Accounting for Intangible Asset, the Way Out


Some unclear, overlapping and unstructured definition occupy the set of intangible assets issues. In turn, some researchers have used in consistent definition of IA, reducing the transparency that accountants and financial experts have to discuss these issues.

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According to the FASB an internally generated is proposed to be defined as a past event that has a measurable effect and presents a future benefit. The FASB special report states  that there is not a need for different rules of recognition for internally and externally generated intangible asset. The clarified that intangibly generated intangible asset is simply does not have to be an externally acquisition, as long as all three tests are conformed with any business event or process can produce an intangible asset. The FASB further notes that there is an embedded conflict in those definitions because it contains a departure from the historical cost principles.

As earlier stated, according to Ubaka C.E. (2008) defined intangible asset as legal right privileges and competitive advantages which are enjoyed by a business over a time.

According to Penne Alnsworth (2010) intangible assets, unlike plant assets and natural resources, have no tangible or visible physical presence. However, they convey to their owner a legal right or benefits that is often vital to successful operations. According to Walter T. Harrison Jr …. (2010), it also defined intangible assets as long lived assets with no physical form.  He also further explain that intangible asset falls into 2 categories. Intangible with finite cries that can be measured, and indefinite lives that record no amortization for these intangibles. According to Paul d. Kimmel Ph.D (2008) defined intangible asset as right, privileges and competitive advantages that result from ownership of long live assets that do not process physical substance.

According to David H. Marshall MBA (2012) intangible assets are long lived assets that differ from property, plant and equipment that has been purchased out right or acquired under a capital lease either because the asset is represented by a contractual right or because the asset result from a purchase transaction but is not physically identifiable when assets are acquired for us in most cases, their costs are significant.

These assets include:

  • Patent right
  • Trade mark

Copy right

Research development

Preliminary expenses /organization costs


Discount on issue of shares


Patent Right: This represent a temporary monopoly which is granted to an investor  and which is protected by law during its duration. It gives the investor the exclusive right to sell or to use his invention. For a fixed period of years. According to penne. Ains warth …(2012) it is  on intangible asset giving its owner the exclusive legal right to the commercial benefits of a specified product or process. According to Walter T. Harrison Jr. (2008), patent are federal government grants that gives the holder the exclusive right for 20 years to produce and sell an invention.

According to David H. Marshall (2012) patent is a monopoly license granted by the government giving the owner control of the use or sale of an invention for the period of 20 yrs. Although the cost of registering a patent with the appropriate authority is small the amount paid to inventor directly is extremely large. It is the cost of acquisition or that of development and registration that form part of the assets of the company.

Trade marks: Firms often marked their product under a trademark, which is a distinguishing mark to form their products. “Malta Guinness” for example has become a national trademark for the product of Guinness Plc. Trademark is a form of guarantee mark for the products of the firm in question. According to Walter T. Harrison Jr… (2008), Trademarks are identification of a product or service. According to Paul D. Kimmel PhD…(2008), Trade mark is a world, phase, jingle or synibul that distinguishes a identifies a particular enterprise or product. The firm’s reputation for quantity is associated in the public mind with its trademark. Trademark is registered and may not be used by another firm. The cost associated with registering trademarks are shown as asset on the balance sheet.

Research and development: Research is the original planned investigation undertaking with the hope of gaining new scientific or technical knowledge and understanding.

Development is the translation of research finding another knowledge into a plan or design for the production of new or substantially material, designs, products, processed, system or services prior to the commencement of commercial production. These are expenses incurred on the development of new product and now processes. Examples is advertising expenses, expenses in bring in brand new products, research and development costs may be deferred it:

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a        The product or process is clearly defined

  1. The technical feasibility of the product or process has been demonstrated.

c        The management of the enterprises has indicated its intention to produce or marked the product.

d       The is clear indication of a future marked for the product

e        Adequate resources exist or are reasonably expected to be available to complete the product if he benefits expected from these expenses are expected to cast into the future it is capitalized and matched into the future to which it relates.

Discount on Issues of Shares: On issues of shares by the companies shares may be issued at a discount demanding that subscribers pay less than the nominal value of the shares. the short fall in the share value of the share is seperated under an accounting head discount on issues of shares and treated as cost of the company.

