Intangible Assets: GAAP And IFRS

Intangible assets are assets that cannot be physically held, such as copyrights, brand names, trademarks, goodwill, and patents. There are two kinds of intangible assets, definite and indefinite. Definite assets have a useful life and would be amortized ever year to decrease the value, such as trademarks and patents. Indefinite do not have a definite life time and would last as long as the company stays in business. Definite assets need to be amortized based on their useful life by determining the pattern of use for the asset. For example, if a company uses an asset 40% the first year, 30% the next year, and 15% the next 2 years, then it would amortize the value following that pattern. If they do not know the pattern they would use the straight-line

method. For indefinite assets, amortization does not occur, however an impairment test must be made every year to determine if he asset is still valuable.
For GAAP and IFRS accounting practices vary, such as how they record gains and losses and depreciation.

IFRS (International Financial Reporting Standards) is used in 110 different countries, however the GAAP (Generally Accepted Accounting Principles) is only used in the U.S. These two accounting practices report financial data differently, specifically intangible assets. Intangible assets under GAAP are recognized at fair value, however under IFRS “they are only recognized if the asset will have a future economic benefit and has a measured reliability” (2015, GAAP vs IFRS). There are other differences between these two practices for revaluations, advertising costs, goodwill, and internally developed intangible

assets.
Internally developed intangible assets are assets that have been created in research and development, inside the company, and they usually incur a large expense. Under GAAP, for internally developed intangible assets costs for the assets are recognized as an expense, except for computer software. Companies only capitalize direct costs, such as legal costs and they expense the rest because they do not believe that all the costs are an accurate measure of the value for the intangible asset. For IFRS, in order for costs to be recognized, they must meet certain criteria. The cost must be measured reliably and the future revenues and benefits must flow straight to the entity.
For revaluating intangible assets under GAAP it is not allowed, because they are valued at the historical cost less amortization and impairments. Under IFRS intangible assets are also valued at the historical cost less amortization and impairments. Only if there is a quoted market price in an active market for the intangible asset and then the company must elect to take the revaluation or cost model. Whichever policy they elect they must apply to all intangible assets of the same class. For example, if they elect to take the revaluation model of a trademark, then all of their trademarks must take the revaluation model. It will have a revalued amount less the amortization and impairments. This is to prevent people from abusing the rule and over evaluating their assets.

The value of goodwill is the purchase price less the fair value of net identifiable assets.

For goodwill, under GAAP, there is a two-step test to determine the impairment. The first step is to determine if the fair value is less than the carrying value. If the fair value is greater than there is no more testing for impairment. If the fair value is less than the carrying value than you must proceed to the second step. In the second step a comparison of the implied fair value of goodwill and the carrying amount of goodwill is required to determine whether goodwill is impaired. If the implied fair value of goodwill is greater than the carrying amount, than the difference is the impairment loss recognized. Under IFRS, goodwill is tested at the cash-generated unit for impairment. If the fair value, less costs, is less than the cash-generated unit, the difference is the impairment loss. The loss will reduce the value of the

goodwill.
Here is an example of impairment for goodwill. If the fair value of a company is $1 million, the net identifiable assets is $700,000, and the carrying amount of goodwill is $400,000.
Fair value of Company A $1,000,000
Less: Net identifiable assets $700,000
Implied value of goodwill $300,000

Carrying Amount of goodwill $400,000
Less: implied value of goodwill $300,000
Loss on impairment $100,000

The Journal entry would be:
Loss on impairment 100,000
Goodwill 100,000
For advertising costs under IFRS costs are recognized as an expense when it is incurred. However, advertising that has been prepaid would be recognized as a prepaid asset until they have received the service. Under GAAP costs are recognized as an expense when it is incurred or until the advertising takes place. The entity must pick a policy that is the same for all of its advertising costs. If the costs are associated with direct-response advertising or advertising costs are incurred after revenues are recognized. Direct-response advertising is when customers respond directly to the advertiser instantly after viewing the ad. So the costs for the ad would be recognized when the customer responds to the ad.

This is Coca Cola’s 2014 annual report for their intangible assets (in millions). They recorded $195 million in impairments. $113 million for trademark impairments and $82 million in goodwill impairments and it was recorded using the two step method under GAAP (Annual report, 2014).
December 31, 2014 Carrying value Percentage of Total Assets
Goodwill $ 12,100 13%
Bottlers’ franchise rights with indefinite lives 6,689 7
Trademarks with indefinite lives 6,533 7
Definite-lived intangible assets, net 880 1
Other intangible assets not subject to amortization 170 Less than 1%
Total 26372 29%

GAAP and IFRS have many similarities and many differences, particularly in intangible assets. In the way costs are recognized, the accounts and the timing can be different. The accounting policies for advertising costs, revaluations, impairment for goodwill, and internally developed intangible assets all differ.