by Michael Parrington, February 2013
Do increasingly harmonised international accounting standards provide enterprises with improved scope to recognise and value their intangible assets?
Introduction
Intangible Assets are becoming the dominant means for creating value at the modern enterprise.[1] Open any modern day textbook on business strategy and a focus on competitive advantage is evident. However, rather than only concentrating on financial capital or physical resources such as buildings, equipment, manufacturing facilities, or finished goods, instead strategy focuses on investments in non-physical intangible assets derived from human capital, social capital and organisational capital.[2]
Enterprises will develop investment strategies to obtain these physical and non-physical assets, with the expectation of growth and future income. An enterprise can achieve this through organic growth and creation of internally generated assets or by acquisition of another entities assets. It is suggested that the chance of enterprise success is equal with either growth or acquisition strategies, and that the typically large enterprise derives 30% of its income through acquisition.[3] Therefore, the typical enterprise includes intangible assets that are both internally generated and acquisition derived.
Today’s enterprise has intangible assets that account for more than two thirds of their value.[4] In fact in 2007 the S&P500’s value was derived from firms with an average of 85% in intangible assets, which had grown significantly from 38% in 1982.[5] This trend of an increasing proportion of enterprise assets being non-physically derived intangible assets seems set to continue as more businesses look to intellectual property professionals to create new products and services. Many of these new intellectual property products and services will be from industries that don’t exist today.
Accounting is the method used for representing business enterprise activities in monetary terms, so that an interested party can make informed decisions regarding the enterprises current, historical, and future potential performance. These figures are normally represented in a balance sheet, income statement, and cash flow statement, where the balance sheet is supposed to represent the assets that the firm owns against the liabilities (debt) and shareholders’ equity of the enterprise.
Modern balance sheets can display a large disparity between the book value and the market value of an enterprise.[6] It is perhaps concerning to note that even with the knowledge that an increasing proportion of value being derived from intangible assets, that there are still as much as 49% of enterprise value that is not captured and remains unrecorded on the balance sheet.[7] This can be due to a number of factors, such as depreciation and inflation, misrepresenting long held tangible assets below market price or fair value,[8] but is also due to the non-representation of intangible assets on the balance sheet. However, others propose an opposing viewpoint and have suggested that the balance sheet is in reality only a record of enterprise cost and not value, and should be left as such.[9]
With the understanding that intangible assets are important comes the realisation that in order to be recognised, an asset must have and be able to demonstrate a value for its owner. That is to say if an asset is to appear on an enterprise balance sheet, or form the basis of a legal damages or compensation, then it must be represented in a monetary term in a similar way to that of a tangible assets such as buildings. Moreover, not only should these intangible assets demonstrate a value, that value should be a fair, reasonable and realistic value. However, the realisation of such a value of an intangible asset is not a simple task and is open to considerable disparity due to reasoning for valuations, valuation methodologies, skill of valuation professionals, regulatory provisions, and case law.
Accounting standards are developed to improve the quality of financial information available to stakeholders of an organisation as well as improve the comparability between enterprises, by regulating the methods and criteria for identity, recognition, valuation, and ongoing disclosure in an enterprise accounts. With many enterprises currently operating, or seeking to operate beyond their own national borders, the creation of unified standards, by the harmonisation of national standards with international standards, seems sensible if it offers improved financial information to stakeholders and economic benefits to enterprises.
This paper aims to show the basic principles that exist today in regards to the identifying, valuing and disclosure of intangible assets and to highlight some of the relevant standards and what they mean in regards to accounting, as well as identifying some key elements to improve the scope for enterprises to recognise and value their intangible assets.
Background
To help with a general understanding and provide an appropriate starting point it is important to consider how, in basic terms, an enterprise reports its assets, and the meaning and linkage between value, assets and property. According to the Blacks Law Dictionary the definition of ‘value’ is ‘the monetary worth or price of something; the amount of goods, services or money that something commands in exchange’.[10] An ‘asset’ is defined as ‘a thing or person of use or value’,[11] and ‘property’ is defined as ‘the right to possess, use, and enjoy a determinate thing (either a tract of land or chattel); a bundle of rights’,[12] or ‘any external thing over which the rights of possession, use, and enjoyment are exercised’.[13]
The point of looking at these three definitions is to note that the terms are inextricably linked. That is to say in order for an enterprise to recognise an asset, there must firstly be rights of ownership (property) in the asset, and secondly it must be able to prove a definite value. Another important point to note is in regards to the nature of an exchange, which represents a point in time, or to ensure that it is clearly understood, value is relevant to a particular point in time, and therefore the value of an asset is constantly changing.
According to accounting theory the method for an enterprise representing its assets and the claims against those assets (liabilities and shareholders equity) is the balance sheet, where
Assets = Liabilities + Shareholders’ Equity
In this way, accountants record the owned assets on an asset register that also assigns to each item a value at a point in time, which is commonly the end of an accounting period.[14] Against this a list of the liabilities, or requirements for the firm to pay money owing out, is also tabulated and a total sum is arrived at. The shareholders’ equity is simply the difference between the sums of the recorded assets less the sum of the liabilities owing.
The relevance of this equation is where assets are not represented in the balance sheet and only represented ‘off balance sheet’. ‘Off balance sheet’ value could include value that has been written down by depreciation, appreciation of assets that are only recorded at cost, as well as those of non-represented intangible assets.[15] In this case it can be assumed that if the ‘off balance sheet’ assets were represented on the balance sheet then the total value of assets would increase, without the sum of liabilities increasing, which should increase the value of shareholders’ equity, such is the nature of the double entry accounting system. Therefore, due to ‘off balance sheet’ assets, the true value of the enterprise may not be represented correctly in the balance sheet.
Interested parties, such as investors or shareholders, should understand that due to items such as ‘off balance sheet’ assets, a disparity exists between the book value and market value of an enterprise. The easiest demonstration of this is with enterprises traded on the active stock markets. Here the market capitalisation of an enterprise will show an estimation of the total value of equity, by calculating the outstanding shares owned by the current market price of those shares. It is very relevant that the outstanding shares will have been sold by the enterprise during its public offerings at a different figure to the current market value of those shares, and that recorded book value figure will be in balance with the recorded asset values against recorded liabilities. In other words the market capitalisation only indicates the market expectation of the asset portfolio of the enterprise, it does not change the actual balance sheet of the enterprise.
Of course not all enterprises are publically traded, and the reason for understanding the value of an asset may not only be for investment purposes. There can be numerous reasons that valuations are completed on enterprise owned assets, which can include valuation for damages in litigation cases, a framework for understanding the potential value of intellectual property prior to commercialisation, the structuring of holding companies for tax purposes, allocations of business units for employee bonus schemes, and valuations for identifying assets for sale, to name but a few.[16] The type of value that is considered is therefore dependant on the reason and type of appraisal that needs to be performed and to what means that valuation will be used.
What are Intangible Assets?
It is reasonable to assume that the reader of this paper understands the concept of tangible assets and monetary fund assets. If you can see it and/or touch it then it exists and it is intuitively understood that a value can be attributed to it, but when an item isn’t able to be seen and/or touched the realisation of value is not so intuitive. This is perhaps why International Accounting Standards Board (‘IASB’) defines an intangible asset as an ‘identifiable non-monetary asset without physical substance’.[17] Therefore the first component in valuing an intangible asset for representation on a balance sheet or for other purposes is to conceptually understand what can be deemed to be an intangible asset, so as to identify it.
