Unclear Intangibles Concepts Hinder Rulemaking

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By Denise Lugo

Dec. 13 — Developing rules for how companies would eventually report intangible assets could be hindered by confusion surrounding the terms “asset” and “measurement”, according to discussions by the Financial Accounting Standards Board and the body that advises it on private company issues.

Intangible assets are types of nonphysical assets that give companies inherent value but aren’t reported on the balance sheet.

No Clarity Leads to Impediment

A lack of conceptual clarity currently exists around what meets the definition of an asset. Also, no concept for measurement exits under the FASB’s conceptual framework for accounting standards.

The conceptual framework is FASB’s non-authoritative rule-making guide that provides the foundation for standard-setting.

Any substantial effort by FASB toward developing reporting rules for intangible assets would therefore be hindered, according to the Dec. 13 Private Company Council (PCC) meeting.

“One of the difficulties that I feel we have in this area is that I don’t think that our conceptual framework is currently up to the task of helping us to answer these questions because one of the issues is what meets the definition of an asset,” said FASB member Christine Botosan.

“The other aspect of the conceptual framework that I think is going to hamper it is if we try to take on this project in a complete way is that we don’t have a concept for measurement and so there’s not really a basis for us to have that discussion about historical cost versus fair value,” she said.

Having a stronger conceptual framework would enable the board to make more progress on the topic of intangible assets as opposed to adding it to its agenda before its work on the concepts for financial reporting is complete, Botosan said.

No Overarching Guidance

Intangible assets are highly valuable nonphysical assets that can be critical to the long-term success or failure of a company. For example, corporate intellectual property is an intangible asset, and includes items like patents, trademarks, copyrights and brand recognition.

Internally generated intangibles that are not specifically identifiable are recognized as expense when incurred. Other than this there is no overall recognition and measurement guidance, and thus there's inconsistent accounting. However, industry specific guidance such as software cost, have evolved, according to the discussions.

The issues FASB is considering include which intangibles meet the definition of an asset, and if they were to be recognized how they should be measured.

The topic is therefore on FASB’s standard-setting radar and will be discussed during a roundtable meeting Dec. 16. The board will also consider convergence with the international accounting standard, IAS 38, Intangible assets.

Missing Information

The topic of intangible assets has generated substantial debate, particularly because companies now have more items that fall within that space.

Investors feel financial statements are missing information because of the value of intangible assets like research and development and noncompeting agreements that aren’t on the balance sheet today that cause market capitalization issues.

Some preparers however express concerns about the potential for a company to disclose information that would be competitively harmful.


Overall, most PCC members expressed reservations about the FASB adding a project to its agenda on the topic.

“I’m troubled by the notion of trying to put more intangible things on the balance sheet,” said Timothy Cur, managing director and partner at New York-based private equity investment firm Warburg Pincus LLC.

“Because the way I think about it is the financial statements are supposed to provide information for market participants to determine the value of the business. They shouldn’t then reflect back in the financial statements what market participants are concluding about the value of the business,” he said.

PCC members also agreed the conceptual framework needed more work because it would provide the necessary foundation to properly address the issue.

Moreover, they pointed to the difficulty of trying to measure and recognize certain types of items as intangible assets, though they would likely fit the definition.

“Interestingly the largest unreported intangible doesn’t show up in this or in IFRS either and that’s your workforce,” said Harold Monk, a partner of Gainsville, Fl.-based accounting firm Carr, Riggs & Ingram LLC. “We couldn’t figure out how to value it and that is probably the single greatest intangible that many companies have,” he said.

To contact the reporter on this story: Denise Lugo in New York at dlugo@bna.com

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