Background
The intended impact of the project is to inform managers about the benefits and costs of external accountability for their firms’ marketing assets, including brands and customer relationships, and inform policy regarding the formal reporting of intangible assets, including marketing assets. Currently, the reporting of marketing asset valuations on firms’ balance sheet is highly restricted and firms tend to not report marketing asset valuations on a voluntary basis, with managers citing the cost of valuation and the lack of clarity regarding the benefits of reporting such valuations as the main reasons.
In contrast, investors perceive information on the financial value of a firm’s marketing assets as highly relevant to their decision making, because these assets tend to be fundamental value drivers. Standard setters recognise that the current restrictions do not reflect the increasing importance of intangible assets in today’s business models. The International Accounting Standards Board (IASB) therefore has added a research project to its agenda that seeks to comprehensively review the accounting requirements for intangible assets.
Our research can help inform standard setters’ decision regarding whether to increase reporting requirements for intangible assets. For managers, our research sheds light on the benefits of reporting marketing asset valuations, with empirical research on this question being scarce, which left managers with little guidance to date. Investors, in turn, can benefit from our research if it creates a greater willingness among firms to report such information on a voluntary basis, thereby creating greater transparency and improving investment decisions.
Research
The underpinning research is a study that is currently in the third round of the review process at Journal of Marketing (AJG 4*, FT50). The study uses a unique dataset that captures Australia’s accounting change to International Financial Reporting Standards (IFRS). Specifically, under the previous Australian GAAP, marketing assets could be recorded comprehensively on the books while they are largely off the books under IFRS. Moreover, because Australian GAAP neither explicitly prohibited nor mandated formal marketing asset reporting, some firms recorded these assets comprehensively while others did not, providing us with a control group of firms.
This context represents a natural experiment setting, which allows us to study the effects of the restrictions in a robust way. Our results show that prior to introducing the accounting restrictions, reporting firms had a lower cost of equity, but not lower cost of debt, and a stock price that more accurately reflected the firm’s true value. In addition, the reporting change had a negative effect on marketing management, with management prioritising short-term marketing efficiency over long-term marketing efficiency. These insights are distinct in that research on the effects of the current accounting restrictions is scarce (due to data availability) and usually only conceptual in nature.
However, as evident in comment rounds and roundtable discussions organised by standard setters, managers need better advice about the effects of reporting such information. Investors in turn frequently complain that managers do not report on intangible assets. Our research findings provide important insights for this discussion, as the costs and benefits can be better weighed now. We recommend that firms engage in voluntary reporting of marketing asset valuations, which will provide investors with relevant information to predict future firm performance and can create the above-mentioned advantages for firms (i.e. lower equity financing costs, improved marketing performance, higher stock price informativeness).
Standard setters will be interested especially in the findings regarding firms’ cost of capital and stock price, with the latter being a surprising finding as marketing asset valuation is controversial due to the need to predict future cash flows from these assets and the potential for error and bias in doing so (indicating lower reliability of the valuation, which is a top reason to keep these assets off the books).
Our future research plans in this area are to better understand whether the benefits of formal reporting, as discussed above, still apply when the reporting is done outside the financial statements (e.g. investor events, earnings calls etc.) and what format would provide the most useful information to the investor community (e.g. valuation approach). The research will make use of secondary data, including text analyses of earnings call transcripts, as well as primary data collected from investors. This further research will guide managers’ voluntary reporting of marketing asset information such that firms can optimise reporting benefits despite current accounting restrictions. For standard setters, information on investor-preferred reporting formats can be useful to better understand reporting requirements from a user perspective. requirements.
Impact
The impact of our current and proposed research could show in two major ways: 1) consideration of the findings in formulating a new policy regarding the formal reporting of intangible assets and 2) firms begin to engage in voluntary disclosure of marketing asset valuations. In terms of policy, the IASB has added a project regarding the reporting of intangible assets to its research project pipeline for the coming years. Academic research that contributes to this project is especially welcome. In particular, the project “will aim comprehensively to review the accounting requirements for intangible assets” and directly acknowledges that “developing enhanced disclosure requirements (such as disclosures about unrecognised intangible assets) would help to address user information needs ... [and] reflect the increasing importance of intangible assets in today’s business models” (Third Agenda Consultation – Projects to add to the work plan, p. 11). Our current research can contribute highly relevant insights to this project, as our natural experiment teases out the effects of the current, highly restrictive rules under IFRS in comparison to less restrictive rules (the previous Australian GAAP). We therefore anticipate that our existing research will receive due consideration with regard to policy implications. Further research, as part of a wider research program on marketing asset reporting, can provide insights on desired reporting formats.
The information provided by our research, both current and future, may be included in exposure drafts of the IASB related to its public consultation on whether and how the standard regarding intangible asset reporting needs to change. Being included in exposure drafts will be an important indicator of the impact of our research. In a subsequent step, the impact of our research could become evident if specific recommendations (e.g. regarding reporting format) are included in a draft standard. In this case, the reach of the impact would be global with more than 160 countries worldwide that have implemented IFRS to differing degrees and that potentially could adopt the revised standard. While we can communicate our current research insights in writing as a response to the IASB’s Third Agenda Consultation, for example, we also plan to consult with the IASB more directly. One way is to apply for the IAAER (Association for Accounting Education and Research)-KPMG research grant that supports research that informs the IASB research agenda (if a further round is opened).
Recipients of this research grant will give regular presentations of preliminary research findings at workshops hosted by the IASB in London, creating an opportunity of direct communication with standard setters regarding specific research needs. With regard to managers, we plan to consult with the Marketing Accountability Standards Board (MASB) – which is a private-sector group of academics and practitioners that seeks to establish marketing accountability – in order to better understand the likelihood of managers considering a voluntary uptake of marketing asset reporting when presented with the benefits shown by our current research. Doing so allows to disseminate our findings to a relevant managerial audience and can help us understand potential, additional concerns which can further inform our research agenda.
Dr Miriam Guenther
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