Reporting Intangibles – new Athena Alliance working paper

American businesses, investors, regulators and policymakers are flying blind. The United States is now in an intangible economy, but financial reporting and accounting systems can’t deal with intangibles. Our business reporting system is, in many ways, not even adequate for the Industrial Age, let alone the Information Age. As a consequence, business, investment and economic policy decisions are being made “in the dark.”
What the current system looks like and what to do about it is the subject of latest Athena Alliance working paper: Reporting Intangibles: A Hard Look at Improving Business Information in the US. The paper is available at our website.
Executive Summary:
The U.S. accounting and business reporting system is inadequate to cope with the growing importance of intangible assets. While a framework exists for the recognition (i.e. assigning “book value”) of intangibles under U.S. Financial Accounting Standards Board (FASB) SFAS 141 and 142, this framework is incomplete in both its scope (i.e., only those assets acquired from outside the company must be recognized) and its coverage (i.e., certain intangibles, such as R&D and workforce, are specifically excluded). In addition, simply adding intangible assets to a company balance sheet is not the answer to the reporting problem. Many intangible assets are better understood using non-financial measures and other descriptions. Disclosure of non-financial data has increased. A number of steps have been taken and various suggestions for further disclosure made. But important information on intangibles must still be teased out of financial reports from various places – Management’s Discussion and Analysis (MD&A), expense reporting and asset recognition. Nor is there any guarantee that information on some assets is disclosed at all, or even collected internally. Efforts are underway to create a more comprehensive framework for expanded business reporting, but no consensus framework exists as of now. If investors, managers, regulators, policymakers and the general public are to gain a true understanding of our economic situation, we must devise better means of reporting companies’ circumstances ­with an emphasis on better understanding and measuring our intangible assets.