The Importance of Intangible Assets

The following report has covered the contemporary issues related to the accounting of intangibles. The first article that has been selected is “The accounting treatment of intangibles – A critical review of the literature” written by Daniel and Anis (2011) in Accounting Forum. This article has been selected by our group, as it has covered the importance of intangible assets and how they are being ignored by the accountants. The authors have mentioned that how intangible assets are the main value creators and still, it is not getting the deserved attention in the market. The authors have also discussed the consequences related to the lack of accounting recognition of the intangibles. The second article that has been selected by our group is “Adoption of International Financial Reporting Standards: Impact on the Value Relevance of Intangible Assets” written by Chalmers, et al. (2008) in Australian Accounting Review. The main purpose of selecting this article is that it has focused on examining the value relevance of intangibles, before and after the adoption of International Financial Reporting Standards (AIFRS) and the Australian Accounting Standards (AGAAP). Hence, these articles will help in identifying the importance of intangible assets, and the consequences of not considering them important by the accountants and thirdly, the difference in their value before and after the adoption of the international financial reporting standards. The following report will answer the research questions developed and the literature review conducted by the authors, to give a detailed analysis of the topic. 

The purpose of both the studies is to evaluate about the intangibles, its importance as well as the negative consequences when these intangibles are ignored in the financial statements. Along with this, the article also focuses on the change in the value of intangibles after the adoption of new accounting standards (Chalmers & Godfrey, 2008).It has been discussed that the investment in the intangible assets is giving competition to investment in tangible assets in many countries (OECD, 2006). This has been supported by Zeghal (2000) who says that the share of intangibles is increasing in the capital of an organization and is giving a new shape to the investment structure within the organizations (Hunter, et al., 2005). This is also being considered as one of the main source of value creation in the modern economy (Zeghal, 2000). The other article has focused on clarifying the position of the intangibles in two different accounting regimes. The article has focused on how the accounting of intangibles has become a controversial issue in the modern accounting standards. In order to find out the relevance of intangible in the Australian accounting world, the research questions that were set by the author includes the relationship development between the explanatory powers of intangible assets and shares on the basis of AIFRS measures and the AGAAP measures. From the results of the research questions, it has been found out that both the regimes provide information that is useful in the accounting of intangibles and also has incremental explanatory powers on both the intangibles as well as the shares. The results also reflected that the mean and median of identifiable intangible assets are higher after the adoption of the new measures of AIFRS and the AGAAP in the organization. The results reveal that the measures of AIFRS are not that strong as compared to the AGAAP measures, when it comes to the increment in the valuation of the intangibles in the accounting statements. With the help of the AGAAP measures, the values of the intangibles that are reflected are of great importance to the investors and other external stakeholders of the organization (Chalmers, et al., 2008).On the other hand, the other article reveals that the identification, measurement as well as the control of the intangibles in the accounting world has become difficult in the modern world. Though, it is true that they are the main value creators these days. The author has denied the fact that the financial information has lost any relevance because of the lack of recognition of intangible asset but has put emphasis on the fact that the information regarding the intangible assets should be revealed. The main reason behind this is that it will help in taking an informed decision by the owners or investors of the organization. It is believed that voluntary disclosure of the information pertaining to intangible assets is seen as a compensatory measure to save the loss of relevance of the accounting financial information. It has also been revealed that the market conditions can be improved with the disclosure of the intangibles information by the accountants (Zéghal & Maaloul, 2011).

Negative Consequences of Ignoring Intangible Assets

The main similarity between the two articles is that both the articles have thrown light on the increasing importance of the intangibles in organizations. Both the articles take stand on the fact that, it is important that the information related to intangibles should be revealed as it has the ability to improve the efficiency of an organization and the market as a whole. Another similarity between the two articles is that one article has thrown light on the need for improving the accounting standards in order to give relevance to the intangibles information. On the other hand, the other article talks about the impact of adoption of accounting standards on the intangibles. 

The difference between the two articles is that the first article deals about the importance of the accounting of intangibles and it also discusses about the negative consequences of ignoring the information related to intangibles in the financial statement of the organization. On the other hand, the other article has focused on the difference in the value creation of the intangibles before and after the adoption of the International Financial Reporting Standards and the Australian Accounting Standards. 

Article 1-The main implication of this article on the accountants of Australian companies is that, as the authors have emphasised on the need to reflect the intangible assets in the accounting information, the accountants may need to start reflecting this information in the financial statements of organizations. As a result the accountants will have to undertake the accounting treatment of intangibles depending upon the criteria mentioned.

Article 2 – The implication of this is related to the other two implications mentioned above. The accountants may need to adopt the measures released by the International Financial Reporting Standards as well as the Australian Accounting Standards. Another implication of this is that the accountants now need to reflect the intangibles as both the expenditure of the organization as well as in the form of assets in the final balance sheet of the organization (MCA, 2018). 

Article 1 – The first and the foremost implication on the accounting regulators will be that a proper regulatory norms need to be set up in order to give recognition to intangible assets. Another implication is that these regulations need to be made mandatory and should be circulated to all the important accounting related regulators so that consistency is maintained.

Article 2 – The implication of this article on the accounting regulators is that the regulations adopted by the regulators should be developed in the manner that it is in accordance with the international standards dealing with the intangibles. Another implication is that in order to match with the international standards, there is a possibility that many new alterations may be required to be adopted by the regulators which may be a time consuming process (Wyatt & Abernethy, 2003).

Value Relevance of Intangible Assets Before and After Adoption of International Accounting Standards

Article 1 – the main implication on the investors will be that the value of the stock of the organization will increase in the market. This is so because the true picture of the financial position of the organization will be revealed. As a result, the investors will be attracted towards the organization. Another implication to the investors is that they will be able to analyse the risks and opportunities related to the organization and will be able to take decisions wisely (Skroupa, 2017).

Article 2-the implication of the adoption of international standards related to intangibles will help to develop the investors from every corner with the Australian companies in an easy manner as, a common standard will guide the accounting activities of the organizations. Another major implication is that the investors will have an idea about the technicalities of the companies which was hitherto very limited (Martins & Alves, 2010). 

Conclusion

In the end, it can be concluded that with the help of both the articles it can be inferred that the importance and the value creation of intangibles in organizations is increasing. But, with the increase in the value, the intangibles are not getting the required attention in the accounting world. As a result, the article has reflected the change in the value of the intangibles before and after the adoption of the international accounting standards. It has been mentioned that with the adoption of the accounting standards related to intangibles and the reflection of intangibles in the accounting information, a well-defined decision can be taken by the firm’s management and also will improve the efficiency of the market. The implication of both the articles on different stakeholders has been stated that will help to undertake the necessary preparations required for the successful adoption and reflection of intangible accounting standards. Both the articles have made their contribution towards reflecting how accounting of intangibles can give a different face to the financial statements of a company. 

References

Chalmers, K., Clinch, G. & Godfrey, J. M., 2008. Adoption of International Financial Reporting Standards:. Australian Accounting Review, 18(3), pp. 237- 247.

Chalmers, K. & Godfrey, J., 2008. Intangible assets: diversity of practices and potential impacts from AIFRS adoption. Australian Accounting Review, 16(40), pp. 60-71.

Hunter, L., Webster, E. & Wyatt, A., 2005. Measuring Intangible Capital: A Review of Current Practice. Australian Accounting Review, 15(36), pp. 4-21.

Martins, J. & Alves, S., 2010. The impact of intangible assets on financial and governance policies: A literature review. [Online]
Available at: https://www.ejmanager.com/mnstemps/127/2010-THE%20IMPACT%20OF%20INTANGIBLE%20ASSETS%20ON%20FINANCIAL%20AND%20GOVERNANCE%20POLICIES%20-%20A%20LITERATURE%20REVIEW.pdf
[Accessed 11 September 2018].

MCA, 2018. Accounting Standard (AS) 26. [Online]
Available at: https://www.mca.gov.in/Ministry/notification/pdf/AS_26.pdf
[Accessed 11 September 2018].

OECD, 2006. Creating value from intellectual assets. [Online]
Available at: https://www.oecd.org/science/inno/36701575.pdf
[Accessed 11 September 2018].

Skroupa, C. P., 2017. How Intangible Assets Are Affecting Company Value In The Stock Market. [Online]
Available at: https://www.forbes.com/sites/christopherskroupa/2017/11/01/how-intangible-assets-are-affecting-company-value-in-the-stock-market/#505d8ed22b8e
[Accessed 11 September 2018].

Wyatt, A. & Abernethy, M. A., 2003. Framework For Measurement and Reporting on Intangible Assets, Melbourne: Intellectual Property Research Institute of Australia.

Zeghal, D., 2000. New assets for the new economy. FMI Journal, 11(2), pp. 35-40.

Zéghal, D. & Maaloul, A., 2011. The accounting treatment of intangibles–A critical review of the literature. Accounting Forum, 35(4), pp. 262-274.