Question

a) Explain the presentations of intangible assets in the statements of financial position. Then, suggest some decisions that investors or shareholders may take based on this information. Determine the decision would be difficult to take on the basis of just this information.

Answer 1

An Intangible asset is an asset that is not physical in nature. For example: Patents, trademarks, Goodwill, copyright, etc. Intangible assets are presented in financial statements below the Plant, Property and Equipment. Intangible assets are subject to amortization based on the life of the intangible. The Intangibles are presented at net cost after amortization. Amortization expense is charged to Income statement during the year. Intangibles can also be subject to impairment if there are conditions which show carrying value of intangible is below fair value.

Intangible assets affect the investors or shareholders decision making based on financial statements

· It helps in understanding the ratio of intangible assets to other assets and see how much tangible assets a firm is carrying in its books

· It helps in gauging a business and its metrics. For example : higher value of patents can imply that a firm is registering its patents and thereby protecting its business interests

· It helps in business valuation as intangibles are part of business assets

Decision that would be difficult to take on basis on Intangible information

· Intangible assets can be impaired in business when there is high competition. Hence the value shown in Financial statements may not be the actual value and given value in financial statement can be inadequate for decision making

· Intangible assets are difficult to value as there are many complicated models for valuation

· Intangibles are not shown at market value and hence its historical cost may not help much in decision making to investors or shareholders