1. Introduction
Businesss have ne’er been every bit globalised as they are today. Numerous corporations from developed, freshly industrialised and developing states operate on a planetary footing and need to make fiscal statements utilizing the accounting patterns of their place state, every bit good as those bing in their countries of operations. The divergency in accounting patterns of different states creates the demand for the readying of separate fiscal and accounting statements and subsequent rapprochement of differences. The international accounting fraternity is now steadily traveling towards planetary commonalty in accounting patterns and procedural coverage. The International Accounting Standards Board ( IASB ) has been working towards convergence of planetary accounting criterions. Its mission is to develop and implement a individual set of planetary accounting criterions, based on readying of high quality, transparent and comparable fiscal statements for local and planetary users.
The IASB has been working on roll uping a stable set of International Financial Reporting Standards ( IFRS ) for first clip users. The IFRS was mandated for all publically listed companies in the European Union in 2005 and has besides been adopted by other states like Australia. The IASB has besides been working really closely with the US Financial Accounting Standards Board ( FASB ) , since 2002, to convey about convergence between US GAAP and the IFRS. However, while important work has been done on harmonizing IFRS with US GAAP and many pending issues are being presently addressed, a figure of accounting subjects are still treated otherwise by these two systems.
It is the intent of this assignment to analyze the differences and similarities between US GAAP and IFRS for the intervention of Goodwill, Research and Development costs, Brands, Patents and Trademarks. A figure of texts have been referred for this assignment, particularly “International Accounting and Multinational Enterprises” 6Thursdayedition by Radebaugh, Gray and Black, “International Financial Coverage: A Comparative Approach” by Roberts, Weetman and Gordon, the US GAAP and IFRS web sites, a figure of specialized publications by PWC and Deloitte and the published histories of many transnational corporations. Accounting statements and established patterns are frequently capable to single reading and the perusing of a figure of texts has enabled the research worker to fix a holistic appraisal of the selected subjects. Input signals from all these texts and publications have been used in the readying of this paper.
2. Goodwill
Goodwill arises as an intangible plus and comprises of the difference between the cost of an acquisition and the just value of its identifiable assets, liabilities and contingent liabilities. A recent analysis by PricewaterhouseCoopers ( PWC ) estimates that intangible assets accounted for about 75 % of the purchased monetary value of acquired companies in recent old ages. Increasing attending is now being paid on the direction of intangible assets and the IFRS3 has responded to this demand by detailing accounting processs for intangible assets. Goodwill makes up about two tierces of the value of intangible assets of US companies and the figure for companies registered in the EU would presumptively be similar.
Accounting of Goodwill arises in the instance of acquisitions where the purchase monetary value exceeds the net cost of purchased touchable assets, the pecuniary difference being attributed to goodwill and other intangible assets. IFRS processs, unlike US GAAP, antecedently required the amortization of good will over a specific figure of old ages, therefore set uping an unreal life for this plus. This process has since been changed and with the IFRS place meeting with that of GAAP, good will is non considered to be a wasting plus any longer. It nevertheless needs to be emphasised that this refers merely to goodwill obtained from acquisitions. Internally generated good will is non reflected as an plus either under IFRS or under US GAAP
The IFRS enjoins companies to separate between good will and other identifiable intangible assets. As such the value of other intangible assets like Research and Development, Patents, Trademarks, Brands and others need to be removed from the good will basket to get at the residuary good will value. The intervention of good will is different from other intangibles as, capable to periodic appraisals for damage, it is expected to keep its value indefinitely. While both IFRS and US GAAP require good will to be valued, reconciled, detailed by manner of factors and reflected in fiscal statements, they have dissimilar manners for its accounting intervention.
a ) Goodwill under IFRS
Goodwill is non amortised any longer under IFRS processs and is considered to be an plus with indefinite life. It nevertheless has to be subjected to a rigorous damage trial, either yearly, or at shorter notice if the demand arises, to measure for eroding in value. In the event of damage, the Net income and Loss Account is charged with the computed damage sum to guarantee the immediate highlighting of ill executing acquisitions. Goodwill is therefore non seen as a steadily blowing plus but one with indefinite life ; and with a value linked to the public presentation of the unit.
Another important alteration in the intervention of good will has arisen out of the demand for handling all concern combinations as purchases. This will extinguish the possibility of companies’ non entering good will by pooling the assets and liabilities of assorted companies together for readying of fiscal statements.
