Internally Generated Intangible Assets Initial Accounting

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Accounting for the internally generated intangible asset has become a crucial area in the field of accounting and business as described in the discussion paper. The nature and size of intangible assets in an organization show how important it is especially from an external financial reporting standpoint. Intangible assets are found in large numbers in diverse industries and business entities. It is expected that intangible assets, such as customer contracts, customer relationships and lists, should be in existence in most firms. These firms range from pharmaceutical, media, consumer product, and service-based companies to financial services organizations (Deegan 2005).

The main areas of interest in this assignment is on the discussion papers, A discussion paper is a paper that sets out a discussion of the issues involved on an accounting topic as means of seeking public comment. Unlike exposure drafts, which must always be issued prior to a standard, discussion papers are optional. They are exploratory in nature and do not set out the text of a proposed standard.

Considering the facts presented in the discussion paper, an intangible asset is an important aspect of any entity’s financial statement. Its recognition in the financial statement happens only when the assets are acquired from the others. Due to the importance of particularly internally generated intangible assets, it is necessary for accounting standard setters to come up with a basis, which is recognized and measured in the financial statement (Godfrey 2001).

The criteria under AASB 138 provide the solutions as to when to recognize intangible assets in the balance sheets and how to comply with the disclosure requirements in preparing the financial statements of a company. According to AASB 138 paragraph 21, an intangible asset is recognized when a certain condition is fulfilled. The condition revolves around the economic benefit that the intangible asset will possibly earn for the entity. For the condition to be effective, the cost should also be measured accurately (Tiffin 2005).

Therefore, the main objective of this paper is to analyze the issues raised in the context of Australian Generally Accepted Accounting Principles (GAAP) as well as provide a detailed discussion on the differences between the concepts that exist in the AASB standard.



The definition of intangible asset varies, and the standard normally refers to it, as the portion of asset without monetary value that cannot be felt physically. However, as discussed by different scholars, the term intangible asset can carry different meaning. However, I agree it generally refers to asset which value is not directly reflected in the company’s financial statement. This particular asset is managed by the firm due to events that occur in the past, such as a purchase. The firm also expects to earn certain monetary value from the same in the future. In light of this simple definition, intangible assets are said to have three key characteristics, which include control, identifiability and future economic value. Theories of intangible asset show that economic value is the overriding characteristic, and about this paper, it brings out the key issues as of accounting for internally generated intangible asset (Hunter Webster & Wyatt 2009)

IAS is a very long standard that accounts and explains the various treatments of different forms of intangible assets. Its main aim is to elaborate on how the intangible assets should be handled, specifically those that other standards have ignored. An intangible asset can only be recognized upon fulfillment of certain conditions. The standard can estimate an asset’s value in use as well as highlight the various disclosure requirements (Amir 2003).

The application of IAS 38 as a standard is very broad in terms of intangible assets. However, this application is limited when it comes to certain specific assets, such as financial assets, rights of minerals, and subsequent costs incurred in their exploration. Intangible assets of insurance companies, assets covered in other standards, assets from lease, deferred tax assets, and goodwill are also not covered under IAS.

The basis of identifying intangible assets, as argued in the discussion paper, can be viewed through separation. This means that the intangible asset can be separated and traded, rented, licensed as a single package or in parts. However, interpretation of this can also be in form of binding rights of law, irrespective of whether they can be shared or separated from the firm or other contractual obligation. The AASB also have a provision regarding the separation of intangible asset and its treatment.

There are many examples of intangible assets. The main ones that are common in most firms include copyright patents, trademarks and customer lists. The discussion paper as well as the Australian accounting standard also lists these and other examples of intangible assets. However, there are other forms of intangible assets not commonly known in most businesses but specific to some firms. As most scholars say, the examples stated include motion picture films, which are common in the movie-making industry. Import quotas are common in importation firms, while marketing rights are common in marketing firms.

My view, as supported by the discussion paper, is a firm can own that intangible asset in diverse ways including purchase transaction due to mergers and acquisitions through state funding, asset exchange and lastly internal creation. The discussion is based on internally generated intangible assets including how they are treated in the financial statement.


The discussion paper also analyzes the requirements under which IAS 38 can recognize an intangible asset, be it internally or externally generated. The Australian accounting standard highlights that in order for an asset to be recognized, it must have a certain future economic value to the firm that is linked directly to the intangible assets. The standard further focuses on the recognition description associated with internally generated intangible assets that are also reflected in the discussion paper. My view is that recognition should be as prescribed by the standard especially when making disclosures.

