Intangible Asset is croupier’s delight.

Extract from the Book Titled: Inactivity based Cost Management; with the sub-title: Measurement of Governance, Ethical & Fiscal Responsibility and Accountability

1995: Exposure Draft: Intangible Assets

The year 1995 saw the introduction of exposure draft E50 for Intangible Assets. The stage was set to adopt new policies on changing industrial scene. When IAS 9 Accounting for R&D activities was introduced in 1977, the emphasis was on products leaning towards blue-collared employment oriented industries. In 1995 when the demand for a fresh look had arisen the emphasis had shifted considerably towards brand, computer software, copyrights, patents etc. During the discussion stage of the Exposure Draft E50 the emphasis was evident: i. the recognition of brands as an asset, which covers such fundamental problems as the definition of intangible assets, and the principles governing the recognition of brands including those that are developed internally and, ii. Initial measurement of brand, [Ref. 14] were emphasized.

The exposure draft defined Intangible Assets as: Identifiable, non-monetary assets without physical substance. Whereas Continental European countries defined the same as: Fixed assets other than tangibles or financial.[Ref. 15]By contrast, in France, the General Accounting Plan (Plan comptable general – PCG) 1982 (CNC, 1986: I.33) defines intangible assets as being fixed assets other than tangible or financial assets – a fixed asset being defined as an asset acquired for long term use in the operation of the business. Therefore, intangible assets are only recognized by comparison with tangible assets, which correspond to real rights over tangible objects. [Ref. 16] However the purpose was very obvious: The characterization of intangibles as assets is a necessary preliminary step leading to the examination whether brands can be recognized in the Balance Sheet.[Ref. 17] In August 1997 IASC modified E50 that was re-exposed as Exposure Draft E59 Intangible Assets. Finally IAS 38 Intangible Assets was published in Sep 1998. This was a watershed definition to the role of governing bodies of the accounting profession.

Definition: Intangible Asset: An identifiable non-monetary asset without physical substance. Further IAS 38 defines identifiability and recognition criteria. The urgency of the industry to recognize intangible assets was quite palpable in the changing scenario.

However year 1995 could be termed as the year of Windows 95 and Nick Leesons. The tussle between technology and technology had begun, for good or bad. During the year there were disturbing reports on brand related IPOs with several warnings filed with SEC but hidden from private placement memorandum. Offshore tax havens were used liberally to establish companies without disclosing the ownership information while filing the court papers. Chilling statement from World economy and Social Survey 1995: “Traditionally, the major financial intermediaries have been fractional – reserve banks and thrifts, whose assets and liabilities are, except in bankruptcy, redeemable at par. The assets and liabilities are not directly traded on secondary markets and hence are not ‘marked to market‘. In other words, the ‘prices’ of loans and deposits on the banks’ books are always at par, notwithstanding interest rate changes. When the financial markets are important sources of funds, however, the story can be different. If the market interprets the monetary easing as inflationary, the prices of bonds and notes fall and the yield on credit from the market does not, or not as much as the cost of bank credit. If the market’s share of total finance were small, this would not matter: but traditional par-value banking is gradually being eclipsed by the so-called share of ‘mutual fund’ banking which deals only in securitized assets. Such market intermediation has grown especially rapidly in the United States.[Ref. 18]

The erosion of Balance Sheet assets had already begun in 1995.

During the discussion stage of E50 [Intangible Assets], brand value being used as a tangible asset was quite apparent. Because of this importance of brands for the economic development of certain businesses, the accounting treatment of brands has been a matter of debate and controversy in many countries, such as Australia and the United Kingdom for instance, where companies, such as Grand Metropolitan and Rank Hovis McDougall, decided in 1988 to include the value of brand names, either purchased or internally developed, in their consolidated Balance Sheets.[Ref. 19] It shall be noted that it was seven years before the use of intangible asset in a Balance Sheet that the exposure draft E50 was released for inclusion in the IAS standards!

The definition therefore becomes a crucial aspect of Governance.

1. IAS 38 defines all the terms such as useful life, asset, amortization etc. as they all are in business parlance at the time of publication, excepting one, named ‘intangible’. Nowhere one could find any attempt to define the term ‘intangible’. Asset is a tangible item with specific useful life attached to it. But the very term intangible means ageless. Maybe they wanted to use invisible but used intangible instead.

2. Intangible asset is an oxymoron.

3. Intangible asset was the first licensed clearance for breaking the age-old par-value banking. Mutual funds were to invest in “tangible asset based vehicles” but they started investing in companies, which had more intangible packaged assets that had inflated value in every step of the value chain.

4. There was an urgent need to assess the future economic benefits of such assets that IAS 36 Impairment of Assets [An asset is impaired when its carrying amount exceeds its recoverable amount.] was published on the same date 1st July 1999 as IAS 38 Intangible Assets.

References marked above:

[Ref. 14] Accounting for brands in ED50 of IASC [Intangible Assets] compared with French and German practices – An illustration of the difficulty of International harmonization.; For Presentation at the 19th Annual Congress of the European Accounting Association Bergen, Norway, May 2-4, 1996; Dr. HerveAÅãL Stolowy and Dr. Axel Haller page 3

[Ref. 15] Ibid page 10

[Ref. 16] Ibid page 10

[Ref. 17] Ibid page 9

[Ref. 18] E/1995/50/ ST/ESA/243: Department for Economic and Social Information and Policy Analysis: World Economic and Social Survey,1995: United Nations, New York. page 62-63

[Ref. 19] Accounting for brands in ED50 of IASC [Intangible Assets] compared with French and German practices – An illustration of the difficulty of International harmonization.; For Presentation at the 19th  Annual Congress of the European Accounting Association Bergen, Norway, May 2-4, 1996; Dr. HerveAチ‹L Stolowy and Dr. Axel Haller page 7

Jayaraman Rajah Iyer

Kodaikanal, India

Twitter: @jayaribcm
Author of Inactivity Based Cost Management:


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