According to the resource view of an enterprise its intangible assets, or intellectual capital, is sourced from human capital, social capital and organisational capital.[18] In compliment of the tangible financial resources owned by the business, a strategic business leader will think in terms of using these intangible resources to develop strategies for creating differentiated products and services that will bring value to the business entity, some of which will become recognised as intellectual assets. This is to suggest that the enterprises resources are co-dependent and innovation is the key to the creation of intangible assets.
Human capital, as the name suggests, is based on the people working at the enterprise, and is derived from the knowledge, experience and skill of those individuals.[19] The people who work at the firm will ultimately create, develop and manage products and services that will generate value for the enterprise.
Social capital includes the relationships that the business entity has with its networks and stakeholders, especially those from external individuals and business entities. The premise is that very few enterprises have the necessary resources to function independently and rely on relationships with its supply chain to enable differentiation. Customer relationships are obviously pivotal to value creation.[20]
Organisational capital is sometimes referred to as structural capital. It is the genesis of enabling the workforce to develop the opportunities to create value for the enterprise.[21] At the highest level it is based on the values and beliefs of the enterprise leaders and how their beliefs trickle down to create an organisational structure enabling the human capital to utilise its knowledge.[22] For example if the culture of the enterprise is to grow through the support of innovation then organisational resources will be afforded to projects that can develop intellectual assets.
From this base of human, social and organisational capital, and when specific knowledge can be clearly identified, described, can be shown to create or generate value, is owned by the enterprise, and is capable of being sold or transferred to an alternative business entity, then it can be described as an intangible asset. These owned intangible assets are normally defined by contractual legal rights, non-contractual relationships, intellectual property, or as goodwill.[23]
Contractual legal rights are written agreements that are in place between parties. There are many and varied types of contracts that can form the basis from which to generate income or create cost savings for an enterprise, either individually or in combination with other assets, and in this way show a value that is separable.[24]
Non-contractual relationships are akin to that described by the resource view as social capital, and are more difficult to separate. However, relationships can be very valuable to an enterprise, and some enterprises will pay handsomely to acquire and leverage synergistic relationships. For example recently there has been a focus on high quality talent, and some businesses have been acquired just to take advantage of the existing workforce.[25]
Intellectual property is perhaps the most important and easily understood of the intangible assets in the modern economy, and is created by legal rights that provide the owner with a ‘monopoly right for certain types of imaginary property’.[26] Four different but related categories and associated rights for intellectual property exists: patents, copyrights, trademarks, and trade secrets.
Goodwill has been very difficult to define in any exacting terms and it is said that many have differing views on any accurate description. Goodwill is perhaps best described as an earnings potential that is manifested as value that can-not be accounted for by all of the separable assets, intangible and tangible. For example goodwill might represent high market share, high profitability, positive reputation.[27]
An important point to note is that, by their very nature, each intangible asset is distinctive, and it is has been suggested that the value of an intangible asset is in part gained from how it is differentiated from other intangible assets of a similar type.[28] This is of course perfectly consistent with the business strategic approach, which is to use differentiation in order to gain competitive advantage, and is why intangible assets are valuable to enterprises.
Valuation methods
‘The raison d’etre of business assets is to provide a return on the investment required to obtain and assemble them… the greater the return, the greater should be the assets value’.[29] The purpose of the valuation is therefore to discover the value of the asset by quantifying the return to the business. The accepted methods for calculation of intangible asset values are therefore consistent with those of general financial theory, and fall into three categories: cost method, market method, and income method.
The cost method is based on the premise of assessing the cost of an intangible asset by measuring the value of a substitute asset, and falls broadly into two sub categories of reproduction cost or replacement cost. The concepts of functionality, being the ability to perform the same task, and utility, being the ability to provide an equivalent benefit, are important considerations for a valuation expert in both of the cost valuation methods.[30]
Reproduction cost is understood to be the current cost to make an exact duplicate of the existing asset,[31] for example making an exact copy of an existing building. In this way the replica offers the same functionality and utility as the existing asset. However, and as mentioned earlier, intangible assets are distinctive and so the reproduction cost method is rarely used, with replacement cost usually being the most appropriate method.[32]
Replacement cost is the current price to recreate an asset that provides the same utility as the existing asset.[33] The valuation appraiser would need to be aware that modern methods, materials and design may actually mean that a replacement could provide greater utility than the asset it is replacing, and that this should be taken into account when arriving at a valuation figure.[34] At the same time it is important to factor in the changes to value apparent due to remaining useful life and how this can affect the current value of the asset.
In assessing the cost of creating an intangible asset it is also important to capture not only the obvious attributable costs such as labour and materials, but also the indirect costs and benefits of ownership of the asset. These indirect costs can be apparent from the remaining useful life, i.e. interest on capital invested.[35]
The benefit of the cost method is that it is easy to assess and collect relevant figures, and with good accuracy. However, its major pitfall as a valuation method is that it fails to capture the future benefits that might be realisable.[36] Because of its pitfalls, the cost method is usually recommended as a check of values arrived at by alternative methods, but is also seen as the determinant of value that a shrewd investor would pay as a maximum for an asset.[37]
The market method is discovering the price according to the Keynesian economic model, or where the demand and supply meet.[38] In this way it is based on multiple recent historical transaction prices that have been paid for assets. To use this method effectively requires there to be an active market where there are multiple willing sellers and purchasers, so that the asset price can be clearly identified.[39]
Where active markets exist the market method will produce the most accurate price for an asset, and is therefore in those circumstances it is the best method for valuing an asset.[40] However, intangible assets generally do not fit directly into this category of an active market, and as such appraisers normally seek to use comparable assets that are readily traded as a benchmark for the valuation. This may seem straight forward, and there are many active public databases that can provide guidance for similar assets,[41] especially for those assets bonded by similar royalty structures. In reality as the intangible asset becomes more unique the likelihood of finding a similar asset to benchmark becomes less likely. Moreover, where this comparable asset method is used the valuation appraiser must make adjustments for the differences, which can be exacerbated especially when the intangible asset forms part of a ‘business combination’.[42] For example when valuing a business combination the valuation expert may look to the sale of a comparable company to see what the factor for price-earnings was in that transaction and use this as the basis for valuation, or for publically traded companies use the stock price.[43] Being able to justify the reasoning behind the comparable is pertinent if it is to be used.
The income method is the method preferred for asset valuation by the financial specialists as it seeks to discover the value of investments being made today through analysis and understanding of the future benefits and costs associated with that investment. From an enterprise strategic position the income method is used for capital budgeting and qualification of a project in financial terms, where management teams analyse the future benefits against risks so as to decide whether a project is worthwhile pursuing.[44] The common technique used by enterprises is discounted cash flow modelling, and it is also a method utilised by valuation appraisers for discovery of asset value.
