Chapter 9: Intangible Assets

Perspective and Issues

Long-lived assets are those that will provide economic benefits to an enterprise for a number of future periods. Accounting standards regarding long-lived assets involve determination of the appropriate cost at which to record the assets initially, the amount at which to present the assets at subsequent reporting dates, and the appropriate method(s) to be used to allocate the cost or other recorded values over the periods being benefited. Under international accounting standards, while historical cost is the defined benchmark treatment, revalued amounts may also be used for presenting long-lived assets in the statement of financial position if certain conditions are met.

Long-lived assets are primarily operational in character, and they may be classified into two basic types: tangible and intangible. Tangible assets have physical substance, while intangible assets either have no physical substance, or have a value that is not conveyed by what physical substance they do have (e.g., the value of computer software is not reasonably measured with reference to the cost of the diskettes on which these are contained).

The value of an intangible asset is a function of the rights or privileges that its ownership conveys to the business enterprise. Intangible assets can be further categorized as either

1. Identifiable, or

2. Unidentifiable (i.e., goodwill).

Identifiable intangibles include patents, copyrights, brand names, customer lists, trade names, and other specific rights that typically can be conveyed by an owner without necessarily also transferring related physical assets. Goodwill, on the other hand, cannot be meaningfully transferred to a new owner without also selling the other assets and/or the operations of the business.

Research and development costs are also addressed in this chapter. Formerly the subject of a separate international standard (IAS 9), but more recently guided by the standard covering all intangibles (IAS 38), research costs must be expensed as incurred, whereas development costs, as defined and subject to certain limitations, are to be classified as assets and amortized over the period to be benefited.

The standard on impairment of assets (IAS 36) pertains to both tangible and intangible long-lived assets. This chapter will consider the implications of this standard for the accounting for intangible assets. The matter of goodwill, an unidentifiable intangible asset deemed to be the residual cost of a business combination accounted for as an acquisition, has been addressed by IAS 22 and is covered in Chapter 11; accounting for all other intangibles, addressed in IAS 38, is discussed in this chapter.

As part of its twin projects considering revisions to the standards on business combinations and related topics, the IASB is reviewing the accounting for intangibles in general, so that the accounting for acquired intangibles, including goodwill and in-process research and development, will be consistent with that prescribed for intangibles acquired by other means or internally generated by the reporting entity. These projects may result in changes as early as 2003.

It is highly likely that, among other possible changes, the IASB will adopt the new US GAAP approach to goodwill accounting, under which goodwill is no longer subject to periodic amortization, but rather is tested annually for possible impairment. With such an exemption from amortization, the separate recognition of other intangibles, often acquired together with goodwill (e.g., customer lists), becomes much more critical, since the other intangibles would continue to be subject to amortization, with a possible new exception. That exception would be for intangibles having indefinite lives; IASB is inclined to permit such categorization for the first time (again, following closely the US GAAP standard issued in 2001), which would postpone amortization until a finite life could be assessed for each such asset. The expected revised IAS 38 would also ease the process of assigning lives longer than twenty years to intangibles by removing the current requirement to impairment test such intangibles annually if certain defined conditions are met. Finally, changes might be made to the criteria for capitalization of development costs, including acquired in-process research and development, although it appears that some discrepancies in the criteria for deferral as between internally generated and acquired development efforts might be unavoidable.

Sources of IAS

IAS 36, 38

SIC 6, 32