ACC692 Summer I
By Yigal Rechtman
July 30, 2001
What is the problem?
Accounting for intangibles has gained prominence in the past few decades due to changes in the way the business world operates. The technological revolution and in particular, the information age, has brought intangible resources to the fore of the business environment. Businesses ( even the most traditional production manufacturers ( are moving towards an information age where a competitive edge is increasingly linked to resources other than the fixed and liquid assets as understood by Generally Accepted Accounting Principles (GAAP). Some research has shown that accounting for Intangible Assets (IA) - a general term that will be defined and separated later - will fulfill the accuracy requirement of the accounting functions and reports. Other research has shown that accuracy will have to be traded off with relevance of the accounting functions and reports. Still other research claims that neither accuracy nor relevance are served by accounting for resources that do not meet the current definitions of Assets under GAAP. Accordingly, there are two questions regarding the accounting for IA: 1. Should the Generally Accepted Accounting Principles recognize as financially relevant and accurate events that arise from IA? 2. How should GAAP account, process and present these IA related events (if the answer to question number 1 is positive.)
Question number one is answered in the positive: the existence of IA in the current business environment is proven in repeated investigations. Further, the economic effects of IA on corporations has shown that not disclosing or accounting for such resources amounts to miscomunications regarding the activity and financial state of a business. The research that was used in this paper has shown that Intangible Resources are increasingly a factor in the business world. Intangible resources, as will be discussed below, is a super-set group of strategic elements that contribute to the success of a business. IA, in turn is a sub-set of the Intangible Resources.
The paper intends to explore the current range of thinking relative to IA and how such resources should be valued, recognized and presented in the financial reporting of U.S. companies. The question of how to account for IA poses different challenges, some of them related back to the answer of the first question. As this paper will show, recognizing IA on an entity(s books can be seen as a natural next step, especially for certain knowledge industry type businesses. However, the challenges to the issue of recognition remain: how to determine IA in a meaningful manner? How to report IA and what are the possible ramification of alternative accounting treatments?
Scope and Method of Exploring the ProblemScope and Method of Exploring the Problem The process of finding information about the topics relating to IA, and obtaining an understanding of the issues, involved an introduction by means of participating in a conference on the subject and obtaining complimentary readings of published articles. The Third Annual Conference on Intangible Assets, sponsored by New York University(s Ross Institute produced a documentary of the presentations, which were used in this paper. Additional published material was obtained through the ABI-Inform database, by searching for (Intangible Assets(, (Intangible Accounting( as well as (Assets Valuation( and (Appraisal, Intangibles( for the years 1976-2000[?][i]. The search was limited to articles available in full form on line (versus articles in which only the abstract is available on line.) This paper refers to twenty articles that were obtained through ABI-Inform and ten articles from presenters at the NYU(s conference. Two points should be made in...