Question

In your first post this week briefly describe some of the similarities and differences between IFRS and USGAAP with respect to the accounting for intangibles.

In your reply post this week briefly discuss the convergence efforts underway in the area of intangibles. Discuss whether the following costs are expensed or capitalized under IFRS: purchase of a patent, research costs, development costs, organizational costs, and internal costs generating goodwill. How does international treatment of these items compare with US treatment?

Answer 1

Revaluations other than impairment considerations

US GAAP Revaluations of intangible assets to fair value are prohibited.

IFRS  Subsequent to their initial recognition, intangible assets (other than goodwill) may be revalued to fair value as an accounting policy election. However, because adoption of this election requires that fair value be determined by reference to an active market, it is rarely used.

Internally developed intangible assets

US GAAP

Costs of internally developing, maintaining or restoring intangible assets should be expensed as incurred when one or more of the following are true about the intangible asset: (a) it is not specifically identifiable, (b) it has an indeterminate life or (c) it is inherent in a continuing business or nonprofit activity and relates to an entity as a whole. Given these restrictive criteria, the recognition of internally developed intangible assets is rare and usually only seen in the areas of patents and trademarks.

IFRS

Costs in the research phase are expensed as incurred. Costs in the development phase are capitalized if the entity can demonstrate all of the following: • The technical feasibility of completing the intangible asset • The intention to complete the intangible asset • The ability to use or sell the intangible asset • How the intangible asset will generate probable future economic benefits (the entity should demonstrate the existence of a market or, if for internal use, the usefulness of the intangible asset) • The availability of adequate resources to complete the development and to use or sell the intangible asset • The ability to measure reliably the expenditures attributable to the intangible asset during its development No software-specific guidance exists. As such, the general criteria are applied to software development costs to determine whether they should be capitalized or expensed.

Under IFRS

Purchase of a patent is capitalised and Amortized over its useful expected life.

Reasearch Costs, Organizational costs and Internal Costs generating goodwill are always Expensed in the statement of Profit and loss in the financial year they are incurred.

Development Costs are Capitalized if the following conditions are fulfilled-

1. Ability to use and sell

2. Intention to complete the project

3. The completion of the project is technically feasible

4. The project is expected to generate economic benefits in future i.e. profitable

5. Availability of all the technical, human and financial resources

6. The cost of development is reliably measurable.