StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Accounting of Intangible Assets - Essay Example

Cite this document
Summary
The paper "Accounting of Intangible Assets" highlights that as the nature of intangible assets evolves, and whether or not it stabilizes, formulators of accounting standards will keep in pace with the changing business and financial environments worldwide…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.6% of users find it useful
Accounting of Intangible Assets
Read Text Preview

Extract of sample "Accounting of Intangible Assets"

Accounting of Intangible Assets An asset is a resource owned and controlled by an entity and from which future economic benefits can be derived from it. Assets can either be tangible and intangible. Traditional accounting practices do not recognize, let alone measure or include intangible assets in financial reports. However, the increasing importance of intangible assets such as intellectual properties, have been the reason for phenomenal growth of many companies in the current technology-driven age. As such, generally accepted accounting principles around the world have started prescribing accounting standards for intangible assets. This paper introduces the concepts of assets with particular emphasis on intangible assets. It discusses reasons for the need of a separate accounting standard for intangible assets and looks at AASB 138, the Australian Accounting Standard for Intangible Assets and its conservative approach to the recognition, measurement and reporting of intangible assets. Accounting of Intangible Assets Introduction In business and accounting terms, an asset is a resource controlled by an entity and from which future economic benefits are expected to be derived. Assets have four essential characteristics. First is that the probable future benefit can contribute directly or indirectly to future cash flows. Second, the entity can control access to the benefit. Third, the transaction or event which gives the entity the right to the asset or control of the benefit has already occurred. And fourth, assets are not meant for resell. According to generally accepted accounting principles, GAAP, which vary from country to country, the general classification of assets are current assets, long-term investments, fixed assets and intangible assets. An intangible asset is an identifiable non-monetary asset without physical substance. Intangible assets cannot be seen, touched or physically measured, but they are identifiable as a separate asset because they have been created through time and effort. There are two primary forms of intangibles - legal and competitive. (such as knowledge activities, collaboration activities, leverage activities, and structural activities). Legal intangibles, such as trade secrets, copyrights, patents, trademark and goodwill, generate legal property rights defensible in a court of law. Competitive intangibles, such as knowledge, collaboration, leverage and structural activities are those which relate to effectiveness, productivity, wastage, and opportunity costs, and therefore affect costs, revenues, customer service, satisfaction, market value, and share price. For today’s companies, human resources are competitive intangibles. Competitive intangibles are the source from which competitive advantage flows, or is destroyed (Intangible Asset, 2008). According to AASB 138, the standard’s scope of coverage of particular intangible assets is limited by set criteria defined in the standard. They should meet the definition of identifiability, control over a resource and existence of future economic benefits. Accounting standards which have been recently issued in different countries have created the need for valuation of intangible assets for financial statement purposes, which can be a complicated process. The standards attempt to simplify treatment for various types of intangible assets so as to standardize valuation and reporting. According to Foster et al (2006), the variability of intangible assets is the cause of the decline of “dot-com companies whose reported assets could have never accounted for their market valuation highs.” AASB 138 is one such accounting standard that “prescribes the accounting treatment for intangible assets that are not dealt with specifically in another Standard, requires an entity to recognise an intangible asset if, and only if, specified criteria are met, and specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets” (AASB 138, 2007). The paper will discuss the author’s view of whether or not there is a need for a separate accounting standard for intangibles. It also critically evaluates why AASB 138 adopts a conservative approach to the recognition, measurement and reporting of intangible assets based on the author’s understanding of AASB 138 and relevant research on accounting for intangibles. Separate Accounting Standard for Intangibles Prior to the promulgation of AASB 138, many kinds of intangible assets were not covered by existing accounting standards. AASB 132 – Financial Instruments: Presentation, covered only financial assets; AASB 6 – Exploration for and Evaluation of Mineral Resources, dealt only with recognition and measurement of exploration and evaluation assets; AASB 102 – Inventories and AASB 111- Construction Contracts, dealt with intangible assets held by an entity for sale in the ordinary course of business; AASB 112 – Income Taxes, dealt with deferred tax assets; AASB 117 - Leases, dealt with leases; AASB 119 – Employee Benefits, dealt with assets arising from employee benefits; AASB 3 – Business Combinations, dealt with goodwill acquired in a business combination; AASB 4 – Insurance Contracts, dealt with intangible assets arising from an insurer’s contractual rights under insurance contracts; and AASB 5 - Non-current Assets Held for Sale and Discontinued Operations, dealt with