Headstart: Management - Where next on company reporting?

UK financial reporting faces a dilemma over the reporting of intangibles.

The more we move towards a service and technology-based economy, the higher is the proportion of corporate value that stems from intangibles. Yet these intangibles are often very difficult to identify and value – and hence the current financial reporting rules result in very little being reported on balance sheet.

FRS 10 does permit recognition of some purchased intangibles but virtually no recognition of self-developed intangibles. So balance sheet totals end up a long way from the company’s market capitalisation.

There are two ways in which this gulf could be bridged. One is to develop methods of separately valuing a wide range of intangibles that contribute to corporate value, and changing the accounting rules so that it is permitted or required to reflect these intangible assets on balance sheets. This would necessarily involve bringing on balance sheet numbers that are much softer than are currently found.

The second, more promising, approach is to accept the limitations of the balance sheet but to compensate for those limitations by giving narrative information. The current practice of listed companies presenting an operating and financial review is a good example where words and numbers are used to give a description of the business and its finances in a way that is free from the constraints of balance sheet regulation.

Indeed the ASB’s 1993 statement on the OFR recommends that it ‘could also give a commentary on strengths and resources of the business whose value is not reflected in the balance sheet (or only partially shown in the balance sheet). Such items could include brands and similar intangible items. Where considered appropriate, the value of such items, and increases or decreases in their value, could be discussed.’ Two more recent developments show that giving information on intangibles is still very topical. First, the final report of the Company Law Review Steering Group (part of the current review of company law) proposes that it should become mandatory for listed companies to publish an OFR. The idea is that only broad headings would be set out in the act and that the ASB would give guidance on what sort of details companies might disclose.

The second recent development is the PricewaterhouseCoopers work on ValueReporting.

ValueReporting represents in part an encouragement to companies to expand their reporting beyond the traditional financial numbers so that the markets fully understand their true worth; but it also reflects what is happening already. A surprising number of leading companies around the world have already taken up this challenge and more are sure to follow. ?: