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.

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

Intangible Assets accounting in accordance with US GAAP.

Intangible asset is an identifiable non-monetary asset that lacks physical substance.Examples are patents,goodwill,trademark etc

Accounting treatment of intangible asset in accordance with US GAAP

  a.Intangible assets are valued at fair value.

b. An intangible asset is recognised when it is probable that future economic benefits that are attributable to the asset will flow to the entity.

c, Cost of maintaining and developing intangible assets that are not specifically identifiable are recognised as expense when incurred.

d.Intangible assets subject to amortisation are carried at amortised costs less impairment.Others are carried at historical costs less impairment.

e.Acquired goodwill is not amortised but instead is subject to impairment testing atleast annually.

f.Reversal of impairment losses are not allowed.

g.When an intangible asset is disposed of,the gain or loss is the difference between any net proceeds received and the carrying amount of the asset.Revaluation model is not used.

h.Research and development costs of intangible assets generally are expensed as incurred.

i.Expenditure on internally generated intangible assets cannot be capitalized.

Accounting for internally generated intangible asset under FASB and IASB

FASB

a.The cost of internal developing,maintainig or restoring intangible assets that are not specifically identifiable are recognised as an expense when incurred.

b.Revaluation is not allowed.

c..Intangible assets subject to amortisation are carried at amortised costs less impairment.Others are carried at historical costs less impairment.

IASB

a.The cost of this asset comprises of all expenditure that can be directly attributed or allocated to creating ,producing and prepairing from the date when the recognition criteria are met.

b.Intangible assets subject to amortisation are carried at historical cost less accumulated amortisation/ impairment or at fair value less subsequent amortisation /impaiment.

c. Revaluations are performed regularly and for the entire class of intangible assets at the same time.

Permanent and Temporary Differences in GAAP financial income and taxable income.

Permanent Differences

Permanent difference is an item of income or expense that is not allowed for income tax purposes but it is allowed in GAAP .These differences are permanent in that they are expenses that are dissallowed or income that is not not recognized for the income tax purposes and are not merely a timimg difference Example entertainment expense.

Temporary Differences

A temporary difference is an item of income or expense that is allowed for either income tax or GAAP purposes in one year,but not allowed under other accounting system until a later year.Thus the income or expense item will eventually be allowed for both GAAP and income tax purposes,with the only difference being the timimg of the item of income or expense.It is usually identified by reviewing the current year balance sheet and identify the differences.Examples are depreciation method,amortisation,prepaid accounts etc.