A joint report from ACCA and Deloitte - The capitalisation debate: R&D expenditure, disclosure content and quantity, and stakeholder views - shows there are increasing concerns that financial statements no longer reflect the underpinning drivers of value in modern business – especially when it comes to accounting for intangibles, such as research and development (R&D) costs. 

 

Many have noted the increasing gap between the values of companies based on their share price and the tangible asset values in their financial statements. This is a global issue and several actors such as the Task Force on Climate-related Financial Disclosures, EFRAG, CDSB, and the IIRC are reflecting on how disclosures should reflect a more holistic picture of the interdependencies among the factors that affect companies’ ability to create value over time. 

 

For ACCA, major components of this gap are the intangibles that are recognised as valuable by the market but are not recognised as assets by financial reporting. As part of the wider debate on intangibles, the global Accountancy body and Deloitte recently published a report called The capitalisation debate: R&D expenditure, disclosure content and quantity, and stakeholder views, which looks at the extent to which companies using IFRS recognize development costs as assets in different countries and in different sectors. It investigates the factors that may lie behind that asset recognition and makes some suggestions as to how reporting of R&D might be improved. 

 

Richard Martin, ACCA head of Corporate Reporting and lead author explains: ‘The intangibles may include the value of the workforce, knowhow, customer relationships, brands and a pipeline of new products. The International Financial Reporting Standards (IFRS) only allow for a restricted recognition of these assets, which is why there is a gap. At present, meeting the criteria of what is recognised as an asset can be a matter of judgement giving management considerable scope to decide whether they prefer to expense these costs as incurred or to capitalise them. IFRS could require, and companies should provide, much better disclosures than currently

 

Richard Martin adds: ‘Our study shows that 77% of companies report no R&D activity in their financial statements*. Of those that do, 62% write off immediately and so do not treat the cost as an investment. This obviously has implications for the issue of intangibles and their importance in the economy. Within Europe, there is quite a high variation in the accounting treatment. Among those where more than 60% of companies write off all R&D spend are Austria, Germany, Greece Switzerland and Finland. In Spain, Italy and Sweden by contrast less than 40% write off all. In UK, France, Belgium, Denmark, Norway and Netherlands the proportion is around 50 %.  Our study also shows significant variations in how much non-financial information about R&D is given”.

 

The report also looks at what these findings mean for the intangibles gap and what the future could hold.

 

Richard Martin suggests: ‘Some believe that companies should recognise more of their intangibles in their financial statements if those are to remain relevant. Acquisitive companies will be more likely to do so, but those growing organically are much less likely to. However, our survey shows that companies generally seem reluctant to recognise as assets the one sort of intangible they should – their investment in new products or processes – or even discuss them at length in the narrative sections. It seems likely that they would be even more reluctant with the other 'missing' intangibles.

 

‘There is no sign of that gap closing, and this is an area that requires much further work. ACCA stands ready to bring its support and expertise to the on-going debate, including in supporting brainstorming discussions and responding to public consultations such as the European Commission targeted one on the update of the non-binding guidelines on non-financial reporting”, Richard Martin concludes.