UK - Fund managers could be making ‘subjective evaluations' for up to 60% of a company's value, according to a report by the Institute of Chartered Accountants in England and Wales (ICAEW).
The report, entitled Valuing Intangibles, reveals ‘soft factors’ including stakeholder relationships and staff quality are often relied on in investment decisions. This subjective evaluation can account for 20-60% of a company's value. ICAEW’s report looks at the assessment and management of assets in a digitalised, knowledge and service-based economy. The report discusses the findings of interviews conducted with city analysts, fund managers and finance directors of major corporations.
ICAEW found that companies are keen to increase communication on their intangible assets to explain the gap between balance sheet values and market values. “The suspicion is that poor communication of the valuing of these assets contributes to share price volatility,” said the Institute. “Although companies view it as in their interests to make communications on intangibles clearer, both corporate and city interviewees are opposed to the introduction of statutory formal reporting systems.”
Dr Caroline Vance, co-author of the report added: Analysts feel intangibles are not dealt with consistently by corporations, but introducing formal measurement and reporting may well not lead to greater clarity.
“Many analysts have little faith in the transparency of balance sheets, often seeing them as an opportunity to obscure the true state of affairs.
Instead of formal reporting, ICAEW’s report makes the following suggestions to corporate players:
-Create, test and improve the measurement of intangibles and reporting systems internally before reporting to the City.
-Focus communication on analysts who will influence their peers as new types of reporting are released to the City.
-Encourage dialogue with leading investment analysts, giving them the opportunity to raise questions.
-Before reporting on intellectual property to the City, companies need to be able to track trends and report to their board on the strength of assets to support more intelligent internal investment decisions. Paul Ormerod, who led this research, said: Finance directors must understand internal investment in their own assets and reporting on their own brands before telling the City.
“The end game is to communicate this to the City, but at a time when companies and financial directors are confident to discuss measured value and how it contributes to profitability.
“Long term, the external investor community will look for those who recognise the central nature of intangible assets, and manage the area wisely.
By Janet Du Chenne
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