You Can’t Touch This:
The Intangible Assets Debate

Since the 90s, business leaders have understood that digitization would transform the fundamental makeup of our economy. That vision has come to pass as the engine of our economic growth has begun shifting from goods and services to intangible assets. 

CPAs have always approached intangibles cautiously but as they increasingly drive for economic growth the profession may need to reconsider its approach.

This paper introduces the intangibles conversation and asks CPAs to consider what role the profession is meant to play in this exciting—and controversialspace.

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Business and policy leaders are currently engaged in a critical discussion about how to value and report on intangibles. It’s time for the accounting profession to play a leading role in the debate.

We encourage you to read CPA Ontario’s 2021 whitepaper “You Can’t Touch This: The intangible assets debate” and join the discussion.

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The rise of the intangible economy


A snapshot of the local intangible economy

In advanced economies, intangible assets make up a greater proportion of business value and are recognized as a key source of innovation and growth. In the last 15 years investment in intangible assets has grown 400 per cent, eclipsing investment in tangible assets.

Covid-19 has accelerated the size and importance of intangibles in our economy.

Some 2.5 million Ontarians shifted to working from home and SaaS companies benefited from the resulting unprecedented level of investment in digitization. 

The pandemic has accelerated the intangible shift

New intangible assets like cryptocurrencies, carbon offsets and non-fungible tokens have exploded onto mainstream markets. This has spurred debate as to whether and how regulatory and accounting rules should be applied to these new assets.

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The intangible dilemma and accounting’s place in it

The intangible dilemma

Is there an intangible black hole in markets?

Does treating intangibles as intermediate expenses have a distorting effect on decision-making and investment? Though book value is no substitute for fair market or business value, the widening of what is called the financial reporting “black hole” appears to correlate with a growing volume of intangible capital. Advocates suggest that capitalizing intangibles will help boost equity across the board but not everyone agrees that intangibles are inadequately represented in financial reporting to date.

Can accounting be part of the solution?

Economists and policy analysts have advocated boosting the intangible economy. But, public debate has not reconciled the complexity of accounting for these hotly contested assets.

If the momentum behind intangibles continues to grow, CPAs will need to raise their voices and insist that the accounting implications of intangibles be addressed.

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The accounting debate on capitalizing internally generated intangibles

The accounting debate

Intangibles have become a divisive and contentious issue in the accounting community. Standard-setters, regulators and academics have examined and re-examined the matter via projects, studies, calls for comment, expert groups and committees with multiple positions emerging.

The case for capitalizing internally generated intangibles

The pro side argues that intangible assets should be classified as capital to avoid distortions in business investment and resource allocation. It is thought that when financial statements fail to capture and reflect intangibles, they create distortions between companies that generate their own assets and those that acquire them.

Some contend there may also be spinoff benefits, such as incentivizing adaptation to climate change and addressing transparency concerns around R&D spending.

The case against capitalizing internally generated intangibles

Conversely, those who support the status quo contend that accountants should not lend credibility to problematic valuations like those that include intangibles.

CPAs must meet their professional obligations by taking reasonable steps to ascertain the veracity of data going into intangible valuations. Valuing intangibles that could either generate a fortune in revenue - or nothing - requires too much guesswork and would place the profession on shaky ground.

Is disclosure the catalyst to move the debate forward?

Others acknowledge the difficulties of capitalizing intangibles and suggest sidestepping the issue by enhancing disclosure requirements.

Are we ready for the future?

Rather than wait for revised accounting rules to be hashed out, the fast-moving tech sector has developed their own measures to assess the value of their internally generated intangibles. These are not captured in financial statements, creating a disconnect between traditional reporting and intangible metrics.

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Mounting momentum to re-think intangibles

Mounting momentum to re-think intangibles

Concerns abound on the difficulty of measuring intangibles. A decade ago, intangible-heavy start-ups were valued based on rudimentary proxy measures. No doubt some data is better than none but as economies digitize, advances in data analytics, AI and quantum computing may make valuing intangibles fast and affordable.

In the meantime, economists and analysts are gaining confidence in putting figures to intangibles. As these measures become more precise and ubiquitous, companies will gain the sophistication required to quantify them.

Standard setters and authorities looking at the rise of intangibles

As companies develop their own methods of measuring intangible assets, the desire for standardization grows. The momentum is building for the creation of new approaches and additional disclosures to provide some measure of guidance for those trying to evaluate these types of assets.

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Where to from here?

Where to from here?

New opportunities for the CPA profession

In light of the growing importance of intangibles, future-focused sections of the profession are encouraging CPAs to reposition themselves in the intangible economy. Some have suggested that CPAs have transferable skills that will equip and prepare them to tackle intangibles in a different way.

As the issue of intangibles tops agendas in the coming years, CPAs should inform themselves about the various opinions of those in the profession who are already working in the space.   

How should CPAs proceed?

CPAs can expand the scope of their practice by applying professional skepticism and analytical tools to intangibles, however they must also know where to draw the line in accordance with their fiduciary obligations. The profession is well versed in providing greater disclosure about their intangible assets and risks. Putting more information into the hands of investors, especially those who are newer to the intangible economy, could help dislodge the intangibles debate from the impasse it has been stuck in.

How is the profession adapting to the intangible economy?

As a profession, we also must be focused on equipping our CPAs with the skills and training necessary to add value to knowledge economy businesses now and in the future. Through partnerships with organizations such as the Canadian Council of Innovators, we’re supplying the knowledge and training CPAs need to continue providing strategic advice in the modern economy.

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