The Influence of Institutional Factors on the Levels of Unaccounted for Intangible Assets in Firms

This research explores the influence of institutional factors on the ratio of unaccounted intangible assets to total intangibles. From an analysis of the top global firms by intangible asset value, the results indicate that a firm’s sector, size, financial leverage, profitability, board size, and organisational complexity are all significant factors affecting the amount of intangible assets that remain unaccounted for in a firm’s financial statements. Further, the most widely used accounting standards worldwide (IFRS and US GAAP) severely limit the types of intangibles that can be recognised in the balance sheet. Hence, differences in the levels of unaccounted intangibles depend less on a firm’s accounting and reporting policies and more on the activities a firm chooses to invest in and its propensity to innovate. In practical terms, our findings alert financial statement users to the sorts of conditions where intangibles are more likely to be underestimated. For standard setters, we reveal where reforms are urgently needed to improve accounting for intangibles. On the theoretical side, our results enrich the literature with the institutional factors that influence how much of a firm’s intangibles are accounted for.