Economic Decisions - Case Study Example

ACCOUNTING FOR INTANGIBLE ASSETS The primary objective of providing financial ments is to disseminate information about the financial status andhealth of an organization in addition to its performance as well as any changes in its financial position and structure over a certain period. Such a wide declaration of information helps companies and stakeholders with vested interests in the organization take the various parameters into considering arrive at economic decisions in the best interests of the company. Financial statements are prepared with the intent of meeting the common needs of owners, stakeholders, suppliers, customers and employees of the company. However, financial statements are certainly not the sole declarations that provide a total oversight over the financial health of the company. Users may not get the required information merely by looking at the financial statements, which may render them incapable to make a required economic decision for the future. one of the most prominent reasons for this deficiency is due to the fact that financial statements generally provide historical data and results of analysis performed on that data. Additionally, the users do not have any knowledge of the non-financial assets and determinants, which are crucial in any managerial decision in a firm. In an effort to make meet such required objectives, financial statements are also used be synthesized on the accrual nature of accounting. The statements are formulated with the assumption that a business entity is one that is continuing and existential nature and will continue to stay in business in the foreseeable future. The qualitative characteristics are the basic foundations which constitute a financial statement and provide a benchmark for understandability, reliability, comparability and relevance. The elements which mark the primary focus of financial position are the assets, liability and equity. The Board of International Accounting Standard (IAS) recognizes that there are a limited number of instances where there may be a conflict between a framework and an accounting standard. In such cases where a conflict exists, the requirements outlined by the standard will always prevail upon the standard (Pauline Weetman, 2006). The framework additionally guides the IAS in developing future standards in due consideration with a review of the existing ones. The new Framework adopted in 2001 has been welcomes by the industry and is believed to be a significant contribution to the debate on how the measurement should focus increasingly on intangible assets in order to provide a balanced and well defined outlook. Regulation of the accounting practices for intangible assets has been one of the most difficult areas faced by entities associated with setting standards of accounting. The primary concern is with regards to whether expenditures can be considered to be intangibles and whether they should be expensed under the profit and loss account of the firm or placed under the balance sheet. This is particularly important in the context that with an increasing incidence of mergers and acquisitions in the corporate world in addition to the rapid changes in financial markets, which are increasingly becoming globalized. In related transactions, intangible assets that include goodwill are growing to influence the value of the underlying assets. A review of the rules that govern the evaluation of intangibles is therefore important in this context. In 1997, the Accounting Standards Board issued a new standard that governed the accounting for goodwill. Under FRS 10 and 11, which constituted the goodwill and intangible asset together with its impairment, companies were directed to amortize externally any acquired intangible assets and goodwill that would not measure above the known amounts. As such, a regular and thorough overview of the impairment was required. Further, it was also required that the intangible assets were capable of providing a thorough and prolonged measurement that could result in an unamortized and annual review. Since the past 8 years, there has been no review or study into exploring the relevance of such asset measurement techniques. However, with the adoption of listed companies within the EU by the IFRS, the situation and the requirements have changed substantially (Roger Hussey, Audra Ong, 2005). The international accounting Standards board identifies patents, licenses, products from research and development as also trademarks as intangible assets in addition to brand names. Owing to the increasing prominence of technology in our lives, especially with our growing dependence on Information Technology and the Internet, accounting practices for Research & Development purposes under intangible assets have been strictly recommended. The earlier practice in R&D was to simply write off the expenses whereby a few development costs were amortized (Catherine Gowthorpe, 2006). The criteria for capitalization consisted of the requirement to project a clearly identifiable project as also its associated expenditures. Additionally, the technical and financial viability of the project was also a required criterion. It has also been found that companies that had reported trademarks of high market value as part of the statement of financial position had in fact not created enough brand value that could withstand the forces in the market. However, one of the primary arguments in defense of inclusion of such companies has been to allow them to ensure that they are not undervalued as a result of their high brand value, without which the company may face the danger of a merger or acquisition. Before 1997, firms in the UK were permitted to write off goodwill that was directly marked from the cash reserves. This resulted in a depletion of shareholder value, which is often the practice for purposes of borrowing debt. To minimize the resulting impacts, such write offs to cash reserves are now recorded separately from the value from the brand acquired from the goodwill element. Subsequent to the introduction of FRS 10 on Goodwill and Intangible assets, brand names and internally conceived assets were eligible for capitalization giving them a certain market value. Assets with limited value of market periods are amortized over the duration of their existence and cannot exceed a maximum period over 20 years. Identifiable intangible assets with indefinite economic durations are allowed to be amortized (Carolina Koornhof, 2005). Companies spend a considerable portion of the budget on human resource development, which is considered as an overhead by most of them. Expenditures in this regard are included as part of capital investment on the company’s balance sheet. However, capitalization on expenditures on Human resources can be made coherent with the definition of an asset as per the IASB. Human resource can be capitalized as purchased goodwill in the event of acquisitions. Investment in this area projects the characteristics of expenditures towards development as per the fundamental principles of accounting (IASB, 2007). This practice is beginning to be adopted by accounting firms as a deferral of expenditure on intangible assets so as to match revenues in the future. as such, it is believed that considering the people of a firm in the same plane as the financial and physical assets of a firm would therefore lead to a more qualitative assessment of the costs incurred by a firm in addition to the benefits by way of training and development initiatives. REFERENCES 1. Pauline Weetman (2006), Financial accounting: an introduction. New York: Pearson. 2. Roger Hussey, Audra Ong (2005), International Financial Reporting Standards Desk Reference: Overview, Guide, and Dictionary. London: John Wiley. 3. Catherine Gowthorpe (2006), CIMA Learning System 2007 Financial Analysis. London: Butterworth-Heinemann. 4. Carolina Koornhof (2005), Fundamental Accounting. New York: Juta. 5. IASB (2007), International financial reporting standards (IFRSs) 2007: including International accounting standards (IASs) and interpretations as at 1 January 2007. New York: Kluwer. 6. Pauline Weetman (2006), Financial and management accounting: an introduction. New York: Pearson. Read More