Organizational Cost / Preliminary Expense: The cost involved in setting up a business entity are regarded as constituting intangible assets. They comprise all initial preliminary expenses such as the legal cost associate with company formation and registration and other legal, under writing, accounting and consultancy fees. It is the practice to write them off as soon as possible.

Franchise: A franchise is a monopoly right to create in a particular area or as regards to particular activity. According to penne ainsworth (2012) it is an intangible asset representing the exclusive right to operate or sell a brand name product in a specified territory. According to Walter T. Harrison Dr…… (2008) franchise are privileges granted by a private business or a government to sell a product or service in accordance with specified condition. It is common in motor business.

Goodwill: Goodwill is defined both in law and accounting. In law it is the advantage which a person gets due to good names, reputation connection and attractive force which brings in customers and also differentiate old company from a new one.

According to Walter T. Harrison Jr. …(2008) is defined as the excess of cost of purchasing another company over the sum of the market values of the acquired company’s net assets (asset minus liabilities). According to Paul D. Kimmel PhD. ….(2008) it represent the value of all favourable attributes that relate to a business enterprise. Also, according to David H. Marshall  (2012) it is the results from the purchase of one firm by another for a price that is greater than the fair market value of the net asset acquired. Accountant also defined goodwill as the excess fo fair value (FV) over book value in a purchase transaction (GAAP). Currently treatment of any intangible asset ahs been confined to good will produced on the balance sheet from acquisition under purchase method. As the only allowed intangible asset capitalization account for intangible asset.

For GAAP purchase, three test are applied to allow recognition of an event as an asset.

  • The event is a part event
  • It is measurable
  • It contains probable future benefits.

The reason Goodwill can be seen as a past event is that it is easy to date the creation of an acquisition under the purchase method where the fair value (FO) of an acquired entity is lower than the adjusted basis (AB) to the acquiring entity.

Goodwill arise form a consolidation merger or take out transaction has produced in consistent definition of the other classes of intangible asset for example, at time a well trained work force is describe plainly as an unrecognized goodwill due to the disallowed recognition under GAAP.


Goodwill measurement is the only existing allowed GAAP related event. The measurability of future benefit from goodwill is based on known measures of financial events, namely the adjusted basis (also known as book value and he fair value (FO) we shall discuss goodwill under the following subheadings:

  • Method of accounting for goodwill
  • The impact of goodwill on business.

Method of Accounting for Goodwill: Accountant (GAAP) today only recognize acquired goodwill because of easy of identification, estimation measurement and calculation. The problem of internally created goodwill is lack of abilities to estimate it’s naira value. Quite obvious a company may posses goodwill but it is not traditional to prepare account for it in he books of the company unless it si represented in money of accounting.

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The concept of acquisition of a company by another brings to bare the theory of business combination when companies agree for whatever reason to bare the business, business combination is said that companies combine for multitude of reason, among them cost savings, tax advantage, as well as earning management, investors need to know how such transaction are affecting their investments. Until now there have been two method of accounting for business combinations. Purchase accounting and poling of interests accounting. The underlying issue in the controversy in accounting for consolidation is how of goodwill. A consistent and reliable rule must dictate how to account for these assets or else the financial statement of consolidating companies will continue to mislead and confuse investors pool of in test method: This method of accounting allows companies to pool their resources together as a summation of asset and liabilities. It does not create any goodwill amount at combination. This is simply the addition of the balance sheet of the combining companies.

Purchase method: By this method, goodwill is created in the business combination the acquiring company normally put the excess purchase price a goodwill and carried this forward in her balance sheet after amortization.

The impact of Goodwill on Business: Impact means the powerful effect something has an somebody/something Oxford Advance Learners Dictionary (2010) 558,, International Association of impact, assessment as he process fo identifying he future consequences of a current or proposed action form our forgone discussion, it is obvious that goodwill plays a significant role in business operations particularly its accounting implications where there is no goodwill surface “bad will” will give room for dwindling business operations, slow patronage, loss in profit and possible liquidation becomes imminent.

Goodwill when properly analyzed and maintained provided for steady growth, continues profit higher customers patronage and efficient work ***** and better environmental account relationship with host communities. Valuation of intangible Assets: Valuation of intangible assets create  problem to accountants because of cost and money measurement concept approaches used on appraise according to GAPP.