non-current intangible assets classified for sale. Clearly, a standard did not exist to address the reporting of internally developed intangible assets. Foster et al (2006) uses Microsoft as an example when it reported $68 billion stockholders’ equity when its market value was many times that amount. The cause of this difference is in the financial reporting model used which did not properly value intangible assets. The fact remains that the value of intellectual property such as that held by Microsoft have become very important, yet may not be recognized in financial statements. The lack of an appropriate accounting standard for handling intangible assets can cause business entities to not report their true worth. A separate accounting standard for intangible assets is needed to guide accountants and investors in the recognition of the value of the asset, provide value definitions that will reduce the difference between reported values and fair market values for intangible assets. It should set the guidelines for the manner or reporting intangible assets, whether or not there should be similar or different reporting procedures for internally generated assets and those acquired from outside the entity, to help investors evaluate the intangible asset aspects of businesses. Methods of measurement should be defined by the standard, whether to use fair market value or some judgmental assessment. For internally generated intangible assets, fair market valuation will require additional costs for appraisers and value analysts and extra risk may be incurred by company executives and auditors considering the nature of fluctuating value of intangibles. All these may be allayed with an accounting standard that will address concerns, specific only to intangibles. Companies whose stock market performance show significant decline over a short period of time may mean that measures of intangible assets used are inaccurate, thus identifying a need in the accounting standard for more stringent guidelines. Another quandary is in the valuation of internally developed intangible assets which have previously been unrecognized or undisclosed. As stated earlier, determining fair value would mean costs to the company which may be irrecoverable and the lack of evidence of value exposes executives and auditors to liabilities. One source of external evidence in this kind of valuations may be from lenders who are willing to accept unrecognized intangible assets as collateral for loans. Another source is insurance for intangible assets, which is commonly used to cover infringement litigation expenses, either protection from or through litigation. Potential losses that threaten the value of intellectual property include infringement, loss of royalties, invalidation, unenforceability or loss of ownership. The fact that owners of intangible assets can use these assets as collateral for loans or take out insurance for these assets are evidences that intangible assets have value and can be accounted for. Specific accounting standards that prescribe the treatment of intangible assets in financial reporting are therefore necessary and should be defined separately from those which handle tangible assets. In terms of generally accepted accounting principles, external evidence can help with treatment of internally developed intangible assets. Companies may also voluntarily include values in their financial reports. Losses of intangible assets due to economic conditions, increased competition, new technology and employment changes would require a redefinition of loss as far as intangible assets are concerned. All these should be addressed by an accounting standard for intangible assets. AASB 138 – A conservative approach to the recognition, measurement and reporting of intangible assets The objective of AASB 138 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard. This Standard requires an entity to recognise an intangible asset if, and only if, specified criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets. AASB 138 takes a conservative because it favors traditional or existing views and values; and somewhat minimizes on the implementation of radical changes. The guidelines contained in the standard are restrained, requires a moderate amount of change to current practices and tend to be cautious in handling intangible assets, the accounting of which is still in the process of evolving. This conservatism is manifested in the definition of scope for the standard. It only covers those intangible assets which are not within the scope of another Australian Accounting Standard. It points out other standards which should be used to cover specific kinds or natures of intangible asset reporting such as AASB 132 Financial Instruments: Presentation, AASB 6 Exploration for and Evaluation of Mineral Resources, AASB 102 Inventories, AASB 111 Construction Contracts, AASB 112 Income Taxes, AASB 117 Leases, AASB 119 Employee Benefits, AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates, AASB 131 Interests in Joint Ventures, AASB 3 Business Combinations, AASB 4 Insurance Contracts, and AASB 5 Non-current Assets Held for Sale and Discontinued Operations. Since, previous standards are already in effect before the promulgation of AASB 138, care seems to have been taken so that if previous standards were efficiently working in their areas of coverage, AASB 138 will not contradict accounting procedures already prescribed and which are effective. AASB 138, even states that the standard will not apply to activities that give rise to accounting issues that may need to be dealt with in a different way, such as in the exploration for, or development and extraction of, oil, gas and mineral deposits in extractive industries and in the case of insurance contracts. This caution supports its conservative approach. With AASB 138’s definition of identifiability of an