The accounting treatment of intangibles – A critical review of the literature
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت) Accounting Forum, Volume 35, Issue 4, December 2011, Pages 262–274
نامشهودها - ارزش محور - تخصیص منابع - رشد - ارزش بازار - افشای داوطلبانه - حسابداری - نشریه
Intangible investments have become the main value creators for many companies and economic sectors. However, these investments are rarely recognized as assets by current accounting standards. We provide a critical review of the literature on the consequences of this lack of accounting recognition of intangibles for the value-relevance of financial information, resource allocation in the capital market, growth of intangible investments, and the firm's market value. We then review recent empirical research on voluntary disclosure of information on intangibles. Our survey concludes that disclosure can considered as a solution to the negative consequences of non-recognition of intangibles in financial statements.
The nature of investment made by companies has drastically changed during the last two decades: in addition to the investment in tangible capital, several investments in “intangible capital” have become increasingly important.
According to the Organisation for Economic Cooperation and Development (OECD, 2007), investments in intangible capital are competing with investment in tangible capital in some countries. For example, in 2002, the total expenditure in intangible capital was larger than the investment in tangible capital in the United States and Finland.
At a micro-economic level, several authors, such as Stewart (1997) and Zéghal (2000), reveal that intangible assets are taking an increasingly important place in a company's capital and are, in fact, becoming more important than tangible assets.
This change in investment structure expresses, according to several economists, the transition of the industrial economy towards a new “knowledge-based” economy. Indeed, several economic institutions, such as the OECD (2007) and UK Department of Trade and Industry (2004), consider intangible assets as the main source of value creation in the new economy.
However, the valuation of intangible assets within the accounting framework raises several problems relating to their identification, measurement, and control. These problems imply that the traditional accounting model, which is based on tangible assets, historical costs, and accounting conservatism, is incapable of fully evaluating the new-economy companies (Lev and Zarowin, 1999, Liang and Yao, 2005 and Upton, 2001).
Indeed, under current accounting standards,1 most intangible investments2 are to be expensed when incurred. The relative lack of accounting recognition of intangible investments as assets led several researchers in accounting and finance to wonder about the consequences of this inadequate accounting treatment on (1) the value-relevance of financial information, (2) the allocation of resources in the capital market, (3) the growth of intangible investments, and (4) the market value of the firm.
The main objective of our paper is therefore to provide a critical review of these previous studies. We then examine recent empirical studies on voluntary disclosure of information on intangibles versus traditional accounting reports. Our survey concludes that disclosure is considered as a solution to mitigate the negative consequences of non-recognition of intangibles in the financial statements.
The remainder of this paper is organized as follow: Section 2 briefly presents the notion of “intangibles” and its different categories. The accounting treatment of intangibles is presented in Section 3 according to both international and American accounting standards. The accounting and socio-economic consequences are detailed in Section 4. Section 5 then illustrates the role of disclosure as a solution to palliate these different consequences. The last section is devoted to the conclusion.
نتیجه گیری انگلیسی
In the new economy, intangible assets have become the main value creators for a large number of companies and economic sectors. However, the valuation of these assets within the accounting framework raises several problems with regard to their identification, measurement, and control.
Under current accounting standards, most of the intangible investments are to be expensed when incurred. The relative lack of accounting recognition of intangibles investments as assets led several researchers to wonder about the consequences of this inadequate accounting treatment on (1) the value-relevance of financial information, (2) the resource allocation in the capital market, (3) the growth in intangible investments, and (4) the market value of the firm.
The ultimate conclusion about research on the value-relevance of financial information is that the results are generally mixed. Indeed, the authors disagree on whether or not financial information has lost its relevance. Moreover, they do not even agree on whether or not the economy has fundamentally changed and whether a new valuation paradigm has rendered financial (accounting) information worthless. The disagreement between authors seems due to the omission of an important control factor, namely information disclosed about intangibles, in their equity valuation models. In fact, recent studies show that voluntary disclosure of intangibles information is viewed by managers as a solution to compensate for the loss of relevance of financial information. The incorporation of this different information into equity valuation models mitigates the omitted variables problem present in most current equity valuation models used by researchers.
However, researchers studying the socio-economic consequences have generally agreed that inadequate accounting treatment of internally generated intangibles can lead to a misallocation of resources in the capital market. This problem could, nevertheless, be attenuated through greater disclosure of information about intangibles to investors. Indeed, recent studies on the subject show that additional disclosure about intangibles to the public could contribute to improved market efficiency, and at a company level, decrease the cost of finance and allow for a more efficient allocation of resources in the capital market.
As for the research on the growth in intangible investments, we validated, using data on R&D investments made by UK and international companies between 2001 and 2007, some studies showing that the inadequate accounting treatment of intangible investments did not effectively inhibit their growth. Although this finding is only true to a certain extent, it could indicate that companies generally find other means of communicating information about their intangibles, such as the disclosure of information about intangibles in annual reports, websites, conference calls, press releases, etc. In fact, recent studies show that an increased level of intangible investments can result in a higher level of disclosure on intangibles.
When it comes to research on market value, authors are generally agreed that the inadequate accounting treatment of internally generated intangibles leads to systematic misvaluation of companies. However, there is no consensus as to whether these companies are undervalued or overvalued by investors in the capital market. These systematic misvaluations could, nevertheless, be attenuated through greater disclosure of information about intangibles to investors. Indeed, the recent studies on the subject show that intangibles disclosure can supplement the financial information, and that capital markets reward companies for increased disclosure.
The conclusions of this article have several practical implications. First, managers should provide more information about their intangible investments in order to attenuate different negative consequences resulting from their inadequate accounting treatment. Second, accounting standard setters should pursue more sophisticated accounting standards for intangibles. They should also provide more detailed guidance to constituents about useful information disclosures on intangibles which would be a particular benefit to intangible-intensive companies. Third, investors should be seeking greater transparency and more disclosure of information about intangibles.
Finally, there are a number of potential areas for future research. First, the above conclusions should be explored by qualitative research including interviews with managers and investors to test their validity. Indeed, future research could focus on the way in which managers and investors recognize the importance of disclosing information on intangibles. Second, future research should consider the disclosure of information about intangibles from a cost-benefit perspective. Finally, we conclude with the famous expression: “Much remains to be done,” and researchers have indeed much to do to meet the challenges of accounting for intangibles.