Towards Some Principles for Intangible Asset Accounting

This paper examines the conceptual issues of intangible asset accounting in the context of recent controversies over the treatment of brand names and goodwill in company accounts. Issues of definition and recognition and the rationale for balance sheet disclosure are considered for goodwill and other intangibles. The implications of capitalising intangibles under accounting models based on present value, net realisable value, current cost and historical cost are examined, and certain principles are proposed. The problem of testing the validity of asset valuation is explored, and a test is developed on the basis of the ‘recoverable amount’ rule of historical cost. This test is demonstrated for two major UK companies.     

Accounting‐based Risk Measurement: An Alternative to Capital Asset Pricing Model Derived Discount Factors

Discount factors have a long tradition of being computed using capital market inputs for the estimation of systematic risk. They are of increasing importance in financial accounting, including the valuation of goodwill and other intangibles. In view of the volatility of stock market returns and their inaccuracy and disjunction from the underlying cash flows of the firm, this paper proposes an alternative accounting‐based approach: accountingbased risk measurement. Alternatives to beta are computed from planning and budgeting metrics at firm level to produce consistent risk estimates factoring patterns of revenue and cost behaviour weighted according to their impact on the accounting rate of return. This approach is contrasted with the analysis and interpretation of asset betas in the corporate finance literature.     

An Empirical Investigation of Accounting Methods for Goodwill and Identifiable Intangible Assets: 1985 to 1989

Accounting for intangible assets represents one of the more controversial accounting standards issues. This study examines the accounting policies adopted for goodwill and for identifiable intangible assets by a sample of 150 Australian Stock Exchange listed companies over the five-year period 1985 to 1989 inclusive. Findings reveal a general decrease in the diversity of goodwill accounting policies over the study period but the converse for identifiable intangible policies. In particular, an increase in the percentage of companies electing not to amortize identifiable intangibles was found. The study provides evidence to support claims that companies have been recognizing identifiable intangibles to reduce the impact on reported operating profits of the requirement of accounting standards for the amortization of goodwill.     

Intangible assets,IFRS and analysts’ earnings forecasts

We investigate whether the adoption of International Financial Reporting Standards (IFRS) in 2005 by Australian firms has been associated with a loss of potentially useful information about intangible assets. We find that the negative association between the accuracy and dispersion of analysts’ earnings forecasts and aggregate reported intangibles previously documented by Matolcsy and Wyatt (2006 ) becomes stronger subsequent to IFRS adoption, primarily for firms with high levels of underlying intangible assets. Our result is largely attributable to reported goodwill, rather than other intangible assets, suggesting that the impairment approach to goodwill valuation required by IFRS conveys more useful information than does the former straight‐line amortization approach. When we investigate a sub‐sample of firms that report lower intangibles under IFRS than under the prior Australian GAAP, we do find some evidence consistent with a loss of useful information relating to intangibles.     

Intangibles and accounting classifications: in search of a classification strategy

The present paper is concerned with classification of ‘intangibles’ and what classification theory can teach us about a ‘good classification’. The present study led to three conclusions about the classification of intangibles. One is that the value of classification lies in its function as a heuristic device, i.e. as a help construction. Accounting becomes the art of background design. Another conclusion is that if we choose to account for intangibles it does not need to change the transaction base of financial accounting. Rather, it is an issue how to classify and label a universe of transactions. Finally, the dichotomy tangible–intangible should not be acknowledged as a supposition. Depending on perspective, purpose and type of financial accounting model, other concepts may do a better job in classifying the accounting world.     