1       The cost approach: It estimates the value of an asset at an aim length transaction of this approach is inapplicable to intangible asset. For example, human capital is not measurable or even possible to conceive as an arms length transaction. Good will also by definition cannot be an arms length transaction because he excess is paid by a purchase above the fair value of an acquired target similarly social capital cannot be assessed this way because of its unique, untransformed characteristics.

2       The marked Approach: States that appraisals of similar purchased (or sold) good or services can be a basis for estimating the value of the transferred property. Although a model for human capital and intellectual capital can be built based on the market approach, social capital cannot be fir into a model that includes transferring asset in an exchange intangible asset of that nature losses its value is such a transfer.

3       The Income Approach: This is the most fitting to the accounting use in term of intangible asset. Present value analysis is available and established within GAAP as a model its application in a 1A valuation depends on the class of intangible asset goodwill for example, is inherently suited to the income approach valuation. He excess over fair value represent the purchaser belief in enhanced cash flow over a known fixed length of time, such that this flow will surpass not only the declared Fu but also the higher purchase price. However, social capital has little know useful, life as does in part of intellectual capital. However, human capital is not completely compatible with the income approach either employees satisfaction and loyalty both intangible asset are similar in concept to the element o going concern of the entity is generally in doubt too.

Recognition of intangible Asset: GAAP recognition currently GAAP contains no recognition of intangible asset other than goodwill as provided by GAAP. As discussed in the measurement section above goodwill is recognized only under certain purchases where certain test of excess of far value over adjusted basis are present, giving use to goodwill.

However, goodwill is often realized and recognized when another class of intangible asset should be created instead good will is realized and recognized due to an excess of a purchase. Consideration over fis (GAAP). This excess, however can be disaggregated or classified more finely that simply calling it good will.

Presentation of intangible Asset: The issue of possible presentation of intangible asset as part of a financial statement must be address by the reputing utilization that such a report contains not specifically within the scope of GAAP in intangible asset other than goodwill are usually disclosed in the financial all statement.

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As research shows some securities and exchange commission regulated corporation disclose goodwill in aggregated format while other disclose the underlying detained moreover, the other disclosure of intangible asset specifically to the external users is done by management. Discussion and analysis (MIDA) that accompanies most financial statements of publicity head entities. It is important to not that the internal users of a financial statement are slightly better equipped to properly ascertain the message in the financial report.


Conceptually, the accounting for intangible asset is at the heart of the frame work that link the balance sheet and he income statement of resource while the name statement is an expression of the utilization of these sources.

This chapter dealt with critical review of related work such as theoretical framework on intangible asset, method of measuring and valuation of intangible asset and presentation of the intangible asset under relevant cited materials were discussed.


Some unclear, overlapping and unstructured definition occupy the set of intangible assets issue. In turn, some researchers have used in consistent of IA, reducing the transparency that accountants experts have to discuss these issues. Intangible assets are typically expense according to their respective life expectancy intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful live and amortized on a straight line basis over their economic or legal life, which ever is shorter. Examples of intangible assets with identifiable useful include copyrights and patents, intangible asses with indefinite useful lives are reassessed each year for impairment if an impairment has occurred, then a loss in determines by subtracting the assets fair value from he assets book / carrying value.

According to international Accounting standards Board (IASB) standard 38 (IASB8) defines an intangible asset as: “an identifiable non-monetary asset without physical substance. The definition is in addition to the standard definition of an asset which requires a past event that has given rise to resource the entity controls and from which future economic benefits are expected to flow. This, the extra requirement for an intangible assets under IAs 38 is identifiable.

According to financial Accounting standards Board (FASB) accounting standard codification 350 (ASC 350) defines a intangible asset as an asset, other than financial assets that lacks physical substance. The lack of physical would therefore seen to be a defining characteristic of an intangible asset. Both he (IASB) and (FASB) definition specifically preclude monetary assets in their definition to an intangible asset. This necessary in order to avoid the classification of items such as accounts receivable, derivatives and cash in the bank as an intangible assets.

According to Walter T. Harrison Jr. (2008) patent are federal government grants that gives the holder the exclusive right for 20 years to produce and sell an invention.

According to Perinc Ainsworth (2010) intangible assets, unlike plant assets and natural resources have no tangible or visible physical presence. However, they convey to their owner or legal right or benefits that is ofter vital to successful operators.

According to Ubaka C.E. (2008) defined intangible asset as legal right privileges and competitive advantage which are enjoyed by a business over a time.

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