Corporate Reporting of Intangible Assets: A Progress Report

At its last meeting, the Committee agreed to contribute to the Organisation's two-year horizontal project on New Sources of Growth: Intangible Assets, with a report covering the reporting of intangible assets (IA) and progress made in this area in recent years. This report provides an update on the nature and quality of reporting on intangible capital in member countries, building on prior work of the Committee in this area. This report explores four interlinked issues related to reporting of intangible assets, namely: 1. collection and management of information on intangibles, 2. external reporting on intangibles, 3. use of such reporting by analysts and investors, and finally 4. political economy of reform. The report seeks to shed light on potential reasons for the varied adoption of intangibles reporting by companies and explore factors accounting for this. In its concluding section, it outlines several potential options available to governments interested to facilitate better intangibles disclosure. As agreed by the Committee during its November 2011 meeting, an abstract of this paper as well as key messages for the May 2012 OECD Ministerial were approved by the written procedure of the Bureau. These are provided in Annex I of this paper. This paper was de-restricted by the Committee during its April 2012 meeting. 4 INTRODUCTION Already in the early 1990s, the importance of intangible resources and the difficulty of accounting for them were raised and has grown steadily ever since. Today, intangible assets (IA) such as employee skills, knowledge, trade secrets software, copyrights and patents, customer and supplier relationships are increasingly recognised as important corporate assets, contributing significantly to a firm's competitiveness. Recent years have even seen the rise of a "conceptual company", characterised by low relevance of physical assets in favour of intangible intensive activities. 1 Estimates of the value of intangibles, particularly in human capital intensive, high technology, innovative companies have increased, though they vary by country. For example, finance directors surveyed as part of one study believed that 50% or more of corporate value is attributable to intangible assets (APCA, 2010). At the same time, the ability to incorporate IA in current accounting frameworks appears to be limited 2 and hence, the value relevance of accounting information has deteriorated, especially in sectors characterised by high intangible capital. This observation raises serious questions about the continued relevance of financial reporting and places growing expectations on non-financial reporting to bridge the information gap. …