Report Accounting Theory and Policy

1.0 Introduction

        Malaysian Financial Reporting Standard (MFRS) 138 defined intangible asset as “an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative services”. In the revised standard, the requirement for the asset to be held for use in the production or supply of goods or services, for rental to others, or for administrative services was eliminated from the definition of intangible asset. This paper will discuss on the importance of intangible asset in current business environment and also about the accounting rules related to the treatment of intangible asset outlined in MFRS 138. The next part of this paper will discuss on the treatment of intangible asset in four public listed companies which involve in different industries such as technology and plantation industries. This is to determine whether a specific industry has some influences on the way intangible assets are reported in the financial statements.

2.0 Importance of Intangible Assets        

        In today’s business environment, investors no longer depend totally on the traditional asset to assess on the viability of the companies. In recent years, with the increasing economic development and globalization in Malaysia, business structures have become much complex and this has led to the different approaches in determining the actual values of the public listed companies in Malaysia, taking into consideration the value of intangible assets. According to Volkov, D (2007), the knowledge in current economy determines the development of contemporary companies and companies which consistently engage in introducing new innovations on knowledge, experience and attainments of their employees will secure competitive advantage in particular industries. Thus, new financial reporting which caters the valuation on intangible assets is required for the investors to make a more useful decision making. There is a growing agreement that traditional financial reporting is insufficient in meeting the information needs of stakeholders, especially in the knowledge economy where there is emerging emphasis on intellectual capital (Bozzolan et al. 2003). According to Rahim, A (2011), knowledge plays a major role in economic growth and social development and intellectual capital is at the heart of knowledge-based growth. Thus, it is an advantage to the companies if they disclose the information on intangible assets due to its importance.  

3.0 Accounting Rules on Intangible Assets

        Under MFRS 138, intangible asset was defined as an identifiable asset without physical substance and in the form of non-monetary assets. Some examples of intangible asset are patents, goodwill, copyrights, trademarks, brands and construction permit. All these intangible assets are difficult to measure directly; hence it requires a special valuation method to evaluate the value of the assets reasonably. In general, intangible asset can be categorized into few groups such as below:

• Marketing-related intangible assets
• Customer-related intangible assets
• Artistic-related intangible assets
• Contract-based intangible assets
• Technology-based intangible assets

3.1 Recognition

MFRS 13 clearly stated that in order for the asset to be qualified and recognized as an intangible asset, it must meet certain requirements such as below:

1. It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
2.  The cost of the asset can be measured reliably.

The management is expected to be able to estimate the future economic benefits by using reasonable and supportable assumptions that will exist over the useful life of the asset.

3.2 Measurement

There are two methods available to measure the intangible assets which are the cost model and revaluation model. As for the cost model, asset will be recorded at the initial cost of acquisition after deduction of any accumulated amortization and accumulated impairment losses.

        The revaluation model is used after initial recognition where the intangible asset will be measured at a revalued amount, which is its fair value at the date of the revaluation minus any subsequent accumulated amortization and any subsequent accumulated impairment losses. MFRS 138 has set the standard for the fair value to be determined based on an active market and the revaluations made on the asset at the end of the reporting period will not result in materially different between the carrying amount of the asset and its fair value.  The standard clearly stated that the revaluation model does not allow the revaluation of intangible assets that have not previously been recognized as assets; or the initial recognition of intangible assets at amounts other than cost.