Question

Intangible assets are resources of a company which have potential value beyond the period of expenditure, yet such resources lack physical substance. Discuss the manner in which such expenditures are accounted for in accordance with U.S. GAAP. One areas where international convergence of accounting standards has not occurred is in the area of accounting for internally generated intangibles. Discuss both FASB's and IASB's points of view on the matter. Which point of view do you align with?  

A company's income tax expense calculated in accordance with U.S. GAAP often differs from a company's income tax liability payable to governmental agencies. Discuss this incongruity, particularly permanent and temporary differences in GAAP financial income and taxable income.

Answer 1

1) Treatment of Intangible Assets under IFRS and US GAAP

Under both IFRS and US GAAP intangible assets are those assets which don’t have physical presence but meet the definition of an asset. That means, which are expected to benefit the company for more than one year. Examples of intangible assets include Goodwill, patents, trademarks, copyrights etc. Goodwill can only be recognized upon acquisition of a business. However, IFRS and US GAAP have moved towards convergence in their treatment of intangibles assets.

A) Goodwill

Accounting of Goodwill arises regarding acquisitions where the purchase price exceeds the net price of purchased tangible property, the monetary difference being attributed to goodwill and other intangible assets.

Under US GAAP treatment, Goodwill requires the amortization over a particular number of years, hence establishing an artificial lifestyle for this asset. Under IFRS treatment, Goodwill is not amortized anymore and is regarded as a secured asset with indefinite life. It however must be put through a stringent impairment check, either annually, or at shorter see if the need arises, to determine for erosion in value.

B) Intangible assets apart from goodwill

Intangible assets apart from goodwill will be identifiable non-monetary property without physical element. This section handles the similarities and dissimilarities under US GAAP and IFRS for specific intangible property e.g. Research and Development Costs, Trademarks and Patents.

Development costs are on the other hand assessed for valuation of long term benefits and, amortized over their identified gain period. IFRS provides for the treatment of the complete amount as an asset, even though the main cost reflects research bills. Regarding further costs becoming incurred on the job following its purchase, research costs will need to end up being expensed out while development costs will qualify for capitalization.

US GAAP however stipulates that Research and Creation costs be immediately charged to expenses. Selected development costs pertaining to website and software expansion are however permitted to be capitalized. Analysis and Development assets, if acquired will be valued at fair value under the purchase method. On the other hand if the assets do not have any alternate make use of they are promptly charged to expense.

C) Trademarks and Patents

The costs of Patents and Trademarks, when produced and attained internally comprise, usually of legal and administrative costs incurred with their filing and registration and so are expensed out as regular legal or administrative costs. The IFRS specifies that no revaluation can be done for Trademarks and Patents in accordance with IAS 38. This is because an active industry cannot exist for makes, music and film publishing rights, patents, or trademarks, as each such asset is exclusive.

In the circumstance of patents and trademarks attained through acquisition, the treatment is comparable to the broad category of intangible resources, for identification, valuation, measurement and recognition for uses of separate disclosure. Acquired patents and trademarks are measured at first at purchase cost and so are amortized on a straight-brand basis over their approximated useful lives.

2) Permanent and temporary differences in GAAP financial income and taxable income.

Because of the differences between financial accounting and tax accounting, differences arise between booking income and taxable income. Some of these differences are permanent while others are temporary. Permanent differences occur only for the tax year in which they occur. Temporary differences occur over several years, ending when the differences reverse.

Temporary differences also arise because, in financial accounting, income is not recognized until it is earned, whereas for taxes, income is recognized when it is received.