The trial for damage of good will under the IFRS is carried out at the degree of the Cash Generating Unit or a group of CGUs stand foring the lowest degree at which internal directions proctor good will. The IFRS besides stipulates that the degree for measuring damage must ne’er be more than a concern or a geographical section.
The trial is a one phase procedure wherein the recoverable sum of the CGU is calculated on the footing of the higher of ( a ) the just value less costs to sell or ( B ) the value in usage, and so compared to the transporting sum. In instance the assessed value is lesser than the transporting cost, an appropriate charge is made to the net income and loss history. The good will appropriated to the CGU is decreased pro rata. The IFRS requires elaborate revelations to be published sing the one-year damage trials. These include the premises made for these trials, and the sensitiveness of the consequences of the damage tests to alterations in these premises. M/s Radebaugh, Gray and Black, in their book “International Accounting and Multinational Enterprises” emphasis that these revelations are intended to give stockholders and fiscal analysts more information about acquisitions, their benefits to the geting company and the efficaciousness and rationality of impairment reappraisals.
Negative good will arises when the cost of acquisition is less than the just value of the identifiable assets, liabilities and contingent liabilities of the company. While its happening is rare, negative good will can good originate when loss doing units are acquired or a distress sale gives a company the chance to get a deal. In such instances IFRS processs stipulate that the acquirer should reevaluate the designation and measuring of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measuring of the cost of the combination. The surplus of net assets over the cost should be recognized and taken to the net income and loss history,
B ) Goodwill under US GAAP
Goodwill was treated as an plus with indefinite life by US GAAP even when IFRS procedures allowed for its amortization. The alteration in IFRS processs is a therefore a desirable measure towards convergence.
In US GAAP, good will is reviewed for damage at the operating degree, which specifically indicates a concern section, or at a lower organizational degree. In no instance can an impairment appraisal be made for a degree higher than a concern section. Impairment must be carried out yearly or even at shorter intervals, if events indicate that the recoverability of the transporting sum demands to be reassessed. While these demands are similar to those stipulated by IFRS, the process for appraisal of damage is significantly different and comprises of two stairss.
In the first measure the just value is computed and compared with the transporting sum of the concerned unit including good will. If the book value is higher than the just value, no farther exercising is suggested and goodwill carried frontward at the same value. If nevertheless the just value of the coverage unit is lesser than its carrying sum, good will is considered to be impaired and the 2nd measure is applied. Goodwill damage, under US GAAP, is measured by calculating the surplus of the transporting sum of good will over its just value. The calculation for this is reasonably simple and constitutes of finding the just value of good will by apportioning just value to the assorted assets and liabilities of the coverage unit, similar to the process used for the finding of good will in a concern combination. The deliberate eroding in good will demands to be shown specifically as an impairment charge in the calculation of income.
The appraisal and intervention of negative good will is besides slightly different in US GAAP, even though the basic accounting rules are similar to that followed by IFRS. In this instance the surplus of just value over the purchase monetary value is allocated on a pro rata footing to all assets other than current assets, fiscal assets, assets that have been chosen for sale, postpaid pension investings and deferred revenue enhancements. Any negative good will staying after this exercising is recognised as an extraordinary addition.
3. Intangible Assets other than Goodwill
Intangible assets other than good will are identifiable non-monetary plus without physical substance. M/s Radebaugh, Gray and Black province that intangible assets need to be identifiable, under the control of the company and capable of supplying future economic benefits.
While preparation of appropriate manners of accounting for these assets pose challenges to accounting theory and constructs, their importance in concern is important plenty to justify the application of elaborate accounting thought. All the texts consulted have devoted important attending to the intervention of intangible assets. A July 2006 paper on “Accounting Standards sing Intellectual and other Intangible Assets” by Halsey Bullen and Regenia Cafini of the United Nations Department of Economic and Social Affairs is besides really explanatory and trades with the capable both in deepness and with fullness.
This subdivision deals with the similarities and unsimilarities under US GAAP and IFRS for specific intangible assets e.g. Research and Development Costs, Brands, Trademarks and Patents. While the turning importance of intangible assets call for their inclusion in fiscal statements, their intrinsic nature makes it hard to make so. First, there is small connexion between the costs incurred for creative activity of intangibles and their value. Second, it is besides hard to foretell the extent of benefits that intangibles will be able to present.
