The GIFT Report (Global Intangible Financial Tracker) 2016 is a really useful piece. A collaboration by Brand Finance (a brand valuation firm), CIMA (the Chartered Institute of Management Accountants), and the IPA (Institute of Practitioners in Advertising). It contains some notes on intangible value. It highlights major factors and trends in the reporting of this type of assets. The report is very helpful reading for anyone interested in the interface between marketing and finance.
Intangibles Are Sneaking Towards Balance Sheets
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. These are things like brand and know-how.
…companies are increasingly recognizing 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. Intangibles disclosed are currently still at a low level compared to enterprise value. Yet, there has been some dramatic growth in the last decade [written in 2017].
Accounting And Real-World Problems
David Haigh, CEO of Brand Finance, gives his thoughts. He isn’t afraid to suggest a linkage between accounting practice and real-world problems. Haigh thinks firms with strong unreported intangible assets are potentially undervalued. This makes them targets for asset stripping. People think they are less valuable than they are because of accounting choices.
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 suggesting that accounting for marketing is a problem. 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 strongly supports changes to the reporting of brands. I work with MASB, the Marketing Accountability Standards Board which has ideas for change. See here.
Some Notes On Intangible Value
There are also interesting statistics comparing the level of tangible reported assets to enterprise value. Perhaps unsurprisingly the industry with the highest level of unreported assets was advertising. The iron and steel industry seemed to have negative unreported assets. This means the industry has more asset value reported than they have. This is an unusual case. Probably this suggests write-offs and impairments of assets on the balance sheet could be coming soon to that sector.
A Case Study
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.