The tangible problem of intangibles

Saturday, 01 December 2001

Frank Di Giantomasso photo
Frank Di Giantomasso

    In the New Year the US will start using new accounting standards as they relate to intangible assets. There will be obvious implications for Australian business. Frank Di Giantomasso outlines the issues.

    Australian directors would be unwise to ignore the American Financial Accounting Standards Board's decision to introduce a new Accounting Standard relating to intangible assets which comes into force on 1 January next year. The FASB standard - which may be mirrored in this country - will change how companies value and treat such assets, including goodwill and other forms of intellectual property (IP), in their public accounts.

    Historically, US (and Australian) accounting standards have permitted corporations to write off their intangibles over time. The new US standard will demand that these assets be managed in the accounts with much greater accountability. This means that people who manage or are otherwise responsible for portfolios of intangible assets will have to account for what's happening to the items in those portfolios. If a corporation has $1 billion worth of goodwill, in its accounts for example, it will now have to identify the components that make up that figure and disclose what has happened to each of them from one statutory reporting period to the next.

    This will be far more of an exact science than the annual discounting exercise that has taken place in the past. Corporations will now have to show how the number is made up and how much of the total is apportioned to trademarks, intellectual capital, domain names and other components. If there is an impairment - something which prevents the corporation from realising the book value of a particular item of intellectual property - the intangible will need to be written down and an explanation will have to be included in the public accounts.

    This new requirement will make managers and directors more accountable for intangibles than they have ever been before.

    Australia is likely to follow this US initiative, if for no other reason than major Australian and American corporations which do business in both countries will want a common standard.

    As the new standard comes into force, we can expect spirited debate as to whether it is a good thing or not. It is certainly beneficial in one sense, namely that it will require enhanced corporate governance procedures to ensure that shareholder value is retained rather than just having these assets written off.

    Depending on how well the standard works in practice, this could lead to contrivance whereby valuations are cobbled together to suppress a responsibility. In addition to the corporate governance benefit, the new standard also reinforces and recognises the fact that we are now in an era where intangible property is increasingly important. It also underlines the fact that directors and senior officers cannot afford to be uninformed, misinformed or ill-informed about their corporations. In many ways, it has been all too easy for corporations to concentrate on tangible assets such as plant and equipment while steering clear of any custodial role in relation to intangibles. While companies across the board should benefit from paying more attention to their intangibles, those involved in mergers and acquisitions can expect particular bonuses.

    On one hand, it will help takeover targets ensure that they are not selling their goodwill unwittingly at a discount, and it should help raiders or white knights avoid paying too much for the goodwill they are acquiring. Overall, a company that better understands its intangibles and how to optimise the ways of protecting them, is better placed to make sensible commercial decisions in its capacity as the custodian of shareholder funds. With a quantitative understanding of their intangibles, these corporations will know what intellectual property they need, where to park it and how to look after it.

    Frank Di Giantomasso, a lawyer and registered patent attorney, is vice president of the Intellectual Property Society of Australia and New Zealand, and heads the intellectual property group at international law firm Minter Ellison

    Policy under review

    Intangibles often form a substantial part of the business and financial statements of Australian companies. Identification and valuation of intangibles raise a complex series of issues. While the Australian position on a number of the contentious issues, including the effects of amortisation on distributable profits, remains unsettled, Australian companies are at a competitive disadvantage. For these reasons AICD's Accounting and Financial Advisory Committee has been following domestic and international developments on the subject of intangibles closely. Following a survey of members, AICD has urged the Australian Accounting Standards Board to look at intangibles as a priority. The committee has recently prepared a briefing paper on intangibles for AICD National Council and will be developing a policy for release in early 2002. AICD will advocate that the recently adopted US accounting standard is good practice and consistent with the generally accepted views of directors in Australia. 


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