Discounted cash flow is based on the premise of incremental income, the time-value of money, and the risk versus return trade-off. Effectively it is the discovery of the incremental cash flows that will occur due to ownership of the intangible asset versus those that would be achieved without the intangible asset, and where those future incremental cash flows are tempered by the discounting for risk.[45]
Incremental cash flows require a detailed discovery process to arrive at a projected income statement, or future sum of money, for the life of the intangible asset.[46] The calculation of the incremental cash flows is only for those cash flows that would not have occurred or be apparent if the intangible asset did not exist or was not utilised. This tends to require a detailed understanding of the business together with detailed and supported business plans, normally developed through a capital budgeting process. However, in some cases cash flows can be discovered more easily, for example where a company licenses out a technology and can be benchmarked. In this case the relief from royalty model, where estimations are made of the royalty that does not have to be paid for use of a technology due to ownership, can be utilised.[47]
To this stage the future sum is calculated without risk being accounted for, but in reality each project carries risks to varying degrees. Enterprise and relevant project risk can come from many and varied sources,[48] but it is easy to understand that the chances of future income being realised from a contracted license for use of technology, or a building, is less risky than that of a project for a new technology that has just applied for patents. The risk that is specifically relative to a project is taken into account through what is known as discounting relative assumptions made to arrive at the risk-adjusted discount rate. In simple terms discounting is the reverse of compound interest.[49]
The risk-adjusted discount rate seeks to assist in discovering the present value of a future sum by adjusting the cash flows for inflation, uncertainty as to whether or not the cash flows will be achieved, and the opportunity cost against an alternative investment.[50] There are various ways to arrive at a relevant risk-adjusted discount rate, with the most common being the application of a risk premium specific to for the intangible asset project, being added to the weighted average cost of capital relevant to the enterprise.[51] Problems associated with this are that the capital asset pricing model assumes a diversified portfolio, which assumes no unsystematic risk,[52] and thus it has little relevance if valuing an individual asset. Moreover the current methodology to arrive at a risk premium for intangible assets is open to significant individual assumptions due to little theoretical guidance.[53]
The other issue with discounting is that it does not account for the variation of risk over the life of an intangible asset. For example a pending patent recently applied for may be a highly risky investment requiring a very high-risk premium to be applied to its projected cash flows. However, that same patent two years later may have been granted a full patent right and so its risk premium would be significantly lower. Of course management could also decide not to continue with a patent application if they discover alternative technologies offering similar utility, or if the patent is relatively weak in giving a monopoly. There are various methods that have been used to try and capture this variation in risk over time and make appropriate variations to the relevant risk premium in different periods or to different decisions, such as decision tree’s and real options. However, these methods still provide significant margin for error in terms of the decisions that can be made as situations change and accordingly to the valuation of intangible assets, and add vast complexity.[54] Decision trees and real options are perhaps more as a benefit to strategic and business planning and capital budgeting rather than valuation.[55]
The income method is detailed and normally requires specialised financial knowledge to use effectively. The important point to derive in regards to valuation from the overview of the income method is that it is subject to significant variation depending on the assumptions that are made by the people predicting the incremental cash flows and risk premiums. In terms of the valuation of intangible assets this perhaps is clearly demonstrated by an understanding of the risk-return trade off and standard distribution, that being the risk of success is in general similar to the risk of failure, which can create a significant disparity between the valuation today and the realised valuation.
Standards Overview
After understanding what can be deemed an intellectual asset, how they might be valued, and how they are represented in an enterprise balance sheet, it would seem that recognition of those assets by an organisation would follow a simple three-stage process to: identify the intellectual assets owned by the enterprise; appraise the value of those assets; and disclose to balance sheet. Whilst this may be true in part, the actual ability to follow this process is governed by accounting standards, legal statutory requirements and those requirements developed through case law.
There are generally three levels of standards that are developed relevant to accounting and valuation, these are regulatory standards, legal-guidance standards and self-regulatory standards. In Australia the regulatory standards are legislated by the AASB, which is a government agency under the Australian Securities and Investments Commission Act 2001 (Cth).[56] The primary responsibility for the AASB under the Act is to formulate accounting standards under s334 of the Corporations Act 2001 (Cth).[57] In the USA, and in a similar way to the AASB, the Financial Accounting Standards Board (‘FASB’) develop accounting standards for the private sector, that are recognised as authoritative by the statutory body of the Securities and Investments Commission (‘SEC’) who have that power invested in them by the Securities Exchange Act of 1934.[58] Other nations have similar systems.
Relevantly, the AASB are also assigned to work with other similar nations agencies to converge national standards with international standards so as to ‘develop a single set of accounting standards for worldwide use’.[59] In line with the development of a common accounting standard, the AASB has been working to integrate the Australian regulations by making them equivalent to International Financial Reporting Standards (‘IFRS’) that are issued by the International Accounting Standards Board (‘IASB’).[60] This integration has been a requirement since 1 January 2005, although the AASB still retains a number of local standards.
The IASB is an independent standard setting board that works with national agencies ‘to develop a single set of high quality, understandable, enforceable at a local level, and globally accepted financial reporting standards based upon clearly articulated principles’.[61] There are close to 120 countries that are currently using the standards, including Australia, Canada, Brasil and the European Union countries.[62] It is also suggested that the United States of America (‘US’) and Japan will integrate the IFRS standards and decide on obligatory requirements for companies in the near future.[63] However, in the US there is resistance to move away from the Generally Accepted Accounting Principles (‘GAAP’) as these GAAP standards are precise and understood,[64] even though foreign entities with operations in the US can file accounts with the SEC based on IFRS principles.
The guidance standards in Australia those are provided by the Australian Securities and Investments Corporation (‘ASIC’) as a recommended procedure according to their interpretation of the law, which if followed should to prevent them exercising their legislative power. In other jurisdictions these types of standards may require a detailed understanding of how to interpret statutory provisions and case law.
Self-regulatory standards are those that are created by expert organisations such as the Accounting and Professional Standards Board (‘APESB’), American Institute of Certified Public Accountants (‘AICPA’) or the International Standards Organisation (‘ISO’). In general the industry experts assist in creating a procedure that is based on best practice. These organisations are not part of government and do not make laws or regulations, however, it is not unusual for these standards to be adopted by government agencies or referenced in case law,[65] and accordingly it is recommended in most instances that these types of standards are followed unless there is good reason not to.
Standards and Identification of Intangible Assets
Returning to the three-stage process, the starting point is the identification of intellectual assets. From strategy, an enterprise will seek to create and increase value through: acquisition or mergers for control of externally owned assets, which are either individual assets or a business combination of multiple assets; organic growth, or the development of internally generated assets; or from a combination of both. This is where a major point of conjecture arises in the current standards for the valuation of intangible assets, as internally generated intangible assets are not accounted for in the same way as acquired intangible assets.
IFRS 3, created by the IASB in conjunction with FASB, and has its equivalent in SFAS 141,[66] was created to set international regulatory standards for the acquisition of assets in business combinations where there is a controlling ownership takeover. In general this standard sets expectations for clear identity of the controlling entity, the date of the transaction, recognition and measurement of the acquired assets, and measurement and recognition of goodwill. In particular intangible assets must be recognised measured at their ‘fair value’ at acquisition date according to the ‘acquisition method’[67] of accounting for business combinations. Further to this goodwill is recognised as the difference between the purchase price and the fair value of the recognised and measured assets and liabilities.[68] Where this difference creates a positive value the amount is recognised as a goodwill asset in the balance sheet, and where this is a negative figure the amount is recognised in the revenue statement.[69]
In Australia, and according to AASB 138, which is directly derived from IAS 38 and will be treated here as the same standard,[70] the first hurdles for an intangible asset to be recognised is that it meets an identification criteria, that being: it meets the definition of an intangible asset; is distinguishable from goodwill; arises from contractual rights, or is capable of being identified separably from the business entity so it could be ‘sold, transferred, licensed, rented or exchanged’.[71] Further to this the criteria for recognition of those intangible assets is that future economic benefits will arise due to that intangible asset, and the asset cost can be identified.[72] However, this is where the requirements of the AASB 138 standard start to display an issue in regards to the potential for recognition by an enterprise, as an intangible asset is always considered to have met the recognition criteria when acquired, either as an individual asset or as part of a business combination, as per IFRS 3 and SFAS 141, but internally generated intangible assets are not so easily recognised. For example IAS 38 prevents the recognition of any internally generated ‘brands, mastheads, publishing titles, customer lists’ and similar items from being recognised as intangible assets.[73] This is in stark contrast to that of similar assets that are acquired according to IFRS 3 or even by the IAS 38 standard.
