Intangible Assets Recognition and Measurement under US GAAP and IFRS - Research Paper Example

The US GAAP categories of intangible assets: (1) Limited life intangible assets and (2) Indefinite life intangible assets. An intangible asset is an asset other than financial assets lacking physical appearance (SFAS 142 Glossary) and is separately distinguished from goodwill that is derived from any contractual or legal rights. These rights can be separated or transferred, sold, licensed, exchanged, or rented. There is no contingency regarding them being separable or transferable.

Contrast:
To qualify as an asset under IFRS, the intangible right should be identifiable. It should have control as per the guidelines provided in IAS 38.113-.116. Another important benchmark to qualify as an asset, the intangible right’s cost should be measured in a reliable way (IAS 38.21) In the case of an intangible asset that has been purchased or acquired through a business combination, it is considered a requisite condition that the asset will bring future economic benefits to the organization.

To qualify as an asset under US GAAP, the intangible asset must have a relevant attribute that is measurable through a reliable method (SFAC 5.63). It should be fully controlled by the entity (SFAC 6.26). It should provide future economic benefits in the shape of contribution to net cash flows as a mandatory attribute (SFAC 6.26). Should be an outcome of an already occurred event and information regarding it is neutral, representationally faithful, verifiable, and relevant (SFAC 5.63).

Part IB: Measurement of Intangible Assets under US GAAP and IFRS

Under IFRS the intangible assets are measured as (1) Development Costs: The development costs of an intangible asset are capitalized if several criteria are met including intention, the technical feasibility of completion, ability to use or sell, ability to generate future economic benefits, development resources availability and reliable measurement. (2) Acquisition Cost: Acquisition costs of both types of intangible assets are capitalized as intangible assets provided it meets all criteria of an intangible asset. There is no condition regarding their regulatory approval. (3) Advertising Costs: Promotional and advertising costs are expensed as incurred.

Under IFRS the intangible assets are measured as (1) Development Costs: The development costs related to intangible assets development are expensed at the time of their incurring except for activities having alternative future use. (2) Acquisition Cost: The acquisition cost associated with products that are under approval process are expensed. Others are capitalized. (3) Advertising Costs: Promotional and advertising costs are expensed as incurred or take place initially.

Part II: Financial Reporting Standards for the Impairment of Intangible Assets under US GAAP and IFRS

US GAAP and IFRS both report impairment of non-amortized goodwill and intangible assets and long-lived assets through a similar method. The non-amortized goodwill and intangible assets are impaired annually or regularly in case any indications of impairment exist. Long-lived assets other than non-amortized are impaired as and when the impairment exists.

Conversely, IFRS reviews the non-amortized intangible assets and goodwill at the cash-generating unit or CGU. It is the smallest asset group generating cash independently. The impairment losses are recorded in the following order: Goodwill allocated to CGU and Pro rata to other assets.

US GAAP reviews the non-amortized intangible assets individually. Goodwill is reviewed at the reporting level. Other assets are reviewed at the lowest level where the cash flows are independent of other assets and liabilities. Using a two-step approach, the impairment losses are recorded where the goodwill is not allocated to the other assets reporting: Comparison of fair value and its carrying amount and where fair value is less than the carrying amount compare with impaired fair value (Jerman & Manzin, 2008). In the case where the goodwill is recorded where the goodwill is allocated for reporting with other assets for impairment, the losses are recorded in the following order: Pro rata to other assets and Goodwill. Read More