The United States Generally Accepted Accounting Principles - Essay Example

Currently, the standards for intangible assets are found in US GAAP’s Financial Accounting Standards (FAS) 141, Business Combination, and FAS 142, Goodwill and Other Intangible Assets, and in the IASB’s International Accounting Standards (IAS) 38, Intangible Assets, and IFRS 3, Business Combinations. These standards have basically the same definitions for intangible assets, the same criteria for recognizing intangible assets and goodwill, the same method used to account for business combinations (i.e., purchase method), basically the same provisions for amortization of intangible assets and the same provisions if the useful life of the intangible asset is considered to be indefinite.

However, there are still differences and these are discussed in the following paragraphs, along with how, in the opinion of this writer, these should be converged:The first one is the use of cost and the revaluation method. FAS 142 does not allow revaluation of intangible assets. IAS 38, however, allows revaluation to the fair value of intangible assets other than goodwill with the fair value referenced to an active market (Ernst & Young, p. 13). To converge these two, FASB should also adopt the revaluation method for intangible assets.

This is in keeping with IASB’s thrust to move towards fair valuation of the assets. However, the basis for the revaluation may be revisited as currently, the basis is the fair value at an active market, which is not common and which, in turn, makes this method not a readily available option for most of the companies. A revisiting of the basis may be necessary so that the revaluation method will become more accepted in the same way as the revaluation of property, plant, and equipment.The treatment of development costs also differs between the two standards.

Under FAS 142, “development costs are expensed as incurred unless addressed by a separate standard” such as in the accounting for the development costs of computer software. On the other hand, IAS 38 allows “development costs to be capitalized when the technical and economic feasibility of a project can be demonstrated….There is also no separate guidance addressing computer software development costs” (Ernst & Young, p. 12). In addressing these differences, first of all, IASB should consider adopting FASB’s standards for the accounting for the development costs of computer software as this is becoming critical to a lot of companies who use the IFRS.

This will make it easier for companies to address the issue on computer software costs since there will be no need for them to refer to other standards. On the general treatment of development costs, FASB should allow the capitalization of development costs under the circumstances contemplated for in IAS 38. This will give alternative treatment to the companies who are incurring a lot of costs in developing their products.The third and last difference is on advertising costs. Under IAS 38, advertising costs are “expensed as incurred”.

Under FAS 142, these are also expensed as incurred unless the costs are for direct-response advertising. FAS 142’s treatment may create arbitrary and subjective decisions on the capitalization of advertising costs. It will also create difficulties and will be costly because, according to Andrew Finger, the companies will need to study (or get a study) to assess if the customer responded specifically to the advertising. For this difference and to address the disadvantages stated for FAS 142, it will be better if advertising costs will be expensed as incurred, with no exceptions to this treatment.