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Intangible assets are the non monetary assets without any form of physical and tangible existence, held for use in production of goods, rendering of services and rental purpose. Intangible assets are identifiable though they lack any quality of physical substance. Such intangible assets either self generated or acquired through government grant, asset exchange, business combination or purchase from the outside market or industry thereto from which probable future economic benefits can be expected to be derived in the form of reduced future cost or enhanced generation of revenues. They are identifiable either separately or arise from various legal or contractual rights. Various types of intangible assets are -
- computer software and databases
- patented technology
- franchise agreements
- marketing rights
- trade dress
- trade secrets
- customer and supplier relationships
- customer lists
- mortgage servicing rights
- import quotas
- customer loyalty
- standstill agreements
- market share
The basic objective of the accounting standard is to prescribe an entity to recognize an intangible asset only when certain specified criteria and conditions are being met. The particular accounting standard specifies the valuation of the carrying amount of intangible assets and requires the various stated disclosures requirements about the intangible assets. An asset is defined as a resource which is controlled by an enterprise due to past events and henceforth from which there are expectation of certain inflows in the form of economic benefits to the particular firm. Future economic benefits flowing from an intangible asset may include revenue from the cost savings and other benefits occuring from the use of the asset by the enterprise. For instance the use of intellectual property in a production process may reduce future production costs rather than increase future revenues. An enterprise controls an asset if the enterprise has the power to obtain the future economic benefits flowing from the underlying resource and also can restrict the access of others to those specific benefits. The ability of an enterprise to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in the court of law. However legal enforceability of a right is not a necessary condition for control since an enterprise may be able to control the future economic benefits is some other way. Market and technical knowledge may result to future economic benefits. An enterprise controls those benefits when the knowledge is protected by various forms of legal rights such as a restraint of trade agreement, copyrights or others. An enterprise may have a team of skilled staff and may be able to identify incremental staff skills leading to future economic benefits from training. Intangible assets are referred as non – monetary assets which signify that the amount of money is not determinable. Enterprises often expend resources or incur liabilities on the acquisition, maintenance, development or enhancement of intangible resources such as technical or scientific knowledge, implementation and design of new processes or systems, licenses, intellectual property, trademarks and marker knowledge. Some intangible assets may be contained in or on a physical substance such as compact disk (computer software), legal documentation (license or patent), or film (motion pictures). The cost of the physical substance containing the particular intangible asset is not significant. Hence the physical substance which merely contains the intangible asset is treated as a part of the particular intangible asset. In few cases an asset may incorporate both tangible and intangible elements which are practically inseparable. Judgment is to be applied to determine the specific nature of such asset. Suitable example is that of an operating system of a computer where the software is not an integral part of the related hardware, computer software is an intangible asset. (Lightfoot, 2013)
US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are the main principle bodies which formulates the accounting standards. The accounting standards prescribed by Financial Accounting Standards Board (FASB) are known as US GAAP and the ones prescribed by International Accounting Standards Board (IASB) are known as International Financial Reporting Standards (IFRS). There is an existing disparity and differences between these two standards that makes it troublesome for globalised organizations. Several steps and measures have been undertaken for the convergence of both the standards. On an overview of both the standards as promulgated by the Boards much difference is not observed as the basic conceptual frameworks and principles are almost similar. In fact IFRS is formulated and based on the basic principles of US GAAP. Both the Boards are making distinct efforts towards the goal of convergence of both the standards to provide an integrated, single and globalized uniform set of high quality accounting standards. (Accounting for intangible assets and goodwill under IFRS, 2014)
The US Securities and Exchange Commission (SEC) since many years been has been trying to strive towards its objective of setting up high-quality global accounting standards. In order to align the standards, US Securities and Exchange Commission (SEC) have strongly supported the efforts of the IASB and the FASB. Requisite level of cooperation is quite necessary from the industry groups and national regulators. US GAAP (ASC 350 - Intangibles — Goodwill and Other), IFRS (IFRS 3(R) and IAS 38, are the accounting standards prescribed for the treatment of intangible assets of an entity. Intangible assets as defined as non monetary assets without any form of physical substance. Under US GAAP, ASC 350 does not recognize internally developed or self generated intangible assets as assets and same form of treatment is done in IAS 38. Costs related to the research and development work are considered as expense. Assessing the correct useful lives of the intangible assets is very much vital in order to determine the amortization. Goodwill is the though an exception where amortization treatment is not given effect to. Amortization of intangible assets over their estimated useful lives of the assets are required under both US GAAP and IFRS, though an exception exists in ASC 985-20 of US GAAP, Software — Costs of Software to be Sold, Leased or Marketed, which relates to the amortization of computer software sold to others. In both set of standards, if there is no existence of any foreseeable limit to the period over which an intangible asset is expected to generate net cash inflows to the organization, then the useful life of such asset is considered to be indefinite and the asset is subjected to amortization. The major concern with intangible assets is their valuation. Appropriate valuation is often not made which does not provide true and fair view of an entity’s financial statements. In US GAAP, development costs are expensed as incurred only when they are supported by guidance in another ASC Topic. Capitalization of development costs related to computer software is made only after establishment of technological feasibility in accordance with specific criteria (ASC 985-20). The costs incurred in the application development stage during the development of software for the purpose of internal use (as defined in ASC 350-40, Intangibles — Goodwill and Other — Internal-Use Software) can be capitalized. In IFRS the capitalization of development costs occurs when economic and technical feasibility of a project can be substantiated in accordance with specific condition of demonstrating technical feasibility, its aim to complete the asset, and the ability of future sale of asset. These principles may be in consistency with ASC 985-20 and ASC 350-40, but guidance addressing computer software development costs are not available. According to the respective policy adapted the advertising and promotional costs are expensed as incurred or expensed when for the first time the advertising takes place. On the other hand the direct response advertising is subjected to capitalization if the specific conditions in ASC 340-20, Other Assets and Deferred Costs — Capitalized Advertising Costs are adhered to. Revaluation of intangible assets are not considered and recognized under US GAAP. In IFRS revaluation exercise is permitted to fair value of such intangible assets. Revaluation of goodwill is though not permitted by IFRS. Substantial efforts have been taken for the convergence of both the best internationally recognized accounting standards. The main objective of accounting standard is to provide adequate treatment to the intangible assets of an entity along with specifying the disclosure requirements to be maintained by such entity regarding the existing intangible assets. In the initial stages the assets must be first recognized as intangible assets to give the respective treatment to such assets. If an asset does not fulfill the conditions stated in the definition of intangible assets the associated expenditure on such assets should be recognized as an expense.
