Difficulties Relating to the Recognition and Measurement of Intangibles Generally and of Brands in Particular

Topics: Balance sheet, Asset, Goodwill Pages: 5 (1336 words) Published: January 28, 2013
Difficulties relating to the recognition and measurement of intangibles generally and of brands in particular

With the development of market economies, knowledge economy and information industry, intangible assets as a necessary part of current business become one of the most important factors leading businesses to a success. In the previous years, people paid more attentions to tangible assets i.e. PPE, inventories, and other tangible assets that can produce future economic benefits. However, nowadays, people recognize that intangible assets would bring enormous benefits than we can expect. In fact, tangible assets, on average, are only 30% of the value of some companies. Especially, in the hi-tech industry, the percentage of intangible assets arrives to 90% in some companies. For instance, the US Microsoft, its book value is lower than GM’s, but its output value and profit is far more than the combination of three subsidiaries of GM. Furthermore, the ratio of intangible asset even reflects the strength of a company and makes the company more competitive. Intangible assets have real vale and are very important to a company's success, but are much harder to measure and quantify than their tangible counterparts. Therefore, what is the most significant point regarding to intangible asset is to recognize and measure reliably during accounting process thereby evaluating asset or even the value of a corporation more accurately and disclosing the actual information to accounting users. This essay will illustrate difficulties when recognizing and measuring intangibles and concentrating on the process of brand in particular.

Difficulty analysis:
IAS38 defines an in tangible asset as “an identifiable, non-monetary asset without physical substance”. It cannot be an intangible asset if an item is not an asset. As an asset, it must be controlled by an entity which also results in expected economic benefits flowing into the entity. Being distinguished from PPE, intangible asset has no physical substance. The feature “Identifiable” stated in IAS38 is that “an item is identifiable when it arises from contractual or other legal rights or when it is separable”. When it comes to control, the problem becomes more complicated. An entity could obtain future benefits arising from an intangible; however, whether the item is controlled by the entity firmly or not is not certain. For example, if a company purchase patent by trading contract, this patent controlled legally will bring benefit to the entity, then the patent can be demonstrated as intangible asset. On the other side, staff training expenditure for talents plan is not recognized as intangible asset because the entity cannot control the staff actually if they change jobs to another company even though after training they can generate future benefits for this company. As a result, it is difficult to recognize the intangible asset from its definition. Intangible resources should be recognized as expenses when incurring, if the asset recognition criteria are not met.

In the respect of measurement, capitalizing and amortizing intangible assets over their useful lives will affect future benefits, which are believed to follow the principles of prudence and accrual of financial statements. Nevertheless since intangibles are difficult to record materially, the value of financial statements will be declined when doubtful or even non-existing assets happened. Take deferred charge as a example, in some standards, deferred charges (e.g. advertising and promotion costs, R&D costs, organization costs, start-up costs, and legal costs ) can be capitalized, because they are amortized over 1 year period, thus costing the future economic benefits. As for their counterpart, ISAC states that these costs must be expenses, for which reason that “Once an intangible asset is in working condition, any further costs incurred in relation to that asset are not recognized as part of its...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Discuss the Difficulties Relating to the Recognition and Measurement of Intangibles Generally and of Brands in Particular. Essay
  • Essay about Discuss the Difficulties Relating to the Recognition and Measurement of Intangibles Generally and of Brands in Particular.
  • Essay about Brand Recognition
  • Intangible Assets Essay
  • Brand equity measurement Essay
  • Intangible Asset Essay
  • Essay on Intangible Asset
  • Essay about Intangible Assets

Become a StudyMode Member

Sign Up - It's Free