Raleigh building products: A teaching case that highlights the differences between IFRS and US GAAP

Within 5 years, the United States will join the rest of the world’s industrialized countries and many emerging economies in adopting International Financial Reporting Standards (IFRS). However, many educational programs have not yet developed full curricula or integrated case studies in existing programs to compare and contrast how US GAAP and IFRS would record and present major accounting transactions.Based on events that reflect real world scenarios, this study presents a series of three Raleigh Building Products cases as an instrument to fill the current IFRS education void. The first case in the series discusses US GAAP acquisition and consolidation activities, the second case examines asset and intangible impairment under US GAAP and IFRS, and the last case adds components that differ significantly between US GAAP and IFRS. The series of cases can be used stand alone or build upon each other throughout the semester. The combined cases focus on the following key concepts: (1) calculating acquisition price; (2) preparing combination financial statements including deleting LIFO reserves; (3) measuring goodwill and other intangibles; (4) determining the impairment of goodwill due to economic declines; and (5) comparing fundamental differences between US GAAP to IFRS. The attached teaching notes detail these matters and discuss the statements of cash flows under US GAAP and IFRS.Results from classroom use indicate that this case will benefit accounting students and practitioners as IFRSs become effective in the US.     

Intangible Assets: Diversity of Practices and Potential Impacts from AIFRS Adoption

The adoption of Australian equivalents of International Financial Reporting Standards (AIFRS) radically alters Australian accounting practices for intangible assets. Under AIFRS, goodwill amortisation expense is replaced by goodwill impairment loss based on frequent tests of the value of goodwill, and Australian firms are no longer permitted to recognise certain internally generated intangibles. This paper provides statistics regarding intangible asset reporting by 476 firms listed on the Australian Stock Exchange in 2002. We find significant diversity in reporting practices relating to both goodwill and identifiable intangible assets. Accordingly, the new accounting rules will potentially reshape ASX-listed firms' financial statements by significant amounts.     

Capitalisation of Intangibles — A Review of Current Practice and the Regulatory Framework

This paper reports on capitalisation practices of Australian managers for a large sample of firms in the 1993–97 period, and on accounting regulatory issues in relation to intangibles during and after this period. The data show diversity in capitalisation practices in 1993–97, which we suggest is a consequence of abstract conceptual bases for capitalisation decisions under the Australian regulatory framework. The analysis indicates the framework retains traditional emphasis on conservatism and reliable measurement while providing managers with substantial accounting discretion to capitalise intangible assets. We conclude there is an imperative for research investigating capitalisation decisions for intangibles to guide any further regulation.     

The relative and incremental value relevance of goodwill before and after SFAS No. 142

We explore the value relevance of goodwill against two benchmarks: other accounting information and long-lived tangible assets. Prior research suggests that fair value estimates for goodwill must be inferred from other available information because of the nature of goodwill, including its intangibility. Such inferences are highly discretionary and may limit the usefulness of reported goodwill estimates. Because Statement of Financial Accounting Standards (SFAS) No. 142 relies exclusively on fair value estimates to subsequently measure goodwill, reported values considering management’s increased discretion may be less reliable and less value relevant when presented in conjunction with other accounting information. However, the subsequent accounting measurement for goodwill is not dissimilar from the subsequent measurement for long-lived tangible assets, which are also subject to impairment. In general, impairment measurement is subjective; management may have greater insight, even in the presence of management incentives and other accounting information, that may help confirm or disconfirm investors’ own goodwill estimates. Using other accounting information and long-lived tangible assets as benchmarks for the value relevance of goodwill, we find that reported goodwill provides greater value relevance relative to other accounting information after SFAS 142 and that the difference between the value relevance of goodwill and other long-lived tangible assets is also significantly greater following SFAS 142.     

