Intangible Asset - Best Essay Writing Service Reviews Reviews | Get Coupon Or Discount 2016
Free Essays All Companies All Writing Services

Intangible Asset

An intangible is an asset of value that cannot be physically touched but subject to amortization. Its becoming an asset is determined by the international accounting standard. It non-compliance with the standard has a consequence which affects decision makers. This paper seeks to support this assertion by analyzing what are these intangibles and the requirements for their establishment and recognition and the consequence for non compliance.

The international accounting standard (IAS) regulates intangibles is (IAS) 38 as prescribed by the accounting standards board (IASB). There are however other rules under the different standards on intangibles issued by the IASB but precisely the purpose of the IAS 38 is to prescribe the accounting treatment for intangibles assets that are not deal with specifically in other IAS.

The criteria under IAS 38 determine when to recognize intangible asset in the books and how to comply with the disclosure requirements in matters of preparing the financial statements of a company. To be considered as intangible asset, the same must be controlled by the enterprise as a result of past events which could either be by purchase or self-creation and future economic benefits must be expected by the enterprise. Said economic benefits may take the form of cash inflows or other assets that will increase wealth of the enterprise.

Not all kinds of intangible assets is governed by the rules under IAS 38. What are not covered may include the following (1) financial assets; (2) mineral rights and exploration and development cost incurred by mining and oil and gas companies; (3) intangible assets arising from insurance contracts issued by insurance companies; and (4) intangibles covered by the another IAS or IFRS such as intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits, and goodwill.

By definition above the following are therefore the attributes of an intangible: identifiability, control and future economic benefits which could take the form of revenues or reduced future costs. An asset is identifiable when it is capable of being separated and sold, transferred, licensed, rented, or exchanged, (Olsen and Halliwell 2007;Webster and Jensen, 2006) either individually or part of the package and (2) arises from contractual or other legal rights. There is control when it has the power of obtaining benefits from the asset.

Under IAS 38, an intangible could only be recognized as asset whether the asset is self-created or purchase if the following are requirements are complied with: (1) it is probable that future economic benefits that are attributable to the asset will flow to the enterprise and (2) the cost of the asset can me measured reliably. If the asset is generated internally there is additional requirement. It is required that the probability of future economic benefits must be based on reasonable and supportable assumptions and conditions that will exist over the life of the assets (IAS 38).

It will be observed that this latter requirement would be deemed considered satisfied for intangible assets that are acquired separately or in a business combination (Delloitte Touche Tohmatsu, 2008) citing IAS 38). Under the definition given, the following could be considered examples of intangibles: copy rights, motion and picture films, customer lists, mortgage servicing rights, license, computer software, patents, import quotas, franchises, and marketing rights (Delloitte Touche Tohmatsu, 2008).

Note these assets are expected to produce future economic benefits, and their costs are measured reliably. What happens then if the criteria are not met? The answer would be to have the amount spent recognized as expense for the period. What then are the differences in the effects on the financial statements? To recognize it as asset, if proper under the criteria set, would in effect defer the recognition of expenses in subsequent period because of amortization and hence reported income for the current year would be higher.

However when charged to expenses because of not compliance with the criteria, the expense would be higher for the current period hence net income would be lower than in the first. How would intangible be acquired? One company can buy the copyright or patent of certain from form another person whether natural or juridical. The most unique way of acquiring intangible however is in the case of business combination where there is a rebuttable presumption that the fair value (and therefore the cost) of an intangible acquired in a business combination can be measured reliably.

Normally goodwill is associated with the purchase because of easier compliance with measurability and that the only instance perhaps where it would not be possible to measure reliably the fair value of an intangible asset acquired under a business combination is in case the intangible assets arise from legal or other contractual rights and it is not separable or separable. It could be separable, but one cannot adduce history or evidence of exchange transactions for the same or similar assets, and to estimate fair values would be to depend on immeasurable variables (Delloitte Touche Tohmatsu, 2008).

It can be concluded that intangible asset does not become my mere choice of management to influence decision makers. There is an international standard to determine its recognition in the books. Decision makers should therefore be informed that if said financial statements are audited independently the auditors, they have all the reason to rely on the financial statements that what represented that intangibles as presented are in fact assets that have passed the requirements of IAS 38.

Despite the existence of standard researchers found that the current accounting system cannot capture all important intangible values (Jenkins and Kane, 2006) that resulted in traditional financial statements being misleading and other users of financial information (Arkblad and Milberg, 2006). It can be counter-argued however that the standard is not perfect and much will still depend on the decision maker how to process accounting information but the standard enhanced reliability.

References:

Arkblad and Milberg (2006) Accounting for Intangible Assets – Relevance Lost. {www document ? http://www. handels. gu. se/epc/archive/00005205/01/05-06-152. pdf Delloitte Touche Tohmatsu (2008) Summaries of International Reporting Standards, {www document} URL http://www. iasplus. com/standard/ias38. htm, Accessed March 2, 2008. IAS 38, International Accounting Standards 38, {www document} URL http://www. iasplus. com/standard/ias38.

htm, Accessed March 2, 2008. Jenkins and Kane (2006) A Contextual Analysis of Income- and Asset-Based Approaches to Private Equity Valuation ; Accounting Horizons, Vol. 20 Olsen and Halliwell (2007) (Intangible Value: Delineating between Shades of Gray: How Do You Quantify Things You Can’t Feel, See or Weigh? ; Journal of Accountancy, Vol. 203. Webster and Jensen (2006) Investment in Intangible Capital: An Enterprise Perspective;; Economic Record, Vol. 82

Sample Essay of UkEssays