A joint report from the Association of Chartered Certified Accountants (ACCA) and Deloitte, The capitalisation debate: R&D expenditure, disclosure content and quantity, and stakeholder views, found an increasing gap between the values of companies based on their share price and the tangible asset values in their financial statements.
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.
According to the report, 77% of companies report no R&D activity in their financial statements, whereas 62% write it off immediately so as to not treat the cost as an investment.
Europe shows a high variation in the accounting treatment. 60% of the companies that write off all R&D spend are Austria, Germany, Greece Switzerland and Finland. 40% of those that write off all are Italy and Sweden. 50% are in UK, France, Belgium, Denmark, Norway and Netherlands.
ACCA head of corporate reporting and lead author Richard Martin said: “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.”
The report also looks at what these findings mean for the intangibles gap and what the future could hold.
Martin said: “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.”
By Asena Degirmenci