Finding common ground

There are currently many accounting bodies and industry groups which research how intangible assets can be better recorded. This is leading to a profound shift in thinking in how undertake the annual reviews and forecasts. It was not long ago that using measures or indicators such as brands, customer lists and technology were seen as unthinkable. However, in the world of the digital-age company, such accounting and business reporting has become a business necessity.

In the next decade the reporting of so-called intangible assets will dramatically change the accounting landscape. For the first time investors and the public will have a greater opportunity to place a better measure on the true value and future of an enterprise. It will also provide internal decision- makers with data to improve cycles of knowledge and innovation.

We can already see this with Coca-Cola, whose brand equity and protection of its secret formula is valued in billions of dollars, or Merck who with clever investment in research and development is able to use its acquired insight to help grow competitive advantage. In the world of entertainment and hospitality organizations such as the Sydney Opera House, through their web site at www.sydneyoperahouse.com, smartly markets their intellectual property to improve customer loyalty and market share.

Of course, saying that intangible assets have a right and a place to be recorded is one thing but reaching agreement on how to do it is another. To help address this, the International Accounting Standards Board is working hard to achieve implementation in 2005 of new accounting reports . You may wish to visit www.iasb.org.uk for the latest. While the US Financial and Standards Board (FASB) has already said that measures of intangible values must be:

• selected very carefully

• displayed in a systematic and ordered way using matrixes or tables

• used across a business or organization rather than in isolation

• compared between periods of time and with other relevant organizations, divisions or industries

• supported with explanatory notes to guide the reader through the material. Where old measures are no longer used and new ones are brought in, these should be explained.

The great dilemma for many experts is that placing value on talent and genius is seen as a very imprecise science and many of the measures and indicators are seen as unreliable. However, in saying this, relying only on traditional financial reporting is even more dangerous, particularly if we consider investments in our people, training, innovation, research and development are currently treated as costs within existing accounting methods .

As Wayne Upton Jr recommended in another study commissioned by the FASB, businesses should be required to produce records that demonstrate :

• a recognition of intangible assets in financial statements and improved measures of those assets

• an expanded and systematic use of non-financial performance metrics

• an increased use of forward-looking information.

In noting the need for change, most accounting professionals and many industry observers are very cautious and not likely to suggest massive overnight change. To begin with businesses cannot toss out mandatory financial records and then duplicate this with another set of books that are unrealistic , unnecessary and unlawful . So, expect a phased and incremental introduction rather than a revolution during the next decade.

It must also be said that many managers are very hesitant about disclosing information to the public that could be used against them in the future. Others are very keen to share their story of how they are growing expertise, talent and know-how. As former chairperson of Lend Lease Corporation, Stuart Hornery, said at a symposium on measuring and reporting intellectual capital, ˜measuring intangible assets should be voluntary and should report on the matters that matter most to performance .

When it comes to reporting intangible assets it is imperative these disclosures are true and accurate. We do not want another set of reports that have questionable integrity. As with traditional measurements of tangible assets, indicators, rations or measures of intangible value must be relevant, reliable, clear, comparable and verifiable providing a consistent basis of comparison from period to period.