Recognition of an item as an intangible asset requires an enterprise to demonstrate that the item meets the definition of intangible asset and recognition criteria set out in the statement. If an intangible asset is acquired on a standalone basis then the cost of the intangible asset can be measured reliably and correctly. This happens particularly when the purchase consideration is in the form of cash or any other monetary asset. The cost of an intangible asset comprises its purchase price, including any import duties and such other taxes, and any directly attributable expenditure includes professional fees for legal services and others. Rebates and trade discounts are deducted in arriving at the actual cost. When an intangible asset is acquired in exchange for shares or other securities of the concerned enterprise, the asset is to be recorded at its fair value of the securities issued, whichever is more clearly evident. An enterprise uses judgment to assess the degree of certainty attached to the flow of future economic benefits that are attributable to the use of the asset on the basis of the evidence available at the time of initial recognition by providing greater weight to the available external evidence. The depreciable amount of an asset should be allocated on a systematic basis over the best estimate of its useful life. The useful life of an intangible asset may be very long but in maximum and almost all the cases it is finite. Uncertainty associated justifies the estimation of the useful life of an intangible asset on a prudent basis, but it does not justify choosing an unrealistically short life. In some cases there may be persuasive evidence that the useful life of an intangible asset will be a specific period. In these cases the presumption that the useful life generally does not exceed the years is rebutted and the entity amortizes the intangible asset over the estimation of its probable and justified useful life. The amortization should be given effect to when the asset is available for use. The amortization method used should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise. If that pattern cannot be determined properly and reliably then straight line method is suitable. The amortization for each time period should be recognized as expenditure unless another accounting standard permits or requires it to be included in the carrying amount of another asset. The amortization charge for each period should be recognized as expenditure unless another accounting standard permits or requires it to be included in the carrying amount of another asset. For example, the amortization of a software used in a production processes is included in the carrying amount of inventories. (KÅ™íÅ¾ová, 2011)
Intangible asset valuations are carried out in various ways. Approaches considered by entities for intangible asset valuation includes business valuations, brand valuations, contract valuations, contract valuations, valuing shares, valuing patents and such other form of intangible asset valuations. Among all the most suitable and appropriate intangible asset valuation method is then selected for the valuation of specific asset. The three main approaches of valuation of Intangible Assets are:
1. Income valuation
2. Market valuation
3. Cost valuation
Differences between the market value of an enterprise and the carrying amount of its identifiable net assets at any point in time may be due to a range of factors that affect the value of the entity. However the existence of such disparities cannot be considered to represent the cost of intangible assets controlled by the enterprise. In addition to complying with the general requirements for the recognition and initial valuation of an intangible asset, the entities even applies the guidance and requirements to all internally generated intangible assets. In order to assess whether an internally generated intangible asset meets the criteria for recognition, an entity distinguishes the generation of a self generated intangible asset into a research phase and development phase. The financial statements should disclose the aggregate amount of research and development expenditure recognized as an expense. Research and development expenditure covers all expenditure that is directly attributable to research or development activities or that can be allocated on a reasonable and consistent basis to such activities. An enterprise is encouraged, but not required, to give a description of any fully amortized intangible assets that is still in use. To demonstrate how an intangible asset will generate probable future benefits, an enterprise assesses or values the future economic benefits to be derived from an asset using the principles in accounting standard on Impairment of assets. When an asset generates economic benefits only in combination with other assets, an entity applies the principle of cash - generating units specified in Accounting Standard in Impairment of Assets. In addition to the requirements of accounting standard on Impairment of Assets, an enterprise should estimate the amount of recovery of the following intangible assets at least at each financial year end even if there is no indication that the asset is impaired –
- an intangible asset that is not yet available for use , and
- an intangible asset that is amortized over a period
The recoverable amount should be determined under accounting standard on Impairment of Assets and impairment losses recognized accordingly. The ability of an intangible asset to generate sufficient future economic benefits to recover its cost is usually subject to great uncertainty until the asset is available for use. It is sometimes difficult to identify whether an intangible asset may be impaired because there always does not exist any obvious evidence of disposal. This problem generally arises particularly if the asset has a long useful life. The requirement for an annual impairment test of an intangible asset applies whenever the current total estimated useful life of the asset exceeds ten years from when it became available for use. An intangible asset should be derecognized on disposal or when no future economic benefits are expected from its use and subsequent disposal. An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. The financial statements should disclose the useful lives, amortization method, accumulated amortization and etc. (By Gary Lasker, 2011)
Generally intangible assets are categorized into three broad heads –
- Independent Intangibles
- Cash generating Intangibles
- Composite Intangibles
This helps to classify the intangible assets into their respective heads and the statement of an entity is able to present a vivid picture of the existing assets and their valuation.
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KÅ™íÅ¾ová, Z. (2011). Accounting for Intangible Assets . In Z. KÅ™íÅ¾ová, Accounting for Intangible Assets (pp. 1-13). Czech Republic .
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