Policy

 

Intangible Assets

April 2002

The G100 policy on Accounting for Intangible Assets is that:

IASB

The The IASB has given high priority to "fast-tracking" a project on business combinations including purchased intangibles and plans to issue an Exposure Draft in mid 2002.

FASB (USA)

The FASB issued new Standards on Business Combinations (FAS 141) and Goodwill and Other Intangible Assets (FAS 142) that require acquired intangible assets to be recognised separately from goodwill. The main requirements are that:

These standards are operative for transactions completed after 30 June 2001 and apply to existing assets for financial years starting after 15 December 2001.

The requirements apply to purchased goodwill and identifiable intangible assets.

G100

The FASB approach is broadly consistent with the G100 position so far as it relates to purchased intangible assets. The G100 wrote to the AASB and IASB recommending that the FASB approach provides the basis for reaching an internationally agreed approach to accounting for intangible assets and represents an excellent opportunity to align with the world's major capital market on this issue.

The G100 recommended that the AASB give:

The G100 arranged for a number of its members to undertake a field test of the FASB requirements to identify implementation issues of the impairment approach to intangible assets.

AASB

The AASB is developing a project on purchased intangible assets to coincide with the IASB project and field tested the US requirements on purchased intangible assets including the impairment approach to intangible assets. The AASB has indicated its intention to seek comments on requirements in IAS 38 "Intangible Assets" dealing with the recognition and subsequent accounting for internally generated identifiable intangible assets.

Action

The G100 encouraged its members to participate in the field testing of the US approach to accounting for purchased intangible assets including impairment. The field testing was completed in December 2001. The AASB has indicated that it would share the results of the field testing with the IASB as part of the IASB's development of an Exposure Draft in its Business Combinations project (Phase 1).

The main issues and concerns identified in the field testing were:

The G100 encourages its members to participate in other ways to ensure that the momentum of the IASB and AASB projects is achieved and maintained.

Background - intangible assets

1. The G100 prepared a Statement of Principles (SOP) on Intangible Assets in 1995. The SOP specifies that:
  • expenditures satisfying the definition of an asset and asset recognition criteria should be recognised as an asset irrespective of whether it is purchased or internally developed;
  • identifiable intangible assets should be able to be revalued if the criteria for revaluation are satisfied;
  • identifiable intangible assets with finite or contracted useful lives should be amortised over that life;
  • goodwill and identifiable intangible assets having an indefinite life should not be amortised but should be subject to annual impairment testing of the carrying amount;
  • goodwill should only be recognised on acquisition and internally generated goodwill should not be recognised.  
2. Australia has an Accounting Standard on Goodwill (AASB 1013). AASB 1015 "Acquisitions of Assets, AASB 1021 "Depreciation" and AASB 1011 "Accounting for Research and Development Costs" provide limited guidance on accounting for identifiable intangible assets. Current requirements are:

Goodwill - recognise purchased goodwill at cost and amortise over its useful life but not more than 20 years.

Identifiable Intangibles (purchased and internally developed) - recognise at cost/valuation and amortise over useful life. (However the practice of non-amortisation evolved but has recently attracted action by ASIC). AASB 1021 and Accounting Interpretation 1 require amortisation of identifiable intangible assets.
 

3. ASIC is active in seeking compliance with Australian requirements, in particular, the amortisaton of identifiable intangible assets.
 
4. The IASC issued IAS 38 "Intangible Assets" in 1998. Australia has not yet dealt with this Standard as part of the harmonisation program. Although a strong supporter of international harmonisation the G100 does not support harmonisation with IAS 38 because:
  • it effectively precludes the revaluation of identifiable intangible assets;
  • IAS 38 does not allow internally generated identifiable intangible assets to be recognised; and
  • IAS 38 requires intangibles having an indefinite life to be amortised. 
5. The G100 established a Working Party involving the Big 5 and members for whom intangible assets were significant in late 1999. The Working Party prepared recommendations on accounting for intangible assets by applying existing Australian requirements. In May 2000 the G100 supported by the BCA, AICD, ICAA and CPA Australia wrote to the AASB indicating that accounting for intangible assets should be dealt with as a high priority issue.
 
6. The FASB, as part of its consideration of issues arising in respect of purchased intangibles including goodwill in business combinations issued revised proposals which were viewed as a significant breakthrough in accounting for purchased intangibles. The FASB proposal was to mandate that goodwill and certain other intangible assets must not be amortised but rather that an impairment approach be adopted under which impairment write-downs would be charged to profit and loss.

