Question

Should all intangible assets (incl. intellectual capital) be reflected in financial statements to reflect the true value of a firm per IFRS?

Do voluntary disclosures in this context make matters worse for stakeholders and/or preparers of company accounts?

Answer 1

intangible asset is classified as an asset, it should appear in the balance sheet. However, this is not always the case.

The reason for the variable treatment of intangible assets is that the accounting standards mandate that a business cannot recognize any internally-generated intangible assets (with some exceptions), only acquired intangible assets. This means that any intangible assets listed on a balance sheet were most likely gained as part of the acquisition of another business, or they were purchased outright as individual assets.

Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets. Proper valuation and accounting of intangible assets are often problematic, due in large part to the way in which intangible assets are handled. The difficulty assigning value stems from the uncertainty of their future benefits. Also, the useful life of an intangible asset can be either identifiable or non-identifiable. Most intangible assets are long-term assets meaning they have a useful life of more than a year.

Examples of intangible assets that are intellectual property include:

• Patents
• Trademarks
• Franchises or licensing agreements
• Goodwill
• Copyrights
• A company's brand

Intangible assets can also include internet domain names, service contracts, computer software, blueprints, manuscripts, joint ventures, medical records, and permits. Brand equity is an intangible asset since the value of a brand is determined by the perception of the company's customers and is not a physical asset.

Intellectual capital is knowledge that can be exploited for some money-making or other useful purpose. The term combines the idea of the intellect or brain-power with the economic concept of capital, the saving of entitled benefits so that they can be invested in producing more goods and services. Intellectual capital can include the skills and knowledge that a company has developed about how to make its goods or services; individual employees or groups of employees whose knowledge is deemed critical to a company's continued success; and its aggregation of documents about processes, customers, research results, and other information that might have value for a competitor that is not common knowledge.

Yes Voluntary Disclosures may affect the distribution of rents among the main categories of a firm's stakeholders- managers, shareholders and debt holders. Managers contribute with human capital, whereas debt holders and shareholders contribute with financial capital (of a different nature, hence with different rights) to the firm. The maximisation of the utility function of each category of stakeholder is a function of the return or remuneration structure (that entails quite heterogeneous components), risk profile, diversification level and business expertise. This suggests that the interactions among the firm's stakeholders are a complex issue in the presence of intangible assets. Severe agency costs and information asymmetry problems have obvious impact on the relationship between shareholders, managers and debt holders, and the way they share risks and returns. Given the nature of a knowledge- intensive firm, asset-substitution and under-investment effects are increasingly important. Very often, investors (shareholders and debt holders) have limited knowledge about the technicalities of the companies in which they invest. The more important the amount of intangible assets, the greater is the scope for managerial discretionary power. Also, as intangible assets cannot serve as collateral, the risk-shifting incentive (asset-substitution risk) increases.