In regards to internally generated intangible assets IAS 38 prevents any investment from research from being capitalised to the balance sheet,[74] but assuming that an intangible asset can separately identify the research phase from the development stage then IAS 38 requires any spent funds during the development stage to be expensed unless they meet all of six recognition criteria.[75] These recognition criteria require the enterprise to prove that the intangible asset is technically feasible, they intend to use it to derive value and that value will bring future economic benefit, and that they have adequate resources to complete the development.[76] Assuming these six criteria are met the intangible asset can be recognised and capitalised to the balance sheet, together with future expenses.
The situation for US incorporated private firms is more difficult as ASC 350 requires directly attributable costs for internally generated intangible assets to be expensed, unless meeting specific exceptions such as for computer software for sale or use.[77] Both IAS 38 and ASC 350 seem to be divergent from the whole premise of what an intangible asset actually is, that it would require thought and research to create, which incurs costs. Currently this makes it difficult for enterprises to represent their potential for organic growth on the balance sheet.
Even when IAS 38 allows an internally generated intangible asset to be recognised on an enterprise balance sheet, a hypothetically identical intangible asset acquired would be at ‘fair value’[78] whereas the internally generated would be at directly attributable accounting cost.[79] This removes the objective comparability between the assets.
The question that must be proposed is that if one of the purposes of a unified accounting standard is to improve the underlying economics in the balance sheet, better reflect the investment and evaluation of such, and allow comparability between business entities,[80] then how does the recognition of acquired intangible assets on the one hand and non recognition of internally generated intangible assets on the other aid comparability between enterprises? Perhaps the most obvious demonstration of the difference and discrepancy in recognition is in regards to goodwill. Goodwill is an asset according to SAFS 142, and even though it should be deemed an intangible asset according to the definition of an intangible asset, it is not classified as such by IAS 38 and cannot be recognised when it is internally generated. This is in contrast to the standard for acquired goodwill, as this can be recognised on the balance sheet as an asset according to IFRS 3 and SAFS 141. This would seem to remove objective comparability for users of financial information.
Standards and Appraising Value of Intangible Assets
When intangible assets have been identified according to the regulatory standards criteria it means that they are recognised and can appear in the balance sheet. Before appearing on the enterprise balance sheet the intangible assets must first be measured by valuation. The standards for valuation generally fall into two parts, firstly the requirements for accounting purposes, and secondly the requirements for the preparation of the valuation.
IAS 38 has different requirements for accounting for intangible assets depending on the assets source. Internally generated intangible asset should be initially valued only based on the directly attributable costs that meet the recognition criteria.[81] Separately acquired intangible assets must be valued at the actual transaction cost, including those directly attributable costs in having the asset ready for use.[82] It should be noted that the transaction price for a separately acquired intangible assets might have been assisted by asset valuation prior to the transaction, although this is not an absolute requirement. In both of these cases it is reasonable to suggest that this is an easy measurement for an internal accountant to accurately make.
On the other hand IAS 38 is aligned with IFRS 3 and SFAS 141 that separable or grouped intangible assets, purchased as part of a business combination, will be the fair value at acquisition date.[83] From 1st January 2005 the IFRS 13 standard became relevant, which is more aligned with SFAS 157 and ASC 805 in regards to the definition of an intangible asset, where ‘Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants as of the measurement date’.[84]
IFRS 13 is helpful in providing the principle framework with which to arrive at a fair value, through a hierarchy for disclosure. There are three levels to the hierarchy, which is based on the quality of the available data inputs for arriving at the sum, through cost, market or income methods.[85] Level 1 is the best available inputs, i.e. an active market for the direct asset so as to derive market price.[86] Level 2 is similar to that described earlier where comparable assets are used to arrive at a valuation.[87] Level 3 is where inputs of an active market are not available, which allows the enterprise to use its best data in the circumstances to arrive at a valuation.[88]
Fair value at acquisition date requires an expert understanding of valuation principles and methodology and is therefore not such an easy calculation for an internal accountant to measure. Additionally an internal or stakeholder accountant could also be subject to significant bias in arriving at a valuation.[89] Even though the standards note that these valuation can be completed by internal management, providing an orderly transaction suggests a preference for an independent valuation based on thorough methodology, or in short that a valuation expert whom is skilled in the art of intellectual asset valuation.
The art of preparing a valuation is open to personal bias of the valuation expert, as well as the valuation methods used in arriving at the estimated sum being capable of significant disparity.[90] The IFRS and SFAS are based on principle rather than procedure, and there is limited guidance in the in regards to the methodology and inputs that should be used to arrive at the estimation of fair value, and nothing regarding the required details of a suitable valuation report. However, self-regulatory standards organisations such as ISO regarding brand valuation,[91] and AICPA for business and intangible asset valuations,[92] and APES for valuation reports,[93] offer similar approaches to each other and guidance to the correct preparation, to begin to bridge the gap and enable a common approach for intangible assets. These standards are in line with the regulatory standards for valuation approaches, but additionally provide more detailed guidance on the expectation of what valuation inputs (observable and unobservable) should be considered when preparing a valuation, including both the analysis of financial and legal factors. Owing to the importance of the valuation estimation in the realisation of intangible assets on an enterprise balance sheet, it is worthwhile understanding the requirements of an independent valuation appraiser.
The genesis of a valuation report is the engagement of the appraiser by the engagement party, which must detail the scope, purpose, valuation date, standard of value, intended use including restrictions, and type of engagement.[94] The appraiser must ensure that they have no conflict of interest and that there will be sufficient and quality information available for them to complete the valuation report.[95] Assuming that there is sufficient information available, then the appraiser will be able to use their information analysis and valuation skill to arrive at a valuation sum for a valuation report. If there is not sufficient information, or if requested the appraiser may only provide a calculation report which is a more basic document, not necessarily relevant for intangible asset realisation on balance sheets.[96]
The valuation report document provided by the appraiser should include comprehensive details of the information and assumptions used in arriving at a valuation sum.[97] The report should detail any relevant information that may affect the valuation: the type of engagement such as valuation, summary or calculation; sources of information; statements regarding the appraiser, such as independence from engagement party and qualifications; analysis of interest, such as intended use, applicable standard of value, assumptions and considerations; non-financial details such as management team, industry sector, facilities, and economic environment; financial info such as method of valuation, discount rates, financial statements and assumptions; ownership information about the intangible asset, including legal rights; valuation adjustments; and most importantly a conclusion of value.[98]
The self regulatory standards give some good guidance in relation to the data required for financial information, but still stop short of giving a standard procedure for calculations according to the cost, market or income approach, which leaves the valuation open to disparity based on the views and methods of the appraiser.