The FASB also proposed that other purchased identifiable intangibles having finite useful lives be amortised over their useful life.

The FASB approach gives rise to implementation issues in respect of impairment testing, the level at which it is undertaken and the methodology employed. Further implications of this approach are that there should be greater effort in identifying other intangible assets with the result that the amount of goodwill recognised would be expected to be less significant than had previously occurred and that in the event of impairment significant one-off write downs are likely. (These issues formed part of the field testing undertaken by G100 members for the AASB in Q4/2001).
   

7. The FASB requirements (June 2001) are:
(a) goodwill and purchased intangibles having an indefinite life are not amortised and a specific impairment test is applied on an annual basis;
 
(b) impairment testing which is at the reporting unit level is a two-step process:

  • Step 1: Compare fair value (FV) of reporting unit with its carrying amount (CA). If FV>CA no further action.

  • Step 2: If FV<CA the entity must determine the implied value of goodwill using a full fair value exercise to determine the value of the business unit. This test implicitly takes account of internally generated goodwill.

If goodwill is impaired an impairment loss is recognised in profit and loss; and
  

(c) purchased identified intangible assets with finite useful lives are amortised over their useful life and subjected to normal impairment testing rules.

The existing US GAAP requirements relating to internally generated identifiable intangible assets are retained. The FASB does not deal with revaluations. (Revaluations are not permitted under US GAAP).
  

8. In February 2001 the G100 issued a media release supporting the FASB approach as reflecting the way in which directors and management view goodwill and other intangible assets. The G100 also wrote to the Chairmen of the AASB and IASB indicating that the FASB approach provided the basis for reaching international agreement on accounting for intangible assets.
  
9. The AASB confirmed the high priority of its project dealing with intangible assets at its Consultative Group meeting (May 2001). It is a major project for 2001-2002. (AASB members identified the project as the highest priority in their responses to a AASB Survey).
  
10. In July 2001 the G100 also provided its views regarding a high priority convergence project on this issue to the IASB's Standards Advisory Council (SAC) which provides input to the IASB on its work priorities and work program. (Peter Day, Executive General Manager Finance - Amcor, is the Australian representative on SAC).
  
11. This project now has a major impetus with the issue of the FASB standards and the IASB reviewing accounting for purchased intangible assets as part of its Business Combinations Project - Phase One. However, in view of the alignment of agendas and convergence activities of the IASB liaison standard-setters (including Australia), the capacity of the AASB to maintain its momentum on this project is critical to the timely development of an Australian standard.
  
12. The IASB issued its work program and priorities in July 2001 and has given a high priority to 'fast-tracking' a project on business combinations including purchased intangible assets. In August 2001 the AASB, consistent with its role as an IASB liaison standard-setter, decided to deal with accounting for purchased intangibles assets at the same time as the IASB. The AASB also decided to approach the G100 to invite companies to participate in the field testing of an impairment approach to accounting for intangible assets.
  
13. In Q4/2001 a number of G100 member companies participated in a field test of the FASB requirements with particular emphasis on criteria for recognising intangible assets separately from goodwill, subsequent measurement of identifiable intangible assets, the reporting unit for impairment testing and goodwill impairment testing procedures. The AASB discussed the field test results in December 2001. These results were shared with the IASB for consideration in the development of an IASB Exposure Draft in its Business Combinations project (Phase 1).
  
14. The main issues and concerns identified in the field testing were:
  • the need for clarification in respect of applying the recognition criteria to customer contracts and non-contractual customer relationships. Field testers indicated that non contractual relationships were unlikely to satisfy the recognition criteria for identifiable intangible assets and, as such, were considered to be more in the nature of goodwill;
  • initial recognition of identifiable intangible assets, particularly those arising from contractual arrangements, would be more prevalent;
  • the need for some flexibility in identifying the reporting unit for applying the impairment testing of goodwill; and
  • the importance of appropriate transitional provisions relating to changes in accounting requirements.
15. As a consequence of these decisions by the IASB and AASB it is likely that the IASB will issue an exposure draft in early Q3/2002 and that the AASB will issue an Australian exposure draft at approximately the same time. In February 2002 the AASB decided to expose for comment those parts of IAS 38 "Intangible Assets" that are not being considered by the IASB as part of its project on business combinations. These sections deal primarily with internally generated intangible assets and revaluation of intangible assets.

April 2002

 

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