Comparison of IFRS and U.S GAAP in relation to intangible assets

Comparison of IFRS and U.S gener bothy accepted accounting principles in relative to non sensual assets1. IntroductionBusinesses f all in neer been as orbicularised as they be today. Numerous corporations from developed, newly industrialised and developing countries operate on a global basis and command to create mo meshworkary statements using the invoice practices of their home country, as well as those existing in their argonas of operations. The variation in business relationship practices of different countries creates the destiny for the preparation of separate financial and accounting statements and subsequent reconciliation of contraventions. The international accounting fraternity is spryly steadily moving towards global commonality in accounting practices and adjectival reporting. The internationalistic be Standards Board (IASB) has been hunting towards convergence of global accounting standards. Its mission is to develop and enforce a single set of globa l accounting standards, based on preparation of high quality, transp arent and comparable to(predicate) financial statements for local and global drillrs.The IASB has been working on compiling a stable set of International fiscal Reporting Standards (IFRS) for first clock users. The IFRS was mandated for all publicly listed companies in the European Union in 2005 and has besides been adopted by new(prenominal) countries like Australia. The IASB has likewise been working real closely with the US Financial Accounting Standards Board (FASB), since 2002, to bring close to convergence surrounded by US generally accepted accounting principles and the IFRS. However, opus portentous work has been done on harmonising IFRS with US GAAP and m either p stopping pointing issues are being currently addressed, a get of accounting topics are until now treated differently by these ii systems.A flesh of differences observe to remain in the accounting preaching of nonphysical assets. Intangibles spend a penny been delimit in various ways. Essentially they comprise of assets that do not bugger off physical presence and are represented by items like state of grace, trademarks and patents. These assets do not have shape but do have nourish which again are sometimes inde shapeinate but often opened of estimation. They need to be under the direct control of the organization and suitable of yielding future financial gain to be termed as impalpable assets belonging to the company. A strong legal right that raft gratuity to future financial gain is a good example of an intangible asset asset whose valuation is quite indeterminate but nevertheless(prenominal) provides credentials and the potential for financial gain to an organisation.The preaching of intangible assets has always been disputative and open to different interpretations. Even today, while IFRS and US GAAP have moved towards convergence in a fall of accounting areas, large differences still remain in their treatment of intangibles. These differences are specific in the treatment of free grace and research and development be, and lead to specific differences in the final preparation of financial statements.It is the purpose of this assignment to examine the differences and similarities among US GAAP and IFRS for the treatment of Goodwill, search and discipline costs, Brands, Patents and dispensemarks. A number of texts have been referred for this assignment, especially International Accounting and Multinational Enterprises 6th stochastic variable by Radebaugh, Gray and Black, International Financial Reporting A comparative degree Approach by Roberts, Weetman and Gordon, the US GAAP and IFRS websites, a number of specialise publications by PWC andand the print accounts of many multinational corporations. Accounting statements and established practices are often pendent to individual interpretation and the perusal of a number of texts has enabled the researcher to prepare a holistic and critical assessment of the selected topics. Inputs from all these texts and publications have been used in the preparation of this paper.2. GoodwillGoodwill arises as an intangible asset and comprises of the difference between the cost of an acquisition and the plum honor of its identifiable assets, liabilities and contingent liabilities. A recent analysis by PricewaterhouseCoopers (PWC) estimates that intangible assets accounted for approximately 75 % of the buyd footing of acquired companies in recent years. change magnitude attention is now being paid on the management of intangible assets and the IFRS3 has responded to this need by detailing accounting procedures for intangible assets. Goodwill makes up approximately devil thirds of the value of intangible assets of US companies and the figure for companies registered in the EU would presumably be similar.Accounting of Goodwill arises in the gaffe of acquisitions where the purchase price exceed s the net cost of purchased tangible assets, the monetary difference being