The recognition description is often considered sufficient for intangible assets that are either individually acquired or acquired through mergers and acquisitions. The AASB has a detailed provision regarding the recognition description of both types of intangible assets. The discussion paper hence in my view does not adequately give details on this provision.

In the event that an intangible asset fails to comply with the recognition definition as well as its criteria, the standard requires its expenditure to be recognized and expensed as and when it occurs. I find out that this consideration is a convincing argument for accounting for the intangible asset. IAS 38 notes, however, that non-recognition should be rare due to measurement reliability (Lev 2001). This is further highlighted in the Australian accounting standard.

The only circumstances in which it might be impossible to measure the reliability of the fair value of an intangible asset acquired in a business combination are when the intangible asset arises from legal or other contractual rights. This also relies on whether the intangible assets are separable or not. I agree with the discussion paper on the argument that intangible asset is subject to evidence of transaction trails for the same asset. Otherwise, estimating fair value would be dependent on immeasurable variables.

According to the discussion paper, the accounting of intangible assets can be shown through Initial Recognition of Research and Development Costs, which can be evaluated as follows. The cost of development should be capitalized. However, this depends on the feasibility of the study and the establishment of the technical aspect of the asset. Hence, the firm will use several criteria in assessing the intangible asset and choose the best way to dispose of it in order to earn future economic value.

Any research and development embraced within the company because of a joint venture will be recognized as an asset. Any additional cost may be taken as extra research-related cost, except the case where such expenditure conforms to recognition criteria in IAS 38. However, as suggested by different IFRS concerning intangible asset, this consideration can change considerably, especially concerning disclosure.

The discussion paper aims at accessing the options in which initial recognition of internally generated intangible assets can be accounted for in the financial statements.

Initial recognition of computer software includes an operating system for hardware. In terms of hardware, costs that arise from within the firm will be charged to expenses. Other aspects including technological innovation, future values and the ability to dispose of the software should conform to the guidelines that the standard has set regarding intangible assets.

The discussion paper analyzes the costs associated with the intangible asset, and I agree with the idea that such costs should be expensed when incurred. These items include internally generated goodwill, start-up, pre-opening, and pre-operating costs, training, advertising and relocation costs (Alfredson, Picker, Loftus, Clark & Wise 2009). The Australian Accounting Standard also has a provision of these items included in the discussion paper.


Intangible assets at the beginning and as the standard but it should be measured at cost. The firm is supposed to select one model for each class of intangible assets. The model selected can be either a revaluation one or a cost one. However, the intangible asset may be expressed as revalued after deducting amortization as well as impairment losses. This is although subject to whether the asset in question can be determined in comparison to an active market, which is not commonly found for intangible assets as the theories of intangible asset suggest. In my view, the revaluation model forms the best model as prescribed by the Australian Accounting Standard.

Under the revaluation model, the revaluation increases are credited directly to revaluation surplus within equity, except to the extent that it reverses a revaluation decrease previously recognized in profit and loss. In my view, this model is the best as it reflects the fair value of accounting for the internally generated intangible asset.

The classification of intangible assets can be divided into two groups. Indefinite life brings monetary gains to the firm in a long run. The finite life can only generate cash flow for an entity for a short period (Canibano 2009).

The procedure for amortization should show the level of benefit to the firm. However, if it is impossible to determine it for sure, then the asset should be amortized according to a straight-line method. The cost of amortization is supposed to be charged in the profit and loss account; however, if other standards have a provision regarding it, then the treatment will be as those standards suggest. The time in which an asset is amortized should be reviewed yearly. An intangible asset should also be impaired as per IAS 36, this provision is outlined in both the discussion paper and the Australian Accounting Standard.

An intangible asset that does not have a certain useful life is not to be amortized. The life of such asset should be periodically reviewed to access if the prevailing circumstances are to achieve the indefinite useful life of the asset. However, if the results are against it, then the change in any of the two forms of life should be accounted for and treated according to the standard. Impairment should also be assessed in accordance with the Australian Accounting Standard.

The issue of amortization and impairment of intangible assets about accounting can be determined and treated in various ways depending on the provision of the standard. In my view, attaining impairment gain or loss is important in accounting for the internally generated intangible asset.


