Comparison of IFRS and U.S GAAP with regards to intangible assets

1. Introduction

Businesses haven't been as globalised as they are today. Numerous businesses from developed, recently industrialised and developing countries operate on a global basis and need to build financial statements using the accounting tactics of their house country, as well as those existing in their areas of functions. The divergence in accounting procedures of different countries creates the need for the planning of different financial and accounting claims and subsequent reconciliation of differences. The international accounting fraternity is now gradually moving towards global commonality in accounting practices and procedural reporting. The International Accounting Criteria Plank (IASB) has been working towards convergence of global accounting benchmarks. Its objective is to develop and enforce a single group of global accounting criteria, based on planning of high quality, transparent and similar financial claims for local and global users.

The IASB has been focusing on compiling a well balanced group of International Financial Reporting Specifications (IFRS) for first-time users. The IFRS was mandated for those publicly shown companies in the European Union in 2005 and has also been followed by other countries like Australia. The IASB in addition has been working very meticulously with the US Financial Accounting Benchmarks Mother board (FASB), since 2002, to effect a result of convergence between US GAAP and the IFRS. However, while significant work has been done on harmonising IFRS with US GAAP and many pending issues are being presently addressed, a number of accounting subject areas are still cared for differently by both of these systems.

A variety of differences continue to stay in the accounting treatment of intangible possessions. Intangibles have been described in various ways. Essentially they comprise of assets that do not have physical presence and are symbolized by items like goodwill, brands and patents. These possessions do not have form but do have values; which again are occasionally indeterminate but often with the capacity of estimation. They have to be under the direct control of the organization and capable of yielding future financial gain to be termed as intangible assets belonging to the company. A strong right that can result in future financial gain is an excellent exemplory case of an intangible advantage whose valuation is quite indeterminate but nevertheless provides security and the potential for financial gain to the organisation.

The treatment of intangible investments has always been contentious and open to different interpretations. Even today, while IFRS and US GAAP have shifted towards convergence in several accounting areas, significant dissimilarities still remain in their treatment of intangibles. These dissimilarities are specific in the treating goodwill and research and development costs, and business lead to specific variations in the ultimate planning of financial claims.

It is the goal of this assignment to examine the distinctions and similarities between US GAAP and IFRS for the treating Goodwill, Research and Development costs, Brands, Patents and Trademarks. Several text messages have been referred for this assignment, especially International Accounting and Multinational Businesses 6th model by Radebaugh, Gray and Black, International Financial Reporting: A Comparative Procedure by Roberts, Weetman and Gordon, the US GAAP and IFRS websites, lots of specialised magazines by PWC andand the publicized accounts of many multinational organizations. Accounting claims and established routines are often at the mercy of individual interpretation and the perusal of a number of texts has empowered the researcher to get ready a all natural and critical analysis of the determined subject areas. Inputs from each one of these texts and publications have been found in the preparation of the paper.

2. Goodwill

Goodwill comes up as an intangible property and comprises of the difference between the cost of an acquisition and the reasonable value of its identifiable possessions, liabilities and contingent liabilities. A recent examination by PricewaterhouseCoopers (PWC) estimates that intangible investments accounted for about 75 % of the purchased price of attained companies in recent years. Increasing attention is now being paid on the management of intangible belongings and the IFRS3 has taken care of immediately this need by detailing accounting strategies for intangible investments. Goodwill makes up about two thirds of the worthiness of intangible resources of US companies and the number for companies documented in the EU would presumably be similar.

Accounting of Goodwill occurs in the case of acquisitions where the purchase price surpasses the net cost of purchased tangible investments, the financial difference being attributed to goodwill and other intangible possessions. IFRS types of procedures, unlike US GAAP, recently required the amortisation of goodwill over a specific period of time, thus building an man-made life for this asset. This procedure has since been modified and with the IFRS position converging recover of GAAP, goodwill is not considered to be a wasting advantage ever again. It however needs to be emphasised that refers only to goodwill extracted from acquisitions. Internally made goodwill is not mirrored as a secured asset either under IFRS or under US GAAP.

The IFRS enjoins companies to tell apart between goodwill and other identifiable intangible possessions. As such the worthiness of other intangible property like Research and Development, Patents, Trademarks, Brands while others have to be taken off the goodwill container to arrive at the rest of the goodwill value. The treatment of goodwill is different from other intangibles as, subject to periodic assessments for impairment, it is likely to maintain steadily its value indefinitely. While both IFRS and US GAAP require goodwill to be respected, reconciled, detailed by means of factors and mirrored in financial statements, they have dissimilar modes because of its accounting treatment. Generally in most acquisitions the amount of goodwill is significant due to considerable difference between the price and cost of net resources of the attained company. The difference in accounting treatment between IFRS and US GAAP thus causes the results of the financial statements prepared under the two methods to change considerably and demands an in depth reconciliation. There is no immediate plan to bring about a convergence between these two methods of treatment, which really is a subject of regret.

a) Goodwill under IFRS

Goodwill is not amortised any longer under IFRS procedures and is known as to be an asset with indefinite life. It however must be put through a stringent impairment test, either each year, or at shorter notice if the need arises, to assess for erosion in value. In case of impairment, the Income and Loss Bank account is incurred with the computed impairment amount to ensure the immediate highlighting of badly accomplishing acquisitions. Goodwill is thus not regarded as a steadily wasting advantage but one with indefinite life; and with a value linked to the performance of the machine.

