Home/Essays Examples/Economics/Accounting: Recognition of Intangible Asset

Accounting: Recognition of Intangible Asset

Introduction

Intangible assets are non-monetary assets that are identifiable and do not exist physically. As stipulated in the International Accounting Standards Board (2020, IAS 38 Intangible Assets, 8), an intangible asset must have three essential attributes. First, the asset must be identifiable; that is, the asset must either be separable or arise from legal contracts. Second, the assets must be able to generate material benefits to the organization, either as cash or cash equivalents. Lastly, the asset must be a resource controlled by an entity. A typical example of an intangible asset that has all three attributes is patented technology. This definition of an intangible asset is in line with the Australian accounting policy spelled out in the Australian Accounting Standards Board (2016, AASB 138). Although most of the Australian accounting policies on intangible assets are consistent with the global accounting standards given in IAS 38 Intangible Assets, some sections, particularly on the recognition and measurement of the internally generated intangible assets, have faced fierce criticism and sparked a constant debate in the financial sector.

Main text

The Australian Accounting Standards Board (2019, AASB 138 Intangible Assets, 21) dictates that intangible assets should only be recognized in an entity’s financial statements under two conditions: an entity expects future economic benefit from the asset and, the cost of the underlying asset can be measured reliably. This definition prohibits the recognition of internally generated identifiable intangible assets such as publishing titles, goodwill, and brands since the value of such assets cannot be measured reliably under AASB 138 (Marzo, 2005). Moreover, the Australian accounting policies on intangible assets, under AASB 138 Intangible Assets impose stringent criteria on how the costs related to the assets should be capitalized or expensed (Australian National Audit Office, 2016). For instance, under AASB 138 Intangible Assets, the cost incurred to develop and maintain an internally developed software can either be capitalized if it is probable that the software will generate future economic benefit to the firm or expensed at the time in which they are incurred. Although this policy is unpopular and considered controversial, it is beneficial since it prevents organizations from overstating their expense. The policy also brings uniformity and prevents possible conflicts of interest during the reporting stage.

However, in the modern world where innovation and globalization are the order of the day for businesses, these regulations are not only detrimental to small and medium enterprises but also ineffective in revealing the true financial position and profitability of an organization (Wyatt et al., 2001). Today, many companies invest a significant amount of resources in technology and innovation not only to increase their profitability but also to have a competitive advantage over their competitors. The capitalization of these costs in an organization may either create a false impression that the company has a weak financial position or negatively influence the firm’s profitability ratios. Moreover, some companies may end up in an awkward financial situation by appropriating inflated profits. Therefore, to bring controversies and accounting conflicts to an end, it is advisable to recognize all costs related to intangible assets expenses.

Conclusion

In conclusion, contrary to the Australian Accounting Standards Board, all costs related to intangible assets should be recognized in the financial statements as an expense. Most companies spend many resources to build their brand through marketing. Other companies also take advantage of the development of technology to create innovative software to automate their production internally. Since these costs can sometimes be significantly substantial, it is recommended that they are expensed at the time they are incurred, as commonly practiced in other jurisdictions.

References

Australian Accounting Standards Board. (2016). AASB 138 Intangible Assets. Web.

Australian National Audit Office (ANAO). (2016). Capitalization of Software. Web.

International Accounting Standards Board. (2020). IAS 38-Intangible Assets. Web.

Marzo, G. (2005). Valuing intangible assets through real options theory: Some critical remarks. SSRN Electronic Journal. Web.

Wyatt, A., Matolcsy, Z., & Stokes, D. (2001). Capitalisation of Intangibles: A Review of Current Practice and the Regulatory Framework. Australian Accounting Review, 11(24), 22-38.