Normative accounting for intangibles – a briefing for board directors from Rethinking Capital 

05 Jul 2023

A briefing note for non-executive directors and boards on applying normative accounting for intangibles in net zero transition decision governance and reporting  

Rethinking Capital is a thinktank working on technical accounting solutions for climate action. It has set up working groups named The to explore the financial, mindset and other benefits of its net zero decision governance and reporting framework. The framework applies normative accounting and governance to enable informed decision-making on the intangibles impacted by a net zero transition commitment. It is designed to tackle the root cause of the climate crisis—being upside down accounting incentives and, by cause and effect, an upside down transition mindset.

The Centre for Climate Engagement is pleased to share this briefing with our network.

This is a fresh, new, back to basics accounting approach to any commitment to achieve ‘net zero by 2040’ or ‘a 50% reduction in Scopes 1 and 2 by 2030’ for example. At its heart is the simple application of double-entry bookkeeping to recognise each £1 of capital allocated into building sustainable relationships with the environment, nature, people and society as investments into intangible assets on the balance sheet—and to revalue the impacts of that £1.

The framework uses simple tools already familiar in business, including the balance sheet and risk register. It begins by recognising that the company’s net zero commitment has converted an externality into an obligation.

The main features and benefits of the framework for non-executive directors and boards include:

  1. The best available tools for the job. Better informed decision-making enabled by properly accounting for and governing the intangible assets, obligations and risks impacted by the net zero transition commitment.
  2. Many key financial metrics will materially improve. As the company allocates capital into and achieves its net zero transition commitment over time, each of profitability, shareholder equity, earnings per share, return on equity and debt to equity ratios will materially improve.
  3. Creates positive, immediate and certain incentives. Giving the financial incentives to invest into meeting the transition commitment and further incentives to speed it up—flipping today’s upside down incentives.
  4. Should remove the risk of personal liability. Because using tools that don’t recognise the commitment as an obligation and don’t recognise the impact on intangibles is like being handed a grenade to fix a tyre puncture.
  5. Transparency of the important management decisions. Using management accounts to inform and report decisions to allocate capital to the transition in annual budget setting and strategic planning.

“It is exciting to see Rethinking Capital’s fresh approach to enabling more transparent accounting that can facilitate improved board-level understanding and stewardship of intangible assets to accelerate the net zero transition.”

Emily Farnworth, Director, Centre for Climate Engagement

For further details, please download the full briefing paper below.

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