Accounting for Intangibles and Goodwill

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Regulating intangible assets reporting for major firms is debatably the greatest challenge for accounting standards-setters globally. Presently, more businesses are shifting to service-based companies. This has continued to present additional challenges for many firms. This is because serviced-based companies handle more intangible assets including technological copyrights and human capital. It is important for companies to accurately account for the intangibles and goodwill providing their true value.

Financial reporting standards in Australia are well documented. The Australian monetary reporting standard (Australian Accounting Standards Board) AASB 138 has provided applicable guidelines for valuing intangible assets including goodwill (AASB 2009). AASB 138 stipulates that businesses should measure their intangible assets after recognition. The cost and revaluation models are applicable in recognizing intangible assets.

The standard stipulates the accounting treatment for notable indefinable assets, which are not handled in other standards. The reporting standard wants Australian companies to identify intangible assets only if they meet specified criteria. It also describes how to quantify the carrying amount of indefinable assets. The standard also requires particular disclosures about such assets (Dagwell, Wines & Lambert 2007).

However, considering the nature of intangibles, reporting the worth of such assets has remained a massive challenge. This paper discusses whether specific treatment should be applied in recognizing and measuring intangibles in financial reports. Furthermore, it presents an alternative measurement base that would be highly appropriate for reporting intangibles and goodwill (AASB 2009). Finally, it discusses the appropriateness and practicability of leaving the criteria for recognizing and reporting intangibles at the discretion of companies’ management.

The current AASB reporting requirements for intangibles and its reflection of the true economic value of intangible assets

The current reporting guideline for intangible property possessed by firms is an improvement of previous standards (AASB 2009). However, its application fails to reveal the true monetary value of indefinable assets in companies. The standard has provided criteria to be used by firms. It argues that intangible assets must be discernible from goodwill. The assets must also be separable or emerge from contractual or other lawful rights. Intangible assets must be saleable, transferrable, licensed, leased, or exchanged at certain value (Dagwell, Wines & Lambert 2007). The recognition of intangible assets is based on their ability to generate monetary benefits measurable during the useful life that such property exists.

The standard has created gaps in accounting for intangible resources in companies that to some extent produce noticeable mistakes. Notably, some companies report losses on their intangible assets (Cheong & Al Masum 2010). Apparently, this occurs because most intangible assets statements generated by firms do not reflect their actual economic value. Most importantly, the standard has stipulated that all assets are included except some internally acquired intangibles (AASB 2009). The standard stipulates that the accounting process for intangible assets shall not recognize internally generated goodwill.

Furthermore, the standard does not provide how to account for internally developed trademarks, mastheads, publication titles, clients’ lists, and other items of comparable substance (Cheung, Evans & Wright 2008). The standard stipulates that additional specific criteria shall be applied in recognizing development expenditure.

It is notable that these intangible assets, which are not recognized, contain massive economic value. Indeed, internally developed brands and goodwill have economic value attachments. This is because their worth and value can be evaluated. Furthermore, failure to recognize these intangible assets appears to be a big mistake by the standard setters. Presumably, if company owners wanted to sell their business to other entities, the internally developed brands and goodwill must be evaluated and calculated (Cheong & Al Masum 2010).

Therefore, considering that such companies were new at their start having been developed through fresh ideas, then their internally developed intangibles are also transferrable. The entities purchasing such businesses must also pay for the internally developed trademark and goodwill (AASB 2009). Therefore, the value for intangible assets normally reported by companies does not reflect the true economic value for such property.

The standard has prescribed how to measure intangible assets. The measurement guidelines also present diverse gaps in determining the true economic value of intangible assets. Costs for assets acquired through business combination are considered as the value at the purchase date (Marsden 2010). Measurement of assets’ worth based on the fair value, which is permissible where valuation is based on active markets is also misleading. It is plausible to comment that the current AASB reporting requirements for intangibles including goodwill do not reflect the true economic value of intangible assets.

Alternative measurement base that enhances the recognition of the economic value of intangible assets

This paper has indicated that the current AASB reporting requirements do not best recognize the true economic value of intangible assets. This has been a result of the applicable AASB reporting standards. Indeed, most company reports on intangible assets are frequently misleading. Therefore, an alternative measurement base that enhances the recognition of the economic value of intangible assets is appropriate. Most importantly, the alternative measurement base shall adopt the current reporting requirements together with fresh approaches of accounting for internally developed intangibles (Cheung, Evans & Wright 2008). This will eliminate the possibility of omitting capital accumulations generated from internally developed intangibles.

