Internally Generated Intangible Assets - Assignment Example

IAS 38, Intangible Assets Table of Contents Table of Contents 2 a.Internally Generated Brands Meeting the Definition and Recognition Criteria As Outlined In IAS 38 3 b. The Advantages and Disadvantages of Capitalising Internally Generated Brands 4 c. Impact upon Capitalisation of Brands on the Financial Position of Toyota 5 d. Capitalisation of Internally Generated Brands 7 References 9 a. Internally Generated Brands Meeting the Definition and Recognition Criteria As Outlined In IAS 38 Assets are the resources which provide the result for certain previous events to benefit the economy of an organisation in future. Intangible assets refer to those assets which have no physical existence or substance. Thus, intangible assets are non monetary by nature. Intangible assets involve certain factors or elements such as computer software, copyrights, licenses, franchises, and patents among others (Saudagaran, 2009). IAS 38 needs an entity or unit to identify an intangible asset, be it a self created or purchased. The IAS 38 involves certain additional criteria for recognition especially for those intangible assets which are generated internally. The internally generated intangible assets refer to those entities which are produced or manufactured by the state, which involve assets obtained from the third party. These assets need more than negligible augmentation efforts to the portion of the state to initiate to acquire the estimated level of the service capability. The IAS 38 declares that the economic benefits in the future ought to be based on supportable and logical assumptions regarding the asset’s conditions which would subsist over the existence of the assets in its lifetime. If the intangible assets, which are internally generated cannot meet the criteria given by the IAS 38 regarding recognition and definition, then the expenditure related to these assets need to get recognised as incurred expenses. If the assets do not meet the criteria given by the IAS 38 regarding recognition and definition, these assets need to figure a part of the amount credited to the goodwill, documented at the acquirement date. IAS 38 has described that brands which is considered to be generated internally is not identified as assets. If the internally generated assets do not meet the criteria given by IAS 38, the standards prevent a unit or entity to reinstate afterward as an ‘intangible asset’ (Saudagaran, 2009). b. The Advantages and Disadvantages of Capitalising Internally Generated Brands Capitalising internally generated brands refer to the practice of increasing the significance of the brands in the business process; and it also increases the scope of companies along with the brands. There are certain advantages and disadvantages of capitalising an internally generated brand. It makes the calculation of the brand royalty simpler. It also explains the capability and the potential of the cash flow to be generated in the future. It helps in increasing the shareholders’ and capitalisation values, which assists to improve the competitiveness within the market and helps to get easy access to the finance. It also helps to evaluate the intangibles and the distinction between the net assets value and the value of the total market. The capitalisation of the internally generated brands is helpful from the users prospective as well. It helps the brands to perform a methodology with an objective. It has a secured comparability and results in increasing the usefulness of the information sources to make decisions regarding investments. The investment related decisions can also help brands to prosper in the market as if a company gains value in the eyes of the investors then it can leverage the same value in gaining popularity and profitability. In the similar context, a well-recognised brand can be identified to a value addition for a company in the long run as it can in turn facilitates to draw the investors (The Ministry of Economy, Trade and Industry, The Government of Japan, 2002). There are certain disadvantages also for the capitalisation of the internally generated brands, such as accounting the internally generated brand. It becomes really difficult to identify the brands on the balance sheet of a business, and due to this problem the book keepers and the accountants face difficulties. This capitalisation process does not only hampers the accounting it also creates problem for the tax laws of the corporation and for the commercial codes. Due to the difficulties in accounting of the internally generated brands, it makes the balance sheet and the brand assets measurement less reliable and complicated. As the Japanese companies as well as the other companies follow the rules and the norms of legal entry of the entities, it creates issues regarding the illegal and unrecognised profits, which