Contents -

1. Meaning and Nature of Intellectual Property.
2. Treatment of Intellectual Property in Deals.
3. Type of Intellectual Property or Intangible Assets.
4. Intangible Assets Recognition.
5. Accounting Standard - 26 : Intangible Assets.

  • Meaning -
Under intellectual property law owners are granted certain exclusive rights to a veriety of intangible assets, such as musical, literary and artistic work, discoveries and invention and words phrases, symbols and designs. Intellectual property is a number of distinct type of legal monopolies over creations of the mind both artists and commercial and the corresponding fields of law. Common type of intellectual property includes copyright, Trademark, patent, industrial design right and trade secret in some jurisdiction. These monopoly profit provide a financial incentive for the creation of intellectual property and pay associated research and development costs. These executive right allow owners of intellectual property to reap monopoly profits.

  • Nature of Intellectual Property -
Following are the nature of intellectual property :

1. Non Rivalry in Consumption -
Intellectual Property can be used simultaneously by different people without diminishing in its worth.

2. Transferability -
Intellectual property is transferable to any new or similar business context.

3. Partial Excludability -
Intellectual property guarantees a firm exclusivity and freedom to operate in the market.

4. Knowledge Content -
Background of users and context determine relevance of intellectual property to business.

5. Spontaneity -
Successful intellectual property creation in risky since there is a creative and a business element to it.

6. Perishability -
Over time intellectual property may become outdated, e.g. technology cycles.

  • Treatment of Intellectual Property in Deals -
Introduction -

However over the years accounting for intellectual property has become an important issue in the corporate world. Accounting for any asset or liability has historically not been a subject that excites much interest outside the accountancy profession for a company's accounts department. This is because more and more of the world's companies derive their wealth from their intangible rather than their tangible assets and there for the issue of how to record this fact becomes more pressing. The extent to which a company's value in derived from unrecognised intellectual property is most commonly illustracted by various of the following bar chart showing the market capitalisation of different business sectors compared with their recorded net asset value.

The Treatment of Intellectual Property in Deals -

What is the reason for this excess ? What is being paid for ? Historically the excess has been described as 'goodwill'. When a company does a deal and acquires another company or business it frequently pays a price considerably e in excess of the value of the net tangible asset acquired. Directors seeking a pursuade the market of the commercial advantage that their most recent deal will bring to their business usually described Goodwill as the value of synergies, cost savings or other commercial benefits. However, since this is the least tangible of any intangible asset, Goodwill has tended to attract a fair degree of scepticism. Many consider it to represent simply and over payment, hence the requirement until relatively recently under UK accounting standard, for this amount to be immediately written off. Others consider it to be simply an accounting entry to balance the books and there for of little interest. Whilst some element of over payment surely exist in many deals, in the majority of cases the price paid reflects the value of the various intangible assets acquired. These are assets which have been internally generated by the acquired company but which are not reflected on the acquirees balance sheet due to the accounting rules prohibiting this as noted above. As the proportion of a typical acquisition price represented by such assets has increasingly become significant, accounting standard setters have to deal with issue with verifying degrees of success around the world.

  • Type of Intellectual Property or Intangible Assets -
Following are the various types of intellectual property or intangible asset :

A) Marketing Related Intangible Assets -
1. Internet domain names.
2. Trademarks, trade names.
3. Newspaper mastheads.
4. Service marks, collective marks, certification marks.
5. Non compete agreement.
6. Trade dress (Union colour shape or package design).

B) Contract Based Intangible Assets -
1. Lease agreements.
2. Operating and broadcast rights.
3. Licensing, royalty, standstill agreements.
4. Employment contracts.
5. Servicing contracts such as mortgage servicing contracts.
6. Use rights such as drilling, water, minerals, timber cutting and route authorities.
7. Franchise agreements.
8. Construction agreements.
9. Advertising, construction, management, service or supply contracts.

C) Customer Related Intangible Assets -
1. Customer contract and related customer relationships.
2. Order or production backlog.
3. Customer lists.
4. Non-contractual customer relationships.

D) Technology Based Intangible Assets -
1. Databases, including title plants.
2. Unpatented technology.
3. Patented Technology.
4. Computer software and mask works.
5. Trade secret such as secret formula, processes, recipes.