The alternative measurement base shall include strategies for measuring and capitalizing the intangibles ignored by the current standards. The alternative shall prescribe how internally developed intangibles such as knowledge base, software development, instruction expenses, organizational reorganization, and revamping business process among others (Cheong & Al Masum 2010).

The alternative measurement base should also recognize and measure the internally developed assets after proper evaluation of the research and development activities. Furthermore, the new alternative should prescribe how to account for goodwill through capitalizing on their worth. Amortizing goodwill period should also be lowered (Marsden 2010). This is important because through the signaling theory managers have the full discretion to report goodwill (Cheung, Evans & Wright 2008). This allows company goodwill reported to reflect the true economic value.

The company’s management should be allowed more flexibility in accounting for intangible assets

Managers of companies should be allowed more flexibility in accounting for intangible assets. Permitting managers to account for intangible assets is crucial for relevant capitalization. Indeed, research and development accounting improves value reliance of intangible assets. The managers should also be permitted to account for the internally developed intangibles (Dagwell, Wines & Lambert 2007). These include trademarks, publication titles, and patents among others. In this scenario, managers have greater opportunities to provide value relevance of such assets. Furthermore, business managers should have the discretion to provide value relevance of both purchased and internally developed goodwill.

It is notable that signaling theory permits company leaders to exercise their will in reporting goodwill. Therefore, the leaders normally report the actual monetary worth of goodwill. On the other hand, agency theory argues that company leaders might easily maneuver discretionary power to attain their own purposes (Cheong & Al Masum 2010). It is noteworthy that regulators are aware of these two aspects of discretionary power application.

The opportunistic theory explains the notion that business managers might always choose accounting regulations to maximize their gains. In this scenario, business leaders are more likely to manipulate their reports. The accounting managers may also choose to signal the actual economic value for their intangibles as a good business governance strategy (Cheung, Evans & Wright 2008).

Standard setters are also faced with dilemmas concerning value importance versus reliability of details about indefinables. They are all important for the reason that providing unreliable details about intangibles reduces the relevance of such information. According to standards setters, applying discretionary will in capitalizing insubstantial assets together with subsequent expensing enhance the provision of relevant details regarding monetary reality of an entity (Cheung, Evans & Wright 2008). Notably, information regarding intangibles concerns users more than managers. Therefore, inability of users to comprehend signals sent by information preparers renders them inapplicable. Particularly, managers ought to be provided with the discretion that enhances their ability to disseminate appropriate signals.

On the contrary, providing discretionary powers to business leaders raises concerns over the quality of sent signals (Cheung, Evans & Wright 2008). Most importantly, noisy signals render information untrustworthy and irrelevant.


It is noteworthy that regulating how firms report their intangible assets remains a challenging task. The noticeable shifts occurring in major firms entering into fresh service-based industry continue to hamper efforts to account for intangible assets. The efforts by standard setters at the global arena have failed to find a common standpoint on how companies should account for technological copyrights, human capital, brands, and goodwill among others. Standards setters in Australia have successfully generated the country’s monetary reporting standard AASB 138.

The standard presents principles that company managers should employ while valuing intangible assets. This paper discusses the current AASB reporting requirements for intangibles and its reflection of the true economic value of intangible assets. It also discusses an alternative measurement base that enhances the recognition of the economic value of intangible assets. Finally, it discusses the applicability of providing business managers with the discretion to voluntarily report the worth of their companies’ intangible assets.

Reference List

AASB. 2009. AASB 138: Intangible Assets. Web.

Cheung, E, Evans, E & Wright, S. 2008. ‘The adoption of IFRS in Australia: The case of AASB 138 (IAS 38) Intangible Assets’, Australian Accounting Review, Vol. 18, pp. 248–256, Web.

Dagwell, R, Wines, G & Lambert, C. 2007. Corporate accounting in Australia, Sydney, University of New South Wales Press.

Cheong, C & Al Masum, M. 2010. ‘Financial Analysts’ Forecast Accuracy: Before and After the Introduction of AIFRS’, Australasian Accounting Business and Finance Journal, Vol. 4, no. 3, pp. 65-81. Web.

Marsden, S. 2010. Australian master bookkeepers’ guide [2009/10], North Ryde, CCH Australia.

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