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International Financial Reporting Standards (IFRS) can be defined as the global accounting principle for different kinds of business operations. These are formulated as common principles and accounting practices in all over the world (Kieso, Weygandt and Warfield, 2010). This approach assists management in formulation of business accounts and statements that can easily comparable across international boundaries. This avoids the problems in terms of differences in national accounting standards. These practices help companies in order to manage their business operation in different parts the world (Gelinas, Dull and Wheeler, 2010). It determines many types of financial statement that can present information within structured method. It provides several benefits to organization.
The main features of IFRS are fair presentation, going concern concept, accrual basis accounting, frequent reporting and consistency of presentation. The fair presentation determines that systematic presentation of transactions and their effects on other business process on the basis of criteria of information (Chalmers, Clinch, Godfrey and Wei, 2012). The accrual base accounting involves determination of assets, liabilities, equity, income as well as expenditure of organization. IFRS collects different sets of financial statements to manage and arrange different transaction for efficient presentation. With the help of IFRS system, management can review the financial information and resend according to different presentation and criteria.
On the basis of the IFRS, IAS 38 determines the accounting requirement of intangible assets (Brealey and Myers, 2010). The intangible assets can be defined the assets without physical substance and are identifiable. This section recognize the intangible assets only if certain criteria are met. It is assets that is controlled by the business entity as past events like purchases self-creation and provides future benefits to organization in terms of cash inflow (Cohen, 2011). Intangible assets may become identifiable when it can be transferred, sold, rented and licensed within a special legal contract. It involves the transfer of trademarks, patented technology, data base, copy rights and internet domains as well as licensing. An entity controls an asset if management can obtain future benefits to company (Pettersen and Nyland, 2011). It involves technical knowledge, skills of employees as well as market share and relation with consumer of an organization. All these things provide benefit to company in near future.
Valuation of intangible assets is very important element of IFRS. IFRS determines several approaches in order to estimate the value of different types of intangible assets. Market based approach is one the most important approach for valuation of intangible assets. In this, company determines the fair value on the basis of quoted market prices measured by active market research (International Accounting Standard 38 Intangible Assets, 2014). It determines certain conditions like homogenous market trade, proper evaluation of willingness buyers and prices. In the context of intangible assets, determination of selling price is not easy task; it is transferred as a part of the sale of business.
The income based approach is another important technique for evaluation of intangible asset. This system evaluates the intangible assets on the basis of assumption regarding ability assets to generate future cash flow (Storbacka, 2012). It follows two stages; the first stage estimates the expected net cash flow to accrue directly or indirectly from ownership of assets. In the second stage, the present value of estimated future cash flow from intangible can be determined by discounting process. The discounting rate is determined by observation of capital market yield. The income approach also applies other methods of discounted cash flow. The relief from royal method determines the earning capacity of assets in the form of royalty in the remaining life cycle of assets (Calegari, 2000). The estimated royalty stream after tax is then discounted to present value, which results in an indication of the value of owning the intangible asset.
The identification of intangible assets with valuation of approach presents different evaluation tactics which are used for various intangible assets (Joshi and Al-Bastaki, 2002). In process of evaluation of trademark, consumer relations, technology and licenses, business entity can use income approach. On the other hand, assembled approach can be evaluated on the basis of cost approach.
Prohibitions of the recognition are playing very important role for measurement of intangible assets. It includes internally generated goodwill, brand and copyrights (Cairns, Massoudi, Taplin and Tarca, 2011). It also consists of the different expenditure made on above items in the form of start-up cost, training activities, expenditure on advertisement and promotion.
In the process of accounting treatment and measurement of intangible assets, organization needs to consider the several elements. On the basis of general principle of IAS 38, the intangible asset is initially treated as cost of firm (ACCOUNTING TREATMENT FOR R&D ACTIVITIES IN ACCORDANCE WITH IFRS AND ROMANIAN LEGISLATION, 2014). The management can determine the value or initial cost by evaluating fair value, cash paid for acquisition and construction of assets. Company needs to treat the value internally generated intangible assets on the basis of its production cost. The cost is recorded as expenses prior to reorganization then it will be treated as an asset.
