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Accounting for Intangible Assets - Term Paper Example

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The term paper "Accounting for Intangible Assets" states that The report will elaborate on the use of accounting for intangible assets and will cover the recent issues that are faced by the companies as well as the accountants relating to the accounting of intangible assets. …
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Accounting for Intangible Assets
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Current Issues on accounting for Intangible Assets The report will elaborate the use of the accounting for the intangible assets and will cover the recent issues that are faced by the companies as well as the accountants relating to the accounting of intangible assets. The report will also cover the solutions to the issues that the accounting for the intangible assets has given rise to and the way that these solutions have been implemented in the companies throughout the world. In the end of the report, the current status of the issue will be analyzed\ with respect to the implementation of the solutions. Introduction The intangible assets’ existence has given rise to numerous issues based on its accounting and treatment which should be addressed in order to keep the consistency of the accounts intact. Definition The International Accounting Standard 38 governs the accounting of the Intangible assets which define the intangible asset as: “a non-monetary identifiable asset which does not have a physical existence which is handled by the company due to the occurrence of any past events and due to which, potential economic advantage is anticipated” (IAS Plus, 2009) Attributes of intangible assets The key attributes of the intangible assets as per the IAS 38 are: The asset can be identified Control can be applied on the asset; and Revenues and other prospective benefits can be obtained from it Types of Intangible assets Intangible assets can be divided among two forms: Intangibles having a legal form Competitive intangibles Intangibles having a legal form: The intangibles that possess a legal form may also be referred to as intellectual property as they possess a legal right that can be defended in the court of law. These may include patents, copyrights, trade secrets and trademarks. Competitive intangibles: These are the intangibles that can not be owned legally and are generated as a result of productivity, efficiency and effectiveness etc. These are those assets due to which an entity gains a competitive advantage over other entities and for which it is known to exist. These intangibles include human capital, knowledge base of the company, structural and leverage activities etc. Recognition of the intangible assets The accounting f intangible assets is done according to IAS 38, which recommends that the intangible asset will be recognized if following two conditions are satisfied: Prospective economic benefits connected with the asset will come to the company The asset’s cost can be reliably measured. Some intangible assets, especially, goodwill can not be recognized if it is internally generated but can only be recognized when it is externally purchased by the entity. Initially, the intangible asset is recognized at its cost which should be reliably measured by the entity. Subsequent measurement of the intangible assets There are two models suggested by the IAS for the measurement of he intangible asset: Cost model Revaluation model Cost model: In light of the IAS 38, the intangible asset should be amortized over the period through which the benefits will be accrued. The intangible asset shall also be tested for any impairment due to which the cost of the asset will be reduced. Revaluation model: In this method, the asset shall be carried at the amount which is the revaluated amount after the subtraction of any impairment losses, if the asset has an active market. Current issues relating to intangibles There are numerous issues that have been raised relating to the accounting of the intangibles since the change in the way that business is conducted throughout the world, some of which are discussed in detail: Issue of valuation: One of the most prominent issues that the accountants are facing today is the valuation of the intangible assets. Especially when the asset does not have an active market where the asset can be traded at an arm’s length transaction, the valuation of the asset becomes one of the biggest issues. Human capital: Human capital is also considered to be a very crucial intangible asset but its accounting can be considered to be the vaguest. It has been argued that the most vigorous value driver in a company is its human capital but the measurement of the human capital and its recognition has always raised questions. There have been arguments regarding its valuation and its impairment. Measurement: The researches carried out by the auditing firms have proven that the intangible assets can be reliably measured but the question remains that which standards method should be relied upon for its measurement? Due to the fact that they more than one autonomous variable to be taken to measure the asset, the assumptions and estimates increase with the increase in number of variables. (King 1999) Pricing: The proper pricing of an intangible asset is also an issue when the market of the asset does not exist. The assets that do not possess an active market require being valued at the price that they will be bought or exchanged. Some companies have also used different methods such as the benefit that will be derived from the use of it during the life or the tenure of use of the asset. Issues in research and development cost: The research and development cost that a company incurs for its business is also classified as the intangible asset and can be capitalized. The International Accounting Standard requires that the company should charge all the cost pertaining to the phase where the research was being carried to expense and the phase where the development was being should be capitalized. The issue is that of the recognition of the phase where the research has ended and the development has started. For many industries it is very difficult to distinguish between the phase when the asset has entered its development phase and it shall capitalize it. It is always arguable when the fact is established and for the accountants it is very difficult to analyze the phases where the asset shall be expenses