November 29, 2021
With an ever-increasing share of intangible assets in enterprise value, their accounting is one of the most debated topics among accounting practitioners, investors, and academics. As of now, acquired intangible assets make it on the balance sheet, internally generated intangibles are left out. Some call for the valuation and reporting of all intangible assets on the balance sheet, or at least in the MD&A. The skeptics doubt the reliability, relevance and efficiency of such information, considering the challenges and costs related to their valuation.
New research findings suggest that (acquired) intangibles on the balance sheets of listed companies are of high value-relevance for stock prices and equity investors. An international research team from the US and Germany analyzed the effects of intangible asset disclosures on stock prices in the three-month period post disclosure, for a sample of 16,508 observations.
Both definite and indefinite intangible assets are positively associated with stock prices. Customer-, contract- and marketing-related intangible assets show high value relevance. The highest value relevance is found for technology-related IA. This is in line with acquisitions and valuation multiples in the tech sectors. The only intangible asset class showing no value-relevance are non-compete agreements.
The authors conclude that any limitation of the accounting and reporting of intangible assets – as currently discussed and considered by FASB – would result in losses in decision-relevant information for equity market participants.
Please download the research in full text here.
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