Intangible Assets : GAAP vs IFRS
IFRS and US GAAP use different methods to classify intangible assets, which can lead to significant consequences when it comes to financial judgments. Most differences arise from IFRS being more flexible with allowing capitalization. Under US GAAP, all research and development is expensed once it happens. Under IFRS, development is capitalized. Also, according to Intermediate Accounting, “IFRS permits some capitalization of internally generated intangible assets” (Kieso, 712), while “GAAP requires expensing of all costs associated with [them]” (712). Permissibility of capitalization leads to important advantages and disadvantages.
Theoretically, IFRS capitalization is advantageous because the specific intangibles have value that last longer than a year. Research and development is the perfect example of the difference between the two methods used. Research is always expensed because all of its use has been exhausted. You already have achieved the goal of getting the information. Development, or the use of information to benefit a company, can be capitalized under IFRS because its full use is not always immediately realized. A particular development may result in benefits that last for years after its conception.
Strictly speaking, though, both research and development incur immediate costs. A theoretical disadvantage is that the use of capitalized items may be poorly estimated. This disadvantage parallels the issues arising from depreciation methods. What if a particular development or internally generated intangible is eventually determined to have no value? In such a case, immediately expensing these items would have been the more accurate approach.
Practically speaking, capitalization results in less immediate expense, which results in higher net income. This is attractive to potential investors. On top of that, IFRS has regulations in an attempt to counter errors in estimation of value. Capitalization only begins “once technological feasibility…is
Theoretically, IFRS capitalization is advantageous because the specific intangibles have value that last longer than a year. Research and development is the perfect example of the difference between the two methods used. Research is always expensed because all of its use has been exhausted. You already have achieved the goal of getting the information. Development, or the use of information to benefit a company, can be capitalized under IFRS because its full use is not always immediately realized. A particular development may result in benefits that last for years after its conception.
Strictly speaking, though, both research and development incur immediate costs. A theoretical disadvantage is that the use of capitalized items may be poorly estimated. This disadvantage parallels the issues arising from depreciation methods. What if a particular development or internally generated intangible is eventually determined to have no value? In such a case, immediately expensing these items would have been the more accurate approach.
Practically speaking, capitalization results in less immediate expense, which results in higher net income. This is attractive to potential investors. On top of that, IFRS has regulations in an attempt to counter errors in estimation of value. Capitalization only begins “once technological feasibility…is