Intangible assets are fundamental to the modern economy but largely omitted from financial statements. Our survey of CFA Institute members finds that investors desire more recognition but are wary of the potential for abuse and therefore support greater transparency through disclosures.
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Report Overview
While accounting rules largely ignore intangibles—expensing them rather than recognizing them on the balance sheet—intangibles have become the most important driver of value in the modern economy. Many large companies today have few tangible assets relative to their market value, and investments in intangibles, such as research and development (R&D), often significantly exceed investments in physical assets. The increasing prominence of intangibles reflects the broader shift from a manufacturing economy to a service and technology-based economy that began several decades ago.
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are currently researching whether accounting standards for intangible assets need to change.
“Investor Perspectives: Intangible Assets,” a paper based on the findings of a recent CFA Institute membership survey, offers recommendations to the IASB and FASB on how to move forward.
Key Findings of Our Survey on Intangibles Assets
Investors see intangibles as companies’ most valuable assets, yet the current accounting model largely overlooks them. More than 70% of respondents agreed that unrecognized intangibles are responsible for the significant disparity between many companies’ book and market values.
More than 80% of survey respondents expressed a strong need for better disclosures related to both acquired and internally generated intangibles. Only 39% of investors find existing disclosures useful. Respondents emphasized that enhanced transparency in disclosures could eventually lead to recognition on financial statements. Respondents are particularly supportive of disclosures on the types, the amounts, and management’s estimate of expected future cash flows of recognized and unrecognized intangibles.
Investors largely support the current recognition of acquired intangibles but identified significant shortcomings in impairment testing, with 73% of survey respondents noting a lack of transparency and a lack of timeliness on taking impairment charges. Most prefer impairment over amortization, asserting that timely and transparent impairments provide valuable information about asset performance, while amortization is largely ignored.
The survey revealed support for recognizing internally generated intangibles, though opinions differ on their initial measurement—cost versus fair value. While many favor a single accounting model for all intangibles, a significant plurality of respondents expressed concerns about abuse if management is given wide discretion in capitalizing costs for generating intangibles.
Overall, investors believe that without addressing these issues, financial statements risk losing relevance. However, they do not support radical changes, such as a completely new balance sheet structure. The consensus among our members is clear: Improving disclosures, disaggregation of investments versus expenses on financial statements, and the timeliness of impairment testing should be priorities for standard setters. That improved transparency may reveal improvements to be made to recognition and measurement of more intangibles, but presentation and disclosure should be addressed first.