Intangibles

Intangibles Essay Questions (Research and Development)

Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort. One obvious difference between UK and International regulations in the area of Intangible assets is the continuing existence of a separate standard in the UK on Research and Development, SSAP 13. The original international standard, IAS 9, on this specific intangible asset has been superseded as part of the development of IAS 38, which covers all intangible assets.

Research is defined as �original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’. Development is defined as �application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use’ Development is more closely related to the earnings process than research.

Although IAS 38 will remove the discretion of directors it has introduced more rigorous criteria before costs may be classified as "development" within its meaning. To satisfy the criteria an entity must be able to demonstrate all of the following:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale;

• its intention to complete the intangible asset and use or sell it;

• its ability to use or sell the intangible asset;

• how the intangible asset will generate probable future economic benefits. Among other things, the entity shall demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

• the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

• its ability to measure reliably the expenditure attributable to the intangible asset during its development.

The cost of research activities should not be recognized as an intangible asset because it is not possible to demonstrate that probable future economic benefits will flow to the entity. Research costs should be expensed as incurred [IAS38R.54-55]. On the other hand, the cost of development activities should be capitalized when it is probable that the entity will obtain economic benefits from the use of the asset and the cost can be reliably measured. Otherwise, the cost of development activities should be expensed as incurred [IAS38R.57] Under SSAP 13 �Accounting for research and development’, UK companies face a choice as to whether to capitalise or write off development costs with the decision ultimately left to directors. This discretion will be eliminated in 2005 with the introduction of IAS 38."Intangible assets" which will