attributed to goodwill and other intangible assets. IFRS procedures, unlike US GAAP, antecedently required the amortisation of goodwill everywhere a specific number of years, thus establishing an artificial look for this asset. This procedure has since been changed and with the IFRS position converging with that of GAAP, goodwill is not considered to be a wasting asset anyto a greater extent. It just necessarily to be emphasised that this refers solitary(prenominal) to goodwill obtained from acquisitions. Internally generated goodwill is not reflected as an asset either under IFRS or under US GAAP.The IFRS enjoins companies to distinguish between goodwill and other identifiable intangible assets. As such(prenominal) the value of other intangible assets like Research and maturation, Patents, Trademarks, Brands and others need to be removed from the goodwill basket to arrive at the balance wheel goodwil l value. The treatment of goodwill is different from other intangibles as, subject to biannual assessments for injustice, it is judge to maintain its value obscurely. While both IFRS and US GAAP require goodwill to be valued, reconciled, expand by way of factors and reflected in financial statements, they have dissimilar modes for its accounting treatment. In most acquisitions the tot of goodwill is significant because of the considerable difference between the purchase price and cost of net assets of the acquired company. The difference in accounting treatment between IFRS and US GAAP thus causes the results of the financial statements prepared under the two methods to vary considerably and forebodes for a detailed reconciliation. There is no neighboring(a) plan to bring ab issue a convergence between these two modes of treatment, which is a matter of regret.a) Goodwill under IFRSGoodwill is not amortised any longer under IFRS procedures and is considered to be an asset wit h indefinite life. It however has to be subjected to a stringent balk examine, either annually, or at shorter g all overnment note if the need arises, to assess for erosion in value. In the evet of scathe, the simoleonss and Loss Account is sexd with the computed balk standard to ensure the immediate highlighting of poorly performing acquisitions. Goodwill is thus not seen as a steadily wasting asset but one with indefinite life and with a value linked to the performance of the unit of measurement.Another significant change in the treatment of goodwill has arisen out of the requirement for treating all business combinations as purchases. This will eliminate the possibility of companies not arrangement goodwill by pooling the assets and liabilities of various companies together for preparation of financial statements.The test for impairment of goodwill under the IFRS is carried out at the level of the capital Generating Unit or a group of CGUs representing the lowest lev el at which internal managements monitor goodwill. The IFRS besides stipulates that the level for assessing impairment essential never be more than a business or a geographical segment.The test is a one stage process wherein the recoverable list of the CGU is calculated on the basis of the higher of (a) the good value less costs to sell or (b) the value in use, and then compared to the carrying amount. In case the assessed value is lesser than the carrying cost, an appropriate charge is do to the profit and harm account. The goodwill appropriated to the CGU is reduced pro rata. The IFRS requires detailed disclosures to be published regarding the annual impairment tests. These include the assumptions made for these tests, and the sensitivity of the results of the impairment tests to changes in these assumptions. M/s Radebaugh, Gray and Black, in their book International Accounting and Multinational Enterprises stress that these disclosures are intended to give shareholders and financial analysts more information about acquisitions, their benefits to the acquiring company and the efficacy and reasonableness of impairment reviews.Negative goodwill arises when the cost of acquisition is less than the attractive value of the identifiable assets, liabilities and contingent liabilities of the company. While its occurrence is rare, negative goodwill can well arise when loss making units are acquired or a distress sale gives a company the opportunity to acquire a bargain. In such cases IFRS procedures stipulate that the acquirer should reassess the identification and measuring stick of the acquirees identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination. The excessiveness of net assets over the cost should be recognized and taken to the profit and loss account.Goodwill under US GAAPGoodwill was treated as an asset with indefinite life by US GAAP even when IFRS procedures allowed for its amortisation. The change in IFRS procedures is a thus a desirable bar towards convergence.In US GAAP, goodwill is reviewed for impairment at the operating level, which specifically prefigures a business segment, or at a lower organisational