Intangibles reform – ready for it?

Note from the editor: Adam has hidden 20 Taylor Swift song titles in this piece. Can you find them all? The answers are given at the end of the article.

While two new standards have been issued this year (covering presentation and disclosure and leases), it has been a while since a really big technical standard has been addressed in a significant way. The implementation of IFRS 17, Insurance Contracts, was significant but will not have come across the radar of too many people. The last significant changes for many will have been the financial instruments, revenue, and leases projects.

An argument could be made that there is little blank space left within the suite of standards now and that large-scale changes may not be needed. Some attempts at closing gaps with the requirements for business combinations under common control resulted in the project being dropped, and it appears that focus may be more on maintenance and the link with the IFRS sustainability disclosure standards.

Change overdue

Despite that, one big area remains a point of concern. It is one that has been covered in this column many times and that many people will know all too well. It felt like it wouldn’t happen in our wildest dreams, but the IASB has begun to mastermind its research project on intangible assets. IAS 38, Intangible Assets, was originally written in 1998, and it is fair to say that pretty well everything has changed in terms of the nature of intangible assets and technology since then.

The IASB is reviewing research from national standard-setters and academics before deciding on a way forward for the intangibles project. Most commentators believe that IAS 38 needs an overhaul, but a specific direction is difficult to find consensus on.

Five prongs

As a result of these findings, the IASB has stated there may be five topics it will explore. The first of these is to identify the potential scope – whether only to address financial statement elements or to address intangible items more broadly. It could also consider items currently outside the scope of IAS 38, such as goodwill or exploration and evaluation assets or cryptocurrencies.

The second topic could look at whether the definition of an intangible asset, and the associated guidance, should be updated for the revisions to the Conceptual Framework for financial reporting.

The third area could look at recognition and would likely be the most significant if taken on. If looked at, the big area would be to consider whether specific recognition criteria should be applied to intangible assets, particularly in relation to internally generated items. It was noted by both standard-setters and academics that people feel it would be good to recognise more internally generated intangible assets. Many also feel that there is a problematic asymmetry between internally generated intangible assets and acquired assets, leading to issues over comparability.

The fourth topic could be measurement, which is probably the hardest problem to solve. Changing the criteria to recognise more intangible assets is one thing, but the big problem is how to actually value them. With the active market definition having generated some negative feedback, the IASB could decide to shake it off and consider instead whether obtaining a fair value for the asset is possible.

The fifth and final topic is disclosures. As is always the case, some commentators say that rather than changing recognition, enhanced disclosures may be the way forward. These could include a description of the asset, why it is key, its expected useful life, and other financial or non-financial information that stakeholders could use in assessing the financial statements. The style and content of these could be difficult to agree, as entities often don’t want to provide such disclosures, arguing that they are commercially sensitive.

End game

So the project on intangibles will mean some heated discussions begin again, with plenty of potential for us to see sparks fly. It will inevitably take a while, so you need to calm down before expecting significant sweeping changes.

The hope is that the IASB is more fearless than it has been with the goodwill and impairment project – the last time it looked to tackle a large standard. The board will decide whether it should address all of the many concerns or focus on what it regards as the most important. There is always the chance that it could decide just to enhance the disclosures.

It has taken so long for the project to conclude that enhanced disclosure would be the least satisfying outcome, leading to a cruel summer, where the excitement of the intangibles project gives way to a more humdrum outcome.