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This report discusses about the paradoxes around unrecorded and undisclosed intangible assets in corporate balance sheets. This report also discusses that what is more important factor for intangible assets to be recognized in balance sheet; has to be identifiable or separable. It also discuss about the some possible reasons for having very high level of undisclosed intangibles. This report more focus on why intangible assets are important for business to increase the value of business. Intangibles should be reported in financial statements whether they are separable or not in reference to current cost accounting and exit-price accounting.
Intangible assets are become more vital for the business. Intangibles assets increase the value the company The widespread adoption of new information technologies has led to intangible assets
being a major determinant of corporate value (Lev, 2001). Many questions have been raised
about the value relevance of accounting measures that arise in accounting for intangibles
Several studies have concluded that the value relevance of accounting information has decreased over recent decades, principally because of an increase of unreported intangible assets Over the past two decades intensified business competition and the advent of new information technologies have combined to help highlight the importance of intangibles as the major driver of corporate value (Lev, 2001). The measurement and reporting of intangibles has attracted keen interest from accounting researchers, prompted by the growing gap between the book value and market value of companies (Beattie, 2005). Many intangibles are not recognised as assets, due in part to the conservative nature of asset recognition criteria and concerns for the reliability of contemporary accounting standards. The case study focus on why intangible are so important. Moreover, measuring intangible assets can increase the total value of the company.The purpose of this report is to analysis the paradoxes around unrecorded and undisclosed intangible assets in corporate balance sheet. Even intangible assets don't have the physical value, they can prove very valuable for a firm and can be critical to its long-term success or failure.
AS per Paragraph 8 of AASB 138 an intangible assets "an identifiable non monetary asset without physical substance." (Picker, et.al. 2006, p. 313). An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected". [IAS 38.8] the three attributes of an intangible asset are:
control (power to obtain benefits from the asset)
future economic benefits (such as revenues or reduced future costs)
An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset.
For intangible to be recognized it has to be Identifiable and separable:
an intangible asset is identifiable when it: is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract) or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. [IAS 38.12]
Identifiable and separable:
An asset is identifiable when:
it is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability.( IFRS)
The International Accounting Standards Board definition of an intangible asset requires it to be:
Without physical substance
In order to be 'identifiable' it must either be separable (capable of being separated from the entity and sold, transferred or licensed) or it must arise from contractual or legal rights (irrespective of whether those rights are themselves 'separable').
It is important to recognize the distinction between internally-generated and acquired intangible assets. IAS only allow acquired intangible assets to be recognized on the balance sheet provided that they meet the above mentioned criteria. Ie; the internally generated intangibles of a company cannot be explicitly stated on its balance sheet.
The future economic benefits or service potential may result from synergy between the identifiable assets acquired or from assets that, individually, do not qualify for recognition in the financial statements.
AASB 138 Paragraph 12 state that one of which must met for an asset to be classified as identifiable;
An asset is identifiable if it either:
To be recognised, an intangible asset be separable (capable of being separated from the entity and able to be sold, transferred, licensed, rented or exchanged) or arise from contractual or other legal rights.
Is separable i.e., is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
Arises from binding arrangements (including rights from contracts or other legal rights), regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.Some intangibles previously recognized, ie; capitalized research and development expenditure, may not meet the new recognition criteria. These assets would need to be derecognised at transition. The Standard's definition of active market is restrictive and it is unlikely that intangibles can be revalued.
Expenditures on the acquisition, development and enhancement of intangible resources (such as new systems, processes, intellectual property and market knowledge) cannot be recognised as intangible assets unless an asset is separately identifiable and the entity has control over the future economic benefits to be generated by the asset (AASB 138).
One of the reason an assets to be separable prior to reorganization is to makes the measurement easier. (Picker, et.al. 2006, p. 314). However, intangible assets don't have the obvious physical value of a factory or equipment, they are not insignificant. In fact, they can prove very valuable for a firm and can be critical to its long-term success or failure.
