Characteristics of Intangible Assets - Research Proposal Example

Draft Research Proposal On Should All Intangible Assets Be Shown in the Balance Sheet Author: Target Degree: PhD Contents Contents 2 Introduction 3 Statement of the Problem 4 Literature Review 5 Research Design 8 Sampling 9 Data Collection 9 Data Analysis 10 References 10 Introduction The changes which have been taking place since 1978, in global economic as well as financial systems have been unique as well as gradual in nature. There is also a gradual shift towards an economy which is mostly based on the knowledge and service rather than relying on the industrial and manufacturing base alone. Accounting, as a profession, also grew in importance as the complications regarding the nature of the business also grew simultaneously. The use of creative accounting by the firm have necessitated a large scale changes to take place within accounting literature to suggest more radical approaches to handling many " creative accounting" issues of importance. A major offshoot was that intangible assets grew in gross disproportion to tangible assets. Still, despite growing 'suspect' irregularities in accounting of intangible assets that emerged from time to time, the world did not place proper regulations in place; one of these missing regulations included presenting clear and proper information of all intangible assets in the balance sheet. In the backdrop of Enron disaster, UK and US has initiated many changed in different accounting practices such as amendments made in IAS 38 however, there is still lot to be done in terms of intangible asset disclosure in accounting statements as some of the firms are still engaged in practices of evading the inclusion of intangible assets into their balance sheet. The issue of reflecting intangible assets into the balance sheet is therefore one such issue which not only comes under the purview of prudent accounting disclosures but also reflect the need for viewing it from ethical perspective as the continual use of creative accounting could again create scandals like Enron and World Com with the potential to hamper the progress of better corporate governance methods and tools necessary to bring in more transparency into the corporate world Statement of the Problem Intangible assets are defined as assets with the quality of being identifiable as well as quantifiable apart from the goodwill. Thus most of the financial assets used by the firms, mostly with the intention of leveraging the business, are considered as intangible assets. However the use of intangible assets as one of the critical means of hiding some of the highest importance accounting information with the potential to affect the decision making of investors is on increase as companies, despite tightening regulations and accounting standards is using them to conceal different facts. This has become even more important in the wake of the biggest corporate scandals like Enron and World Com both of which tried to conceal important facts through the reporting of accounting information in more creative way. The use of intangible assets was one of the most important mean used by these firms to hid information. This also creates very interesting ethical questions of the accounting practices being used by the firms. This research will attempt to discuss whether, the scope of the disclosure of the tangible assets in balance sheet should be increased to include all the tangible assets to be reported on the financial statements Literature Review The concept of intangible assets, in itself, is a very important and somewhat different qualities associated to them. (Berry, 2004, 15). Intangible assets hold a very different and somewhat blurred distinction between what comprise of the intellectual capital of the firm i.e. in the form of its human resources, copyrights, patents etc however, on the other hand financial assets are also often labeled as intangible assets. All Financial assets until securitized through physical assets therefore are considered as intangible assets (Cohen, 2005, 12) thus virtually extending the scope and focus of intangible assets. These discussions also suggest that the so called old view of the intellectual capital as the only major form of intangible assets does not hold as many other classes and types of assets, through their sheer quality and nature, can also be classified as intangible assets. International accounting standards define Intangible assets as ""an asset that is identifiable (contractual or separable) and measurable with sufficient reliability apart from goodwill" (Osburn, 2008). However, there is also another side of this definition which has been outlined by FASB which suggest that Intangible assets are those assets which do not possess the physical characteristics and that this very characteristic make them more difficult to be compared with the physical assets. One of the most important and critical point of distinction regarding the intangible assets is the fact that they increase in value when used as well as they are not scarce in nature as most of the economic goods are considered. However, when taken together with the physical assets, intangible asset do become scarce in nature because they are backed up scarce physical resources. On the other side, the down side risk of such kind of assets is that of the fact that they are hard to manage as well as control and measure. In its essence, intangible assets are riskier assets as compared to the physical assets because of their more volatile nature in terms of their price fluctuations and subjectivity to the market forces which make controlling such assets more difficult and hard to manage. (Value Based Management, 2008). Due to their diversified nature, intangible assets can be classified into almost 90 distinct types with five major groups. (Mard et al., 2008, 52). These groups comprise of 1) Marketing relevant such as trademarks, patents etc 2) Customer relevant such as customer contracts 3) Technology based which mostly comprise of priority software hold by the firm 4) Contracting Relevant which requires servicing of certain specific services etc 5) Artistic relevant where firms tend to secure their