Intangible assets are the non-monetary, non-physical assets of a business, including its rights, goodwill, overarching brand, and other intellectual property (IP) (i.e., patents, trademarks, copyrights, trade secrets). These types of assets represented 52% of the global enterprise value in 2018; however, 80% of that value went wholly undisclosed on companies’ balance sheets. Why are businesses’ financial disclosures largely silent with respect to intangible assets? Should companies consider reporting on such resources?
Currently, the International Financial Reporting Standards (IFRS), which are commonly followed in Canada, do not allow for businesses to recognize most internally-generated intangible assets on their financial statements. Only externally-acquired assets (i.e., those obtained through a business consolidation or other M&A transaction) will necessarily crop up in financial reporting documents. As a result, regular and reliable determinations of where intangible value is or is not being generated and utilized are unavailable, frustrating both company and interested stakeholder efforts at evaluating a business’ resources, management, and worth.
In its recent report, Brand Finance suggested a new approach to financial reporting, whereby the fair values of all intangible assets would be annually determined and reported on by management, accompanied by notes expounding on the nature of each asset, any assumptions relied upon in arriving at the values disclosed, and an explanation of the health and maintenance of such assets. Brand Finance would require that boards disclose their opinions on the fair value of their company’s key intangible assets through “living” balance sheets, the practice of which will benefit customers, investors, and other stakeholders.
Some of the potential benefits which could stem from the consistent internal valuation of, and reporting on, intangible assets include:
- Deal draw: more meaningful and fulsome financial reporting would likely prove attractive for potential investors and partners, as well as other lenders and creditors, by allowing for informed decision-making and fostering trust through transparency. Further, when the time comes for a M&A opportunity, those crucial intangible valuations are already accurately and reliably determined so as to better facilitate information exchange and price assessment.
- Better informed management: management would have a more comprehensive understanding of the business’ aggregate assets and its overall value if intangible assets were regularly evaluated in-house. Cyclically attributing accurate values to unseen and previously unreported assets will also encourage informed management action directed at bolstering and preserving such assets and their related benefits. Given such information, management personnel will be better equipped to allocate resources and plan into the future.
- Increased innovative investments: reporting on intangible assets will also likely encourage investments in the same. A consistent awareness of such assets’ value, and the peaks and valleys thereof, will highlight the growing worth of such intangibles, or any notable deficits. Further research and development into innovative and improved IP and other intangibles can benefit individual companies and broader industries alike.
Accordingly, beyond serving as a “big slice” of any M&A deal’s purchase price, the value of a company’s intangible assets could also act as an apt internal marker, encouraging and guiding appropriate action, inventiveness, and allotments. A holistic understanding of any given business necessarily demands familiarity with its key assets, and who better to evaluate and market intangibles information than the company itself?
It may be time to consider the value in regularly reporting on your business’ intangible assets through financial disclosures. If you would like more information or advice in relation to such an inclusion and any potential tax consequences, please contact a member of our team.
The author would like to thank Sarah Pennington, articling student, for her assistance in preparing this legal update.
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