Highlighted in the above-mentioned regulatory and self-regulatory standards is the recommendation for management to use an independent appraiser, who is an expert in valuation. In Australia the regulatory guide ASIC 112 provides guidance on its statutory legal interpretation of the Corporations Act 2001 (Cth.), and relevant case law interpretations upon the requirement for independence of an expert, where the key criteria are that the expert ‘should be, and appear to be, independent’,[99] and ‘give an opinion that is genuinely its own opinion’,[100] as well as guidance on interaction with interested parties and use of third parties.[101] Brooking J noted the requirement and importance of the expert in Phosphate Co-operative v Shears (No 3)[102]
Unless high [independence] standards are observed by those who prepare these [expert] reports, there is a danger that the systems established for the protection of the investing public will, in fact, operate to their detriment… The experts integrity from baneful influences are essential.[103]
With similar authority, ASIC 111 provides more specific guidance regarding the content of independent expert reports, including: how transactions should be analysed, expert methodologies and assumptions, report requirements, and potential regulatory action. Notably, the standard requires an expert to be just that, as Gyles J noted in Reiffel v ACN 075 839 266 Ltd[104] ‘it is implicit… that such an expert will exercise care, skill and judgement appropriate to the relevant field of expertise in forming and expressing the opinion’.[105]
Without doubt different jurisdictions will have variations on the Australian requirements and local laws should always be taken into consideration when preparing valuation reports.[106] For example in the US some observers believe that the requirement for a skilled expert witness will be an increasing one in litigation in federal and across multiple state jurisdictions.[107] This is derived for the decisions in two key cases. In Daubert v Merrell Dow Pharmaceuticals, Inc.[108] the Court held that the Federal Rules of Evidence, Rule 702, overrode the previous Frye ‘general acceptability’ test for the acceptability of scientific evidence. Here the Court implemented a ‘flexible test’ for the reliability of ‘scientific’ evidence, thereby providing greater scope for the Court in deciding if evidence was valid.[109] This flexible test has since 2011 been added to Rule 702.[110] In Kumho Tire Co., Ltd. v Carmichael[111] the Court extended the reach of the acceptable evidence to include that which was non-scientific as long as it was ‘technical’ and ‘specialised’ knowledge. This so called ‘Daubert Test’ has subsequently also been adopted as precedent by the Canadian Supreme Court in R. v Mohan.[112]
This requirement of an independent expert may not seem to directly affect the ability to represent valued assets on a balance sheet, but may have indirect consequences if not followed, especially if relied upon for future transactional, compliance, litigation or tax purposes. For example evidence of how the common law courts may deal with poor methodologies, even when experts evidence is provided, are seen in Caracci v Commissioner of Inland Revenue (‘CIR’).[113] In this case the CIR had issued excise tax penalty notices to Caracci for incorrect valuation of assets during an ownership change. The Tax Court heard the original case and found in favour of the CIR, even though they dismissed the methodology of the CIR’s expert witness, and came up with their own valuation of the asset at USD 5m supposedly based on the market value of invested capital. The Appeals Court reversed and rendered the Tax Courts decision re-affirming the definition of ‘fair value’ and noting inter alia that the CIR’s expert had made errors due to incorrect selection and application of valuation methodologies used to derive the initial excise notice. The Appeals Court also found that the Tax Court had made its own errors in selection and application of valuation methodologies.[114]
This case additionally demonstrates that unless there is an accepted valuation methodology that becomes a regulatory standard then consistency of application in the courts, especially in multiple jurisdictions, could be subject to variable decisions.
Standards and Disclosure to Balance Sheet
The adjustment of the balance sheet to correctly represent the identified and valued intangible assets is a relatively easy process for any qualified accountant. Other than those items that can be expensed and represented directly on the revenue statement,[115] intangible assets are identified together with their values and added to the assets side of the ledger with either the corresponding reduction in cash reserves, or increase in the liabilities side of the ledger by debt or equity. Thereby maintaining the integrity of accounting theory and balance sheets.
IFRS 3 realises the difficulty of correctly understanding all values in the current accounting period especially if a business combination is acquired immediately prior to the end of an accounting period, and as such adjustments are possible within 12 months of the acquisition date if relevant to the acquisition date.[116] After this period the assets acquired in a business combination are dealt with as a consolidated disclosure with other assets of the owning enterprise.[117]
The more detailed requirement for representation of intangible assets follows their recognition in regards to their carrying amount and the related measurement, useful life, and disclosure. For measurement the enterprise has two choices for each asset or asset group, it can use a traditional physical asset style approach where the asset retains its initial cost less any amortisation or impairment, or alternatively the enterprise can use the revaluation model.[118] The revaluation model allows a periodic update to the fair value of the intangible asset at the date of the revaluation, less and accumulated depreciation or impairment following that valuation.[119] Due to the potential of tax modification there are some strict requirements on revaluations being clearly identified as a positive or negative surplus in equity, but sometimes in the revenue statement as a profit or loss where this eventually affects equity through retained earnings.[120]
The revaluation model perhaps intuitively suits the intangible asset, but as fair value is its primary requirement and the standards require an active market, the cost model is usually the required approach for brands, patents, trademarks and copyrights owing to their unique nature.[121] In regards to fair value IFRS 13 directs that the initial disclosure of value calculation should be according to the level and type of inputs used to arrive at the valuation.[122]
The useful life of an intangible asset is either finite or infinite.[123] The finite asset, for example patents or contracts, is depreciated over its useful life in a diminishing proportional or straight line approach,[124] in much the same way that a piece of industrial equipment would be treated. This is an understanding that the asset value decreases over time due to obsolescence. However, some assets useful lives are described as infinite, such as a Trade Mark or Brand, where the value of the asset is not expected to diminish over time and they are expected to continue similar cash flows. These infinite assets can not be amortised, but must be annually tested for impairment, or if impairment is indicated, although their status can change to finite if this requirement becomes obvious.[125] In both cases the intangible assets must be written off when no future economic benefits are expected to flow to the enterprise.[126]
Disclosure is all about being able to comprehensively explain how the enterprise has accounted for the carrying amounts of each of its intangible assets or classes of intangible assets. Amongst other things IAS 38 requires disclosure on the carrying amount, the measurement method, the useful life, related amortisation methods and impairments, indication of whether the intangibles were internally generated or purchased separately or as part of a business combination, fair value, and details regarding revaluation.[127] In addition to this IAS 27 requires ongoing disclosure in relation to the ownership of intangible assets, where any change must be disclosed with profit or loss on those changes being represented in the revenue statement.[128] IFRS 13 requires additional disclosure in regards to those assets based on fair value, especially where the calculation is based on level 3 inputs. This includes proof of sales, issues and settlements, and relevant profit and loss, and importantly a written sensitivity analysis on how the assumptions on the level 3 inputs may change. Interestingly IAS 38 also encourages disclosure on intangible assets that are not recognised in their standard, which suggests a more detailed requirement for all investments.
It can be seen from an overview of the current standards that there is a more detailed system for the recognition of intangible assets by enterprises, that is: identify, recognise, measure/value, and disclose intangible assets that are owned by the entity, acquired individually or as part of a business combination, or internally generated.
Points on International Harmonisation
The harmonisation of accounting standards on either an international level, such as the IASB and FASB, or national level to the international standards, for example the AASB, or US GAAP with IFRS are based primarily on providing a better and consistent quality of enterprise financial information for comparability and investment decisions by stakeholders. Therefore, the question on intangible assets is a subset of a much larger accounting question.