Another significant change in the treatment of goodwill has arisen from the requirement for treating all business combos as purchases. This will eliminate the likelihood of companies not documenting goodwill by pooling the assets and liabilities of various companies jointly for planning of financial assertions.

The test for impairment of goodwill under the IFRS is completed at the amount of the money Generating Unit or a group of CGUs representing the cheapest level at which internal managements keep an eye on goodwill. The IFRS also stipulates that the particular level for evaluating impairment must never be more when compared to a business or a geographical segment.

The test is a one level process wherein the recoverable amount of the CGU is computed based on the higher of (a) the fair value less costs to market or (b) the worthiness in use, and then compared to the carrying amount. In case the assessed value is smaller than the taking cost, a proper charge is made to the income and loss bank account. The goodwill appropriated to the CGU is reduced pro rata. The IFRS requires in depth disclosures to be printed regarding the total annual impairment tests. Included in these are the assumptions made for these testing, and the sensitivity of the results of the impairment testing to changes in these assumptions. M/s Radebaugh, Gray and African american, in their publication International Accounting and Multinational Companies stress these disclosures are designed to give shareholders and financial analysts more info about acquisitions, their benefits to the acquiring company and the efficacy and reasonableness of impairment reviews.

Negative goodwill occurs when the price of acquisition is significantly less than the fair value of the identifiable property, liabilities and contingent liabilities of the business. While its event is exceptional, negative goodwill can well occur when reduction making models are obtained or a distress sale provides company the opportunity to acquire a bargain. In such instances IFRS techniques stipulate that the acquirer should reassess the id and measurement of the acquirees identifiable resources, liabilities and contingent liabilities and the way of measuring of the price of the combination. The surplus of net investments over the cost should be acknowledged and taken to the revenue and loss profile.

Goodwill under US GAAP

Goodwill was cared for as a secured asset with indefinite life by US GAAP even though IFRS procedures allowed for its amortisation. The change in IFRS types of procedures is a thus an appealing step towards convergence.

In US GAAP, goodwill is researched for impairment at the operating level, which specifically shows a business portion, or at less organisational level. In no case can an impairment analysis be made for a level higher than a business portion. Impairment must be carried out annually or even at shorter intervals, if situations suggest that the recoverability of the holding amount needs to be reassessed. While these requirements act like those stipulated by IFRS, the task for examination of impairment is significantly different and consists of two steps.

In the first step the fair value is computed and compared with the holding amount of the worried product including goodwill. In the event the e book value is greater than the good value, no further exercise is recommended and goodwill taken forward at the same value. If however the good value of the reporting device is smaller than its transporting amount, goodwill is considered to be impaired and the second step is applied. Goodwill impairment, under US GAAP, is measured by computing the excess of the holding amount of goodwill over its reasonable value. The computation because of this is rather simple and constitutes of deciding the reasonable value of goodwill by allocating reasonable value to the various property and liabilities of the reporting unit, like the treatment used for the determination of goodwill in a business combination. The calculated erosion in goodwill needs to be shown specifically as an impairment fee in the computation of income.

The assessment and treatment of negative goodwill is also somewhat different in US GAAP, even though the basic accounting concepts act like that accompanied by IFRS. In this case the surplus of reasonable value on the price is allocated on an expert rata basis to all or any assets other than current possessions, financial assets, possessions which have been chosen for sale, prepaid pension purchases and deferred fees. Any negative goodwill staying after this exercise is recognized as an extraordinary gain.

3. Intangible Assets apart from Goodwill

Intangible assets apart from goodwill are identifiable non-monetary possessions without physical product. M/s Radebaugh, Grey and Black declare that intangible assets need to be identifiable, under the control of the business and capable of providing future economic benefits.

While formulation of appropriate methods of accounting for these possessions pose obstacles to accounting theory and ideas, their importance running a business is significant enough to warrant the use of precise accounting thought. All of the texts consulted have dedicated significant focus on the treating intangible assets. A July 2006 newspaper on Accounting Specifications regarding Intellectual and other Intangible Property by Halsey Bullen and Regenia Cafini of the United Nations Department of Economic and Friendly Affairs is also very explanatory and handles the topic both in depth and with comprehensiveness.

This section deals with the similarities and dissimilarities under US GAAP and IFRS for specific intangible resources e. g. Research and Development Costs, Brands, Trademarks and Patents. While the growing importance of intangible assets demand their addition in financial claims, their intrinsic dynamics helps it be difficult to do so. First, there is certainly little connection between your costs incurred for creation of intangibles and their value. Second, it is also difficult to predict the magnitude of benefits that intangibles will be able to deliver.

