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Probably the most accepted accounting definition of an asset is the one used by the International Accounting Standards Board. The following is a quotation from the IFRS Framework (see later): "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise."
Assets are economic entities that give rise to future economic benefit and are controlled by the entity as a result of past transaction or other events. It is probable that the future economic benefit will eventuate and the amount of asset can be measured with reliability from source document, which makes it representationally faithful. Examples include cash, equipment, buildings, and land.
Assets have three essential characteristics:
- They embody a future benefit that involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;
- The entity can control access to the benefit; and,
- The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred.
Classification of assets
Assets may be classified in many ways. In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.
a) Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle.
b) Investments are to be held for many years and are not intended to be disposed in the near future.
c) Fixed assets, also referred to as PPE (property, plant, and equipment), or tangible assets, these are purchased for continued and long-term use in earning profit in a business. This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). Accumulated depreciation is shown in the face of the balance sheet or in the notes.
d) Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, trademarks, copyrights, franchises, goodwill, etc.
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort. There are two primary forms of intangibles
· Legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, utility models, designs, trademarks, and goodwill) and
- Competitive intangibles (such as knowledge activities (know-how, knowledge), collaboration activities, leverage activities, and structural activities).
How do current regional accounting standards approach IP?
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB) serving to standardise valuation rules, presentation of results and the contents of annual reports. Their purpose is to make balance sheets, income statements and notes of annual reports comparable internationally.
Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). Nearly 100 countries, including the member states of the EU currently require, permit the use of, or have a policy of convergence with IFRS.
IAS 38 deals with accounting of intangible assets that are not dealt with specifically in another IAS. The Standard requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires certain disclosures regarding intangible assets (see Appendix).
There is no law that enforces IFRS-rules in reporting, but investors and the media ask more and more for presentations that are drawn up according to these rules.
As these rules are issued by the International Accounting Standards Board they always represent a compromise between the interpretations in different countries. This compromise is usually regarded as the minimum standard.