In regards to accounting there are many detractors who would prefer that standards are not increased or imposed for the comparability between organisations for investment or other purposes. Some argue that active markets already exist for comparison of business enterprises, and this is in the financial markets that constantly price the overall valuation of enterprises according to their market cap. Others argue that this may give a market or fair value for the portfolio of business assets, but still does not give good visibility to individual assets and will, though not on the balance sheet, only appear as a hypothetical overall change in goodwill in comparison to equity. Although in agreement with the market cap principle, it is suggested that rather than have unclear valuations for individual intangible assets, if value is to be recognised on the balance sheet then a default to goodwill is the best answer.[129] However, even the default to goodwill can lead to problems of correct value representation, as it is not subject to the same amortisations as intangible assets, thereby benefitting executives who wish to show the market improved earnings ratio’s.[130] Others argue that speculative items such as intangible assets should not appear on the balance sheet at all.[131] This is because intangibles can loose value very quickly, especially where innovations replace intangible technology assets, or new competitors enter the market, suggesting that including their value on balance sheets leads to overvaluation, with the best solution being the disclosure of the intangible asset but not recording of its value.[132] Some commentators also argue, the methods required to maintain so-called fair value introduces ‘unwanted subjectivity, distorts reported earnings, and greatly increases earnings volatility’.[133]
With these fundamental arguments against standards, an important reason for enterprises to recognise intangible assets returns to business strategy. It is said that most enterprises currently have very poor processes in place for measuring and managing their intangible assets.[134] However, when properly managed intangible assets can lead to competitive advantage, improve market position, increase revenue, and when using this information and communicating it to stakeholders can increase their overall enterprise valuation.[135] In this way harmonising standards can also assist enterprises in creating structures and methods to improve their management and therefore realisation and valuation of intangible assets. In relation to multinational organisations, or those business enterprises with a potential to expand outside their national accounting standards jurisdictions, the implications of harmonisations of standards should bring the economic benefits of a single accounting system.
The general position on whether the harmonisation of the standards to IFRS is providing the stated benefits is that empirical evidence suggests that they are, particularly in regards to higher quality accounting information standards and comparability between statements.[136] The evidence also suggests that where enterprises had already adopted IFRS standards balance of information between interested parties was improved as enterprise private information was made available to analysts, reducing sinister practices such as insider trading and thus enabling comparability.[137] Furthermore, studies show in particular that where the IFRS are obligatory and enforced in local jurisdictions barriers to international investment are reduced,[138] and costs of preparation of financial statements is reduced, thereby returning economic benefits. Certainly from this perspective the harmonisation of standards provides enterprises for greater scope and reason to realise and value intangible assets.
In regard to the recognition of intangible assets it seems that the fundamental issue is not that of meeting the stated goals of the benefits of overall harmonisation, but in the unequal recognition of internally generated intangible assets with those that are acquired. This statement seems at odds with empirical evidence of information quality and comparability, but is simply expecting a higher standard for financial information. The trend that standards organisations such as IASB, FASB, and national accounting standards boards that have harmonised these international standards is, inter alia, to rectify this intangible asset inequality issue.
The office of the AASB on behalf of the IASB and supported by the FASB generated a discussion paper regarding the initial accounting for intangible assets.[139] This paper focussed on the factors relating to identification, recognition, measurement, and disclosure for internally generated intangible assets setting forward a recognition or direction for each.
From identification viewpoint the position is simple: fundamentally there is no difference in the underlying nature of an intangible asset that is organically internally generated, or is alternatively acquired.[140] The recommendation being internally generated intangible assets should be recognisable in the same way as they are when purchased as part of a business combination according to IFRS 3 framework.[141]
Consistent with the IFRS 3 framework, recognition of intangible assets could be confirmed if planned investment can be linked with costs to create the asset, if future cash flows are probable.[142] This would include those intangible items not currently recognised in IAS 38, where intangibles would be measured and recognised on the balance sheet at fair value.[143] There is consideration in regards to the principles behind valuation, and it is suggested that there is considerable work to do in regards to standards in this discipline.[144] Some concerns in this area relate to costs of using an external appraiser, and the methodologies used to assess cash flows can be inconsistent especially where valuation is a developing skill,[145] and it is being suggested to standard setters that a bucket list of what should be considered as insignificant for valuation is clarified.[146] Furthermore the issue seen in cases such as Caracci,[147] where the Tax Court developed its own version of a valuation and was subsequently overruled by the appellant Court, disregarding expert appraisers valuations, would be minimised where the valuation items and methods are specified in regulatory standards. In courts that have accepted the ‘Daubert Test’, where peer review from the self-regulatory standards would be possible, may not have the same requirement as those that have not adopted the test. This is a philosophical question between whether to follow the IFRS method of principles of valuing intangible assets, i.e. market or income method based on the quality of inputs, or implementing explicit rules such as those commonly seen in US GAAP.[148]
The recommendations are that once recognised the carrying amount of internally generated intangible assets would be treated identically to acquired intangible assets in that continuing impairment, amortisation, and disclosure would follow the IFRS 3, IAS 38, IFRS 13 and IAS 27 framework.[149] For those intangible assets that do not meet the identification, recognition and measurement criterion, the recommendation is that these are still required to be identified in disclosure.[150] This is already an opt-in on standards such as IAS 38,[151] as they can still have saleable value. This provides scope to include greater details on all investments, so that stakeholders can make decisions that are based on non-financial information as well as financial information.
The trend is to create a single worldwide accounting standard through the convergence of varying international standards, and adoption of international standards by nations that are enforced locally. Through the improvement of the international standards, to enable the recognition of internally generated intangible assets as per acquired intangible assets, together with improvements in the identification of relevant intangible assets, improved methodologies and standards for valuation appraisal, and fair value continual disclosure of intangible assets, together with economic benefits, will give enterprises improved scope to recognise and value their intangible assets.
Conclusion
Business strategy sees key executives of enterprises developing business plans that invest funds to create assets that will return future profits and cash flows. These business plans are either to grow organically or through acquisition of third party assets. The organisational view of a business enterprise means that these investments are human, social, and organisational assets, many of which are intangible assets.
Accountancy is the measurement scorecard for business enterprises, and ultimately the financial statements should accurately represent the value of the enterprise. However, as was seen many intangible assets are not adequately represented by enterprise balance sheets.
Regulatory standards in different jurisdictions assist the preparer of financial statements to identify, recognise, value and disclose intangible assets. Essential to this process is the valuation of those intangibles, which can be measured using cost, market, or income methodologies to arrive at a fair value. Self-regulatory standards are in place to assist appraisers to expertly value the intangible assets of an enterprise, which expect both financial and legal aspects to be taken into consideration. It is recommended that for the purposes of an enterprise mitigating the risk of future legal and related issues, that using an independent expert in the preparation of valuations is pertinent.
The harmonisation of international standards is intended to improve the quality of financial information for stakeholders, and improve comparability between distinctive enterprises. There is evidence to suggest that overall this is occurring, in particular returning economic benefits to adopting nations.
However, the current issue with the standards is that there is a disparity between the representations of acquired intangible assets on balance sheets and internally generated intangible assets that are more likely to be represented off balance sheet. Upgrading the standards to remove this disparity in representation between internally generated and acquired intangible assets so that they can be accounted for with a similar framework, in addition to the continuing harmonisation of international standards, should improve the ability of enterprises to recognise and value their intangible assets. This will return greater future profits and cash flows for the enterprise thus completing the business strategy benefit.
