Researching the Significance of Intangible Assets of the Balance Sheet
Description:
Intangible assets become of particular importance in contemporary company valuation. The article presents an overview of the concepts behind intangible assets.
Content:
Intangible assets play a determining role when it comes to evaluation of the financial situation a company is facing. Starting 1980th, the proportion of intangible assets as part of a company’s market value has increased from 40% to 80% by the end of 1990th. In the global economy, intangible assets play an increasing important role, consequently, inability of financial statements to adequately report intangible assets on a company’s Balance Sheet results in a declining value of financial statements for users of financial information. This issue has been raised by many scholars in the recent trend of economy towards globalization and economic shift towards service industry. The present reporting principles fail to reveal the true financial situation of the company; consequently, the principles of prudent and objective information reporting are violated. This research aims to analyze the reasons for this violation as well as estimate the degree of violation of basic accounting principles by intangible assets reporting practice in different industries. The research also outlines the current practices adopted for intangible assets reporting.
Intangible assets refer to non-monetary identifiable assets of a company. The asset can be defined as a resource owned by an enterprise as a result of previous events that is controlled by the company and from which potential long-run benefits will be realized. Consequently, there are three critical points when it comes to speaking about intangible assets as identified by IAS 38.8: indentifiability, control, and economic benefits to be realized. Basically, intangible assets represent the gap between the book value and the market value of the company. While the book value consists of tangible assets, when a company is publicly traded, it is normally valued more then the book value. The resulting gap can be referred to as intangible assets owned by the company.
At the very basic level intangible assets are classified into identifiable and unidentifiable. An intangible asset is identifiable if it is separable or, in other words, can be resold, and arises from legal rights. Identifiable assets are further categorized by FASB into five major subcategories: marketing related (e.g. trademarks), customer related (e.g. customer rights), artistic related (e.g. copyrights), contract related (e.g. franchising), and technology related (e.g. patens and trade secrets). Thus, examples of identifiable assets include computer software, licenses, import quotas, customer and supplier relationship and can be acquired from various sources including self-creation or internal generation. Unidentifiable assets are represented by company’s’ reputation and include successful management techniques, talented workforce, etc. Unidentifiable intangible assets is what separates a company from its’ competitors in the market. Consequently, the key notion in reporting intangible assets is identifiability of an asset that is based on valuation of an asset under an assumption of an ability of stakeholders to separate an asset.
As previously stated, tangible assets are the major constitute of the book value of a company. Book value, in its turn, represents mainly a historic perspective on company’s value and ignores the notion of future performance. At the same time, intangible assets combined with tangible compromise the market value of the company that is based on company’s past performance, established reputation, trustworthiness, and a potential to realize profit in future.
Author: Jennifer Burns
About Author:
Jennifer Burns is a staff academic writer at Custom-Writing.org, essay writing services. Jennifer provides writing help and support to students who buy essay and annotated bibliography.
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