Controversies about the Accounting and Reporting of Intangible Assets

Posted: August 27th, 2021

Controversies about the Accounting and Reporting of Intangible Assets

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Controversies about the Accounting and Reporting of Intangible Assets

Introduction

            Accounting and reporting intangible assets have been controversial for the past three decades among the Financial Accounting Standard Board (FASB) regulators and the International Accounting Standard Board (IASB). The chief issue behind this unending debate is the accounting practices of fair value under the two previously mentioned standard boards. The need to consider fair value measurements by regulators of these accounting standards has continued to spark inevitable debates regarding intangible assets’ reliability and value relevance. It is important to prove whether unreliable fair value measurements can adapt to the relevance of intangible assets. Also, there is a need to establish how the disclosure of intangible assets in the balance sheet would bring about economic benefits. Therefore, this paper seeks to discuss how the valuation of intangible assets under the structured accounting measurements of fair value would impart future earnings in a balance sheet.

Explanation of the Treatment of Internally-Generated Intangible Assets under AASB 138

           The treatment of intangible assets depends on whether they were internally generated or rather purchased. In the case of an internally-generated intangible asset, the costs are immediately regarded as expenses without reinstatement. For the treatment of internally created R&D activities; however, there is the selection for capitalization method since some R&D costs are considered intangible assets, whereas others as an expenditure (Intermediate Financial Reporting, 2020). Besides, the R&D has market values defined by the cost model, while the rest are treated under the re-evaluation model. Hence, for the R&D possessing finite lives, they are amortized and further subjected to impairment rules.

Description of In-Process R&D as an Internally-Generated Intangible Asset

           In-Process R&D is a current business example of an internally-generated intangible asset, whose treatment method in a financial statement is an expense for the period it was originally incurred (Uzna, 2011). Likewise, all the R&D costs are treated as intangible assets in the capitalization methods. Since the In-Process R&D does not have a market value, its subsequent measurement cannot be done via the cost model (Intermediate Financial Reporting, 2020). R&D is subject to the amortization method if its residual value would be presumed zero once the finite life is exploited. Therefore, the recording of impairment profit or loss for In-Process R&D would compel for its disclosure in the financial statements.

Discussion on Whether to Include Intangible Assets in a Balance Sheet or Not

With the exclusion of the pooling method’s practice, a shift of purchase method arises, leading to the acknowledgment of intangible assets in the financial reporting (Uzna, 2011). There have been two conflicting arguments regarding the inclusion of intangible assets in the balance sheet. The first dispute favors the inclusion of intangible assets, especially those that are internally generated by the company in question. Notably, the supporters of this argument have posited that intangible assets need to be a subject of an annual impairment test, instead of letting it under the process of amortization (Uzna, 2011). For example, they have defined intangible assets as an important component that must be reported as an acquired entity’s additional costs over the net amounts (Intermediate Financial Reporting, 2020). Therefore, the balance sheet’s consideration of intangible assets is based on the following conditions: identifiability, separability, transferability, and economic value. It has been argued that the capitalized value of intangible assets brings forth the need to measure its fair value during the reporting of the acquired PPE. Moreover, they support that intangible assets like In-Process R&D should no longer be considered an expense, but its changes are reflected under annual impairment tests (Uzna, 2011). Thus, in this regard, it is proper to qualify the recognition of intangible assets as acquisition costs in the balance sheet.

On the contrary, there has been another dispute against intangible assets’ capitalization as acquisition costs in the balance sheet. Specifically, this group of regulators has defended their position that endorsing the disclosure of intangible assets as expenditure in the balance sheet tends to anticipate the availability of future streams of cash flows (Uzna & Singh, 2009). Instead, they have advocated for a separate line of items that would report In-Process R&D as expenses in an income statement. Further, they have reasoned that the In-Process R&D cannot be regarded as value relevant in circumstances where company management has the option of reporting it as an identifiable intangible asset (Uzna, 2011). Therefore, considering an intangible asset as value relevant implies that company management would positively impact the anticipated future research’s market efficiency. In this case, this counterargument posits that an intangible asset may have value relevant but fail to reflect some economic benefit in the future (Intermediate Financial Reporting, 2020). Consequently, the counterargument cautions against including these types of assets in the balance sheet since valuing the company based on this criterion might bring about negative economic implications in the future. 

Conclusion

In my view, the fair value accounting of intangible asset conflicts with statement guidelines of FASB and IASB because it lessens the reliability of financial reporting in the event of scanty disclosures. Also, I find that the balance sheet’s consolidation for involving the value relevance of intangible asset results in the omission of reliability. Further studies must evaluate the recognition and relevance of current values of intangible assets intending to establish their predicted economic value in the future. I can confirm a lack of common agreement on the general approach for measuring an intangible asset’s fair value based on its validity and applicability among other non-financial items. Overall, the authorization of additional disclosures about an intangible asset before in a balance sheet cannot be successfully attained due to the involved flaws in accounting standards.

References

Intermediate Financial Reporting. (, 2020). Unit of study – ACCT6001. The University of Sydney.

Uzna, H. S. (2011). Challenges of reporting intangible assets in financial statements. The IUP Journal of Accounting Research & Audit Practices, 10(4), 1-13.

Uzna, H. S., & Singh, P. H. (2009). Intangible accounting: issues & dimensions. Effect of Corporate Social Responsibility on Corporate Identity: A Systematic Literature Review, 1-12.