Intangible assets
IAS 38 requires that the company should recognize intangible assets should be recognized at cost if only the cost of the asset can be adequately measured. The intangible assets are also recognized at cost if the future benefit of the asset will flow into the company. An intangible asset is defined as an identifiable non-monetary asset that does not have physical substance. For an item to be recognized as an intangible asset the company should demonstrate that the item meets:
- The intangible asset definition
- The recognition criteria
The intangible asset item must be identifiable as a separate item in the entity statement of the financial statement. The intangible should, therefore, have the capability of being separated from other business assets. The entity is also required to have control over the use of the asset for it to be recognized as an intangible asset. This only occurs if the company has a legal entitlement to the asset meaning that the company has legal rights to the assets. The intangible asset should be able to have a future benefit to the company. The asset is, therefore, able to help the company generate revenue in the future.
The cost of the intangible should be measurable. Any cost incurred as a result of an intangible asset should be recognized in the company balance sheet only if they meet recognition criteria. Otherwise, the cost should be recorded as expenses for the period when they are incurred.
Criteria for recognition of intangible assets:
- The intangible asset should be recognized in the balance sheet if their economic benefit obtained exceed one reporting period.
- The asset is not provided and not intended for sale. The intangible asset intended for sale should be recognized as stock/inventory.
- The asset can be used in management, business transaction, and production.
- There must be a document to prove the entitlement of the asset to the company.
- The intangible assets do not have any material substance in the assessment of the property
- The asset should also be independent of other accounting items hence should be separated from other properties.
Should criteria for the recognition of intangible assets in the balance sheet be expanded?
The intangible asset is classified either as generated internally or acquired externally. Intangible assets acquired externally should be recognized at a cost in which the asset was purchased. On the other hand, those that are generated internally are recognized at the current expense in the period under which the cost for the asset was incurred. In case the asset is internally generated there the cost of its generation is not recognized in the balance sheet but it is expensed in the income statement. Internally generated intangible assets are only recognized in the balance sheet only if they meet the definition of the intangible asset or they meet the recognition requirement of the asset.
Those items that are recognized as intangible assets include copyright, Patents and Licenses, computer software, Development and experimental costs and entitlement to the production samples. Cost related to site preparation, trademarks and trade brand acquired externally should also be recognized as intangible assets. Trademark and trade brand developed by the company should be reported in the company income statement.
Internally generated intangible assets are classified into the research and development phase. Intangible costs during the research phase are not recognized in the balance sheet as they do not meet recognition criteria. All the research costs are recognized as expenses in the income statement on the period the expense occurred. Development costs should be recognized as an intangible asset if the technical feasibility of the development results can be proven. In case the enterprise is able to prove that the development phase is able to offer benefits in the future then it can be recognized in the balance sheet as an asset.
On issues of internally generated intangible assets, some of the costs of the asset should be capitalized and recorded in the balance sheet. Internal generated intangible costs that should be reported in the balance sheet should include labor cost, cost of material and services, fees to register legal rights and amortization of patents and licenses that are used in the generation of the intangible asset.
According to IAS 38, the following internally generated intangibles items should not be recognized in the balance sheet as they do not meet the definition of the intangible asset. They are inseparable from the enterprise. They include internally generated mastheads, internally generated brands, internally generated customer lists, and internally generated publishing titles.
The intangible asset is amortized base on the period over which the asset is useful. Some assets such as high technology intangible assets and computer software may have a short useful life. In other cases, the useful life can be very long though a definite period will always be provided. In layer cases, a useful time will be more than 20 years.
The intangible assets are amortized the same way as the depreciation method of the property, plant, and equipment or fixed assets. The amortization approach is based on the benefit gained by the entity as a result of the asset. If the gain on the company cannot be reliably determined, the straight-line approach should be applied. The residual value must always be assumed to be 0. This should not be the case if there is an active market for the asset or there is a third party liability to purchase of an intangible asset at the end of its useful life.
Internally generated goodwill should also not be recognized in the company balance sheet. The reason for not recognizing the internally generated asset is because the asset is not individually identifiable cost which the company has legal control and also the cost of the goodwill cannot be measured reliably. This means that the internally generated goodwill does not meet the definition of the intangible asset.
Goodwill represents the future economic benefit which rises from other assets either tangible or intangible in an enterprise combination. The intangible asset is separable, unlike the goodwill which is not separable. An asset is separable if it can be exchanged, sold, rented or future economic benefits associated with the asset can be divided without disposing at the same time of those future economic benefits arising from other assets used in the same revenue-generating operation.in case the cost of the asset cannot be reliably measured or if it does not have any future economic benefit attributable to it then it cannot be recognized in the balance sheet as an intangible asset. This is the reason why we don’t recognize goodwill as an intangible asset. Most intangible assets are expensed immediately when they incurred, while the benefits for the asset are recorded later. The recognition of intangible investment distorts the principle of matching the costs to revenues. In case intangible asset is purchased as part of business combination they should be recognized at their fair value at the date the asset is acquired. According to IFRS 3 business combination does into only recognized research and development and licenses, but customer-related intangibles such as customer lists, brand-customer relationships also include on the enterprise balance sheet. Internally generated goodwill should also not be recognized in the company balance sheet. The reason for not recognizing the internally generated asset is because the asset is not individually identifiable cost which the company has legal control and also the cost of the goodwill cannot be measured reliably. This means that the internally generated goodwill does not meet the definition of the intangible asset.
All the expenditures incurred during the acquisition of intangible assets should add to the cost of the asset. Such costs should be recognized in the balance sheet. The intangible assets are required to be recognized at cost of acquisition or fair value at which the asset was acquired.
Finally, though the international accounting standard for intangible assets promotes consistency in financial reporting is and archly and seriously flowed conservative standard. The standard is much restrictive and fails to recognize many intangible assets. The restriction is much skewed on recognition and revaluation of internally intangibles assets.