For each class of intangible asset, the following should be disclosed as useful life or amortization rate, amortization method, gross carrying amount, accumulated amortization and impairment losses (Finch 2006). Disclosure of some items of research and development expenditure is also required in the financial statement. A provision, which is outlined in the Australian Accounting Standard.

The discussion paper closely assesses disclosure requirements as per the provision of the IAS 38. The general guidelines that apply to IAS 1 will also be implemented in the disclosure requirements of internally generated intangible assets. I support the argument that disclosure requirements that exist under IAS 38 apply to all classes of assets that have passed the recognition criteria. In my opinion, this is important in accounting for an internally generated intangible asset, as both the standard and discussion paper require firms to provide this information.

When an entity wants to make financial reporting, certain disclosure items are required to be included in the financial statements, as stated in both IAS 38 and IFRS 3. The disclosure of internally generated intangible asset shall be disclosed in no particular order, as the standard does not specify the order.

However, disclosure of internally generated intangible asset does not provide adequate information for the users of financial statements. Disclosure items are of great importance to the users as they form the basis of their decision-making. The Australian Accounting Standard elaborated on the importance of firms disclosing information on internally generated intangible asset. In my view, the discussion paper should explain the importance of disclosure requirements rather than just highlighting the procedure for disclosure.

Management normally has the discretion of disclosing non-financial information as it is not mandatory. However, non-disclosure of certain important information may be detrimental to the enterprise depending on how much investors value that piece of information. It is thus prudent as the report highlights that disclosure of internally generated intangible asset can be disclosed whether financial or non-financial.

Disclosure of the items of research and development expenditure is required in the financial statement as the discussion paper outlines, the Australian Accounting Standard also has a provision for this disclosure requirements.


In view of matters raised in the discussion paper pertaining to an internally generated intangible asset, there are guidelines that are required in order to make an intangible asset to be identifiable. These guidelines involve certain criteria that are independent of the entity and can be sold, transferred, licensed, rented, or exchanged. Moreover, matters of contractual or legal rights arise. These aspects are recognized in AASB 138 paragraph 12 (Accounting Handbook, 2010). Although, the standard states that certain classes of an intangible asset are required to meet identifiable and lack of physical substance whereas some intangible assets cannot be separately sold.

The size of the intangible assets cannot be estimated directly because they are not recognized in financial reports. For instance, intangible assets arise because of research and development. However, the efforts of research and development do not always result in assets. The International Accounting Standards Board does not allow Intangible assets to be recognized in the financial statements as much as they are important to most reporting entities. This does not mean that the entity should fail to account for the internally generated intangible asset.


  • Internally generated intangible assets should be initially measured at fair value to improve financial reports’ decision profile.
  • Internally generated intangible assets that meet the asset definition and recognition criteria must be included in the financial statements.
  • Disclosure of internally generated intangible asset is not a proper replacement for recognition.
  • Possible technique for identifying internally generated intangible assets is based on business combinations.


Amir, E., Lev, B. & Sougiannis, T. (2003). Do financial analysts get intangibles? European Accounting Review, 12(4), 635-659.

Alfredson, K., Picker, R., Loftus, J., Clark, K. & Wise, V. (2009). Applying International Financial Reporting Standard, Australia: John Wiley & Sons.

Canibano, L., Garcia-Ayuso, M. & Sanchez, P. (2000). Accounting for Intangibles: A literature review. Journal of Accounting Literature, 19, 102-130.

CPA Australia, (2010), Accounting handbook, Melbourne: Pearson Education.

Deegan, C. M. (2005). Australian financial accounting. Sydney: McGraw-Hill.

Finch, N. (2006). Intangible assets and creative impairment – An analysis of current disclosure practices by large Australian listed firms. Journal of Law and Financial Management, 5(2), 18-24. Web.

Godfrey, M. (2001). The relevance to firm valuation of capitalising intangible assets in total and by category. Australian Accounting Review, 11(2), 39-48.

Hunter, L. C., Webster, E. & Wyatt, A. (2009). Identifying corporate expenditures on intangibles using GAAP. Melbourne: Melbourne Institute of Applied Economic and Social Research.

Lev, B. (2001). Intangibles: Management, Measurement, and Reporting. Washington: Brookings Institute.

Tiffin, R. (2005). The Complete Guide to International Financial Reporting Standards. London: Thorogood.

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