would not support the commercial codes and corporate laws (IFRS, 2011). c. Impact upon Capitalisation of Brands on the Financial Position of Toyota It would be difficult for any company to capitalise the ‘internally generated brand’, as it would be difficult to identify the difference between the two factors i.e. internally generated goodwill and internally generated brand. According to the rules and norms in every country, Japanese companies also are not able to capitalise the goodwill or the brand in the system of accounting. These intangible assets can be legally recorded in the balance sheet as designs, patents, and copyrights among others with a disclosed amount, which is not the real value of those assets. These are the cost which can be utilised after the achievement of the advanced activity, such as registration cost (Okano & et. al., 1999) Toyota utilised the brand quite well and it has capitalised on their brand equity. Brand equity refers to the intangible asset, which is characterised by the name of the brand. Toyota made the use of their brand reputation to manufacture quality and well-priced products in order to draw the consumers in America. Toyota has also identified the brand loyalty and its supremacy. For example, Toyota has upheld its faithful clientele with the continuation of the production of valuable products, such as the Prius, where simultaneously it has introduced certain fresh products such as Toyota Tundra. The company believes in the loyalty of its brand and its customers as Toyota is looking for a win over the new target consumers. The annual reports of the year 2007 and 2008 show that after these changes and the capitalisation on the brand, Toyota has augmented its level of performances, its income as well as its revenue among others. All these advancements or increased values show that the financial statement of the company has changed and it has provided with certain positive outcomes in the financial report of Toyota which can be depicted from the graphical representation below: (Lowery, 2007). Source: (Toyota, 2011) d. Capitalisation of Internally Generated Brands Capitalisation of the internally generated brands has both advantages and disadvantages. In relation to the above discussion, conclusively, it can be stated that the practice of capitalising the internally generated brands has facilitated certain companies to gain revenue, income and in terms of performance levels, whereas at the same time, it has created various problems in the process of accounting in many businesses. The process of capitalising essentially creates the issues regarding illegal accounting and unidentified assets, which create problem for the accountants and the book keepers. This process does not support the commercial codes of business and not even the corporate laws of any business. Capitalising internally generated brands gives profits which have been identified in rare cases for the companies such as Toyota, Coca-Cola, and Nokia among others. They have applied the advantages like clear calculations, identification of the real potentials and capabilities, provide easy access to finance, increase the competitiveness in the market and value identification of the assets among others. Essentially, the internally generated brands should be capitalised only if needed and could be handled properly, in order to facilitate customers, or else it is not a regular and reliable practice to perform in case of business organisations and companies (State of California, 2007). References IFRS, 2011. IAS 38 Intangible Assets. Technical Summery. [Online] Available at: http://www.ifrs.org/NR/rdonlyres/AF990B4C-E9B4-41CD-A6C6-8F735E932247/0/IAS38.pdf [Accessed March 14, 2012]. Lowery, K. B., 2007. A Re-Branding Campaign: Toyota’s Quest To Be Viewed As An American Company. Acknowledgements. [Online] Available at: http://www.american.edu/soc/communication/upload/07-Lowery.pdf [Accessed March 14, 2012]. Okano, H. & et. al., 1999. Implementing Brand Management in the Japanese Companies: Related With Target Cost Management. Abstract. [Online] Available at: http://www.oecd.org/dataoecd/16/23/1947902.pdf [Accessed March 14, 2012]. State of California, 2007. Internally Generated Intangible Assets. Home Page. [Online] Available at:  http://sam.dgs.ca.gov/TOC/8600/8635.htm [Accessed March 14, 2012]. Saudagaran, S. M., 2009. International Accounting: A User Perspective. CCH. Toyota, 2011. Leading the Way to Future of Mobility. Annual Report. [Online] Available at: http://www.toyota-global.com/investors/ir_library/annual/pdf/2011/p02_05.pdf [Accessed March 14, 2012]. The Ministry of Economy, Trade and Industry, The Government of Japan, 2002. The Report of the Committee on Brand Valuation. Summary. [Online] Available at: http://www.meti.go.jp/english/information/downloadfiles/cbrandvalue.pdf [Accessed March 14, 2012]. Read More