The Recognition of Intangible Assets - Assignment Example

The recognition of intangible assets: should it be permitted? Refer to contemporary practice and research. What is the worldview? In the current economy scenario, intangible capital sometimes called intellectual capital has great value. According to the report of the Federal Reserve Bank of Philadelphia more than one trillion dollars was spent in the year 2000 on intangible assets. But some of these assets are not shown in the Statement of Position. There are various accounting standards that have evolved in the past and present to suit various businesses with regard to the treatment of intangible assets in accounting. The widely known GAAP or Generally Accepted Accounting Principles have slated inconsistency in the calculation and reporting of intangible assets. The objective of this essay is to find examples of current practice, alternatives and research in the field of calculating intangible assets by considering the importance and reliability of such accounting standards. There have not been many changes to the accounting principles that deal with internally created intangible assets for the past seventy or more years. Intangible assets purchased by the company are treated as a capital and the cost involved in internal generation of these treated as an expense incurred by the company. While assessing the intangible assets of major corporates knowledge capital amounts to $211, $170 and $112 for Microsoft, Intel and GE respectively. There are several drawbacks when intangible assets are not reported and this reflects in the financial statement of knowledge based companies where the importance and reliability of intangible assets are not met. The Financial Accounting Standards Board does not provide any provision to treat internally generated intangible assets as capital though the board has made procedures to measure technical feasibility of calculating intangibles. This provision is applicable for companies that are retail the goodwill purchased during acquisition (Siegel, P. & Borgia, C. 2000.). The IAS 38 was developed to evolve a policy to account intangibles assets that are not accounted in any other IAS. IAS requires a business to recognize intangibles only when the asset satisfies certain criteria. The standard has also derived procedures to treat the carrying amount of intangibles which requires certain disclosures about the asset. According to IAS 38, an intangible assets is a recognizable non monetary assets that has no physical form and it is under the control of a company and the asset has been maintained as an outcome of past performances(self creation or buying) and when future economic advantages (cash inflows) are anticipated. Intangible assets exist when the asset can be identified, controlled and used for future benefits. Some of the commonly known intangible assets are copyrights, licenses, patents, import quotas, computer software, etc. Intangible assets can be acquired by exchange of assets, purchase, self creation (internal generation) and as a part of merger. As per IAS 38, intangible assets (internally generated or purchased) is recognized only if the cost can be calculated by a reliable method and if the assets amounts to future benefits of the company. There are few additional conditions for recognizing internally generated assets. The possibility of future gains has to be supported by assumptions and it should be reasonable (IAS 38.22). The possibility condition is recognized as a satisfactory calculation of intangible assets when they are purchased separately or acquired through acquisition (IAS 38.33). When then intangible asset does not meet the above mentioned criteria, IAS 38 directs the business to treat it as an expenditure whenever the cost was incurred(IAS 38 Intangible Assets (n.d)). The future benefit criterion is associated to the control criterion in the definition of asset. Hence the aspect of control is evident in the case of property rights through legal, contractual or statute means. The treatment of intellectual property is thus comes under legal aspects rather than as an intangible assets in the balance sheet. In short, the economic or behavioural aspects can influence the uncertainty of the anticipated future benefits from investment and the amount of policies to record the expense of investment will influence the accounting treatments of the expense (Bosworth,D.L. & Webster, E. 2006. p.42) In most of the cases the management of a company has the discretion to account various intangible assets. The decision of the management to treat intangibles is related to the power of the technology that affects the operation of the business, the duration of the technology cycle and property rights related issues that enable the business to allocate the benefits of investment. The effect of the treatment of intangible assets is of more significance than the basic and contracting aspects related to the basic operations as mentioned in GAAP. The result from this kind of treatment envisages that unregulated recording of recognisable intangibles are correlated to the basic econpmic aspects than the purchased goodwill and research and development assets owned by a company. The