The GIFT Report (Global Intangible Financial Tracker) 2016 is a really useful piece shared by Brand Finance (a brand valuation firm), CIMA (the Chartered Institute of Management Accountants), and the IPA (Institute of Practitioners in Advertising). It highlights major factors and trends in the reporting of intangibles. It is very helpful reading for anyone interested in the interface between marketing and finance.
One fascinating observation is that more and more intangibles are, slowly, creeping onto balance sheets. Growth in reported intangibles has been much higher than growth in business value. “…companies are increasingly recognising more intangible value on their balance sheets, thus providing a better picture of their business and improving transparency of corporate reporting.” (Brand Finance, 2016, page 11). The evidence from China is fascinating. Disclosed intangibles are currently still low compared to enterprise value but have seen some dramatic growth in the last decade.
David Haigh, CEO of Brand Finance, gives his thoughts and isn’t afraid to suggest a linkage between accounting practice and real-world problems. He thinks firms with strong unreported intangible assets are potentially undervalued and thus targets for asset stripping. “We believe that too many great UK brands have been bought and transferred offshore as a result of the ongoing reporting problem” (Haigh in Brand Finance 2016, page 3).
Haigh isn’t alone in seeing problems with the way marketing is accounted for. The survey outlined in the GIFT report suggests that a) intangible assets are widely seen as becoming more important and b) there is widespread dissatisfaction with the status quo of financial reporting. The report notes strong support for changes to the way brands are reported, such as that advocated for by MASB (the Marketing Accountability Standards board).
There are also interesting statistics comparing the level of tangible reported assets to enterprise value. Perhaps unsurprisingly the industry with highest level of unreported assets was advertising. The iron and steel industry seemed to have negative unreported assets, i.e. more value of assets reported than they have; an unusual case suggesting write-offs and impairments of assets on the balance sheet could be coming soon to that sector.
The case-study of Apple’s value is useful for trying to understand what the owners of Apple stock actually own. Suffice it to say they own a lot more than the sort of hard assets that financial accounting is comfortable with.
Read: Brand Finance (2016) GIFT: Global Intangible Financial Tracker: An Annual Review of the World’s Intangible Value.