Intangible Asset Essay

ABSTRACT The purpose of this study is to examine several issues when dealing with intangible assets. By means secondary research, relevant evidence from many sources was selected, evaluated and organized into three main points, which are research and development cost, brand valuation and the risk of intangible asset in financial statement in relation with market and book value. The evidence includes statistical data and expert opinion. The research results that intangible assets give a significant impact to the company if they are not measuring appropriately based on the accounting standards. Based on these findings, it is argued that intangible asset would affect company’s performance if there are misjudgments in the valuing of these assets. Introduction Financial statement has a significant role in businesses system in due to transparency of company’s financial position in the businesses environment. The purpose of financial report is to give important information about any changes in company’s performance that is useful for a wide range of users in making decision making in order to make investment in that particular company. According to FASB that is stated in Canibano, Garcia-Ayuso, & Sanchez (2000, p.102), financial statement should provide a useful information that will benefit to any potential investors and creditors to make further investment, credit and similar decision. Therefore, any event that will affect company’s performance either present or future should be presented in this annual report. During last 20 years, expansion in technology, economic system and people knowledge have brought many changes in businesses environment which increase the use of media due to more competition between companies a nd company’s feasibility in the future. Due all these changes as stated in Canibano, Garcia-Ayuso, & Sanchez (2000, p.102) the resource of wealth and future economic benefit is not from material production or tangible asset but from investing and management of intangible asset. As defined in paragraph 8 of AASB 138 that is noted in Picker et al (2006, p. 313) intangible asset is â€Å"an identifiable non monetary asset without physical substance†. There are two main forms of intangible asset, first legal intangible such as trademark, patent, brand  and other thing that defendable in the court and the second one is competitive intangible such as knowledge activities and other activities that have a direct impact and effectiveness to company’s performance (Wikipedia, 2010, accessed 15/05/10). Intangible asset is one of accounts that should present in the financial statement; this is however, by putting intangible assets in the financial statement, this report would be less informative because they raise the difficulties of estimation of market value and book value which can affect the company’s performance. It can be argued that there are some issues that arise when dealing with internally generated assets. Therefore, in this essay the author will discuss possible issues that can arise in intangible asset such as research and development cost, brand valuation and the risk of intangible assets in financial report in relation with market and book value. R&D cost In order to expand intangible asset, companies need to spend more money in research and development (R&D) due to market competition to get more profit. This expense is relatively expensive and continuous until the firms can find a new finding in intangible asset that can improve company’s performance. This statement is strengthened by Canibano, Garcia-Ayuso, & Sanchez (2000, pp.108-109) argument which states that between R&D and future economic benefit had not been confirmed thoroughly because there were no confirmation that can be found in relation with expanding research and development a new product can lead future improvement in the company’s performance. Changes in the R&D can cause a divergences between profit each year and also enlarge the difference between cash flow that is actually generated by firms and profit that is stated in financial statement because a new product of the research is about to be commenced and generated revenue later (Wrigley, 2008, p.258) . Furthermore, in determining research and development cost, this activity will lead to greater amount of expense in balance because when any spending for research incurred, it will be recorded as expense and it will affect company’s performance which can be a huge disadvantages for companies. If there are more expense that company generates as a result of research and development in one accounting period, it will decrease value of profit which lead to a negative expectation to investors because the investors will start to doubt with the company’s  performance if they see more expenses than profit during the year. An example arises from Sigma Pharmaceuticals Limited (SIP) that was developing a new product that have a purpose to measure carbon gas emission in order safe the environment (Sigma Pharmaceuticals Limited 2009, p.5). Based on SIP summary of complex accounting policy, R&D cost would be capitalised if the research bring a future economic benefit or can be sold to other parties (Sigma Pharmaceuticals Limited 2009, p. 54). This means that SIP would spend a lot of money to make this research success and able to generate profit but it is more expense would be generated during this research that has possibility to reduce the profit in that year. Another significant example is from Rolls-Royce Company, â€Å"in 1960’s because of R&D expenditures Rolls-Royce Company couldn’t make profit† (Yardimcioglu 2008, p.91). This explanation can be conclude that even companies increase their research and development to find a new intangible asset such as patents that have expectation to bring more profit to the particular corporation, the firms still do not have control to this expectation because of uncertainty in the future economic