Difficulties Relating to the Recognition

Custom Student Mr. Teacher ENG 1001-04 20 November 2016

Difficulties Relating to the Recognition


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 cost.

Therefore, costs incurred in using or redeploying an intangible asset should be recognized as an expense” (Melville, 2011, P103). When concerning the subsequent expense, it is difficult to distinguish between capitalization and expenses clearly. What should be highlighted here is ”brands” which referred in IAS38, “Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognized as intangible assets.”Brands are regarded as a type of intangible items where recognition could become possible and even necessary. Difficulties arise when brands are separated by internally and externally generated intangible assets.

Internally generated tangible assets are “those which have been developed by the entity itself rather than purchased from another entity.” (Melville, 2011, P103) In order to be included in balance sheet assets, brands should be either “acquired for valuable consideration and need not be shown under goodwill” or “created by the undertaking itself, in so far as national law permits their being shown as assets” (EEC 1978, art. 9 C.).

According to the example of Part A, Enigma plc has a brand expenditure of €10,000 including the acquisition of the Variations brand acquired from Elgar Ltd for €7 million and marketing expenditure on Enigma’s internally generated brands. Externally and internally generated intangible asset should be separated for accounting. In terms of externally generated tangible asset acquired by purchasing from another company, which satisfies the criteria of intangible assets: (a) future economic benefits arising from the acquisition of this item will flow into the entity; (b) the entity obtained this equity by contract so that controlling it legally and substantially; (c) brand is non-monetary; (d) it is identifiable for brand with no substance. Brand acquired from external parties reflects the position of intangible assets that have been clarified above; therefore, being recognized as intangible asset and recording €7 million under asset in the statement of financial position.

Notwithstanding internally generated brands might be an intangible asset, difficulties to confirming still exist. IAS38 then states that “it may be difficult to assess whether an internally generated intangible asset qualifies for recognition because of: (a) The problem of establishing whether or not there is an identifiable asset which will generate future economic benefits, and (b) The problem of determining the cost of the asset reliably” Managers cannot ascertain that internally generated brands would produce future economic benefits even if generating the brands at cost which should be written off as an expense. In consequence, the cost of brands is demonstrated as expenditure and recorded in the comprehensive income.


Difficulties of recognizing and measuring the intangible assets are not only on the process of accounting, but also regarding the difference between varies of standards around the world. Moreover, investors and managers of corporations abstract more emphasis on self-brand as increasingly attention paid to competition of intangibles. Nevertheless, the self-brand should be firstly recognized as actually an intangible assets or the cost is just an expense, which will assist us with accounting process as well as disclosures to the outer parties.

EEC (European Economic Community). 1978. “4th Directive on the annual accounts of certain types of companies n° 78/660/EEC.” Official Journal of the European Communities, (August 14).

Hendriksen, E.S. and Van Bred, M.F. (1992) An Accounting Theory.5th edition. Chicago: Irwin

IAS 38

Johnsen, L.T. and Patrone K. R. (1998)Accounting Horizons. pp. 293–303

Melville, A. (2011) International financial reporting. 3rd edition. pp.100-113

Nils,E.J. and Kjell.H.K. (2000) ’Accounting for Intangible Assets in Scandinavia, the UK, the US, and by the IASC: Challenges and a Solution’, the International Journal of Accounting, 35(2), pp. 243–265. 2000 [Online] Available at http://www.sciencedirect.com/science/article/pii/S0020706300000480 (Accessed:20 Nov.2012)

Stolowy, H. , Haller, A. and Klockhaus, V. (1999) ’Accounting for brands in IAS38 of IASC (intangible assets) compared with French and German Practices’, Emerging issues in international accounting, pp.7-20.1999 [Online] Available at https://studies2.hec.fr/jahia/webdav/site/hec/shared/sites/stolowy/acces_anon

Walton, P. and Aerts, W. Global Financial Accounting and Reporting. second edition.pp.150-155)


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  • University/College: University of Chicago

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 20 November 2016

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