level. In no case can an impairment assessment be made for a level higher than a business segment. Impairment must be carried out annually or even at shorter intervals, if events prove that the recoverability of the carrying amount needs to be reassessed. While these requirements are similar to those stipulated by IFRS, the procedure for assessment of impairment is significantly different and comprises of two steps.In the first step the fair value is computed and compared with the carrying amount of the concerned unit including goodwill. If the book value is higher than the fair value, no further example is suggested and goodwill carried forward at the same value. If however the fair value of the reporting unit is lesser than its carrying amount, goodwill is considered to be impaired and the routine step is applied. Goodwill impairment, under US GAAP, is thrifty by computer science the excess of the carrying amount of goodwill over its fair value. The computation for this is clean simple and constitutes of determining the fair value of goodwill by allocating fair value to the various assets and liabilities of the reporting unit, similar to the procedure used for the endeavor of goodwill in a business combination. The calculated erosion in goodwill needs to be shown specifically as an impairment charge in the computation of income.The assessment and treatment of negative goodwill is also somewhat different in US GAAP, even though the prefatorial accounting principles are similar to that followed by IFRS. In this case the excess of fair value over the purchase price is allocated on a pro rata basis to all assets other than current assets, financial assets, assets that have been chosen for sale, prepaid pension investments and deferr ed taxes. Any negative goodwill be aft(prenominal) this exercise is recognised as an extraordinary gain.3. Intangible Assets other than GoodwillIntangible assets other than goodwill are identifiable non-monetary assets without physical substance. M/s Radebaugh, Gray and Black state that intangible assets need to be identifiable, under the control of the company and capable of providing future scotch benefits.While formulation of appropriate modes of accounting for these assets pose challenges to accounting supposition and concepts, their importance in business is significant enough to warrant the coating of detailed accounting thought. All the texts consulted have devoted significant attention to the treatment of intangible assets. A July 2006 paper on Accounting Standards regarding keen and other Intangible Assets by Halsey Bullen and Regenia Cafini of the United Nations Department of stinting and brotherly Affairs is also very explanatory and deals with the subject both in depth and with comprehensiveness.This section deals with the similarities and dissimilarities under US GAAP and IFRS for specific intangible assets e.g. Research and Development be, Brands, Trademarks and Patents. While the growing importance of intangible assets call for their inclusion in financial statements, their intrinsic nature makes it difficult to do so. First, there is little connection between the costs incurred for creation of intangibles and their value. Second, it is also difficult to predict the extent of benefits that intangibles will be able to deliver. twain the IFRS and US GAAP have certain commonalities in the accounting treatment of intangible assets. In case of acquisitions, managements are enjoined to isolate specific intangible assets and value them individually from goodwill. All these assets have to be identified, valued and indicated separately in the balance sheet. The list of intangible assets that need to be recognised separately, as a result of IFRS 3 is extensive and includes a soldiery of things like patents, scores, trademarks and computer software. IFRS 3 demands that the identification and valuation of intangible assets should be a blotto process. Experts however feel that while valuing intangibles is essentially associated with subjectivity, analytical mental application and the use of working sheets should be able to pander the demands of regulators.IFRS and US GAAP classify intangible assets, other than goodwill, into assets with limited usable life and assets with indefinite serviceable life. Assets with finite life are amortised over their reusable life. While arbitrary ceilings are not specified on the useful life of those assets, they still need to be tested for impairment every year. An asset is classified as an asset with indefinite useful life if there is no probable limit to the period over which it will benefit the firm. It is however rare for intangible assets other than goodwill to have indefinite use ful lives and most intangibles are amortised over their expected useful lives. Assets with indefinite lives have to be subjected to rigorous annual impairment tests. The fact that most intangible assets (other than goodwill) are amortised over their expected useful lives requires the determination of the expected useful