benefit. It also gives negative impact to firm’s performance in investing activities because it will affect the investors’ confidence to put their investment in a particular company’s. Brand valuation Brand valuation has appeared as issues that arise from measuring intangible asset in financial report of companies. This is because of the deficient of perceptive and evaluation from accounting standard in measuring brand in a firm that mostly lead to uncertainties between goodwill and other intangible assets. Brand can be defined as a unique symbol or trade mark that is used to identify goods and services differently from its competitors (Tollington, 1998, p.180). The problem that occurs from brand as intangible asset is from useful life of it because brand does not have a fixed life which can lead to misjudge of indefinite and definite life of other intangible asset (Seetharaman et al, 2001, p.247). Another problem that arises from brand measurement is the difficulties of prediction in maintaining the value of brands in a period of time, for example, well known brand like Ferrari, Marlboro and Coca Cola mostly have a stable value if compare with forgotten brand that may have less v alue (Seetharaman et al, 2001, p.247). In the most case, it has been debated that the value of brand asset could be measured  appropriately because in order to evaluate brand value, the company will use relief from royalty. However, Royalty rate is not always available and often the rate used is based on the company’s decision rather than reliable source in that particular company. If the royalty rate is too high, it could be destroy the company’s profit that could earn (Sinclair & Keller, 2007, accessed 16/05/10). Risk in financial statement. Intangible asset that takes a place in financial statement would create significant risk in relation with company’s performance. This is because the values of intangible assets have not exhibited in the financial report due to lack of measurement on intangible asset such as trademark, knowledge of employees and development of technology. An example of the risk that is reflecting the difficulties of measuring intangible asset value is from Nokia Corporation. According to the data from Yardimcioglu (2008, p.91), financial position that stated on financial statement in 1999 was US$11 billion of total asset, liabilities were US$5.3 billion and residual cost US$5.7. In 2000, Nokia’s market value was US$190 billion and made US$183 billion differences between book value and market value, and this differences arise because intangible asset that Nokia possessed. This difference should be stated in the financial statement, but after one year Nokia’s market value has decrea sed to US$97 billion and if the difference of market and book value was stated in the financial position, Nokia would lose profit by US$86 billion. Another example of the risk of intangible asset in financial statement is Rolls Royce Company; this company has suffered a loss in 1960’s that lead to serious financial issues because of transference of more sources to R&D process (Yardimcioglu, 2008, p.91). Based on these two examples, measuring intangible asset is quite difficult because â€Å",,, it is impossible to supply the deficiency between book value and market value in consequence of taking the intangible assets into financial statements (Yardimcioglu, 2008, p.91). In conclusion, there are some issues that arise from valuing of intangible asset in a corporation. This issue is including uncertainty of research and development cost that still cannot be ascertained to make future economic benefits, brand valuation because inadequate measurement for this intangible assets and the risk of putting intangible asset in financial report. Companies should do some actions to  solve this problem that might be useful for company’s management or even for investors who are willing to invest their money to the company. First, maximise the use of intellectual property by expanding only small proportion of patents. Second, introduce a new product to the market that will possibly generate an innovation and third, technologies involvement (Hand & Lev, 2003, pp. 511-512). References Canibano, L, Garcia-Ayuso & Sanchez, P 2000, â€Å"Accounting for Intangible: A Literature Review, Journal of Accounting Literature, vol.19, pp.102-130. Hand, J, R, M & Lev, B 2003, Intangible assets: values, measures, and risks, Oxford University Press, London, accessed 14/05/2010, http://books.google.com.au/books?id=RmFLUk7NydQC&printsec=frontcover&dq=intangible+assets&source=bl&ots=1QtSgbhUPK&sig=Nsy8mguyyw6tV8-FUAqpWi6pzVw&hl=en&ei=jNfsS96tM47U7APH_tiMBg&sa=X&oi=book_result&ct=result&resnum=7&ved=0CDoQ6AEwBg#v=onepage&q&f=false Picker, R, Leo, K, Alfredson, K, Pacter, P & Wise, V 2006, Australian Accounting Standards, John Wiley & Sons, Queensland, Austalia, Seetharaman, A, Azlan Bin Mohd Nadzir, Z & Gunalan, S 2001, â€Å"A Conceptual Study on Brand Valuation†, Journal of Product & Brand Management, vol.10, no.4, pp.243-256. Sigma Pharmaceuticals Limited 2009, Annual Report 2008-2009, accessed 14/05/2010, http://sigma.ice4.interactiveinvestor.com.au/Sigma0901/Annual%20Re port/EN/body.aspx?z=1&p=-1&v=2&uid= Sinclair, R & Keller, K, L 2007, â€Å"Determination of Fair Value of Intangible Assets for IFRS Reporting Purposes†, International Valuation Standards Committee (IVSC), pp.1-6, accessed 14/05/2010, http://www.ivsc.org/pubs/comment/intangibleassets/06_keller.pdf Tollington, T 1998, â€Å"Brands: the asset definition and recognition test, Journal of Product & Brand Management, vol. 7, no. 3, pp. 180-192. Wikipedia 2010, Intangible Asset, accessed 14/05/2010, http://en.wikipedia.org/wiki/Intangible_asset Wrigley, J 2008, â€Å"Discussion of ‘What financial and non-financial information on intangibles is value-relevant? A review of the evidence†, Accounting and Business Research, vol.38, no.3, pp.257-260. Yardimcioglu, M 2008, â€Å"The Risk of Intangible