Importance of valuing intangible:
Under AASB 3 intangible must value assigned to it. according to this case study intangibles must be recognized even is it is not separable from the business. (Godfrey. et.al. 2006). It is not necessary condition for an assets to meet the legal contract norm. In accounting, a balance sheet is a type of financial statement that provides a synopsis of a business entity's financial position at a specific time, including a company's economic resources (assets), economic obligations (liabilities), and the value of a company after its liabilities are subtracted from its assets (owners' equity). Therefore, intangible should be valued and reported in financial statement, whether they are separable or not. Today, many companies in global markets are driven by the creation and use of intangible assets. Without a doubt, much of the major economic growth worldwide is because to such assets. The current reporting model is deficient in its requirements for transparent recognition and disclosure for intangibles. High priority should be given to improvements in the reporting of intangibles so that investors will have the information they need to understand, analyze, and value intangibles-dependent companies. (PricewaterhouseCoopers2007)
(Lev 2001, p. 9) reported the average price to book of 500 companies shows that the mean market to book ratio has continuously increased over the period of time (from 1977 to 2001) reaching a ratio of 6:1 in march 2001. Lev noted that this mean that of every 6 dollars of market value, only one dollar appears on the balance sheet while remaining 5 dollar represent intangible assets.
Have been increasing in importance over time due to:
Intensified business competition
The advent of information technologies
Macroeconomic data traditionally exclude most intangible investment from measured GDP. This situation is beginning to change, but our estimates suggest that as much as $800 billion is still excluded from U.S. published data (as of 2003), and that this leads to the exclusion of more than $3 trillion of business intangible capital stock. The rate of change of output per worker increases more rapidly when intangibles are counted as capital. (Carol, et.al. 2009)
A company's balance sheet discloses the financial position. The financial position of an enterprise is influenced by the economic resources, financial structure, liquidity, solvency and its capacity to adapt to changes in the environment. However, it is becoming increasingly clear that intangible assets have a significant role in defining the growth of a company. So often, the search for the added value invariably leads us to calculating and evaluating the intangible assets of the business. (IIPM, 2006)
Both figure shows the importance of the intangible for company growth.
Current cost accounting:
Current cost accounting is an system in which assets are valued at current market buying prices and profit is determined by allocation based on current cost. Current cost accounting attempts to provide more realistic book values by valuing assets at current replacement cost, rather than the amount actually paid for them. CCA differentiates between profits from trading, and those gains that result from holding an asset.
Objective of the accounting is to provide useful information on economic decision making. They represent the opportunity cost. Current cost maintain the traditional going concern view using the current rather than historical cost.(Godfrey. et.al. 2006) Intangibles acquired as part of a business combination are not initially measured at cost, but by fair value measures such as:quoted market prices in an active market rare for intangibles that an active market exists
Exit-price-accounting is a system of accounting which uses market selling prices to measure the firm's financial position and performances. It particularly made and important distinction between measurement and valuation. Measurement is obtaining price whereas valuation is concerned about future economic benefit. The selling price of non monetary assets is the asset's realised price on the basis of an orderly liquidation chambers call this price 'current cash equivalent'.( Godfrey. et.al. 2006) exit-price accounting argues that unproven statement are not made, because every figure refers to present, actual market price. Exit-price accounting only provide relevant information only if the company plans to liquidate its assets. Where as current cash equivalent measure the resources available to firm on the assumption that the firm plans to continue in business not liquidate all assets.
Even intangible assets don't have the physical value, they can prove very valuable for a firm and can be critical to its long-term success or failure. For example, a company such as Coca-Cola wouldn't be nearly as successful were it not for the high value obtained through its brand-name recognition. Although brand recognition is not a physical asset you can see or touch, its positive effects on bottom-line profits can prove extremely valuable to firms such as Coca-Cola, whose brand strength drives global sales year after year.
Undisclosed value of intangible:
In reference to the bar chart; telecom, energy and ASX 200 sectors have highest level of undisclosed values. These all sectors have problem of measuring the intangible assets. According to AASB 138 some assets are non separable as they were did not meet the identification criteria:
Customer service capability
Present in geographic markets
Non union status
Outstanding credit rating
Favorable government relation
(Picker, et.al. 2006, p. 314). Some intangible assets cannot be measure separately as they are interrelated. ie; such as excellent work force and high level of customer service.
The study on Australian Intangible Asset Review state in their report that,There are three contributors to the large portion of undisclosed value:
Internally generated intangible items.
Undervalued tangible assets.
Market 'froth' in cases where market value exceeds intrinsic value.