Both the IFRS and US GAAP have certain commonalties in the accounting intervention of intangible assets. In instance of acquisitions, directions are enjoined to insulate specific intangible assets and value them individually from good will. All these assets have to be identified, valued and indicated individually in the balance sheet. The list of intangible assets that need to be recognised individually, as a consequence of IFRS 3 is extended and includes a host of things like patents, trade names, hallmarks and computing machine package. IFRS 3 demands that the designation and rating of intangible assets should be a strict procedure. Experts nevertheless feel that while valuing intangibles is basically associated with subjectiveness, logical mental application and the usage of working sheets should be able to fulfill the demands of regulators.
IFRS and US GAAP sort intangible assets, other than good will, into assets with limited utile life and assets with indefinite utile life. Assetss with finite life are amortised over their utile life. While arbitrary ceilings are non specified on the utile life of those assets, they still need to be tested for damage every twelvemonth. An plus is classified as an plus with indefinite utile life if there is no likely bound to the period over which it will profit the house. It is nevertheless rare for intangible assets other than good will to hold indefinite utile lives and most intangibles are amortised over their expected utile lives. Assetss with indefinite lives have to be subjected to strict one-year damage trials. The fact that most intangible assets ( other than good will ) are amortised over their expected utile lives requires the finding of the expected utile life of each of the assets acquired.
The general rules detailed supra are common to both IFRS and US GAAP and are utile in finding the wide processs for accounting and revelation of intangible assets. As antecedently elaborated, accounting intervention chiefly depends upon the finding of the life of an intangible plus, more specifically whether it has an indefinite or finite mensurable life.
All intangibles are governed by the same sets of revelation demands. Consequently, fiscal statements should bespeak the utile life or amortization rate, amortization method, gross carrying sum, accumulated amortization and damage losingss, rapprochement of the transporting sum at the beginning and the terminal of the period, and the footing for finding that an intangible has an indefinite life
Apart from these demands, the differences, detailed below, between US GAAP and IFRS in the intervention of Research and Development costs, Brands, Trade Marks and Patents, besides need consideration.
a ) Research and Development Costss
IFRS processs call for expensing of all research cost. Development costs are nevertheless assessed for rating of long term benefits and, amortised over their determined benefit period. Capitalization of development costs is allowed merely when development attempts consequence in the creative activity of an identifiable plus, e.g. package or procedures, whose good life and costs can be measured faithfully. If nevertheless a Research and Development undertaking is purchased, IFRS provides for the intervention of the whole sum as an plus, even though portion of the cost reflects research disbursals. In the instance of farther costs being incurred on the undertaking after its purchase, research costs will necessitate to be expensed out while development costs will be eligible for capitalization, capable to their meeting the needed standards.
US GAAP nevertheless stipulates that all Research and Development costs be instantly charged to disbursals. Certain development costs refering to website and package development are nevertheless allowed to be capitalised. Research and Development assets, if acquired are valued at just value under the purchase method. However if the assets do non hold any surrogate usage they are instantly charged to write off.
Both PWC and Deloitte publications opine that US GAAP will most likely move towards the IFRS place on Research and Development as portion of the short term convergence exercising.
B ) Trade names
The intervention of Brands is similar under both US GAAP and IFRS norms.
It has been specifically clarified that the value of trade names generated internally should non be reflected in fiscal statements. In instance of trade names obtained through purchase or acquisition the value of the trade name will hold to be computed at cost or just value and it will necessitate to be determined whether the life of the trade name is indefinite or finite.
Trade names with indefinite lives will necessitate to be subjected to strict damage trials every twelvemonth, and treated like good will. Trade names with finite lives, while capable to annual damage trials, will necessitate to be amortised like other intangible assets. It needs to be noted that the manner of appraisal of damage in US GAAP is different from IFRS and this factor will consequently come into drama for appraisal of damage.
degree Celsius ) Trademarks and Patents
The costs of Patents and Trademarks, when developed and obtained internally consist, largely of legal and administrative costs incurred with their filing and enrollment and are expensed out as regular legal or administrative costs. The IFRS specifies that no reappraisal is possible for Trademarks and Patents in conformity with IAS 38. This is because an active market can non be for trade names, newspaper flags, music and movie publication rights, patents, or hallmarks, as each such plus is alone.
In the instance of patents and hallmarks obtained through acquisition, the intervention is similar to the wide class of intangible assets, for designation, rating, measuring and acknowledgment for intents of separate revelation. Acquired patents and hallmarks are measured ab initio at purchase cost and are amortized on a straight-line footing over their estimated utile lives.
