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Closing the accounting for intangibles gap - ACCA and Deloitte report looks at what drives value in modern business


Euro & Finance
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.
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Note to editors
* The great majority of companies report no R&D activity at all in terms of asset recognition and  specified expense in the financial statements. This is despite the definition of development costs in IAS 38 being widely drawn, including those of new products, processes, systems, services.
About ACCA
ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants, offering business-relevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. 
ACCA supports its 208,000 members and 503,000 students in 179 countries, helping them to develop successful careers in accounting and business, with the skills required by employers. ACCA works through a network of 104 offices and centres and more than 7,300 Approved Employers worldwide, who provide high standards of employee learning and development. Through its public interest remit, ACCA promotes appropriate regulation of accounting and conducts relevant research to ensure accountancy continues to grow in reputation and influence.
ACCA has introduced major innovations to its flagship qualification to ensure its members and future members continue to be the most valued, up to date and sought-after accountancy professionals globally. 
Founded in 1904, ACCA has consistently held unique core values: opportunity, diversity, innovation, integrity and accountability. More information is here:


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