The study found that internally generated intangible items represent the bulk of the undisclosed value in most industries. "The carrying value of Goodwill and Intangible Assets is $221 billion - despite the fact that many of the ASX 100's most valuable intangibles do not appear on balance sheets." At 30 June 2008 the carrying value of Intangible Assets was $75 billion and that of Goodwill $146 billion. The total of $221 billion only represents 26% of net balance sheet assets, and 13% of enterprise
value. Balance sheets provide poor visibility of corporate Australia's asset base. 49% of
the ASX100's enterprise value is not reflected on the balance sheet.
The study shows
the Financial Reporting Council study (FRC, 2010) found that the valuation standards had been poorly applied due to unfamiliarity with the accounting requirements and the complexity of valuing intangible assets. Intangible assets under Australian GAAP might have caused this class of assets to be less reliably reported (Godfrey, 2001)
Nobody can disagree over the fact that intangible assets have become far more important than its tangible especially in the service industry. However, evaluating such intangibles is complex issue.
Mixed measurement system:
The use of multiple measurement bases on the one set of corporate reports. Current accounting practices use mix measurement in dealing with accounts valuation. They use lower cost or market for inventory, revaluation as well as depreciation for fixed assets etc. (Alfredson, et al, 2005).s of Asset Value Change on Accounting.
The traditional accounting based on historical cost does not only ignore the fact that the general level of prices (inflation/deflation) change every time, but also the changes in specific prices of assets. The IASB assessed the affect on users to be positive. The accounting for loss of control of a subsidiary and the remeasurement of the retained investment will be comparable as all entities will be measuring the gain or loss on disposal on a consistent basis. Going forward, the retained investment will be recognised initially on a consistent basis for all entities. As entities would carry forward the carrying amount, which is likely to be
based on mixed measurement models. Some of different measurement concept in new accounting standards:
IAS 2/AASB 102: permits measurement of inventory at net realizable valueeven it is above cost for producers'
IAS 16/ AASB 16: PPE may be valued at historical cost or revalued amount where revalued amount is fair value less subsequent accumulated depreciation and impairment losses.
IAS 17/AASB 117: Leasehold interest in land is accounted for investment property measured at fair value with value changes recognized as a profit and loss in the income statement.
IAS 19 AASB 119: measurement of a curtailment gain or loss comprises
The change in the present value of the defined benefit obligation
Any resulting change in fair value of the plan asset
A pro rata share of any related actuarial gain or losses.
IAS 29/AASB 129: adjustment to the financial statement of an entity that operates in a hyper-inflationary economy can be done by using a general price level index.
IAS 36/AASB 136:
Impairment of assets, where the assets is valued at the recoverable amount which the higher of the asset's value in use and the current cash equivalent
Treats the residual value of an assets as the current cash equivalent
IAS 37/AASB137: Measurement of provisions is determined by the expected present value method.
IAS 40/AASB140: Investment property can be measured either
Cost depreciation impairment or
Fair value changes passed through the income statement as a profit of loss.(Godfrey. et.al. 2006. P. 238)
Identifiable and separability are two main characteristic of the intangible asset to be recognized Intangible assets can be very valuable for a firm and can be critical to its long-term success or failure. many companies in global markets are driven by the creation and use of intangible assets. in reality, much of the major economic growth worldwide is attributable to such intangible assets.
High priority should be given to improvements in the reporting of intangibles so that investors will
have the information they need to understand, analyze, and value intangibles-dependent companies .IFRS has brought more certainty to the reporting requirement for intangibles. IFRS 3 makes clear view the requirement to value identifiable intangibles.
Current cost accounting and exit-price accounting both have strength as well as weakness.
CCA differentiates between profits from trading, and those gains that result from holding an asset. Exit-price particularly made and important distinction between measurement and valuation. Some intangible assets cannot be measure separately as they are interrelated. In chart we can see that energy, telecom and ASX have highest level of undisclosed values. This might be because of the measurement problems.
Company can adopt the mixed measurement system in their financial report. The use of multiple measurement bases on the one set of corporate reports. IFRS 3/ AASB 3 also has incorporated a mixed measurement system. Even intangible assets don't have the physical value, they can prove very valuable for a firm and can be critical to its long-term success or failure.