Recognition and Measurement of Intangibles Generally and of Brands in Particular Essay
Recognition and Measurement of Intangibles Generally and of Brands in Particular
Q: Discuss the difficulties relating to the recognition and measurement of intangibles generally and of brands in particular. Refer to the example in Enigma plc in your discussion.
According to IAS 38, an intangible asset defines as “an identifiable, non-monetary asset without physical substance” including brand, computer software, patents and copyrights. As this typical asset has no physical substance, it is really difficult to recognize and measure it. This essay mainly aims to explain the difficulties to recognize and measure generally intangible assets especially the brand and some analyze refer to the Enigma example will be shown.
An item cannot be an intangible asset unless it is an asset in the first place, that is to say the intangible assets should meet the definition of the asset based on IASB Conceptual Framework which contains three main criterions: control, future economic benefits and identifiable (Sacui and Predișcan, 2011). Therefore, whether the item meets the three criterions are the first requirements and the difficulties to recognize an intangible asset. Firstly, the identifiable of an asset is that “it is capable of being separate or divided from the entity and sold, transferred, licensed, rented or exchanged” (IAS38). So as the intangible assets, it also should be separable from the entity or other rights and obligations. However, the intangible assets are lack of physical substance, the requirement of “identifiable” is one of the difficulties the entities will meet.
Then the accountancy standards require that the company must be able to control the item’s future economic benefits. At last, there must be an expectation of future economics and the intangible assets should be capable of attributing directly or indirectly to future net cash flow (Sacui and Predișcan, 2011). Without selling the intangible asset, it is nearly impossible to determine whether the future cash flow mainly due to the intangible assets or the operating activities. Furthermore, there are still some more requirements should be met when an item will be recognized as an intangible asset, such as without physical substance, be non-monetary and be able to be measured reliably.
Considering the brand, it is protected by the trademark law and can only be recognized as intangible assets if they comply with the assets definition. If the brand is acquired in a separate transaction, just like the Enigma example, the Enigma Company spent 7million purchasing the Variations brand, the price that has been paid for the brand is one of the evidence that the brand can be controlled effectively and the future economic benefit will flow to the enterprise. In addition, the cost of the brand usually can be measured reliably and in this case it is 7million.
So the brand which was purchased separately in this accounting period has met the recognition requirement and can be treated as an intangible asset. What is more, there is another way to purchase the brand though the business combination. Under this circumstance, the cost of brand is the fair value on the date of the acquisition (Melville, 2011). Furthermore, the fact price that has been paid for the brand is treated as a reflection that economic benefit is expected to flow to the entity in the future. To sum up, the brand acquired in a business combination satisfied the requirements and also can be classified as an intangible asset.
However, it is really difficulty to decide whether the internally generated intangible assets meet the general requirement for recognition. Moreover, the IAS38 states that internally generated brand shall not be recognized as an asset. It is mainly because the expenditure on internally generated brands cannot be distinguished from the cost of developing the business as a whole and the problem of establishing whether the item is an identifiable asset which will generate future economic benefits (Melville, 2011). As in the Enigma example, the 3 million marketing expenditure on Enigma’s internally generated brand is recognized as an expense in the 2012 comprehensive income statement instead of an intangible asset which meets the requirement of prudence.
After initial recognition, the IAS38 permits the entities to choose between the “cost model” and the “revaluation model” to measure the brand. In the cost model, the intangible assets are carried at cost less accumulated amortization and accumulated impairment losses (Austin, 2007). In this case, the company needs to decide the intangible asset’s useful life objectively and choose a proper method to amortize the intangible assets. While the revaluation model measure intangible assets at a revalued amount.
According to IAS38, the fair value of intangible assets must be estimated by reference to an active market in that kind of assets. Therefore, if the brand doesn’t have an active market, the recent price cannot be treated as a fair value and the revaluation model should not be applied to it as well. Compared with the tangible market, such as houses, inventories and machines, the intangible market is imperfections (Alali and Cao, 2010). Therefore, it is difficult to get a fair market value for the enterprises to use or reference at any time they need, especially the brand. The brand is a typical intangible asset whose price will change dramatically when a small scandal occurs. So when using revaluation model to measure a brand, the market is particularly important.
Before considering the subsequent measurement, the intangible assets should be determined the length of useful life. Intangible assets with finite useful life will be amortized in the following years; however, intangible assets with infinite useful life will not (Melville, 2011). In general, the IASC claims that the useful life of an intangible asset is not longer than twenty years. While if there is no foreseeable limit to the period over which the brand is expected to generate net cash flow for the enterprise, the useful life of brand can be treated as indefinite (Austin, 2007). That is to say, how to decide the useful life for a brand is another problem that a company will meet in the future.
Thinking about the Enigma example again, as it says no depreciation has yet been charged on any non current asset for the 2012, we assume that the Enigma plc use the revalued model to measure the brand. Then the company should make the revaluation with sufficient regularity to ensure that the carrying amount of the brand does not differ materially from fair value. In addition, if the Enigma plc chooses the cost model, the useful life of the brand and the amortization policy should be determined by the managers and we may have an accumulative amortization in our statement of financial statement.
To sum up, as a special kind of assets, the intangible assets have so many typical characters and difficulties to recognize and measure, such as lack of mature market for intangible assets, hard to decide its useful life and relevant expense. In this case, we should treat this kind of assets more carefully.
1. Sacui, V. and Predișcan, M., 2011. The intangible assets investments characteristics and the accounting treatment. Annals of the University of Oradea, Economic Science Series. 2. Melville, A., 2011. International Financial Reporting, Third Edition, FT Prentice Hall. 3. Austin, L., 2007. Accounting for Intangible Assets, University of Auckland Business Review Autumn. 4. Alali, F. and Cao, L., 2010. International Financial Reporting Standards – Credible and Reliable, Advances in Accounting, Incorporating Advances in International Accounting 5. Austin, L., 2007. Accounting for Intangible Assets, University of Auckland Business Review Autumn.