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Pitkethly, Robert, ‘The Valuation of Patents: A Review of Patent Valuation Methods with Consideration of Option Based Methods and the Potential for Further Research’ (1997)
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- Duane Ireland, Robert E. Hoskisson, Michael A. Hitt, Understanding Business Strategy: Concepts and Cases (Thomson South-Western, 1st ed, 2006)
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Smith, Gordon V., Trademark Valuation (John Wiley & Sons, 1997)
Smith, Gordon V. and Parr, Russell L., Valuation of Intellectual Property and Intangible Assets (John Wiley & Sons, 2004) ch. 11
Sudipta Basu, Gregory Waymire, ‘Has the Importance of Intangibles Really Grown? And If So Why?’ (2008) 38(3) Accounting and Business Research 171
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B Cases
Caracci, et al v Commissioner of Inland Revenue (5th Cir. 2006) 456 F.3d 444
Daubert v. Merrell Dow Pharmaceuticals, Inc. (1993) 509 U.S. 579
Kumho Tire Co., Ltd. v Carmichael (1999) 526 U.S. 137
Phosphate Co-operative v Shears (No 3) (1988) 14 ACLR 323
- v Mohan [1994] 2 S.C.R. 9.
Reiffel v ACN 075 839 266 Ltd (2003) 45 ACSR 67
C Legislation
Australian Securities and Investments Commission Act 2001
Corporations Act (2001) (Cth.)
Federal Rules of Evidence 1975, Article VII, Opinions and Expert Testimony, Rule 702, Testimony by Experts.
Securities Exchange Act 1934 (US)
D Treaties
E Other
AICPA Statement on Standards for Valuation Services No. 1 Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, June 2007, Durham, North Carolina
APESB, APES 225 Valuation Services, July 2008
ASIC, Regulatory Guide 111, October 2007
ASIC, Regulatory Guide 112, October 2007
Australian Accounting Standards Board, For Students (2013) <http://www.aasb.gov.au/about-the-aasb/for-students.aspx#>
Australian Accounting Standards Board, AASB 138 Intangible Assets, 2009, AASB, Melbourne, Australia
Black’s Law Dictionary (9th Ed. 2009)
Financial Accounting Standards Board, SFAS 141 Business Combinations, December 2007, FASB, Norwalk, Connecticut
Financial Accounting Standards Board, SFAS 142 Goodwill and Other Intangible Assets, July 2001, FASB, Norwalk, Connecticut
Financial Accounting Standards Board, SFAS 157 Fair Value Measurements, September 2006, FASB, Norwalk, Connecticut
Financial Accounting Standards Board, ASC 805 Business Combinations, December 2007, FASB, Norwalk, Connecticut
Financial Accounting Standards Board, FASB Facts About FASB (2013) <http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495>
Government of Western Australia – Department of Treasury and Finance, AASB 138 ‘Intangible Assets’ Summary
International Accounting Standards Board, IAS 1 Presentation of Financial Statements, IASB, London
International Accounting Standards Board, IAS 27 Consolidated and Separate Financial Statements, IASB, London
International Accounting Standards Board, IAS 36 Impairment of Assets, IASB, London
International Accounting Standards Board, IAS 38 Intangible Assets, IASB, London
International Accounting Standards Board, IFRS 3 Business Combinations, IASB, London
International Accounting Standards Board, IFRS 13 Fair Value Measurement, IASB, London
International Standards Organisation, Benefits of International Standards <http://www.iso.org/iso/home/standards/benefitsofstandards.htm>
International Accounting Standards Board, About the IFRS Foundation and the IASB (2013) <http://www.ifrs.org/The-Organisation/Pages/IFRS-Foundation-and-the-IASB.aspx>
International Accounting Standards Board, IFRS Foundation: Who We Are and What We Do, (2013) < <http://www.ifrs.org/The-organisation/Documents/Who-We-Are-English-2013.pdf>
Shorter Oxford English Dictionary (6th Ed. 2007).
The Australian Accounting Standards Board, Intangible Assets Project (2012)
TASC Foundation Education, IAS 38 Intangible Assets
Footnotes
[1] Shaikh, Junaid M., ‘Measuring and Reporting of Intellectual Capital Performance Analysis’ (2004) (4) (March 2004) The Journal of American Academy of Business 439, 439.
[2] R. Duane Ireland, Robert E. Hoskisson, Michael A. Hitt, Understanding Business Strategy: Concepts and Cases (Thomson South-Western, 1st ed, 2006) 35-37.
[3] Dan Lovallo, Patrick Viguerie, Robert Uhlaner & John Horn, ‘Deals without Delusions’ (2007) 85(12) (December) Harvard Business Review 92, 92.
[4] Shaikh, above n 1, 439.
[5] Chris Rose, John Cronin, Rachel Schwartz, ‘Communicating the Value of Your Intellectual Property to Wall Street’ (2007) 50(2) Research Technology Management 36, 36.
[6] Higgins, Robert C., Analysis for Financial Management (McGraw-Hill, 10th ed, 2012) 23.
[7] Brand-Finance, ‘Australian Intangible Asset Review’ (2008) 1, 2.
[8] Higgins, above n 6, 23.
[9] Smith, Gordon V., Trademark Valuation (John Wiley & Sons, 1997) 8.
[10] Black’s Law Dictionary (9th Ed. 2009).
[11] Shorter Oxford English Dictionary (6th Ed. 2007).
[12] Black’s Law Dictionary (9th Ed. 2009).
[13] Ibid.
[14] International Accounting Standards Board, IAS 1 Presentation of Financial Statements, IASB London [54-58].
[15] Cezair, Joan A., ‘Intellectual Capital, Hiding in Plain View’ (2008) 21(2) Journal of Performance Management 29, 33.
[16] Heberden T., When Will an IP Valuation Be Helpful in Informing Legal Decisions? (2008).
[17] International Accounting Standards Board, IAS 38 Intangible Assets, IASB, London [8].
[18] Ireland, above n 2, 35-37.
[19] Michael J. Mard, Steven Hyden, James S. Rigby, Intellectual Property Valuation (April 20 2000).
[20] Ireland, above n 2, 35-37.
[21] Ibid 35-37.
[22] Mard, above n 19.
[23] Smith, above n 9, 4-6.
[24] Ibid 4-6.
[25] Needleman, Sarah E., ‘Start-Ups Get Snapped up for Their Talent: Entrepreneurs Face Dilemma over Offers Aimed at Acquiring Their Software Engineers’, The Wall Street Journal September 12 2012.
[26] Hunter, Dan, The Oxford Introductions to Us Law: Intellectual Property (Oxford University Press, 2012) 1.
[27] Mard, above n 19, 5.
[28] ‘Valuation of Intangible Assets: Four Case Studies’ (Valuation Consulting Limited, 2006) 1, 8.
[29] Smith, above n 9, 9.
[30] Wirtz, Harald, ‘Valuation of Intellectual Property: A Review of Approaches and Methods’ (2012) 7(9) (May) International Journal of Business & Management 40, 41.
[31] Mard, above n 19, 12.
[32] Wirtz, above n 30, 41.
[33] Mard, above n 19, 12.
[34] Ibid.
[35] Wirtz, above n 30, 41.
[36] Pitkethly, Robert, ‘The Valuation of Patents: A Review of Patent Valuation Methods with Consideration of Option Based Methods and the Potential for Further Research’ (1997) 6.
[37] Wirtz, above n 30, 41-42.
[38] Moss, David A., A Concise Guide to Macro Economics: What Managers, Executives, and Students Need to Know (Harvard Business School Press, 2007) 23-29.
[39] Wirtz, above n 30, 42.
[40] ‘Valuation of Intangible Assets: Four Case Studies’ (Valuation Consulting Limited, 2006) 1, 10.
