Analysts wary of balance sheets
Analysts have little faith in balance sheets and their ability to show the real value of intangiable assets, according to a new report.
They are also against the introduction of a statutory formal reporting structure for intangible assets and rely on ‘soft factors’ in investment decisions.
The report, called Valuing Intangibles and sponsored by the ICAEW, looked at the growing complexity of assessing and communicating the value of intangible assets, such as intellectual capital and supplier relations, and revealed that ‘subjective evaluation’ can and does account for 20-60% of a company’s value.
Added to this, the corporate world sees the balance sheet as a limited tool when putting a value on companies.
The survey also found that adding intangibles to the balance sheet was perceived by most interviewees, including fund managers, finance directors and analysts, as increasing the complexity of the valuation process.
Dr Caroline Vance, co-author of the report, explains: ‘Analysts feel intangibles are not dealt with consistently by corporations, but introducing formal measurement and reporting may well lead to greater clarity. Many analysts have little faith in the transparency of balance sheets, often seeing them as an opportunity to obscure the true state of affairs.’
Authors of the research suggest that instead of a formal reporting structure for intangibles, companies should create, test and improve the measurement of intangibles and reporting systems internally before reporting to the City; focus on communication on a company’s respective industry analysts and encourage dialogue with leading investment analysts.
Paul Ormerod, who led the research, said: ‘Finance directors must understand internal investment in their own assets and reporting on their own brands before telling the City. The endgame is to communicate this to the City, but at a time when companies and FDs are confident to discuss measured value and how it contributes to profitability. Long term, the external investor community will look for those who recognise the central nature of intangible assets, and manage the area wisely.’
Links
For & Against: Disclosing non-financial data