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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
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Experience:  35 years tax experience, including four years at a Big 4 firm.
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The recognition of intangible assets: should it be permitted?

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The recognition of intangible assets: should it be permitted? Refer to contemporary practice and research. What is the worldview?

PDtax :

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Intangible assets are not traditional 'bricks and mortar' hard assets, but have significant value nonetheless, and must be accounted for. The blue oval of Ford, Coca-Cola's iconic red symbol, and thousands more are just a few examples of the type of recognition value some intangibles can have. While these are recognized globally, the international accounting community is now becoming more united on the treatment of these assets.

Australian recognition and treatment of intangibles has not been consistently treated, leaving some entities trying to record both the asset and underlying expense over its life, while other entities do not report the asset or amortize the benefit at all. How is a user of these financial statements supposed to compare reporting results when treatment of intangibles is not consistent?

In the US, intangibles have long been a source of tax and business litigation. Value of patents, trademarks, and other such assets is long recognized, and protected legally. Gradual expensing of the costs to acquire or build the asset is allowed, often over the intangible's legally protected life.

International accounting standards have been promulgated to define the assets and specify recognition of the value they bring to an entity. International Financial Reporting Standards (IFRS) IAS 38 Intangible Assets, from 1998, suggests definitions and standards for recognizing what intangibles are, how to value and recognize them for financial reporting. It should be noted that these standards are not universally accepted, and various countries choose to apply some, much or all of these standards. The effort to offer consistent accounting treatments for these items is commendable and should be applauded.

If you accept the IFRS view as a world view, IAS 38 outlines some tests to determine what should be a capitalized intangible, and suggestions for amortisation over a finite life.

Documents used in this report:

http://www.docstoc.com/docs/44780895/Australian-Intangible-Asset-Review
http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/IAS_38_intangible_assets.pdf

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