Intangible Assets Recognition in Balance Sheet Statement - Essay Example

Financial Accounting Part Intangible Assets Recognition in Balance Sheet ment Recognition of goodwill, marketing related assets, and contract related assets that are intangibles in the balance sheet draws mixed arguments. One of the arguments supporting recognition of the intangible assets in the balance sheet is that failure to recognize intangible assets while intangible investments are expensed fully when undertaken has the potential of understating both equity book value and earnings book value. Consequently, the financial information estimates provided to the investors will be biased on the current value of the firm and its potential of maximizing wealth in future (Gabriel & Marcus, 2010). Another reason in support of recognizing the goodwill intangible assets is that decision to acquire assets from others reflects there is intangible asset value of the asset acquired. The extent of a business acquiring another business entity facility or brand name instead of developing its own demonstrates that an external value of intangible asset exist in the market transaction. Consequently, business organizations should recognize the external value triggering acquisition of external market value attached to the assets to reflect the real value of the business entity in the balance sheet statement. However, there has been argument against recognition of the various intangible assets in the balance sheet financial statement. One of the arguments against recognition of intangible assets in the balance sheet is that it enhances the earnings information since the balance sheet financial statement will be cleansed from soft assets that have no physical substance. In addition, balance sheet information quality is improved since the cost of managing earnings is relatively reduced (Wahlen, Bradshaw, Baginski, & Stickney, 2010). Another reason against recognizing intangible assets in the balance is the uncertainty and difficult to ascertain the ability of asset recognized will generate revenue in future. Consequently, recognition of goodwill, market-related assets and contract related assets has the potential of causing material bias on the value of the business entity according to arguments against recognition of intangible assets in the balance sheet statement. Amortization of Intangible Assets Amortization of intangible assets faces both support and disapproval due to the potential material effect it causes in the balance sheet statement. One of the reasons in support of amortization of intangible asset is that the ability of a business to generate revenue in different financial is influenced by the market reputation of it brand name. Consequently, the market-related intangible asset of brand name recognized should be amortized systematically to reflect the losing value of the asset in generating sales revenue. Another argument behind amortization of recognized intangible assets is that contractual right of using a certain brand name to generate revenue in future expires (Gabriel & Marcus, 2010). Consequently, business entities should recognize the depreciation of the contractual-related intangible asset to reflect the value of the asset in the different subsequent financial years. Conversely, there has been argument against amortization of intangible assets recognized in the balance sheet. One of the arguments against amortization of intangible assets is the difficulty in determining the useful life of the intangible asset. The inability to determine with certainty the usefulness of the intangible implies that the amortization rate applied in biases since it is not backed by economic reasons (Wahlen, Bradshaw, Baginski, & Stickney, 2010). Consequently, intangible assets identified should not be amortized. Similarly, the uncertainty on the ability of the recognized intangible assets to generate revenue in future reflects that intangible assets should not been amortized. This is because amortizing the assets will be based on a subjective rate that is likely to mislead investors on the book value of earnings and equity. IFRS3 Bargain Purchase Bargain purchase under IFR3 is defined as the surplus between the total of the considerations purchased, any non-controlling interest and, the acquisition-date fair value of equity interest held by the acquirer previously in a business combination achieved in stages (Gabriel & Marcus, 2010). Thus, bargain purchase under the IFR3 is the amount that is in excess of the fair value of the business combination transaction from the considerations acquired and any arising non-controlling interest from the transaction undertaken. In addition, bargain purchase is the net assets that are identifiable in business combination including deferred taxes if any under international financial reporting standard three (IFRS3). Considerations that are transferred under business combination transaction including arising contingent considerations are recorded at fair price. Consequently, bargain purchase gains are recorded in the income financial statement recognized immediately. Similarly, acquirer recognizes on the day of acquisition goodwill separately from liabilities assumed, acquired assets identifiable and non-controlling interest arising from the acquisition transaction. This implies that the bargain purchase derived from the business combination is recorded in the balance sheet separately from assets and liabilities of the entity acquired. Assets and liabilities acquired are measured at the fair value on the date of acquisition date in the balance sheet financial statement (Gabriel & Marcus, 2010). Current ownership interests of non-controlling interests that entitle holders to a fair share of the net assets of the entity if it is liquidated are measured using the fair value at the acquisition date or using the net assets proportionate share