Valuation of IP

International accounting treatment of intangible assets

In 1998 the International Accounting Standards Committee (IASC) issued IAS 38: Intangible Assets and revised IAS 22: Business Combinations. These statements were effective for the financial years beginning on or after 1 July 1999. These International Standards require that intangible assets purchased as part of a business combination be based on their fair values at the date of acquisition. If an intangible asset cannot be reliably measured then it will be accounted for as part of goodwill.

According to IAS 38 the benchmark treatment for measurement, subsequent to initial acquisition, is the cost less accumulated amortisation and any accumulated impairment loss.

Under IAS 36: Impairment of Assets, intangible assets must be reviewed for impairment according to the Standard. Only identifiable intangible assets can be revalued. This must be done according to an 'active market' and once done, the company is required to make regular revaluations.

Both IAS 22 and 38 require that the intangible assets be amortised on a systematic basis over the best estimate of their useful life. There is a rebuttable presumption that this useful life will not exceed 20 years. Intangible assets can have greater useful lives, however, the IAS does not permit an enterprise to subscribe an indefinite useful life.

On 29 June 2001, the United States Financial Accounting Standards Board, (FASB) unanimously approved the issuance of Statements of Financial Accounting Standards No. 141 Business Combinations and No. 142 Goodwill and Other Intangible Assets. These statements drastically change the accounting for business combinations, goodwill and intangible assets.

FASB 141 includes new criteria to recognise intangible assets separately from goodwill in a business combination. If the intangible asset acquired arises from contractual or other legal rights or the intangible asset acquired is separable, that is, it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged whether in combination with a related asset or on its own.

Under FASB 142, goodwill and intangible assets with indefinite lives are no longer amortised but are reviewed annually, or more frequently if impairment indicators arise, for impairment.

The issues discussed in relation to the accounting treatment of intangibles are currently being considered by the AASB through its intangible assets project. This project aims to address the definition, recognition, measurement and disclosure of intangible assets. It is possible that the Australian Accounting Standards Board (AASB) and the International Accounting Standards Board (IASB) will move to follow the US Standards. The AASB is considering papers on key issues and forming views, but it has not specified a time at which an intangible asset accounting standard might be issued.