Towards a financial reporting framework for intangibles. Insights from the Australian experience
| Published date | 01 March 2002 |
| DOI | https://doi.org/10.1108/14691930210412872 |
| Date | 01 March 2002 |
| Pages | 71-86 |
| Author | Anne Wyatt |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Framework for
intangibles
71
Journal of Intellectual Capital,
Vol. 3 No. 1, 2002, pp. 71-86.
#MCB UP Limited, 1469-1930
DOI 10.1108/14691930210412872
Towards a financial reporting
framework for intangibles
Insights from the Australian
experience
Anne Wyatt
Department of Accounting, University of Melbourne, Melbourne,
Australia
Keywords Intangible assets, Capitalization, Economics, Regulations
Abstract In the context of possible future directions in the accounting regulatory arena, this
paper considers what policy makers can learn from the experiences of Australian managers and
investors in relation to capitalization of intangible assets. Focuses on features of the Australian
institutional setting, the motivations behind Australian managers' decisions to capitalize
intangible assets, and capital market efficiency implications. Australian GAAP leaves corporate
managers wide discretion to capitalize intangible assets irrespective of whether the assets are
acquired or generated internally. One central element of this accounting discretion is the
historically liberal attitude of Australian accounting regulators to deviations from the historic cost
basis of measurement. Concerns about the availability, and abuses, of reliable measures in
relation to intangible assets and revalued assets prompted the USA to proscribe these practices
generally. Evidence from the Australian setting suggests these concerns could be overstated.
Evidence to date suggests Australian equity markets are no less efficient than the USA markets.
Existing evidence suggests uncertainty about intangible investment outcomes is a central property
of intangible investment which could quasi-regulate accounting capitalization practice in a
discretionary accounting setting. Supports future regulatory deliberations and research focus on
the economics of intangible investments, and information search behaviours of investors, as one
way to move forward in the regulatory sphere.
Introduction
In the context of possible future directions in the accounting regulatory arena,
this paper considers what policy makers can learn from the experiences of
Australian corporate managers and investors in relation to the capitalization of
intangible assets on corporate balance sheets. The analysis covers three issues:
the features of the Australian institutional setting, the motivations behind
Australian managers' decisions to capitalize intangible assets, and capital
market efficiency implications.
There are insights available from the Australian setting due to the wide
discretion that has long been available to Australian companies to recognise
intangible assets on the corporate balance sheet. Australian generally accepted
accounting principles (GAAP) leave corporate managers wide discretion to
capitalize intangible assets irrespective of whether the assets are acquired or
generated internally. One of the central elements of this discretion is the
historically liberal attitude of regulators to deviations from the historic cost
basis of measurement. Australian firms have always had the option to revalue
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non-current assets upwards to fair value. Revaluation is the accounting method
used to bring internally generated intangible assets onto the balance sheet,
arguably the most controversial of ``intangible assets''.
Concerns about the availability, and abuses, of reliable measures in relation
to revalued assets and capitalization of intangible assets prompted the USA to
proscribe these practices generally. Research evidence and policy analysis from
the liberal Australian setting offers insights to accounting and security
regulators on how managers implement asset recognition rules in a
discretionary setting, and how the information affects the efficiency of
investors' information search and processing. More generally, analysis of the
Australian experience offers insights to policy makers on the possible impact of
a less conservative approach to the recognition of intangible assets in other
jurisdictions.
Accounting for intangible assets under Australian GAAP
First impressions suggest Australian generally accepted accounting principles
adopt a conservative standard of financial reporting for assets. At a first pass
the Australian accounting regulatory framework appears to be dominated by
an emphasis on reliable measurement. The conceptual framework for
accounting in the statement, SAC 4 Definition and Recognition of the Elements
of Financial Statements, advocates capitalization of an asset on the balance
sheet only when future economic benefits are expected and there is a reliable
cost or other value to record in the accounts. In addition, goodwill, R&D and
exploration and evaluation cost classes of intangibles are specifically regulated
under mandatory accounting standards[1].
Reliable measurement ± the bottom line asset recognition rule
The accounting standard AASB 1018 Accounting for Goodwill mandatorily
requires that purchased goodwill is capitalized and amortized over a maximum
20 years period (i.e. purchase method). In constrast, capitalization of internally
generated goodwill is proscribed. Under the purchase method the goodwill
asset is a residual determined by the difference between the purchase amount
paid by the acquiring firm and the arms length based, fair value of the target
firm's net identifiable assets. ``Net assets'' is net of liabilities acquired and
includes all identifiable assets acquired by the purchasing company
irrespective of tangibility. The effect is that the amount of the purchase amount
allocated to the ``purchased goodwill asset'' is dependent on the extent of
identifiable intangible assets recognised.
It can be seen that the accounting treatment of goodwill is asymmetric,
permitting recognition by the acquiring firm but not the firm generating the
assets. This is also the case in other countries such as the USA and UK.
However in Australia the acquisition of assets accounting standard (AASB
1015 Accounting for the Acquisition of Assets) requires firms to recognise
identifiable intangible assets on acquisition, if they exist and meet the asset
definition and recognition criteria in the conceptual statement SAC 4. This
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