All Intangible Assets - Coursework Example

?Financial Reporting a) All intangible assets except those specifically treated in any other IAS, would fall under IAS 38. And there are exceptions to such intangibles under IAS 38 too. Intangible assets are those that are not tangible without a physical form. They are nonmonetary in nature. They are capable of being separated and arising out of contractual and other legal rights. Such rights need not be transferable and separable from the entity owning them or other rights and obligations of the entity (IFRS.org). The intangible asset must be identifiable, non-monetary and formless. It is a resource controlled by an entity as a result of past events with potential to give future economic benefits to the entity (ICAP.org). In order to be recognised as an intangible asset, the intangible must conform to the definition and meet the criteria of IAS 38 above. The criteria emphasizes the requirement that it should be probable that economic benefits of the asset will flow to the entity in future and measurement of cost of such as an asset should be capable of being measured in a reliable manner. (Kirk, 2008). While permitting some internally generated intangible assets such as computer software, copyrights etc, IAS 38 specifically prohibits internally generated brands, mastheads, publishing titles, customer lists and similar items from being recognised. They are not recognised even though they meet some of the criteria for recognition of intangible assets. IAS 38 specifically states internally generated brands among others to avoid confusion (IFRS.org). b) Capitalization of internally generated brands would bring advantages to an entity as much as the acquired brands would give. Thus, internally generated brands if valued and shown in the balance sheet, would give a better picture of the entity. The ratio : Profit After Tax (PAT ) / Fixed assets + Net current assets would show a much higher Return on Investment (ROI) if brand value whether acquired or self-generated is excluded. With its inclusion, the resultant ROI will be a better indicator of the company’s position. If not included, the return on assets would represent a realistic figure. If allowed to be included, the entity’s brand management will be more sharpened. Debt equity ratio of the entity will show improvement. Since it will reduce gearing ratio, entity’s borrowing capacity will increase. In the case of companies in the services sector where there are low levels of assets but strong cash flow and customer base , capitalisation of brand whether acquired or otherwise would help them show a much better picture of strong asset-background. With brands capitalised, it would prevent hostile takeovers as the entity’s value would be prohibitive. Brand value having no depreciation would not impact on the Profit & Loss Account. With consistent promotional efforts brand value can be maintained. In case of acquisition by the entity, the goodwill value will be at a minimum with the presence of internally generated brands also on the balance sheet. It would be helpful while comparison with other companies operating in the same markets or between companies showing mixture of acquired and internally generated. In an insolvency situation, creditors would stand to gain by conversion of brand value into cash especially when worthless inventories are shown as current assets in the balance sheet. Brand value on the balance sheet gives business a competitive advantage. Without the capitalisation of internally generated brands, comparability with a rival entity is not possible. The brands whether acquired or generated internally entail heavy expenditure but help the entity earn substantial income thus contributing to the entity’s net worth. There are instances of entities selling their own brand to third party companies and later reacquiring from them. Unless they have a real value, this would not be possible (caprofesion.com, n.d.). If internally generated intangible are excluded in the balance i.e not allowed to be capitalised, it would show a misleading picture when evaluating a company (Springub, 2010). The only reason adduced by the IAS 38 for prohibiting capitalisation of internally generated brands is that cost of their creation is indistinguishable from expenditures for business development. In pharmaceutical sector, intellectual property represented by patents and trademarks in the nature of brands lacks protection for want of recognition in the wake of IAS 38. This is a serious setback for pharmaceutical sector due to their exposure of their huge investments on intellectual property rights to the arbitrary prohibition (Petrova, 2011). c) Glaxo SmithKline, a U.K. based company have shown in their financial statements acquisition of intangible assets for the past two years as follows. They have shown goodwill and other intangible assets separately in the Balance Sheet. Year 2008 : ? 5,869 m and 2009 ? 8,183 m Year 2009 : ? 3167 m partly offset by currency movements and the amortisation and impairment of existing intangibles (together ? 2314m, net ). Had the company not capitalised, total non-current assets shown as ? 25,292 as at 2009 would have been ? 22,128. And profit before taxation for the year 2009 shown as ? 7,891 would have been reduced to ? 4,724. And profit after taxation from ? 5,669 to ? 2,502. The basic earnings per share shown as 109.1 pence would have been only 49 pence by roughly dividing the above profit after taxation of ? 2502 by the number of basic shares i.e 5,069 million (GlaxoSmithKline, 2009). Similarly for the year 2010, details are as follows. For the year 2010 , the company has acquired ? 252 million worth of intangibles. Thus, total non-current assets shown as ? 26,192 would have been ? 25,942 in the absence of capitalisation of intangible assets. Profit before taxation would have been ? 2,905 instead of ? 3,157 as shown. Profit after taxation which was ? 1,853 would become ? 1,601 if not capitalised. Basic earnings per share shown as 32.1 pence would become 31. 5 pence by roughly dividing the after tax profit ? 1,601 by the number of shares of 5,085 million. Thus, it would appear that capitalisation of intangibles impacts on the ROI of the company positively while affects the earnings per share negatively. (GlaxoSmithKline, 2010). d). All brands are originally ‘internally generated’. When an entity acquires a brand, the fact remains that the brand had been internally generated by the seller of the brand unless the seller had purchased it from an original creator. There can be no denying the fact that all brands have the origins of internal generation. When IAS 38 recognises the acquired brand (once internal), there is no reason why internally generated brands at the hands of the owner entity cannot be recognised. If the reason is that expenditure cannot be distinguished from other expenditures, there is no stipulation in the IAS 38 that an acquired brand’s cost should be distinguishable in the books of the seller. Such a restriction would have ensured against an inflated valuation of the acquired brand. It would be logical if intangible assets in the form of brands are rendered not recognizable regardless of acquisition or internal generation. Partial treatment of internally generated brands would therefore not only deprive the entities of their competitive advantage but also a realistic ROI in their financial statements. While goodwill which lacks transparency is allowed to be capitalised, expenditures on brand creation represented by identifiable set of expenditures should also be allowed to be capitalised. This is a disincentive for research and development activities especially for pharmaceutical sector‘s brand creation overtime. References Caprofesion.com. (n.d.). Brand valuation- Concept and Relevance . Accessed 1 Nov 2011 GlaxoSmithKline. (2009). Annual Report 2009. Accessed 1 Nov 2011. GlaxoSmithKline. (2010). Annual Report 2010. Accessed 1 Nov 2011. ICAP.org. (n.d.). Intangible Assets - IAS 38. Accessed 1 Nov 2011 IFRS.org. (n.d.). IAS 38 Intangible Assets. Accessed 1 Nov 2011 Kirk, R. (2008). IFRS: a quick reference guide. Oxford: Butterworth-Heinemann. Petrova, R. (2011). Accounting treatment of intellectual property in the pharmaceutical industry. Trakia Journal of Sciences , 9 (4), 63-68 Accessed 1 Nov 2011. Springub, F. (2010). Club Med Asset Reporting. Norderstedt Germany: GRIN Verlag. Read More