关于会计计量的几个理论问题

随着当代财务会计试图把越来越多的所谓“资产负债表外业务”纳入表内核算和试图在会计报表中反映资产、负债价值的变化,会计准则中已经越来越多引入了公允价值等除历史成本以外的其它会计计量基础,从而对现行的历史成本会计模式产生了很大挑战。不仅如此,由于过去的财务会计概念框架没有考虑这一新的会计计量发展趋势,也使得会计准则与概念框架之间、会计准则与会计准则之间因为会计计量问题而产生了诸多的不一致,十分不利于会计信息质量的提高和国际会计的趋同。为此,本文以现行国际财务报告准则中存在的会计计量问题为出发点,系统研究了当前会计计量问题的实质、理论基础、未来发展趋向及其国际努力,并进而提出了我国的因应对策。     

Tratamiento contable de las transacciones separadas en las combinaciones de negocios Proceso armonizador de la normativa contable internacional (IFRS) y americana (FAS)

Amendments made to 2007 Financial Accounting Standards ¾FAS 141 (R)¾ and 2008 International Financial Reporting Standards ¾IFRS 3 (R)¾ in order to harmonize the accounting aspects of operations concerning a business combination, have shown the existence of certain transactions that are not part of the combination itself, which are called “separate transactions”. The definition and delimitation of business combinations “separate transactions” is dispersed in both standards, at times with a little clarifying result. Therefore, this paper aims to facilitate the reader’s understanding of their accounting treatment to address the problem of identifying those transactions that occur, or not, as a result of a business combination, the accounting treatment for this dilemma and its effect on the recognition and valuation of goodwill.     

Should Intangibles Be Measured: What Are the Economic Trade‐Offs?

We investigate whether a firm's intangible investments should be measured and separated from operating expenses. We find that the information extracted from accounting reports of investments and earnings is different when intangibles are measured and identified separately from operating expenses than when intangibles are left commingled with operating expenses. This difference in the market's information causes a change in the behavior of market prices, inducing changes in the firm's investments and cash flows. Thus, from a real effects perspective, measuring intangibles is not unambiguously desirable. We identify the conditions under which providing information on intangibles may be desirable. This study also shows the inadequacy of statistical associations between accounting numbers and prices as a basis for evaluating the desirability of measuring intangible investments. We show that the measurement of intangibles alters the very distribution of cash flows about which the measurement regime is seeking to provide information.     

An intuitive appeal for the correct calculation of Present Value-Based Measurements in Accounting

Most introductory and intermediate textbooks in accounting provide a discussion of the time value of money and include a presentation of the calculation of bond values as an example. The bond valuation model is needed primarily for the valuation of debt on the firm's balance sheet when the issue is placed in the market at an amount other than its face value. Often, however, these texts present this information in an incorrect or confusing manner. The errors arise from improperly determining the appropriate discount rate to use when interest payments are other than annual. This paper briefly summarizes prior efforts to correct this problem and offers a consolidated and intuitive approach for accounting instructors to use in presenting this information to students. Examples are provided which can be used in the classroom to explain differences in the alternative techniques, as well as explain the types of errors caused by use of incorrect procedures under different assumptions. Present value concepts play an important role in the recognition and measurement of many accounting transactions, including those in such areas as corporate bonds, long-term notes, long-term investments, capital leases, pension cost components, and capital budgeting. The importance of present value issues is also evident from a Discussion Memorandum entitled “Present Value-Based Measurements in Accounting,” issued by the Financial Accounting Standards Board (FASB, 1990). Given the importance that time-value-of-money concepts play in accounting, and the scope of the current FASB agenda project dealing with present-value measurements, it is important for the accounting instructor to correctly understand and present this information.     

Accounting for Expenditure on Intangibles

In search of a unifying measurement feature on which to base a more systematic and potentially comprehensive analysis of intangibles, this paper first analyses the economic and accounting properties of intangibles, and second, empirically evaluates managerial practices for measuring and analysing expenditure on intangibles. We present evidence from a survey of 614 large Australian firms that suggests gaps in the extent with which firms plan, monitor, record, analyse, and report on intangibles. Third, we evaluate the implications of our analysis and survey for accounting practice. Our evidence suggests GAAP has a role to provide guidance that helps firms identify and classify their expenditure on intangibles in ways that elucidate the strategic implications of the different types of intangibles for future output. A secondary step for accountants, after identifying and classifying the expenditure on intangibles, is to apply a capitalization test to distinguish expenses from assets. The current asymmetric treatment of expenditure on purchased versus internally generated intangibles is not supportable on economic grounds. However, economists identify weak property rights as a major cause of uncertainty associated with the outcomes from expenditure on intangibles, suggesting verifiable property rights is a unifying measurement feature on which to base a capitalization test for intangible assets.     

