IFRS-Intangible Assets
Intangible assets are non-monetary assets without physical substance and can be identified as either separable or arising from contractual rights or other legal rights. These are the long-term assets of an entity who derive value from the worth added onto other assets. The intangible assets can be organized into two key groups; unlimited-life assets (trademarks) and limited-life assets (copyrights, goodwill). Both GAAP and IFRS acknowledge intangible assets to be non-monetary assets (Plus, 2016). The recognition criteria for both accounting standards is that there are probable economic benefits in the future that arise from the asset and that the price or value of the asset can be reliably measured. The criteria relates to all intangible assets whether generated externally or internally. According to IAS 38, the probability of economic benefits in the future should be based on reasonable assumptions of conditions that will be present during the asset’s life.
According to ASC 805 and IFRS 3(R), goodwill is recognized only if in a business combination. Apart from development costs, intangible assets that are internally developed are not recognized as assets under both GAAP and IFRS. Besides, in both models, internal costs that are related to the research and development phase are charged as expenditures in the time they are sustained. When it comes to amortization, both GAAP and IFRS require that an intangible asset is amortized over its useful life if it has a definite one. However, there is an exception under GAAP in ASC 985-20 about amortization of computer programs traded to others. In the two standards, if there is a lack of predictable boundary to the stretch over which an immaterial asset is anticipated to produce money inflows to a business, its valuable life is deemed indefinite hence the asset is not amortized (Plus, 2016)
However, there are a couple of differences in how GAAP and IFRS independently address intangible assets. Under GAAP, development costs are charged as expenses as they are incurred unless addressed otherwise by guidance from a different ASC topic. However, development costs that are connected to computer software developed specifically for external use are capitalized after the foundation of technical feasibility. If the software is designed for internal use, the only costs that can be capitalized are those incurred throughout the application growth stage. In IFRS, development costs are exploited only when the economic and technical feasibility of a venture can be verified. The demonstration can be done following specific criteria such as the venture’s commitment to complete the asset, its technical feasibility and its capacity to trade the asset in the coming days. Though these standards may sound similar with ASC-985-20, in IFRS, there is no distinct guidance on handling development costs related to computer software (Young, 2011)
Intangible assets revaluations is another factor treated differently by GAAP and IFRS. In GAAP, revaluation of intangible assets is not allowed (unless it is for impairments). Intangible assets are measured at historical cost. The IFRS model also allows for intangible assets t be accounted for at historical cost. However, it is different from GAAP as it allows revaluation of assets in limited situations. If an intangible asset’s price is quoted in an active market, an entity is permitted to do an accounting policy election on whether to use the cost or the revaluation model. If an entity chooses an accounting system, it must apply it to the whole class of intangible assets (an individual asset without an active market is exempted). The revaluation model is only used after the asset has been recognized at cost.
When it comes to advertising costs, under GAAP, such costs are expensed as acquired or when marketing is done for the first instant. However, there is an exception if the costs correlate with direct-response advertising and expenses for advertising costs sustained after proceeds linked to those costs are identified. Direct-response advertising is reported as an asset, net of amortization since it results in possible future economic gains. It is amortized over the period in which the profits are expected to be obtained. On the other hand, expenditures sustained after revenues linked to advertising costs that are recognized relate to cooperate advertising. Revenues related to transactions that occur due to cooperate advertising are earned before reimbursements are made to customers. Therefore, an entity should expense cooperative advertising once the client’s revenues are recognized. For the case of the IFRS model, advertising charges are expensed as sustained. However, a prepayment is recognized as an asset when an entity gains a right of access to the related goods or receives related services (Young, 2011)
GAAP and IFRS also differ in the handling of the level of impairment testing for goodwill. Under GAAP, the reporting unit is the point at which goodwill is analyzed for impairment with the lowest level being one level below the operating segment. Under IFRS, the point at which goodwill is analyzed for impairment is the (CGU) cash-generating unit. However, in this model, the lowest testing level is not specified. The only rule is that the testing level should not be larger than the level of the operating segment (Plus, 2016)
In goodwill impairment testing, under the U.S GAAP, an entity may apply the two-step test if it qualitatively verifies that the fair value of the reporting unit is less than the carrying amount or chooses not to enact the qualitative valuation. Under the IFRS model, the recoverable sum of a cash-generating unit is equated with the carrying amount of the cash-generating unit. If the carrying amount is more than the recoverable sum, the impairment loss is assigned to reduce the carrying amount of the unit’s assets. The impairment loss is assigned first to reduce the carrying amount of any goodwill that is allocated to the CGU. It is later assigned to other assets belonging to the unit founded on the carrying amount of individual assets (Young, 2011)
For the case of impairment testing of long-lived intangible assets, the GAAP states that an intangible asset whose useful life is indefinite should not be amortized. The valuable life of the asset should be evaluated every period to see if it still falls under assets with indefinite useful life. If there is a change from infinite to finite, it should be accounted for as a change in an accounting estimate. The GAAP model requires that entities must begin by applying the qualitative impairment assessment in order to determine if an intangible asset that is not suitable for amortization is impaired. If the definite-lived intangible asset if confirmed to be impaired, the entity must calculate the fair value of the asset to carry out an impairment test. In IFRS, an intangible asset is tested for impairment through comparison of the carrying amount with the recoverable sum. If it is discovered that the recoverable amount is less than the carrying amount, an impairment loss for the surplus is recognized (Plus, 2016)
References
Plus, I. (2016, January). Deloitte . Retrieved from IAS plus Web site: http://www.iasplus.com/en/standards/ias/ias38
Young, E. &. (2011). The Basics. US GAAP versus IFRS, 16-18.
