising internally generated goodwill.

Therefore, even where organisations have incurred expenditure to generate future economic benefits but fail to meet the recognition criteria in the framework, they would not include such investments or intangible assets on their balance sheet.

As such, there is a case to be made for using additional frameworks like non-financial reporting frameworks that enable organisations to demonstrate these other stocks of capital that give them a competitive advantage.

For example, information on the future economic benefits and competitive advantage from an organisation’s internal know-how is disclosed using other non-financial reporting frameworks which complement the traditional financial reporting disclosures.

It is no accident that the increase in other non-financial reporting frameworks is happening with the prevalence of intangibles in our economies.

Today, stakeholders recognise that it takes more than financial capital to guarantee an organisation's short and long-term success in the market.