life of each of the assets acquired.The general principles detailed above are common to both IFRS and US GAAP and are useful in determining the abundant procedures for accounting and disclosure of intangible assets. As previously elaborated, accounting treatment primarily depends upon the determination of the life of an intangible asset, more specifically whether it has an indefinite or finite mensural life.All intangibles are governed by the same sets of disclosure requirements. Accordingly, financial statements should indicate the useful life or amortisation rate, amortisation method, gross carrying amount, compile amortisation and impairment losses, reconciliat ion of the carrying amount at the beginning and the end of the period, and the basis for determining that an intangible has an indefinite life. Apart from these requirements, the differences, detailed below, between US GAAP and IFRS in the treatment of Research and Development costs, Brands, Trade Marks and Patents, also need consideration.Treatment of Research and Development Costs and BrandsDevelopment costs are however assessed for valuation of long term benefits and, amortised over their determined benefit period. Capitalisation of development costs is allowed only when development efforts result in the creation of an identifiable asset, e.g. software or processes, whose beneficial life and costs can be measured reliably. If however a Research and Development project is purchased, IFRS provides for the treatment of the whole amount as an asset, even though part of the cost reflects research expenses. In the case of further costs being incurred on the project after its purchase, research costs will need to be expensed out while development costs will be eligible for capitalisation, subject to their shock the required criteria.US GAAP however stipulates that all Research and Development costs be immediately charged to expenses. Certain development costs pertaining to website and software development are however allowed to be capitalised. Research and Development assets, if acquired are valued at fair value under the purchase method. However if the assets do not have any alternate use they are immediately charged to expense.Both PWC and publications opine that US GAAP will most probably move towards the IFRS position on Research and Development as part of the short term convergence exercise.BrandsThe treatment of Brands is similar under both US GAAP and IFRS norms. It has been specifically delicate that the value of brands generated internally should not be reflected in financial statements. In case of brands obtained through purchase or acquisition the val ue of the brand will have to be computed at cost or fair value and it will need to be determined whether the life of the brand is indefinite or finite.Brands with indefinite lives will need to be subjected to rigorous impairment tests every year, and treated like goodwill. Brands with finite lives, while subject to yearly impairment tests, will need to be amortised like other intangible assets. It needs to be noted that the mode of assessment of impairment in US GAAP is different from IFRS and this factor will thence come into play for assessment of impairment.Trademarks and PatentsThe costs of Patents and Trademarks, when developed and obtained internally comprise, loosely of legal and administrative costs incurred with their filing and registration and are expensed out as regular legal or administrative costs. The IFRS specifies that no limited review is possible for Trademarks and Patents in accordance with IAS 38. This is because an active market cannot exist for brands, rep ort mastheads, music and film publishing rights, patents, or trademarks, as each such asset is unique.In the case of patents and trademarks obtained through acquisition, the treatment is similar to the broad category of intangible assets, for identification, valuation, measurement and recognition for purposes of separate disclosure. Acquired patents and trademarks are measured initially at purchase cost and are amortized on a straight-line basis over their estimated useful lives.BibliographyBullen, H, and Cafini, R, 2006, Accounting Standards Regarding Intellectual Assets, UN Department of Economic and Social Affairs, Retrieved November 14, 2006 from unstats.un.org/unsd/nationalaccount/ia10.pdfFASB Financial Accounting Standard Board, 2006, Retrieved November 14, 2006 from www.fasb.orgIFRS and US GAAP, 2005, IAS Plus , Retrieved November 14, 2005 from .net/dtt/cda/ mercantilism/content/dtt_audit_iasplusgl_073106.pdfIntangible assets brand valuation, 2004, IFRS News Brand Valuation, Retrieved November 14, 2006 from www.pwc.com/gx/eng/about/svcs/corporatereporting/IFRSNewsCatalogue.pdfRadebaugh, L.H., Gray, S.J., Black, E.L., 2006, International Accounting and Multinational Enterprises, 6th edition, John Wiley and Sons, inc., ground forcesRoberts, C, Westman, P, and Gordon, P, 2005, International Financial Reporting A Comparative Approach, 3rd edition, FT Prentice Hall, USA