copyrights over certain things produced by the firm and are considered as one of their biggest trade secrets. The variety of the types of intangible assets suggests their level and scope into the overall affairs of the firm and how they can protect business from competition. This however, has been the result of the changes in the economic system of the world especially during last two decades which also necessitated changes in the accounting systems as well as practices all over the world. This change in the accounting saw a very fundamental shift from relying on the cost based accounting to more of a fair value based accounting systems which attempted to reflect more accurate and true pictures of the assets and liabilities of the business. This shift also resulted into the use of intangible capital by the firm as one of their major resource given the fact that intangible assets are also socially dependent classes of assets. (Tollington, 2002, 5). This fact also gave rise to the function of intangible assets as one of the key factors behind influencing the performance of the firm's management and their success was largely measured with how they were using intangible assets of the firm. (Bounfour, 2002, 13). This shift also brought a radical change in the way the accounting for intangible assets was done in the past. Available literature on intangible assets suggest a growing interests in the subject since 1980s when academia around the world began to notice that intangible assets are one of the key determinants of the profits of the firm. (Sullivan, 2000, 13). Initially, accounting treatment of intangible assets failed to distinguish between three important and different components of intangible assets i.e. human capital, structural capital as well as market capital. (Bounfour, 2002, 78). However, there was less emphasis on the use of knowledge as the main deriver of the value for the firm and subsequent development in the literature on the subject viewed intangible assets as more crucial for the success of business rather than its capital. (Contractor, 2001, 185). However, with the collapse of Enron, world witnessed one of the major accounting scandals in the history of corporate world where deliberate efforts were made to hide facts. (Miller et al., 2002, 19) and intangible assets were widely used by the firm as a cover for dishonest manipulation of facts (Volcker, 2002) with total negligence to the fact that circumventing the use of intangible assets could jeopardize the value of the organization's capital. The failure of Enron brought about strong debate for bringing in more regulations and further streamlines the accounting standards to minimize the chances of circumventing the important facts. UK, in order to further strengthen the regulations adopted IAS38 (Amended) for Intangible assets during 2004. The amended standard brought about many changes in order to bring in more ethics into the reporting of intangible assets by the firms however, despite this fact, the use of intangible assets, in more creative ways, is still on rise with more and more firms are now using them for one purpose or other. Research Design From the very nature of study, it is suggested that this study will be qualitative in nature. Qualitative, in the sense that it will attempt to understand and analyze the behavior of the firms regarding the use of intangible assets in their financial statements as an attempt to circumvent the information to be presented in those financial statements. From its essence, qualitative research will attempt to analyze and understand "Why" and "How" rather than "What", "Where" and "When "of a certain social phenomenon takes place. Thus the emphasis of this research would be on understanding why the use of intangible assets is an ethical issue in accounting and how this ethical dilemma can be averted or minimized to ensure more transparency into accounting disclosures Sampling Since qualitative research requires a very small number of samples to be analyzed therefore the emphasis would be on focused samples rather than drawing random samples. It is therefore intended that this research will attempt to define samples in terms of the large corporate approximately to the number of 30. However, it is important to mention that since this study will be exploratory in nature and one of the data collection means would involve analysis of documents and materials therefore the sampling would be precise and focused rather than relying on large number of samples. Data Collection Qualitative research focus on four methods of data collection including 1) Participation in a setting 2) Direct Observation 3) In depth Interviews 4) Analysis of documents and material Considering the nature and limitations of this research study, this research will concentrate on mostly two means of data collection i.e. In-depth Interviews and Analysis of Documents and Material. For the purpose of interviews, it is intended that a sample of 30 interviewees will be taken. These interviews will be mostly conducted from the academia in accounting as well as accounting professionals in a bid to understand the use of intangible assets in financial statements. The major emphasis of these interviews would be testing the hypothesis that all the intangible assets should be included in Financial Statements to ensure better transparency in accounting reporting and disclosures. Apart from the interviews, this research study will also attempt to study a large amount of available documents and research material in order to gain a theoretical understanding of the subject. Data Analysis Data analysis in any qualitative research is mostly done through observing. The expert, after collecting data, often examines it and present findings in qualitative or quantitative form. This study will also attempt to use available literature as data and would attempt to present its findings mostly by observing them. References 1) ANDRIESSEN D. & TISSEN R. 2002. Weightless Wealth: Find Your Real Value in a Future of Intangible Assets. Financial Times/Prentice Hall, UK 2) ANON. 2008. Annual Reports & Shareholder Value: ValueBasedManagement.net. [Online]. 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