Both the IFRS and US GAAP have certain commonalities in the accounting treatment of intangible resources. In case of acquisitions, managements are enjoined to isolate specific intangible property and value them separately from goodwill. All these assets have to be identified, valued and indicated individually in the total amount sheet. The set of intangible assets that need to be recognised separately, consequently of IFRS 3 is intensive and carries a host of things like patents, brands, trademarks and software applications. IFRS 3 demands that the identification and valuation of intangible assets should be considered a strenuous process. Experts however believe that while valuing intangibles is actually associated with subjectivity, logical mental software and the use of working bed linens can satisfy the demands of regulators.

IFRS and US GAAP classify intangible property, other than goodwill, into resources with limited useful life and possessions with indefinite useful life. Resources with finite life are amortised over their useful life. While arbitrary ceilings are not specified on the useful life of these belongings, they still need to be analyzed for impairment every year. An asset is categorized as a secured asset with indefinite useful life if there is no probable limit to the time over which it will benefit the company. It really is however unusual for intangible property other than goodwill to own indefinite useful lives & most intangibles are amortised over their expected useful lives. Belongings with indefinite lives have to be subjected to demanding annual impairment checks. The fact that most intangible belongings (apart from goodwill) are amortised over their expected useful lives requires the dedication of the expected useful life of each of the property acquired.

The general guidelines detailed above are normal to both IFRS and US GAAP and are useful in identifying the broad methods for accounting and disclosure of intangible resources. As recently elaborated, accounting treatment generally depends upon the persistence of the life of the intangible property, more specifically whether it comes with an indefinite or finite measurable life.

All intangibles are governed by the same packages of disclosure requirements. Accordingly, financial assertions should signify the useful life or amortisation rate, amortisation method, gross carrying amount, accumulated amortisation and impairment loss, reconciliation of the transporting amount at the start and the finish of the time, and the basis for determining an intangible comes with an indefinite life. Aside from these requirements, the distinctions, precise below, between US GAAP and IFRS in the treatment of Research and Development costs, Brands, Trade Markings and Patents, also need factor.

Treatment of Research and Development Costs and Brands

Development costs are however assessed for valuation of long term benefits and, amortised over their established benefit period. Capitalisation of development costs is allowed only when development efforts bring about the creation associated with an identifiable property, e. g. software or procedures, whose beneficial life and costs can be measured reliably. If however a Research and Development task is bought, IFRS offers the treatment of the complete amount as an asset, even though part of the cost shows research expenses. In the case of further costs being incurred on the task after its purchase, research costs will need to be expensed out while development costs will be eligible for capitalisation, subject to their meeting the required criteria.

US GAAP however stipulates that Research and Development costs be immediately priced to expenditures. Certain development costs regarding website and software development are however permitted to be capitalised. Research and Development possessions, if acquired are respected at fair value under the purchase method. However if the belongings do not have any alternative use they are simply immediately recharged to price.

Both PWC and publications opine that US GAAP will most probably move into the IFRS position on Research and Development as part of the short term convergence exercise.


The treatment of Brands is comparable under both US GAAP and IFRS norms. It has been specifically clarified that the value of brands made internally shouldn't be mirrored in financial assertions. In case there is brands obtained through purchase or acquisition the worthiness of the brand should be computed at cost or reasonable value and it'll need to be determined if the life of the brand is indefinite or finite.

Brands with indefinite lives should be subjected to rigorous impairment tests every year, and cured like goodwill. Brands with finite lives, while subject to yearly impairment checks, will need to be amortised like other intangible property. It requires to be mentioned that the setting of analysis of impairment in US GAAP is different from IFRS which factor will accordingly come into play for analysis of impairment.

Trademarks and Patents

The costs of Patents and Trademarks, when developed and obtained internally comprise, largely of legal and administrative costs incurred using their filing and subscription and 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. It is because a dynamic market cannot exist for brands, newspapers mastheads, music and film posting rights, patents, or trademarks, as each such advantage is exclusive.

In the truth of patents and trademarks obtained through acquisition, the treatment is similar to the broad category of intangible possessions, for identification, valuation, dimension and reputation for purposes of different disclosure. Bought patents and trademarks are assessed primarily at purchase cost and are amortized on the straight-line basis over their predicted useful lives.


Bullen, H, and Cafini, R, 2006, Accounting Criteria Regarding Intellectual Investments, UN Division of Economic and Public Affairs, Retrieved November 14, 2006 from unstats. un. org/unsd/nationalaccount/ia10. pdf

FASB: Financial Accounting Standard Plank, 2006, Retrieved November 14, 2006 from www. fasb. org

IFRS and US GAAP, 2005, IAS Plus, Retrieved November 14, 2005 from. net/dtt/cda/doc/content/dtt_audit_iasplusgl_073106. pdf

Intangible resources: brand valuation, 2004, IFRS Information Brand Valuation, Retrieved November 14, 2006 from www. pwc. com/gx/eng/about/svcs/corporatereporting/IFRSNewsCatalogue. pdf

Radebaugh, L. H. , Grey, S. J. , Black color, E. L. , 2006, International Accounting and Multinational Enterprises, 6th edition, John Wiley and Sons, inc. , USA

Roberts, C, Westman, P, and Gordon, P, 2005, International Financial Reporting: A Comparative Methodology, 3rd edition, FT Prentice Hall, USA

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