E) Artistic Related Intangible Assets -
1. Picture, photographs.
2. Books, magazines, newspaper or other literary works.
3. Plays, operas, ballets.
4. Musical works such as composition, song lyrics, advertising jingles.
5. Video and audio visual material including Motion Picture, music videos, television programs.
  • Intangible Asset Recognition -
An intangible asset shall be recognised as an asset apart from goodwill :

1. Amortisation -
An acquired intangible asset other than Goodwill, with and indefinite useful economic life should not be amortised (regardless of whether it has an observable market) until its life is determined to be no longer indefinite.

2. Nature of Asset -
If it is separable, that is, it is capable of being separated or divided from the acquired entity and sold, transferred, licenced, rented or exchanged.

3. Form of Arises -
If it arises from contractual or other legal rights.

4. Indefinite Useful Life of Asset -
If no legal, regulatory, contractual, competitive, economic or other factors limit the useful life of an asset, the useful life of that asset should be considered indefinite.

5. Basis of Accounting for Intangible Assets -
An intangible asset with a finite useful life is amortised and intangible asset with and indefinite useful life is not amortised. The accounting for a recognised intangible asset is based on its useful life to the reporting entity. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity.

6. Amortisation of Separate Intangible Asset -
Separable intangible asset that have finite lives will continue to be amortised over their useful lives.

7. Factors to be Considered in Deciding Useful Life of Asset -
The number of pertinent factor that should be considered in deciding the useful life of an asset, they are as follows, Expected use of the asset by the entity
a) Useful life of another asset to which useful life of intangible relates.
b) Legal, regulatory, contractual limits to useful life.
c) Ability to Renew/Extend contractual or legal life.
d) Effect of obsolescence, demand, competition and other economic factors.
e) Level of maintenance expenditures required to realise expected future cash flows.

8. Basis for Recognising Intangible Asset -
A recognised intangible asset that is not amortised must be tested for impairment annually and interim basis if an event or circumstances occurring between annual tests indicates that the assets might be impaired.

9. Categories of Intangible Assets -
The FASB classified intangible assets into five categories :
a) Marketing Related Intangible Assets.
b) Artistic Related Intangible Assets.
c) Customer Related Intangible Assets.
d) Contract Based Intangible Assets.
e) Technology Based Intangible Assets.

  • Accounting Standard - 26 : Intangible Assets -
Definition -
"An intangible asset is an identifiable non-monetary asset, without physical substance held for use in the production or supply of goods or services, for rental to others or for administrative purposes".

Objective -
The objective of Accounting Standard 26 relating to intangible assets is to prescribe the accounting treatment for intangible assets that are not covered specifically in another accounting standard. This standard is mandatory in nature and comes into effect in respect of expenditure incurred on intangible assets during accounting period commencing on or after 1st April, 2003.

1. Recognition Measurement -
Expenditure on search should be recognised as an expenses when it is incurred. Internally generated brands, publishing titles, customer lists and items similar in substance should not be recognised as intangible assets. An intangible asset should be measured initially at cost and internally generated Goodwill should not be recognised as an asset. Intangible asset arising from research should not be recognised.

2. Allocation of Intangible Asset -
According to Para 63 of Accounting Standard 26, "The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed 10 years from the date when the asset is available for use. Amortisation should commence when the asset is available for use". If the pattern of consumption of an intangible asset cannot be determined reliably, the straight line method should be used. The amortisation method used should be based on the pattern in which the assets economic benefit are consumed by the enterprise.

3. Measurement of Cost of Assets -
According to this standard an intangible assets should be recognised only if, It is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and The cost of the asset can be measured reliably.

4. Recognition of Expenditure -
Expenditure on an intangible item that was initially recognised as an expenses by a reporting enterprise should not be recognised as part of the cost of an intangible asset at a later date. Expenditure on an intangible item should be recognised as an expenses when it is incurred unless, It forms part of the cost of an intangible asset that meets the recognition criteria or The items is acquired in an amalgamation in the nature of purchases and cannot be recognised as an intangible asset.

5. Disclosure -
The financial statements should also disclose if an intangible asset is amortised over more than 10 years along with the reasons for doing so. The financial statements should disclose the useful lives or the amortisation rates used, the amortisation method and the gross carrying amount and the the accumulated amortisation at the beginning and end of the period for each class of intangible asset distinguishing between internally generated intangible asset and other intangible assets.

6. Residual Value of Asset -
Residual value of intangible asset should be assumed to be zero unless, There is a commitment by a third party to purchase the asset at the end of its useful life or There is an active market for the asset and residual value can be determined by reference to that market.

7. Review of Amortisation Period -
An intangible assets should be eliminated from the balance sheet on disposal or when no future economic benefits are expected from its use. The amortisation period and the amortisation methods should be reviewed at least at the end of each financial year.