out or capitalized. Amortization of Intangible assets: The capitalization of the intangible asset calls for its amortization over the useful life of the asset. . This has been argued over the period since the asset in continuing to provide benefits and is in use by the company for more than one year than the asset’s cost should also be spread systematically. Issues regarding Impairment of Intangibles: The impairment of the intangible assets is another difficult prospect as the IAS requires that an intangible asset should be tested for its impairment at the end of the year and where there are indications that the asset may be impaired, the impairment charge should be charged to the profit and loss account. The impairment testing requires that the recoverable amount of an intangible asset be measured through which it will be ascertained whether the asset has been impaired or not. Calculation of the recoverable amount has given rise to several issues regarding valuation. Issues pertaining to goodwill: The goodwill is generated when a company acquired another one at a cost which is greater than the actual value of the company which can be recognized by the company. The IAS forbids the recognition of the goodwill that is generated internally by the company. Arguments against the Measurement and Valuation of Intantible assets The accountants and the auditors have had numerous questions regarding the measurement and valuation of the intangible assets and they have spread their work regarding the issues of accounting of Intangible assets: In a research carried out by Jason Schloetzer (1996) it was argued that intangible assets have infinite use while tangible assets have finite use so it is always difficult to measure their life over which it has to be amortized. It was argued by the acountants that intangibles are to be measured at its cost then there can be a case that the cost incurred for the production or upbringing of the asset may be very nominal as compared to the benefits of the asset or its actual value. C. G. Wagner (2001) has pointed out that if a particular asset was generated internally and does not have a market or a product like that has not yet been introduced, such as computer software or a brand, it cannot be properly valued and recognized. (Wagner, 2001) There has also been an argument whether the Human capital should be taken as an asset or an investment. A problem associated with the measurement is that some of the methods are very particular to a specific industry or even a particular company. The methods which are used to measure the intangible assets require estimates and assumptions. Methods of measurement of intangible assets value can be the measurement of future cash flow and where the asset is of such a nature that the future cash flow based on the asset are attached to other assets such as the benefits of software are associated with the computer itself therefore it is complex to disassociate them. The argument presented by McGladrey (2009) was that since the goodwill does not need to be amortized but should be tested for impairment, the accountants and the auditors alike are facing the issue regarding the judgmental issue which is the measurement of the fair value and the impairment of the goodwill. (McGladrey, 2009) Arguments for the Measurement and Valuation of Intantible assets There have been arguments for the measurement of the measurement and valuation of the intangible asset that have been supported by the International Accounting Standards which has simplified the accounting of the Intangible Assets. Some of the arguments are stated below: The IAS has guided that the amortization should imitate the derivation of benefits over the period which is difficult to imply which is why the companies are obliged to stick to the other alternative which is amortization over straight-line basis. The IAS gives the guidance that the asset should be amortized systematically over the period of life of the asset and since the intangible asset cannot be broken down and there is no wear and tear of the asset, it is difficult to judge the useful life of the asset over which the asset should be amortized. One of the methods to test the impairment is the measurement of the fair value less cost to sell. In the research carried out by Ernest & Young, it was preferred that where the asset does not have an active market, it makes it very difficult for the company to measure the fair value of the asset and in the absence of an active market, the company shall give regard to the amount that will be derived if the asset is disposed. (Young, 2011) The IAS has guided that an asset can only be capitalized once commercial and technical viability of the asset pertaining to the use or sale of the asset is recognized which means that the entity shall have sufficient belief that the asset is completed and benefits can be derived from it. (Richard, 2000) Some intangible assets also have an indefinite useful life such as they derive benefits for an indefinite period and the company can keep deriving benefits from it. In such cases the IAS has guided that such an asset should not be capitalized and should be expensed out immediately Conclusion The accounting of the intangible assets is one of the most judgmental tasks to be done as it involves a lot of estimates and a clear cut method of accounting for it has not yet been established. The International Accounting Standards has provided its guidelines on it but some of the points are still arguable as the measurement and valuation of the asset is a difficult question to ask. As the business is growing further and the technology is mounting, new intangible assets are being produced which are creating further questions regarding the accounting treatment of intangible assets. It can be concluded that the accounting for intangible assets will require more clarity so that the arguments of the accountants can be addressed. Works Cited IAS Plus. (2009). Retrieved from http://www.iasplus.com/standard/ias38.htm [accessed April 24, 2011] King, A. M. (1999). Valuing intangible assets through appraisals. McGladrey. (2009). Accounting Insights. National Professional Standards Group . Young, E. a. (2011). IAS 36 Impairmenttesting: practical issues. Richard, E. (2000). A Business Model for the New Economy. Journal of Business Strategy . Wagner, C. G. (2001). Making Intangible Assets More Tangible. Futurist . Young, E. a. (2011). IAS 36 Impairmenttesting: practical issues. Read More
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