By Daniel Hunter

Small businesses may be missing out on accessing finance, investment opportunities and potential tax breaks because they are failing to properly measure and report the value of their ideas and innovations, a new ACCA (the Association of Chartered Certified Accountants) report produced by Nesta, the UK’s innovation foundation, and IP valuation specialists Inngot, has warned.

The report, based on a pilot study of small businesses in Malaysia — with a UK study scheduled for later in 2015 — has found that small businesses have particular difficulties recognising and reporting on ideas and innovations, even when they possess a range of ‘hidden’ intellectual property (IP) through their investments in ‘intangible’ assets.

This prevents them from accessing finance and, in some instances, qualifying for government- supported funding schemes. For example, countries such as China, South Korea, Malaysia and Singapore offer lower rates of tax for SMEs, while Ireland developed a ‘patent box’ tax break in the 1990s.

Rosana Mirkovic, Head of SME Policy at ACCA, said: “We know that investment in innovation and intangible assets has been growing over the past few decades but finance providers and banks have been unable to evolve the way they work in order to allow businesses to leverage their intangible assets to raise finance. This situation will become increasingly problematic as the gulf between the volume of intangibles built up in an SME and the bank’s ability to exploit its financial value widens. Much of the challenge lies in the uncertainty around how to identify and measure intangibles and crucially, how this translates to tangible outputs and financial gains. This project is centred around this challenge giving small businesses the tools to measure their innovation and have a much better grasp on how it creates value in their business.

"The research comes from a collaboration between the Malaysian Government’s Agensi Inovasi Malaysia (AIM) and Nesta, which developed a National Corporate Innovation Index (NCII) to help Malaysian companies become more innovative and make them more sustainable."

The resulting report, Innovation, intangibles and integrated reporting: a pilot study of Malaysian SMEs, written by Martin Brassell FRSA, co-founder and chief executive of Inngot, and Dr Benjamin Reid, Principal Researcher in international innovation at Nesta, shows that the accounting systems and practices of SMEs have made it harder for them than for larger businesses to create an effective inventory of intangible assets.

The report concludes that conventional management reporting systems are not ideally suited to business models centred on knowledge, or to producing the information increasingly wanted by sophisticated investors. The report highlights better data collection will be required by SMEs to understand their IP. Tools such as the NCII — and broader innovative accounting methodologies such as ‘Integrated Reporting’ — are both potential routes to assist SMEs in understanding and accounting for their knowledge- based assets.

CEO of AIM, Mark Rozario said: “The importance of innovation in corporates is another key value for the longevity of a business. AIM has always encouraged the growth of innovation for all businesses, as innovation is the key to the creation of business success and is vital for the durability of any business.”

ACCA Deputy President Alexandra Chin, who is a practising accountant in Sabah, Malaysia, with a large number of small business clients and who wrote the foreword for the report, said: “In order for SMEs to capitalise on opportunities for innovation, it is essential for them to be able to measure their return on innovation and be able to demonstrate its value to the owners and potential investors. Projects such as the NCII in Malaysia will help businesses to capture and measure the benefits of innovation and we look forward to contributing to the initiative to not only help Malaysian SMEs, but small businesses around the world.”