Separately acquired intangible assets are valued in the accounting statement on the basis of cost of the acquisition (Armstrong, Barth, Jagolinzer and Riedl, 2010). It is combination of purchase price as well as other expenses made by the management in the process of acquisition after deducting trade discounts and allowances. The other expenses include import duties, non-refundable taxes and etc. It addition, interest assists management in utilization of deferred payments. The supplementary acquisition cost is combination of all cost directly attributable for development of assets for its use. For example: employment benefits, professional expenditures and cost of testing (DeFond, Hu, Hung and Li, 2011). Intangible can also be measured on the basis of fair value. Fair value can be defined as the value or amount of an asset that could be exchanged between partners and companies. For determination of fair value intangible asset is evaluated on the basis of active market price as well as current bid price.
Amortization is also very important section for accounting treatment of intangible assets. The depreciable amount of intangible assets with a finite useful life can be allocated on the systematic evaluation of life of intangible assets. This process starts when asset is available for the use of management as well as can be used by management (International Accounting Standard 38 Intangible Assets, 2014). The amortization method is used to identify the pattern in which asset will provide future benefits to company. The management can use straight line method when manager has not got reliable pattern. The amortization charge for each period shall be recognized in the profit and loss or another standard permits for this evaluation. There are several methods for Amortization present to evaluate or allocated depreciable amount of an asset based on the useful life and income period (Kang and Gray, 2011). It includes straight-line method, diminishing balance method as well as unit production approach. The selection of method to determine pattern of expected future benefits is also important aspect accounting treatment of intangible assets (Claessens and Laeven, 2006). In this, management has to consider same method for period to period unless there is alteration identified in pattern of economic future benefits.
Amortization is usually identified in terms of profit or loss in accounting statements. The residual value of an intangible asset with a finite useful life can be assumed to be zero unless if third party has made commitment to purchase asset at the end of life. Along with this, active market for assets also plays important role in determination of residual value on the basis of market value (Intangible Assets Accounting | Amortization, 2014). The management of an organization can determine the depreciable amount of asset with the finite useful life after deducting its residual value. In the process of accounting treatment, the residual value of the intangible asset will increase equal to or greater than the carrying amount of the assets. So, the amortization period of intangible assets with a finite useful life needs to be reviewed or estimated at least of each year (Berk and DeMarzo, 2007). If any changes occurs in value of expected future benefit then changes will identified in residual value.
Another important element of accounting treatment is retirement and disposal of intangible assets. In this, business entity can derecognize an intangible asset on disposal or when asset will not provide future income benefit to company. The income and losses arises for disposal of an asset is also considered as profit and loss in the accounts (Kulkarni and Chirputkar, 2013). In the case of reacquired right in business combination, if the right is sold to a third party then the carrying amount will be treated as gain or loss on reissue. On the other hand, if an intangible asset is recognized initially at its fair value then difference between the nominal amount of consideration and the cash price will be considered as revenue of assets (Pettersen and Nyland, 2011). The intangible asset with a finite useful does not cease when an asset will not be used for organization and unless the asset has been fully depreciated.
Application of amortization in different situation describes that organization needs to maintain different procedure for different part of intangible assets. For example: in some case, an intangible asset contains some tangible items like computer software, films and etc. In such kinds of situation, organization needs to evaluate some additional elements (Putra, 2009). If a machine is operated from particular software then entire item could be treated as plant of company. In the evaluation of the intangible asset, the other expenses like advertisement, promotion and start-up cost cannot be capitalized as intangible assets.
For example an organization acquire the copy right of recordings of singer. So, the company conducts a contract for five years. Company has faced initial losses due to improper management of copy right in initial period (Gelinas, Dull and Wheeler, 2010). For this, management has paid $10 million for legal cost of acquisition of copy right, initial losses $3 million and advertisement campaign $ 1 million. So, the legal cost of the acquiring copy right can be capitalized as intangible asset on the basis of IAS 38. On the other hand, operational expenditure and advertisement cost will not be capitalized.
