Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
The difficulty of accounting for intangible fixed assets lies in the difficulty of
attaining an appropriate valuation. This is especially the case for assets that are
not generic such as customer loyalty, brand recognition, trademarks, licences,
franchises etc. Therefore the accounting rules reflect a high degree of
conservatism when dealing with intangibles. The mantra appears to be of the ‘if
in doubt leave it out’ school from academia. Its justification was perhaps most
elegantly expressed by the first Lord Leverhulme (founder of Unilever) when he
is alleged to have said, ‘I know that half of the money that I spend on advertising
is wasted, but unfortunately I don’t know which half’.
IAS 38 Intangible assets only allows recognition of an intangible asset if it meets
a challenging asset definition. An asset is defined as a resource which is
controlled by an entity as a result of past events and from which future economic
benefits are expected to flow to the entity. These two conditions (control and
future benefits) often mean that potential intangibles do not meet the definition
of an asset. For example advertising costs would not meet the definition as the
benefits that may flow are in no way controlled by the enterprise. Therefore such
costs are expensed.
Many of the accounting issues surrounding the recognition of intangible fixed
assets can be distilled into one question: has the intangible been purchased or
internally generated?
8.2.1 Purchased intangibles
By their nature a purchased intangible has a much better chance of recognition
than internally developed. This is simply due to the fact that a company will
normally only buy something over which it has control and from which they
would expect to enjoy future economic benefits. If the purchase of the intangibles
is in the context of a business combination then again recognition is highly likely.
This recognition may well be in the form of a specific intangible (such as brands)
or as part of the residual goodwill. The treatment of goodwill is considered in
Chapter seven.
8.2.2 Internally developed intangibles
As stated above, most of these will not meet the recognition criteria. R&D, or
more precisely ‘D’, is one notable exception. IAS 38 specifies two phases that an
internal intangible passes through, the research phase and the development phase.
1. Research phase
This is the original and planned investigation undertaken with the prospect
of gaining new scientific or technical knowledge. All of the costs associated
with this phase should be written off as incurred.
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