What Explains the Valuation Difference between Intangible‐intensive Profit and Loss Firms?

Prior research suggests that loss firms are valued based on their abandonment/adaptation option values, while profit firms are valued as going concerns. However, conservative accounting treatment of expensing of R&D leads many R&D‐intensive firms to report losses even though they are not in financial distress. In this paper we investigate the difference in valuation of profit and loss firms that invest in intangibles, either through internal development (R&D) or purchases. The accounting treatment for internally developed intangibles is conservative in that US GAAP requires immediate expensing. Yet, it allows recognition of purchased intangibles. We find that in valuation of firms with high recognized‐intangible assets, book value has more prominence in loss firms than profit firms, while that is not the case for firms with high R&D expenditures. This suggests that their abandonment/adaptation option explains the difference in valuation between profit and loss firms with high recognized‐intangibles, while conservative accounting explains the valuation difference between profit and loss firms with high R&D intensity. This result suggests that recognition of intangibles in financial statements might mitigate the conservative bias in accounting numbers.     

The process of measurement in managerial accounting: A psycho-technical systems perspective

This paper develops a formal framework of the act or process of measurement in managerial accounting. Although the traditional paradigm of measurement underlying accounting treats it as a technology designed to represent properties of events and transactions in numerical terms, this paper is based on the notion that managerial accounting measurement is intended to facilitate behavior, and thus requires an alternative view of measurement as a “psycho-technical system”. The paper presents the psycho-technical framework and examines its application in selected areas of managerial accounting: human resource accounting, social accounting, divisional performance evaluation, zero-based budgeting, standard costing, and evaluation of internal control systems.     

Goodwill — An Example of Puzzle-Solving in Accounting

The nature of goodwill continues to be misunderstood by most accountants and confusion surrounding the measurement and reporting of goodwill persists. The rejection of official accounting standards on goodwill is a common occurrence. A dynamic open system perspective is used in this paper to re-examine the nature of goodwill. It is found that a meaningful economic interpretation can be developed for internally generated goodwill but not for 'purchased goodwill'. There is an inability to identify the stream of benefits specifically associated with goodwill arising on acquisition.     

The Effects of International Financial Reporting Standards on the Accounts and Accounting Quality of Australian Firms: A Retrospective Study

We examine the effect of Australian equivalents to International Financial Reporting Standards (IFRS) on the accounts and accounting quality of 1,065 listed firms, relying on retrospective reconciliations between Australian Generally Accepted Accounting Principles (AGAAP) and IFRS. We find that IFRS increases total liabilities, decreases equity and more firms have earnings decreases than increases. IFRS earnings and equity are not more value relevant than AGAAP earnings and equity and while adjustments for changes in accounting for provisions and intangibles other than goodwill are value relevant, they weaken associations with market value. Goodwill adjustments improve associations with market value. We also find that the reconciliation note for the earnings adjustments contained no new information.     

Adoption of International Financial Reporting Standards: Impact on the Value Relevance of Intangible Assets

We examine whether the value relevance of reported intangibles differs between financial reporting regimes pre- and post-adoption of Australian Equivalents to International Financial Reporting Standards (AIFRS) and Australian Accounting Standards (AGAAP) respectively. Using AIFRS and AGAAP measures of goodwill and identifiable intangible assets for the same financial year and testing their association with share prices, we find evidence that AIFRS generally convey incremental useful information for investors about goodwill. For aggregated identifiable intangible assets there is no evidence that AIFRS conveys information beyond that in AGAAP. In contrast, we find evidence that AGAAP provides incremental information for investors in relation to identifiable intangibles, but not goodwill .