intangible asset distinguishes it from goodwill as acquired in a business combination. Another standard handles accounting of goodwill. It strictly indicates that to be identifiable, the intangible asset must be separable or arises from contractual or other legal rights. In terms of control, AASB 138 cites specific guidelines that an entity’s power to obtain future economic benefits from the asset stems from legal rights enforceable by law and that the entity can restrict access to benefits. Unless control of the asset can be enforced through legal rights, the intangible asset may not meet the required definition. This may occur with market and technical knowledge unless protected by copyrights, a restraint of trade agreement or by a legal confidentiality agreement with employees. It may also occur with staff skills, unless protected by appropriate legal rights. Again, this is conservative because it prevents companies from freely including intangible assets in their accounting if control of future benefit is ambiguous. For recognition and measurement, AASB 138 prescribes that an intangible asset item meets the strict definition and recognition criteria. It prescribes that the nature of an intangible assets is such that, there are no additions or replacements of part of it. This results in subsequent expenditures which maintain the expected future economic benefits from an existing intangible asset. AASB 138 strictly allows an intangible asset to be recognised if, and only if it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably. The terms ‘if and only if’ and ‘measured reliably’ are strict terms which support conservatism. AASB 138 goes on to prescribe that assessment of probability for expected future economic benefits should use reasonable and supportable assumptions and that even if the entity uses judgement to assess the degree of certainty attached to the flow of future economic benefits, this should be done so on the basis of the evidence available with greater weight given to external evidence. Conclusion AASB 138, the Australian Accounting Standard for Intangible Assets is necessary as a separate standard because of the increasing importance of intangible assets in today’s organizations. It has been prepared as equivalent to and compliant with IAS 38, the International Accounting Standard for Intangible Assets. As noted in the body of this paper, previous accounting standards were not comprehensively equipped to handle the different kinds of intangible assets and the varying natures of their occurrence in business and financial transactions. Therefore it was imperative to come up with a separate and distinct standard for the treatment of intangible assets not covered in previous standards. AASB 138, seeks to plug the gaps in the existing standards in order to guide accountants and auditors who are increasingly faced with issues and concerns regarding intangible assets especially those developed internally within organizations and which theoretically involve costs, yet may be investments for future economic benefits redounding to the business entity. The accounting standard also seeks to improve the accuracy of financial reports where intangible assets are expected to play a significant role to aid investors and business executives in their business decisions. However, AASB 138 has been very cautiously crafted and has taken a conservative approach to the recognition, measurement and reporting of intangible assets. This is understandable because the very nature of intangible assets is currently rapidly evolving and radically defined standards may not be adoptable in short periods of time. It is hoped though that as the nature of intangible assets evolve, and whether or not it stabilizes, formulators of accounting standards will keep in pace with the changing business and financial environments worldwide. Reference List AASB 138 “Intangible Assets” (In Particular Software). ACT AIFRS Policy Summary AASB 138. 13 August 2008. "Asset." Wikipedia: The Free Encyclopedia. 6 August 2008. 13 August 2008. Compiled Accounting Standard AASB 138 Intangible Assets. Australian Accounting Standards Board. 25 October 2007. Foster, B.P., Fletcher, R. & Stout, W.D. “Valuing Intangible Assets.” The CPA Journal. 2006. 13 August 2008. "Intangible asset." Wikipedia: The Free Encyclopedia. 8 July 2008. 13 August 2008. Price Waterhouse Coopers. “Australian Intangible Assets. The Changing Landscape.” June 2006. 13 August 2008. Price Waterhouse Coopers. “Australian Intangible Assets. Value in the New World.” August 2007. 13 August 2008. Rechtman, Y. “Accounting Treatment of Intangible Assets.” 30 July 2001. 13 August 2008. “Summary of IAS 38.” Deloitte Touche Tohmatsu IAS Plus. 2008. 13 August 2008. “Technical Summary IAS 38 Intangible Assets.” IASC Foundation. 13 August 2008. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(AASB 138 Intangible Assets prescribes the accounting treatment for Essay, n.d.)
AASB 138 Intangible Assets prescribes the accounting treatment for Essay. https://studentshare.org/finance-accounting/1715454-aasb-138-intangible-assets-prescribes-the-accounting-treatment-for-intangible-assetsthe-standardhowever-adopts-a-conservative-approach-to-the-recognition-me
(AASB 138 Intangible Assets Prescribes the Accounting Treatment for Essay)
AASB 138 Intangible Assets Prescribes the Accounting Treatment for Essay. https://studentshare.org/finance-accounting/1715454-aasb-138-intangible-assets-prescribes-the-accounting-treatment-for-intangible-assetsthe-standardhowever-adopts-a-conservative-approach-to-the-recognition-me.
“AASB 138 Intangible Assets Prescribes the Accounting Treatment for Essay”. https://studentshare.org/finance-accounting/1715454-aasb-138-intangible-assets-prescribes-the-accounting-treatment-for-intangible-assetsthe-standardhowever-adopts-a-conservative-approach-to-the-recognition-me.
  • Cited: 0 times