result also indicates that if the power of the management is restricted with formal accounting standards it will lead to a reduction in the value of intangible assets rather than appreciate the value of the asset in the balance sheet (Wyatt, A. 2005.). The IASB has undertaken a proposal in association with FASB that deals with the treatment of intangibles other than goodwill. The proposal to research was taken due to inconsistencies in current treatment methods for various types of intangible assets based on their origin. The scope of the research is applicable to one, few or all kinds of intangibles and the objective of the research is related to the recognition, calculation and disclosure of such assets. The research had given importance to initial accounting of recognizable intangibles instead of those obtained by acquisition with emphasis on self created assets and the subsequent accounting of all recognizable intangible assets. The objective of the research thus comprised the intangibles acquired, acquired through government grants and a set of assets not used in business for initial accounting purpose and excluded intangibles acquired through other modes International Accounting Standards Board (n.d). Certain countries have not adopted a specific standard for accounting intangible assets. In thse countries self created assets are shown in the balance sheet. The United Kingdom and Australia use this policy while accounting intangible assets. Business enterprises may refuse to use this method because they will be required to remove the intangible assets from the balance sheet and show as a cost in the profit and loss account at their basic cost when capitalising the asset. On revaluation, the entry is reversed if there is enough reserve allowed to write off the intangible asset. (Cunningham, D.H. 2002 p.119). When inconsistencies arise in the accounting of intangible assets interim measures are adopted before the finalisation of a proper accounting standard in any country that does not follow any recognised standards (Accounting for Identifiable Intangible Assets. 2000). In the United States, intangible assets are of great importance. The skill of workers and know-how, business procedures, intellectual property like copyrights and patents, brands and innovative work organizations form the major intangible assets of American economy. Investment in intangible asset is crucial for America because there is a labor shift that focuses on technological innovation rather than on industries and manufacture. Thus investment in these assets is crucial for sustaining in the market and economic progress. in the American economy investment is made on intangible assets like knowledge like investment in physical assets are made in the manufacturing industry. Therefore, investment in intangible assets is required to multiply the formation of more intangible assets in this type of economy. Intangible assets are recorded in the financial reports through several methods. The assets are usually valued totally and sometimes it is valued overtly. There are several methods to raise capital in the intangible form that comprise licensing, securitization, outright sale and lending. Recent research and changes to accounting standards have included the accounted of intangible assets in the financial market in a better way. However the evolution of these methods is comparatively slow. There is no specific criterion to include intangible assets in the balance sheet or income statement. There is no proper financial tool to assess the value of intangibles. Every single asset should be valued in a different way and so each asset is unique in its features. The assumption of risk related to intangible asset in the financial market can be assessed only with the happening of events like market meltdown. To use the intangible assets in an effective manner government regulations and accounting standards should be developed to accept, use and distribute these assets in the economy. Though there are several disadvantages related to these assets but intangibles can be monetized by leveraging the system to exploit the unexplored, extremely useful and exciting vistas of efficient and transparent financial market for intangible assets with exclusive regulatory bodies. The advantages of using intangible assets should be publicized and therefore increase the utilization and understanding (Jarboe, K.P. & Furrow, R. 2008). There are arguments in the treatment of information assets as intangibles. The argument says that the valuation of asset should be made from an international perspective rather than specific to a region or nation especially when it comes to the regulation of accounting that impact the inclusion of intangibles in financial reports. Another argument says that inclusion of intangibles in financial reports is important for commercial and other reasons. Hence information assets should be treated as a specially classified type of intangibles assets since it has a value similar to that of a physical asset. The Accounting Standards Board has revised the accounting principles and have effected change in the valuation and recognition of cost as expense and as capital. The new guideline is according