Understanding Intangible Assets and their Recognition in Accounting

André Gonçalves de Freitas

Hatched by André Gonçalves de Freitas

May 08, 2024

3 min read

0

Understanding Intangible Assets and their Recognition in Accounting

Introduction:

In the field of accounting, it is essential to accurately recognize and account for various assets owned by an entity. One such category is intangible assets, which include research and development activities, as well as purchased assets. Understanding the criteria for recognizing these assets is crucial for accurate financial reporting. In this article, we will explore the requirements for recognizing intangible assets, the distinction between research and development activities, and the cost components considered in the acquisition of intangible assets.

Recognizing Intangible Assets:

According to the Technical Pronouncement CPC 23, policies related to accounting, changes in estimates, and error rectification play a significant role in recognizing intangible assets. It specifies that no intangible asset resulting from research activities should be recognized. Instead, the expenses incurred during research should be recognized as expenses. Research activities encompass various endeavors aimed at gaining new knowledge, evaluating and selecting applications for research outcomes, seeking alternatives for materials, devices, products, processes, systems, or services, and formulating, designing, evaluating, and selecting possible alternatives for new or improved assets.

Development Activities and Recognition Criteria:

On the other hand, an intangible asset resulting from development activities may be recognized if the entity can demonstrate specific criteria. These criteria include technical feasibility to complete the intangible asset for its intended use or sale, intention to complete and use or sell the asset, capacity to use or sell the asset, the expected economic benefits generated by the asset, availability of technical, financial, and other necessary resources for completion and utilization, and the ability to reliably measure the expenses attributable to the asset during its development.

Connecting Research and Development:

While research and development activities are distinct, they are often interconnected in practice. The phase of development is more advanced than the research phase since it involves building prototypes, testing pre-production or pre-utilization models, designing tools or molds using new technology, constructing and operating pilot factories, and testing chosen alternatives for new or improved assets. Demonstrating the likelihood of future economic benefits from a development project becomes more feasible due to the progress made in this phase.

Cost Components of Intangible Assets:

When intangible assets are acquired separately, their cost includes the purchase price, import taxes, non-recoverable taxes on the purchase, after deducting commercial discounts and rebates. Additionally, any costs directly attributable to preparing the asset for its intended use are also considered. It is crucial to accurately determine and account for these cost components to reflect the true value of intangible assets in financial statements.

Actionable Advice:

  • 1. Clearly differentiate between research and development activities: Understanding the distinction between research and development can help in accurately recognizing and accounting for intangible assets. Identifying the stage of a project and the associated activities is crucial for compliance with accounting standards.
  • 2. Ensure feasibility and future economic benefits: When recognizing intangible assets resulting from development activities, it is essential to demonstrate technical feasibility, intention, capacity, expected economic benefits, resource availability, and reliable expense measurement. Conduct thorough assessments to meet these criteria.
  • 3. Track and record cost components accurately: Properly identifying and accounting for the cost components of acquired intangible assets is vital for accurate financial reporting. Maintain detailed records of purchase prices, taxes, discounts, and expenses directly attributable to preparing the asset for its intended use or sale.

Conclusion:

Recognizing intangible assets in accounting requires a thorough understanding of the criteria specified by the Technical Pronouncement CPC 23. By differentiating between research and development activities and properly accounting for the cost components of acquired intangible assets, entities can ensure accurate financial reporting. Adhering to these guidelines will lead to transparent and reliable financial statements, ultimately benefiting stakeholders and decision-makers.

Hatch New Ideas with Glasp AI 🐣

Glasp AI allows you to hatch new ideas based on your curated content. Let's curate and create with Glasp AI :)