European accounting group looking into different approach to intangibles

The European Financial Reporting Advisory Group (EFRAG) on August 27 released a discussion paper reviewing and seeking feedback on possible approaches to providing better information on intangibles.

The paper responds to concerns that internally-generated intangibles have become increasingly important in evaluating companies’ market values but that such intangibles are not adequately reflected in financial statements. Similarly, the discussion paper seeks to address the discrepancies between the accounting for intangibles that are acquired (and generally reflected in statements) versus those that are generated internally (and not recognized in most circumstances even when significant to the value of a company).

The paper reviews possible approaches to address these issues with a focus on information in financial statements and management reports, seeking feedback on which approach or combination of approaches would be best. It considers a scope of intangibles broader than just financial assets, taking into account as well other sources of possible economic benefits not controlled by an entity.

EFRAG notes that an approach of just recognizing more internally generated intangibles to deal with these issues could be problematic due to issues related to the valuation of such intangibles and the need to also address intangibles that do not fit the definition of an asset.

In broad terms, the paper reviews three approaches for better information on intangibles. Option one involves recognition and measurement in primary financial statements. Option two would include information on specific intangibles in the notes to the financial statements or in the management report. Option three would include in the notes information on future-oriented expenses and risk/opportunity factors that may affect future performance.

EFRAG will use the input it receives on the paper in considering proposals on intangibles to make to the International Accounting Standards Board (IASB). Comments will be accepted until June 29, 2022.