Accounting Theory Debate Paper Capitalizing Intangible Assets

Debate point 2: Intangible assets are expensive and difficult to measure accurately.

Intangible assets do not have physical substance and by nature difficult to identify and account for. Adding to its complexity there are vast differences in the perception of the nature of the intangible assets across different industries. Given that intangible assets are defined differently under different approaches and systems, it is very time-consuming and costly for accountants to seek different treatment for every intangible asset. IAS 38 clearly provides for what makes an intangible asset and what does not, simplifying the matter. Calculating the value of these assets is difficult, time-consuming and costly. It involves subjectivity and professional judgement.

In 2006, the standard to report intangible assets under IFRS during this time period was IFRS 3. The standard involved valuing intangible assets under three different methods: Market method, income method and cost method. Market method involved valuing the intangible asset based upon similar transactions within the market. This method is not costly or difficult however there are often no similar transactions in the market to base the value upon; therefore this method is not commonly used. Income method and cost method were more commonly used during this time. Income method finds the fair value of intangible assets based on the present value of future economic benefits. The issue with Income method that it heavily relied on forecasts and estimates. These estimates are expensive to produce and open an opportunity for manipulation of financial statements. The use of estimates traded off reliability for a subjective amount of relevance. This standard was changed for good reason: It was too expensive for firms to recognize a wide range of intangibles, the benefit did not justify the expense and the use of estimates opened fraudulent opportunities. (Adding Johnny N)

“The principal reason that published financial...