Calls Grow for Firms to Value Intangible Assets

Companies' intangible assets - including the value of their brands, reputation and employee skills - should be included on balance sheets in financial reporting, according to a growing lobby of experts from both multinationals and consultancies.

Intangible assets make up a greater proportion of the total value of many businesses than tangible assets such as plant, machinery, and real estate, yet current financial reporting rules allow their value to be disclosed only during M&A activity.

Companies including Nestlé, PepsiCo and Unilever have joined around twenty others in a new body, The Coalition for Inclusive Capitalism, which seeks to establish a framework for the valuation of such assets, according to an article in the Financial Times newspaper, reported by ad industry publisher WARC. The Coalition's founder, Lady Lynn Forester de Rothschild, told the FT the body was a 'first step' towards public companies going beyond current quarterly financial statements to accurately report long-term value. Lady Rothschild pointed to the 'very low' esteem in which capitalism is currently held by the public, and said, 'I can't tell you the number of CEOs who talk to me and say, 'I have extensive employee training but not one analyst has asked me about employee training. They've asked me about my margins on burgers in Detroit..''. She adds: 'Investors and businesses need a better way to create and articulate the long-term, inclusive value they create for their customers, employees, communities, the environment, and shareholders'.

Brand and branded business valuation consultancy Brand Finance publishes an annual study called GIFT (Global Intangible Finance Tracker), covering over 57,000 companies, with a total value of US$92 trillion, across more than 170 jurisdictions. The company says the disclosure of intangible assets 'remains disappointingly low, with US$35 trillion, or almost three quarters of global intangible value, not reflected in balance sheets in 2016'. This leads to a host of problems for analysts, investors, boards, and stakeholders, making assessments inaccurate and 'forcing investors, in effect, to act with one eye closed', says the firm. In turn, boards and shareholders with insufficient knowledge of the value of their assets are 'prone to agree to hostile takeovers or to sell individual assets at less-than-competitive prices'.

David Haigh, CEO of Brand Finance, who leads the UK delegation to the ISO and helped formulate the ISO 10668 standard on brand valuation, comments: 'The main objection to including internally generated intangible assets in balance sheets has been scepticism about the reliability of valuation standards and of intangible asset valuers. The rapid development of standards by the International Valuation Standards Council (IVSC) and the recently launched Certificate in Enterprise and Intangible Valuation (CEIV) have addressed these objections' His company's 2016 survey of financial analysts found majority support for an annual revaluation of all intangible assets (73%), including the full disclosure not only of acquired intangibles (79%) but of all internally generated ones too (68%).

Brand Finance says the problem 'is best highlighted by the stark disparity between the list of the world's top 100 most intangible companies and an equivalent list ranked by disclosed as opposed to total intangible value. Apple (with intangibles worth US$455 bn), Amazon (US$410 bn), Alphabet (US$378 bn), and Facebook (US$344 bn) ... do not eveen make the list of top 100 companies by disclosed intangible value'.

Web sites: www.brandfinance.com and www.warc.com .

All articles 2006-23 written and edited by Mel Crowther and/or Nick Thomas, 2024- by Nick Thomas, unless otherwise stated.