Another example is when ABC International acquires another company, so company recognizes a customer list asset in the amount of $2000000. ABC considers amortizing this intangible asset over the next five years at a rate of $400000 per year. After one year, the carrying amount of the asset has been reduced to $1600000, but ABC now estimates that the asset has a market value of only $600000 and a remaining useful life of just two years. Accordingly, ABC incurs a $1000000 impairment charge to write down the value of the asset to $600,000, and then re-sets the associated amortization to be $300,000 in each of the next two years. After that time, the customer list asset will have a carrying amount of zero in the accounting records of ABC.
Reorganization of intangible assets is very important part of assessment of intangible asset. Organization has faced many issues in the process of reorganization. The management can recognize intangible asset on the basis of future expected returns and cost of assets. For this, organization uses many approaches for effective reorganization (International Accounting Standard 38 Intangible Assets, 2014). Separate acquisition is one of technique, in this business entity pays price to acquire separately for an indelible asset. It also reflects the probability of future outcomes from asset. In this, company has to face risk in terms of amount of future returns and expected earnings. In addition to this, cost of intangible asset can be evaluated on the basis of reliability (Brealey and Myers, 2010). The cost of separately acquired intangible asset includes purchase price, import duties as well as non-refundable taxes.
Organization can recognize an intangible asset in terms of acquisition as part of business combination. On the basis of IFRS, an intangible asset is acquired from business combination. The cost of intangible asset can defined on the basis of fair value. Fair value reflects the market value of asset or expected future inflow of cash from assets. In this, organization faces issues in the form of market uncertainties because fair value of an intangible asset is based on high fluctuated market conditions. The management has to evaluate probability that will meet various elements of business combinations (DeFond, Hu, Hung and Li, 2011). So, the business combination also plays important role in reorganization of asset. An intangible asset required in business combinations might be separable, but only with a related contract, identifiable asset or liability. In this situation, business entity recognizes the intangible assets separately from goodwill.
The acquisition by way of government grant is also important aspect of the reorganization of intangible asset. In this, business entity can acquire intangible asset without any cost or nominal consideration in the form of government grants (Kieso, Weygandt and Warfield, 2010). In this, public authority transfer and allocates different types of intangible assets. It includes airport landing rights, import license, license to operate radio and television stations and etc. The company can consider both the technique to evaluate value of intangible asset in the form of fair value and nominal value. But, an organization faces many challenges in acquisition of government grant intangible asset (Armstrong, Barth, Jagolinzer and Riedl, 2010). It includes lengthy governmental procedure and corruption etc.
The exchange of assets is another technique for reorganization of intangible asset. In this, intangible assets may be acquired in exchange for a non-monetary asset of assets as well as combination of monetary and non –monetary assets (Putra, 2009). The asset value can be measured on the basis of fair value as well as on the basis of exchange transaction that does not have the commercial substance.
Internally generated intangible asset is also another important approach for reorganization of intangible assets. In this, an organization develops brand value and market condition and develops some specific technology on the basis of detail research and development process. The business entity also encounters some difficulties in the process of reorganization (Gelinas, Dull and Wheeler, 2010). It involves determination of whether and when identifiable assets will generate expected future profit and returns for company. Organization also faces issues in evaluation of cost of development of intangible asset because it cannot be distinguished from the expenditure on maintaining or enhancing the value of internally generated goodwill and expertise.
IFRS determines various standards and rules for identification and measurement of intangible asset (Berk and DeMarzo, 2007). These rules assist Multinational Corporation in accounting of different kind of intangible assets. With the help these regulation, management can gather accurate information regarding the value of intangible asset. It also provides the direction to companies in order to get good value and return at the time of disposal and retirement of intangible asset (Storbacka, 2012). The IFRS describes the guidelines for development of financial statement and other accounting which can easily measured by other organizations in different part of world.