to the IFRS IAS 38 that defines and recognize intangible assets. The 2008 version of accounting standards includes research and development expense in the self created intangible assets. Section 3064 details the procedure and all intents and purposes are the same. Usually research costs were treated as expenses incurred and development costs were capitalized. Though the new standards come into vogue from October 1, 2008 earlier use of the new standards is not prohibited. However, cooperative entities shall use the section only after the interpretive guidance association with the use of the standard is issued. The new section envisages a new accounting policy for all past accounts prepared after October 1, 2008. Earlier sections that dealt with intangible assets were 3062 and 3450 and this stands cancelled with the implementation of new section 3064 (Asset Recognition. 2008). Though Section 3062 is replaced by Section 3062, section 1000 is amended to explain the criterion for recognition of an asset (Closing the GAAP, 2008) The emergence of management techniques like lean manufacturing and six sigma has enabled management accounting to change from tradition method based on production process to the management of key issues. This conceptual change is due to short life cycle of products and technological innovation with increasing competence in the business world. The International Accounting Standards has recognized this paradigm shift and supports the life cycle costing method and gives better possibilities for strategic management accounting (Seyfert, W., Roseberg, D. and Stack, E.M. 2006). The FASB has come up with a definition under Opinion 17, FASB statement no.142 that requires business enterprise to write off intangibles according to the useful life until the asset becomes impaired. The impairment of such assets are required to be verified from time to time so that assets with definite lives may be amortized (Pronouncements Issued by Other Standards Setters. 2007). The FASB 142 classified intangible assets into intangibles open to amortisation and intangibles not open to amortization which means assets with definite lives and assets with infinite lives respectively (Intangible assets (n.d)). Intangible assets can be written off when the value of the asset is zero. Hence the owner need not wait for the asset to be sold or scrapped to write it off (Accounting Advice. (n.d)). The amortisation of goodwill in income statement has been called for change by certain accountant because the proposed changed will pose as an inappropriate disincentive while recognising intangible assets. This is because appropriate classification of goodwill is required along with other intangible assets (Lucas, T.S. 1999). The accounting standards are different for different intangible assets. Customer database, brand names and mastheads are not recognized as intangibles unless they form a part of acquisition (Parker, C. n.d). While accounting intangible assets a new method based on separability is considered to assess self created assets and account them in the balance sheet. The separability defined whether the assets was purchased, acquired or created by a business enterprise (Tollington, T. 1998). Advocates of intangible assets require better use and attention to the present standard while realistically valuing and reporting intangible assets. The various aspects of goodwill should be reported in financial reports which were ignored during the IFRS3 and it would be the best practice if these assets are completely analyzed to support the amount of expense allocated to purchase goodwill. Therefore intangible assets should be recognized as a portion of accounting standard. This will enable enterprises to adopt transparent and realistic policies while reporting goodwill (Whitewell, S. 2008). In conclusion, considering the change in the nature of business conducted by economies around the world intangible assets should be recognised while accounting. In the contemporary business setting more investments are made on intangible assets like knowledge and copyrights. Hence recognition of intangible assets is required and may be permitted in the wider perspective of business development and economic progress that result in proper accounting of these assets. Reference Accounting Advice (n.d) Retrieved from http://www.lemoineandjames.com/gaap/45intangible.html. Accessed on September 9, 2008. Accounting For Identifiable Intangible Assets 2000. Retrieved from http://www.companydirectors.com.au/Policy/Submissions/2000/Accounting+for+Identifiable+Intangible+Assets.htm. Accessed on September 9, 2008. Asset Recognition. 2008. Retrieved from http://www.bdo.ca/library/publications/assuranceandaccounting/documents/AssetRecognition-Section1000and3064.pdf. September 9, 2008. Bosworth,D.L. & Webster, E. 2006. The Management of Intellectual Property. Camberley: Edward Elgar Publishing, 2006. September 9, 2008. Closing the GAAP: New Canadian GAAP Pronouncements Affecting 2009 Financial Statements. April 7, 2008. 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Retrieved from http://www.atypon-link.com/AAA/doi/abs/10.2308/accr.2005.80.3.967. Accessed on September 9, 2008. . September 9, 2008.   Read More