of non-controlling interest. Thus, the proportion that each of the holders possess on the net assets after deducting liabilities is used in computing the holders non-controlling interest using fair value at the date of acquisition. Furthermore, all constituents of non-controlling interests like shares based on calls or payment under IFRS2 should be recorded at the fair values on the acquisition date (Gabriel & Marcus, 2010). Part 3 Criticism of National Culture in Explaining Differences in Nationals’ Financial Reporting Hofstede studies have been the main models that have tried to explain how national culture causes financial reporting to be different in different nations. The argument derived by Hofstede in explaining how national culture causes diverse financial reporting was based on five dimensions of individualism versus collectivism, strong versus weak in avoiding uncertainty, power distance between large and small, short-term orientation versus long-term orientation and masculinity versus femininity (Heidhues, 2012). However, the national culture explanation on the causes of diverse national financial reporting faces criticism due to the assumption employed in deriving the argument employed. This is because the assumption employed in deriving the argument is viewed to be strong enough in misleading application of the theory blindly (Vassili, Wickramasinghe, & Berland, 2011). Consequently, criticisms have been developed in disapproving the national culture explanation on nations’ financial reporting differences. One of the criticisms of national culture theory in explaining differences in nations’ financial reporting is empirical weakness of the studies. Hofstede model argues that culture is like software of mind that causes shared understandings on values that trigger actions in demonstrating why nations have different financial reporting approach. Even though value is an essential component of culture, the attempt to ignore other significant aspects of culture like norms, habits, customs and beliefs reflect the study was more inclined to socio-economic factors. In addition, national culture explanation on diverse of nations financial reporting assumes that states and nations match. This is because the approach ignores the presence of multicultural countries and cross-border cultures when using linguistic to be contributing factor of nations’ financial reporting approach. The second weakness of the national culture in explaining the differences in financial reporting in different nations is theoretical weaknesses (Chand, 2011). The national culture observation in explaining why different nations use different financial reporting approaches fails to appreciate the specificities and richness of culture in influencing how different cultural group act. Application of the five dimensions in deriving the argument under national culture theory tends to standardize culture. This implies that the explanation is self-referencing and self-predictive in misleading individuals and researchers in applying the concept blindly (Vassili, Wickramasinghe, & Berland, 2011). Consequently, the conclusions derived by national culture theory on nations’ different financial reporting are predictable and homogenous to be reliable upon in designing and implementing the financial reporting mechanism that should be adopted by different given nations. Legal and Economic Factors Attributing to different Nations’ Financial Reporting Legal and economic factors are other contributing factors that determine the financial reporting approach applied by different nations. The legal factor derives from the legal system adopted by given country namely common law and code law environment. Under the code law nations, accounting procedures and standards are highly comprehensive and detailed since they are prescribed through the legislation of the country. Consequently, improvising and interpretation of the financial reporting is minimal since accountants are supposed to literary use the detailed and prescribed legal requirement with minimal creditors’ protection actions (Černe, 2009). In contrast, under the common law nations, accounting policies and rules are highly developed through private sector professional associations. Consequently, financial reporting under the common law environments is more adaptable in enhancing transparency and timely reporting of financial performance and position. Economic factor on the other hand is derived from the different nations international exchange development in designing and developing financial reporting system of a given country (Černe, 2009). Consequently, a nation will be influenced to adopt a financial reporting mechanism that is similar to another nation due to the trading relation when the other country export market is large. The influence of the economic factor is derived from the need of the domestic market to reliably match their transaction values with the powerful trading partner. Reference Černe, K. (2009). Influential factors of countrys accounting system development. Retrieved 2014, from file:///C:/Documents%20and%20Settings/EMMA/My%20Documents/Downloads/INFLUENTIAL_FACTORS_OF_COUNTRY_ACCOUNTING_SYSTEM_DEVE.pdf Chand, P. P. (2011). Achieving global convergence of financial reporting standards: Implications from the South Pacific region. Bingley, U.K: Emerald. Gabriel, S. J., & Marcus, A. (2010). Financial accounting. New Delhi: Tata McGraw-Hill Education. Heidhues, K. (2012). Globalisation and contextual factors in accounting. The case of Germany. Bingley: Emerald Group Publishing. Vassili, J., Wickramasinghe, D., & Berland, N. (2011). Critique on Gray-Hostedes model:what impact on cross-border cultural accounting research? Retrieved 2014, from http://hal.archives-ouvertes.fr/docs/00/69/09/33/PDF/409_Joannides_Wickramasinghe_Berland.pdf Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western. Read More