FOR IP PROFESSIONALS

Accounting issues

Many Australian companies do not recognise their acquired intellectual property (IP) as separately identifiable intangible assets.

Instead, their IP assets are included on their financial statements as goodwill.

This is increasingly being regarded as inadequate for accounting purposes. If goodwill is separated into identifiable and unidentifiable intangible assets, the IP owner can more easily assign value and achieve particular financial benefits.

For instance, if IP is classified as identifiable it does not have to be amortised according to the same rules that apply to goodwill.

This may have an immediate effect on both your profit and loss statement and your balance sheet.

It is important to talk to your accountant, particularly if you intend to sell or license your IP.

Australian Accounting Standards

There is currently no Australian Accounting Standard that comprehensively addresses the accounting treatment of IP in Australia. The most relevant accounting standards include:

AASB 1010: Recoverable Amount of Non-Current Assets
AASB 1011: Accounting for Research and Development Costs
AASB 1013: Accounting for Goodwill
AASB 1015: Accounting for the Acquisition of Assets
AASB 1021: Depreciation of Non-Current Assets
AASB 1041: Revaluation of Non-Current Assets
Accounting Interpretation AI1: Amortisation of Identifiable Intangible Assets.

Being a non-current asset, IP may be measured, subsequent to initial recognition, on either the cost basis (where AASB1010 applies), or the fair value basis (in which case AASB1041 applies).

Choosing a method

Once a revaluation method is chosen for IP, the entity can only revert to cost in extremely limited circumstances, and the revaluations must be undertaken with sufficient regularity to ensure the carrying amount does not differ materially from the fair value at each reporting period.

Assets must still be depreciated even where they have been revalued. In cases where asset values are increased, this will result in a higher depreciation expense.

International accounting treatment of intangible assets

International Accounting Standards (IAS) require that intangible assets such as IP purchased as part of a business combination be based on their fair values at the date of acquisition.

If an intangible asset cannot be reliably measured then it will be accounted for as part of goodwill.

IAS 38 defines the benchmark treatment for measurement is the cost less accumulated amortisation and any accumulated impairment loss.

IAS 36 requires intangible assets to be reviewed for impairment according to the Standard. Only identifiable intangible assets can be revalued.

This must be done according to an 'active market' and once done, the company is required to make regular revaluations.

Useful life

IAS 22 and IAS 38 require that the intangible assets be amortised on a systematic basis over the best estimate of their useful life, assumed to not exceed 20 years. Intangible assets can have greater useful lives, however, IAS do not permit an indefinite useful life.

US Financial Accounting Standards Board

The United States Financial Accounting Standards Board (FASB) recognises intangible assets separately from goodwill in a business combination.

Under FASB 142, goodwill and intangible assets with indefinite lives are no longer amortised but are reviewed annually, or more frequently if impairment indicators arise, for impairment.