The accounting treatment for intangible asset is so complex that many people have ambiguous interpretation about it. The essay has three parts to show a clear and systematic introduction to intangible assets. First the basic information about intangible assets like definition, recognition and measure about intangible assets are shown. Meanwhile some problems in the recognition and measure about IA are also proposed together with some recommendations. Secondly the nature of internal generated IA is analyzed and some successful Australian companies are used to further analysis about IA. Finally the essay also shows some critical thinking about IA and concludes the development of accounting treatments of IA in Australia.
Intangible assets have been defined by many scholars in academic field. Sidney Davidson (1983) defined IA in the handbook of accounting as patents, copyrights and business secret, ingredients and methods and so on. Nowadays AASB defined IA as some identifiable non-monetary asset without physical substance according, which has concluded the mature and characteristics of IA. It has the critical nature of assets- it is resource controlled by the company based on previous business activities and may bring economic benefits to the company in future.
While it is so different from tangible asset for two main characteristics: identifiable and non-physical substance(Alferdson, 2001). IA can make a firm distinguish from its peers and strengthen firms’ competence but no one can feel it like tangible assets with physical existence. The non-physical character makes no competitor can steal or imitate IA in the company, and IA is more volatile than tangible assets especially when the market value of the firm reduces and bad events happen. The matching of revenue and cost is hard for uncertainty in future. Finally the pricing of IA is hard for lack of active markets.
For the complicate characters of IA, the recognition and measurement for it is explicit regulated to make it more understandable. IA can be separable from the entity and arise from contractual or other legal rights like as the identification criteria (Kail, 2000). The recognition of IA like other assets has two criteria: has probability to bring profits to entity in future and the cost is tracked reliably.
IA has two origins: internally generated IA and acquisition. For the internally generated IA, the measure of IA is periodical and is easy to be confounded with goodwill. Goodwill is recognized only when treated as part of a business combination and it is measured at cost as the difference between total expenditure and the sum of tangible and intangible assets (Walkotten, 2003). So the measure of IA also affects the measure of goodwill in acquisition. The first period of research is for gaining knowledge not matching recognition criteria, so all cost is expensed. In the second stage of development, if the development reaches the initial expectation and meets six criteria, the expenditure from the recognition date is capitalized. The third stage of use of IA, accounting treatment is different for infinite and finite life of assets. For finite assets, the amortization of IA is the same like depreciation for PP&E, while no amortization charge but annual impairment is needed for infinite assets. The last stage of retirement and disposals, when IA is out of date and be derecognized, the disposal of IA is needed and gain or loss for IA is known.
Though intangible assets are recorded in the financial report as an improvement of accounting standards, there are still many shortages in the accounting treatments. Reform is needed to complete this account in future to represent the fair value of company. Meanwhile firm should strengthen their effort in increasing intangible assets especially the internally generated IA. It shows core competence of the company and can bring huge profit in future.