[41] David Goldheim, Gene Slowinski, Joseph Daniele, Edward Hummel, Joghn Tao, ‘Extracting Value from Intellectual Assets’ (2005) 48(2) (March-April) Research Technology Management 41, 44.
[42] See, eg, Deloitte, IAS Plus, April 2004. ‘IFRS 3 defines a business combination as the bringing together of separate entities or businesses into one reporting entity’.
[43] Reinbergs, Indra A., ‘Note on Valuing Private Businesses’ (2001) (9-201-060) (April 25) Harvard Business School Publishing 1, 2-5.
[44] Higgins, above n 6, 23.
[45] Higgins, above n 6, 23.
[46] Goldheim, above n 41, 45.
[47] Wirtz, above n 30, 43.
[48] Martin Pergler, Eric Lamarre, ‘Upgrading Your Risk Assessment for Uncertain Times’ (2009) (No. 9) (January) McKinsey Working Papers on Risk 1.
[49] Higgins, above n 6, 250-251.
[50] Ibid 250-251.
[51] Wirtz, above n 30, 45.
[52] Higgins, above n 6, 300-301.
[53] Wirtz, above n 30, 45.
[54] Higgins, above n 6, 324-325.
[55] Ibid.
[56] Australian Accounting Standards Board, For Students (2013).
[57] See, Corporations Act 2001 (Cth.) s334, ‘AASB’s power to make accounting standards… (1) The AASB may, by legislative instrument, make accounting standards for the purposes of this Act. The standards must not be inconsistent with this Act or the regulations’.
[58] Financial Accounting Standards Board, FASB Facts About FASB (2013).
[59] AASB, above n 56.
[60] Ibid.
[61] International Accounting Standards Board, About the IFRS Foundation and the IASB (2013).
[62] International Accounting Standards Board, IFRS Foundation: Who We Are and What We Do, (2013).
[63] Ibid.
[64] Bogoslaw, David, ‘Global Accounting Standards? Not So Fast’ (2008), Bloomberg Businessweek.
[65] International Standards Organisation, Benefits of International Standards (2013).
[66] International Accounting Standards Board, IFRS 3 Business Combinations, IASB, London [4–18].
[67] Ibid [4].
[68] Ibid [32].
[69] Ibid [34].
[70] Australian Accounting Standards Board, AASB 138 Intangible Assets, 2009, AASB, Melbourne, Australia.
[71] IASB, above n 17, [11-12].
[72] Ibid [21].
[73] Ibid [63].
[74] Ibid [54-56].
[75] Ibid [57].
[76] Ibid [57-61].
[77] Financial Accounting Standards Board, ASC 805 Business Combinations, December 2007, FASB, Norwalk, Connecticut.
[78] IASB, above n 17, [35].
[79] Ibid [65, 71].
[80] Financial Accounting Standards Board, SFAS 141 Business Combinations, December 2007, FASB, Norwalk, Connecticut.
[81] IASB, above n 17, [65].
[82] Ibid [27].
[83] Ibid [33].
[84] International Accounting Standards Board, IFRS 13 Fair Value Measurement, IASB, London.
[85] Ibid [61, 67, 73].
[86] Ibid [80].
[87] Ibid [81].
[88] Ibid [86-89].
[89] Chistopher Buccafusco, Christopher J. Sprigman, ‘The Creativity Effect’ (2011) 78(1) University of Chicago Law Review 31, 33.
[90] Billiot, Mary J. and Sid Glandon, ‘The Impact of Undisclosed Intangible Assets on Firm Value’ (2005) Vol. 13(No. 2) (June 2005) Journal of Accounting and Finance Research 67, 72.
[91] Caty, ISO 10668 and Brand Valuations: A summary for Appraisers, April 2001
[92] AICPA Statement on Standards for Valuation Services No. 1 Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, June 2007, Durham, North Carolina.
[93] APESB, APES 225 Valuation Services, July 2008.
[94] AICPA Statement on Standards for Valuation Services No. 1 Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, June 2007, Durham, North Carolina, [11].
[95] Ibid [12].
[96] Ibid [21].
[97] Ibid [23].
[98] Ibid [22-30].
[99] ASIC, Regulatory Guide 112, October 2007 [8-15].
[100] Ibid [16-20].
[101] Ibid [13-19].
[102] (1988) 14 ACLR 323, 339.
[103] Ibid.
[104] (2003) 45 ACSR 67.
[105] Ibid, 87.
[106] AICPA, above n 92, [10].
[107] Smith, Gordon V. and Parr, Russell L., Valuation of Intellectual Property and Intangible Assets (John Wiley & Sons, 2004) ch. 11.
[108] (1993) 509 U.S. 579.
[109] Ibid.
[110] See, Federal Rules of Evidence 1975, Article VII, Opinions and Expert Testimony, Rule 702, Testimony by Experts.
[111] (1999) 526 U.S. 137.
[112] [1994] 2 S.C.R. 9.
[113] (5th Cir. 2006) 456 F.3d 444.
[114] Ibid 462.
[115] IASB, above n 17, [68-69].
[116] IFRS, above n 66, [45].
[117] International Accounting Standards Board, IAS 27 Consolidated and Separate Financial Statements, IASB, London.
[118] IASB, above n 17, [72-75].
[119] Ibid [72-80].
[120] Ibid [85-87].
[121] Ibid [78].
[122] IFRS, above n 66, [93].
[123] IASB, above n 17, [88-96].
[124] Ibid [97-98].
[125] Ibid [107].
[126] Ibid [112].
[127] Ibid [118-122].
[128] IASB, above n 117, [41(e) 41(f)].
[129] Keys, Robert, Initial Accounting for Intangible Assets Acquired in Business Combinations: Research Results, Series Initial Accounting for Intangible Assets Acquired in Business Combinations: Research Results (trans, Australian Accounting Standards Board, 2012).
[130] Ibid.
[131] Shaikh, above n 1, 441.
[132] Billiot, above n 90, 73.
[133] Higgins, above n 6, 24.
[134] Chris Rose, John Cronin, Rachel Schwartz, ‘Communicating the Value of Your Intellectual Property to Wall Street’ (2007) 50(2) Research Technology Management 36, 36.
[135] Ibid 36-37.
[136] Francois Brochet, Alan Jagolinzer, Edward J. Riedl, ‘Mandatory IFRS Adoption and Financial Statement Comparability’ (2011) (11-09) (April) Harvard Business School Accounting & Management Unit Working Paper 1, 3.
[137] Ibid 7.
[138] Churchwell, Synthia, ‘Financial Reporting Goes Global’ (2006) (January 23) Harvard Business School Working Knowledge 1. See also Francois Brochet, Alan Jagolinzer, Edward J. Riedl, ‘Mandatory Ifrs Adoption and Financial Statement Comparability’ (2011) (11-09) (April) Harvard Business School Accounting & Management Unit Working Paper 1, 5-8.
[139] The Office of the Australian Accounting Standards Board, Initial Accounting for Internally Generated Intangible Assets, 2008.
[140] Ibid.
[141] Ibid.
[142] Ibid.
[143] Ibid.
[144] Keys, above n 129, 18-21.
[145] Ibid 18-21.
[146] Ibid 18-21.
[147] Caracci, et al v Commissioner of Inland Revenue (5th Cir. 2006) 456 F.3d 444.
[148] Bogoslaw, David, Global Accounting Standards? Not So Fast, Series Global Accounting Standards? Not So Fast (trans, 2008).
[149] The Office of the Australian Accounting Standards Board, above n 132.
[150] Ibid.
[151] IASB, above n 17, [128].
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