How New Accounting Standards for Intangibles Will Impact Companies in Taiwan
Taiwan's Statement of Financial Accounting Standards No. 37 (SFAS 37), "Accounting Treatment of Intangible Assets", which was released by the Accounting Research and Development Foundation at the end of July 2006, deals mainly with the recognition and measurement of intangible assets and their disclosure in financial statements. The new standards define intangible assets as "non-monetary assets without physical form and which meet the following conditions: They must be identifiable, controllable by the enterprise, and able to yield future economic benefits, where 'identifiable' indicates that they may be separated from the enterprise and sold or transferred; or, if they can not be separated, they are generated from contractual or otherwise legally established rights." In the following, I describe some of the aspects of SFAS 37 that are likely to have the greatest impact on local enterprises:
Intangible resources vs. intangible assets
In this so-called knowledge economy era, the importance of intangible resources to corporations has grown progressively greater, but not all intangible resources meet the definition of intangible assets given in the new standards, so businesses will have to take a second look at what they have. For those that have already recognized spending on intangible resources as expenses, however, SFAS 37 does not make it possible to convert such expenditures into intangible assets. The standard makes it clear that certain things, including a company's technical teams, specific managerial or technical skills, and client relationships or client lists that were not obtained through some sort of business transaction, do not meet the standard's definition of intangible assets.
Intangible assets acquired in an M&A deal
When a business combination occurs, the value of intangible assets is often neglected and lumped together with goodwill. However, the statute also clearly states that, if the fair values of an acquired company's intangible assets can be reliably measured, then the acquiring company must recognize those intangible assets on the date they are purchased, and their value may not be included in goodwill. Moreover, even if the company being bought had not recognized those intangible assets before the deal took place, the acquiring company is still obligated to recognize them (separately from goodwill) as of the purchase date. For example, an acquired company's R&D project plans meet the standard's definition of intangible assets, and their fair value can be reliably measured, so the acquiring company must recognize the project plans as intangible assets. When an enterprise analyzes the difference between the cost of its investment and its net equity value, it will have to adopt the above rule and take intangible assets into consideration.
Intangible assets acquired through asset swaps
According to the accounting principle used up to now to for the treatment of asset swaps, one can discriminate between where the assets swapped are the same type and where they are different. Where the assets are the same type, then if the deal involved the receipt of a cash payment, the cash part should be viewed as a sale and a gain should be recognized on that portion.
When the new standard was established, the methods used in international accounting standards were consulted. Under those standards, where a company acquires an intangible asset partly or entirely in exchange for non-monetary assets, the company must use the fair value method to measure the intangible asset's value and it must recognize the gain or loss realized upon the disposal of the non-monetary assets. However, under one of the following conditions, one must use the book value of the asset given to value the asset acquired: (1) the exchange is not of a business or commercial nature; (2) the value of the assets traded can not be reliably measured. Note that whether the transaction is a commercial one or not depends on the degree to which it is expected to affect cash flows.
Recognition and measurement of internally generated intangible assets
Companies typically pour funds into research and development in hopes of future growth and competitive strength in their industries. For intangible assets developed in-house, it is usually harder to judge exactly when such assets actually exist or when they will produce an economic effect in the future. What is more, with the this sort of investment, it is sometimes difficult to separate what is spent on maintaining the enterprise's internal generation of goodwill from ordinary operating costs. This is why accounting methods almost always expense. However, it would obviously be overly conservative to expense everything that has a future economic effect, and if firms listed as expenses everything they spent on things like research and development plans, it could easily lead financial statement users astray in their decision-making.
To deal with this issue, SFAS 37 clearly stipulates that if expenditures on R&D in the development stage meet certain conditions, they should be recognized as an intangible asset: (1) it has become technically feasible to complete the intangible asset, so that it could be available for sale or use; (2) the intention is to complete the intangible asset and make use of it or sell it; (3) the firm has the ability to use or sell the asset; (4) the intangible asset is very likely to yield future economic benefits. For example, the firm can prove that there is a definite market for the production of the intangible asset or for the asset itself. If the intangible asset is for internal use, the firm can prove the asset's usefulness; (5) there are sufficient technical, financial and other resources available to bring the development plan to fruition and then utilize or sell the intangible asset; (6) resources expended in the development phase can be reliably measured.
Intangible Assets With Indefinite Useful lives May Not Be Amortized
Generally speaking, assets all have limits on their useful lives, and intangible assets are no exception. To decide what the useful life of an intangible is, we typically consider such factors as when its anticipated usage or technology is likely to be out-of-date, competitors' anticipated actions, and legal limitations. It is possible, though, that an intangible asset may provide a company economic benefits for the foreseeable future, and we refer such an asset as one having an "indefinite useful life". Indefinite useful life does not mean the useful life is unlimited, however. As an example, suppose a company acquires through a purchase the trademark rights over a product with a long-established position as market leader. The law says that those rights may be extended every 10 years at little expense. As long as the firm has the "intention" to continue applying to renew the trademark and has proof that it "has the ability" to continue renewing it, and the trademark is expected to continue generating economic benefits in the future, the trademark can be viewed as an intangible asset with an indefinite useful life. Naturally, there is no question of amortizing this kind of asset since the useful life is not clear, but the useful life needs to be reassessed on the balance sheet date to see if it is still "indefinite".
Impairment of Intangible Assets
When Taiwan's domestic accounting standards for the treatment of asset impairment were being formulated for SFAS 35, "Asset Impairment", there was still no concept of an intangible asset with an indefinite service life or an intangible asset that is not yet available for use (the example given previously was an R&D plan in progress when a company is purchased). The new standard on the treatment of intangibles then stipulated that intangible assets with indefinite service lives and intangible assets that are not yet available for use receive the same treatment as goodwill in that they undergo annual impairment testing. So now enterprises that claim those kinds of assets must test them annually for impairment.
Changes in Depreciation/Amortization Methods Viewed as Changes in Accounting Estimates
When adopting a particular depreciation or amortization method for an asset, enterprises must consider what form the consumption of the asset's economic benefits is expected take. In principle, enterprises must apply consistent depreciation and amortization methods each year, but if the expected form of consumption changes, the enterprise will need to assess the appropriateness of its methods. If they are no longer appropriate, they will have to be changed. In the past, such changes in methods were viewed as changes in accounting principles, but the new Standard follows international accounting standards in regarding them as changes in accounting estimates.
Conclusion
To summarize the foregoing, accounting standards for intangible assets had been briefly mentioned in SFAS 1. Now that they have been laid down in SFAS 37, corporations will henceforth have a clear set of standards to follow. Also, by consulting international accounting standards (i.e., IAS 38), accounting treatment in Taiwan has taken a giant stride in the direction of regulatory harmonization.