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Posted by Elizabeth Demers, Laura Girella and Lúcia Lima Rodrigues, on behalf of the EAA Corporate Reporting Committee
In response to a call for responses by the Financial Reporting Council on their document entitled, “Business Reporting of Intangibles: Realistic Proposals” on April 30, 2019, the Corporate Reporting Committee of the European Accounting Association (“the CRC”) issued a memorandum outlining our position related the issues raised therein.
Overall, it was our opinion that the implementation of the FRC’s proposals would lead to significant strides, and very much needed improvements in the reporting of intangibles. Acknowledging the measurement uncertainty associated with intangibles, we agreed with the FRC’s proposed non-recognition of intangibles despite there being some disagreement within the CRC on this point. We expressed particularly strong support for the expanded income statement designations of intangibles-related expenditures that are current period oriented versus those that are expected to yield future benefits, together with the proposed accompanying footnote disclosures consisting of management’s rationale for their approach to segregating such costs. We similarly saw tremendous benefit in the proposed supplemental footnote disclosure of the firm’s internally generated intangibles’ continuity schedule that would notionally treat the assets as being capitalized and subsequently amortized over their expected period of benefit. In our opinion, this footnote disclosure of an “as-if” capitalization of the expenditures would be a reasonable compromise that could satisfy both proponents of full on-balance sheet capitalization and those adherents of the current approach to expensing all of R&D and marketing-related expenditures. Indeed, some CRC members view it as not inconceivable that such a footnote disclosure could lead to an eventual standard of on-balance sheet capitalization, much as occurred with stock option expense and financial instrument fair value accounting. Obviously, there would be a significant role for empirical archival academics to play in substantiating the reliability and relevance of any such footnote disclosures should they become mandatory (or prevalent as a voluntary disclosure). Notwithstanding our general support of the proposed expanded disclosures, however, some CRC members considered it necessary for us to acknowledge the potential proprietary costs associated with such disclosures and to refer to academic literature that questions the mandating of information under such conditions. Finally, we found the FRC’s proposals related to narrative disclosures to be somewhat less practicable as currently outlined. Given the extreme variety of intangibles across the economy, we expect that it would be difficult (and maybe even counter-productive) to issue detailed disclosure regulations. Although in our opinion expanded narrative discussions about intangibles would be valuable, it was our opinion that any mandated disclosure policy would be most valuable if it was offered in the form of a general framework, with perhaps industry- or asset-specific “best practice” guidelines being developed over time.