When we look at an organisation’s financial accounts (i.e. the income statement, balance sheet, cash flow, notes etc) – it is only the financial value of assets and liabilities, which the entity has acquired which usually are shown in the accounts.

The value of the brand (or brands) which the organisation has built up during its lifespan is not included as this is categorised as ‘intangible’ assets, and as such cannot be included in the financial accounts under the current methods of accounting for brands.

It is only when a company is sold, that the acquiring entity can capitalise this brand value and actually include it on the balance sheet. This will typically be in form of good which is the surplus value over the equity, which the acquiring company is paying for an entity.

The phenomenon of ‘hidden intangibles’ has arisen for perfectly logical reasons. Accountants do not like to recognise assets unless there has been a transaction to support the value that appears in the balance sheet. To many accountants, the historical cost convention is a prudent measure to prevent creative accounting and the distortion of reported asset values.

Unfortunately, the ban on assets appearing in balance sheets unless there has been a separate purchase for the asset in question, or a fair value allocation of an acquisition purchase price, means that many highly valuable intangible assets never appear on balance sheets. This may seem strange to ordinary, non-accounting managers, and might give a misleading picture for a potential investor as some (acquired) intangibles could be accounted for while others are not.

The Chartered Institute of Management Accountants (CIMA) together with Brand Finance plc have produced a research report entitled ‘Global Intangible Financial Tracker 2015’ in which 58,000 companies across 120 stock markets were analysed. It reveals that their total market value was $71 trillion at the end of 2014, of which 47% was accounted for by tangible assets, 16% by reported intangibles and 37% by ‘undisclosed value’. The proportion of value represented by undisclosed intangibles is as high as 70% for companies in industries such as pharmaceuticals and advertising.

So what is the fuss about? – Failing to account for intangibles such as the brand value, adds to the unhealthy appetite for short term gain over long term value creation and limits companies understanding of where their true value lies. Without a regular valuation of intangibles, the value of the company in question is not known, leaving it potentially vulnerable to under-priced bids from outsiders.

What might happen in the future? – Maybe a change of the way accountants are thinking, a change of corporate mindset (as stated by CIMA). The world of accountancy is a changing place, and as the world in general is developing, so will the way in which organisations accounts for and reports their financial values.

Per Simonsen is Finance Director at Silver