CHECK THESE SAMPLES OF Accounting of Intangible Assets

Intermediate Financial Accounting

The first part reviews the significance of intangible assets in organizations and how it is assisting companies to maintain their position in the competitive environment.... Agenix Limited has a larger base of intangible assets than Acrux limited, in terms of financial value.... The best examples of intangible assets in organizations are the goodwill, intellectual property rights such as patents, copyrights, trademarks, brand recognition, etc....
8 Pages (2000 words) Essay

Non-Current Assets

The accounting standard can be applied to all intangible assets except the assets that are within the scope of another standard.... It is inapplicable to the intangible assets held by someone... Non-current assets Contents Introduction 3 Differences in accounting treatment 3 Conclusion 6 References 7 Introduction IAS 16 Property, Plant and Equipment analyze the treatment of accounting for most types of property, equipments as well as plants.... Differences in accounting treatment The accounting standard of IAS 16 refers to the tangible noncurrent assets as property, plant and equipment and identifies that they hold a physical substance which can be used for delivery of goods or services or for purposes of administration....
4 Pages (1000 words) Essay

Accounting intangible asset

As taken earlier the two accounting standards AAS 18 and ASRB 1013 has certain implications as to how or to the extent to which the above mentioned categories can be applied as standard operating procedures for intangible assets.... The most important reason as the term "intangible" might itself suggest that quantifying such an asset would literally mean rationale treatment to the asset which means it would be complete subjective of one to classify them Similarly, just as assets can be quantified and expensed by some definite amount, such can not be applied to the case of intangible....
4 Pages (1000 words) Essay

Valuation at Acquisition - Operational Assets

Operational assets may be tangible or intangible assets but during acquisition proceedings the concern is of long term or non- current operational assets that are revenue yielding.... intangible assets have the main characteristic is that they lack physical substance.... intangible assets include patents, goodwill, copyrights, trademarks, franchises, organizational costs and others.... Let us examine the capitalization aspect under both tangible (Property Plant and Equipment) and intangible assets Cost of Land that needed to be capitalized is all the expenditure on its acquisition that is incurred for getting it ready for its intended use....
9 Pages (2250 words) Essay

Intangible Assets for Financial Reporting

In the paper “intangible assets for Financial Reporting,” the author analyzes intangible assets, which have three important characteristics.... IAS 38 clarifies that intangibles should not be recorded as other assets.... Similarly differed tax assets, leases, assets arising from employee benefits, financial assets, mineral rights, and other exploration and evaluation assets, and most importantly goodwill arising from business combinations do not fall the preview of IAS 38....
7 Pages (1750 words) Assignment

Financial Accounting (BUSINESS COMBINATIONS/INTANGIBLE ASSETS/LEASES)

hellip; Goodwill does not meet the definition of intangible asset according to AASB 138, since it is not identifiable as it could not be sold or transferred.... Goodwill is measured as an excess of the cost of business over the net fair value of assets, liabilities and contingent liabilities incurred or assumed at the acquisition date.... Furthermore, there can be several other reasons leading to write down of the goodwill such as a significant decrease in the market value of the assets or a business climate that adversely affects the value of the assets of the acquired company....
4 Pages (1000 words) Essay

International Finances - Mackintosh Speech

Mackintosh told that initiative to accomplish international accounting standards was started in 1973 with the… lishment of the International accounting Standards Committee (IASC) which was mainly intended to minimise the differences in the national accounting standards against the globally agreed benchmarks.... After the lapse of twenty-five years, the accounting standards of those nations This is because each nation has adopted only some portions of the international standards of their choice and as recommended by their home standard-setting board....
11 Pages (2750 words) Essay

Intangibles Seek Due Recognition

The author outlines a required radical change in rules, regulations, and standards for the recognition, measurement, and valuation of intangible assets.... This work "Intangibles Seek Due Recognition" discusses intangible assets that are represented by patents, goodwill, copyrights, human capital, intellectual property.... This remaining value is the value of non-physical assets called by accountants as intangible assets.... It is time that due recognition is given to intangible assets that contribute effectively to the value of the companies....
7 Pages (1750 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us