It's not often that the IP Finance weblog gets the chance to post a response to a response to a response to an original post, but Efrat Kasznik's initial piece on Financial Reporting for Intangibles drew this response from Janice Denoncourt. An anonymous reader then came back this an observation that
"IP is an asset, and one can see that its value should be estimated and reported. However if you are going to 'shine a light' and in particular try to protect investors, then I wonder whether there should be responsibility to report whether a company knows it is likely to be infringing third party rights. This would be very onerous and I would be against making this mandatory. However the 'effect of IP' on value clearly works both ways, and shouldn't investors be protected from this risk too?"Janice now responds as follows:
"You are referring to litigation risk. The simple answer is that, as a minimum, current litigation involving the company must be disclosed if it will have a material effect on the company’s financial results. For example, litigation against a company that represents a tiny percentage of the company’s assets would probably not need to be disclosed. It is certainly more difficult to deal with the disclosure of potential litigation risks, eg the risk of being sued for IP infringement in the future. If the board determines that the risk of litigation is high, then appropriate measures should also be taken to limit or eliminate the risk eg obtain a licence. Strong disclosure of litigation risk (bad news) will tend to lower a company’s share price. If there is high risk of litigation, one would also expect the company to publish a more detailed disclosure to explain the impact.
A company will look at using meaningful cautionary language to minimise the impact of the disclosure, yet still comply with the spirit of the law. The “generally accepted accounting principles” (GAAP) standards used by companies provide that it must set up a ‘reserve fund’ for potential estimated losses due to pending litigation or explain why it has departed from GAAP. Failure to disclose material litigation can result in civil fines, suspended share trading and possibly criminal charges. The regulator can also seek an injunction requiring the company to disclose the litigation.
As for your second point -- the effect of IP value on the business -- I suggest that, as a starting point, one needs to ensure that the narrative disclosure aligns with the numeric intangible figure in the financial statements. If the intangible figure has increased or decreased significantly from the previous year, the company need to explain why. Basically, directors always need to explain the money".