Accounting for intangible assets is a challenge due to the notional amounts involved and the complexity of the theories underlying their accounting treatment. The Financial Accounting Standards Board has provided guidance on how to account for intangible assets in various scenarios.
One of the first challenges associated with accounting for intangible assets is identifying them. Intangible assets are not physical assets that can be easily recognized. In some cases, perceptions may clash and what may seem like an intangible asset to one party may appear to be a liability to another. Also, the rate and complexity of newly emerging technologies can present a challenge for maintaining awareness of intangible asset holdings.
For a long time, global accounting standards have shifted away from cost accounting and toward fair value accounting. This requires valuing intangible assets, which are typically difficult to value. Part of the problem stems from the fact that value is typically impossible to confirm due to the inability to liquidate a holding of the asset. Intangible assets are typically highly illiquid, in contrast to physical commodities such as gold or stock, which can be priced and sold almost immediately.
The Financial Accounting Standards Board has issued guidance via Accounting Standards Code 805 - Business Combinations. When a company acquires a target company, it must report all of the target company's assets at their fair values on the updated balance sheet, including intangible assets. However, accepted valuation methods typically require using market data as a basis for analysis and comparison. This can be extremely challenging in the case of intangible assets, due to their complex natures. Also, there are very few sources of market data available to the public.
Regulation and Uniformity
One of the key goals of accounting standards is to promote uniformity, making it easier to regulate a widely diverse body of companies and compare financial results, promoting reliability. Accounting is highly industry-specific, and adding intangible assets on top of this further challenges uniformity. Concepts such as depreciation are premised on standard rates of economic deterioration, but such metrics are extremely challenging to estimate for intangible assets. Even among seemingly comparable intangible assets, such as trade names, it is very challenging to accurately compare key metrics.
- shironosov/iStock/Getty Images