According to IAS GAAP, Intangible asset is defined as: 'an identifiable non-monetary asset without physical substance'. However goodwill is excluded that is defined as non-identifiable. IAS 38 indicates that an asset meets the identifiable criterion when it is either separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations (IAS 38, 2009).
Nowadays, intangible assets such as brand names are critical to the future prospects of a business. However, in fact, it is very hard to obtain the information needed to manage and enhance the value of intangible assets. According to PricewaterhouseCoopers' (PWC) research, a substantial proportion of a company's value (possibly over 60 per cent) associates to intangible assets. As a result, investors, analysts and other stakeholders realise the importance of intangible assets. Therefore intangible asset management processes is more rigorous since compelling financial reasons. The tax and accounting standards are demanding that numbers are allocated to intangible assets as part of accounting for acquisitions. Hence these intangible assets' value is needed to be monitored on an ongoing basis. In fact, strong brand names effect directly to customer's decision making processes, they also influence the premium prices that can be apply to charge with a guarantee of quality. Sometimes consumers also use luxury brands to derive their social status. Furthermore, popular brand names help to support the quick development in new markets.
In addition, potential competitive advantage is provide by intangible assets, however a specialist management and communication skills is needed. They need to bring the right strategy to its customer relationships, brands and performance of key employees which all are typical intangible assets for accounting purposes. The relevancy of these factors is always essential to a company's sustainment of its future performance and its profitability.
The objective of IAS 38 is to present the accounting treatment for intangible assets. IAS 38 represents the criteria for asset recognition, and also defines how to measure the intangible assets value in subsequent periods. Moreover it provides helpful guidance on required disclosures.
RECOGNITION AND MEASUREMENT
Intangible assets are very important and critical to the future of prospects of company. In 2008, Cadbury PLC has £1.7 billion of Intangible assets which are 18.9% of total assets. Therefore the recognition of intangible assets is a crucial step to company. IAS 38 states that an intangible asset should be recognised if it meets these criteria (IAS 38, 2009):
- It is Identifiable.
- It is controlled by the entity which has the power to obtain economic benefits from asset.
- It is expected to generate future economic benefits for the entity such as revenues or reduced future costs.
- It has a cost that can be measured reliably.
- Probable future economic benefits
- Reliable measurement
Intangible asset is identifiable when it either arises as a result of a legal right, if there are ongoing supply contracts; or intangible assets are separable which would be sold, rented or exchanged separately. If they are not separable, so this kind of assets would become part of goodwill in business combination.
In Cadbury PLC financial statement, there is £87 million of software intangibles which are treated as an intangible asset, since computer software is not an integral part of a related item of computer hardware.
An entity controls an asset when it has the power to obtain economic benefits from assets. In a company, a well-trained and motivated labour force is one of the most valuable intangible assets. However, the management cannot foresee its labour from leaving; hence the future economic benefits cannot be controlled or expected which is going to flow from its workers. Therefore, trained staff cannot be recognised as an intangible asset. Nevertheless, it could be possible for the entity to control the knowledge that the staff is also an asset. The absence of legal rights makes the entity hard to demonstrate control. Thus legal rights of restraint of trade agreements, copyright and patents will help the future economic benefits to keep away others from obtaining them, so patents and copyrights could be capitalised.
There are two ways to help an intangible asset which can generate future economic. Owning the patent for a production operation might help to shorten production costs, moreover owning a brand name could boost revenues. On the other way, the entity's profits will be increased.
When an entity assesses the probability of future economic benefits, the assessment must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. (IAS 38.22)
The cost of a separately acquired intangible asset can usually be measured reliably (IAS 38.26). This is particularly so when the purchase consideration is in the form of cash or other monetary assets. An asset is intangible when it is acquired separately. For instance, the price to purchase a franchise should be capitalised, along with all the related professional and legal costs. However if the asset is a part of a business combination, then this assets' cost will be its fair value at the date of acquisition. Thus the best fair value measurement should be the quoted price of similar assets in the active market. On the other hand, unique intangible assets like publishing titles and brands which cannot have a market value, so they need to be estimated values indirectly by some specific techniques. For example, Cadbury PLC currently owns many well-known brands such as Cadbury, Trident, Green &Black's, Flake, Clorets and Dentyne etc; they need to be estimated at the right value and put in acquisition intangibles.
According to IAS 38 paragraph 75, when intangible assets are recognised, they need to be measured at cost and an entity must choose the suitable for each class of intangible asset. There are two model of intangible measurement such as:
- The cost model measures the asset at cost less accumulated amortisation and impairment
- The revaluation model measures the asset at fair value less accumulated amortisation and impairment.
The revaluation model only can be used when fair value can be regulated in an active market. An active market is where the products are homogeneous and willing sellers and buyers can be found at all time, moreover the prices are available to the public. However they are rare in real life. Active markets might exist for assets such as:
- Milk quotas
- European Union fishing quotas
- Stock exchange seats
Intangible assets such as brands, newspaper mastheads, music and film publishing rights, patents or trademarks might not be existed in active markets.
Revaluations should be made with sufficient regularity such that the carrying amount does not differ materially from actual fair value at the reporting date.
Revaluation gains and losses are accounted for in the same way as revaluation gains and losses of tangible assets under IAS 16.
Subsequent to recognition as an asset at cost, an intangible asset accounted for under the revaluation model is to be carried at a revalue amount - namely, its fair value at the revaluation date less any accumulated amortization and any accumulated impairment losses. Revaluations need to be made often enough to ensure that the carrying amount is not materially different from fair value at the end of the reporting period.
Cadbury PLC is the second largest global confectionery company, employing more than 70,000 people around the world, with 2008 sales of £5.4 billion and a 10.5% share of global confectionary market. The company has products in all three segments of market such as chocolate, sugar and gum. Cadbury PLC manufactures many well-know brands e.g. Cadbury, Trident, Green &Black's, Flake, Clorets, Halls and Dentyne etc.
The main economic and competitive assets of the Group are its brands, including the Cadbury. Some of them are not shown on the balance sheet as they are internally generated. Only major brands has been shown in Group carries assets in the balance sheet since 1986. Those brand values are calculated based on the Group's valuation methodology, which is based on valuations of discounted cash flows. No amortisation is charged over 95% of brand intangibles by the Group, because the values of these brands are indefinite. In 2008, the total brand intangible assets of £1.624 billion were recognised which included confectionery and beverages brands.
Furthermore, the Group also recognises obvious other identifiable intangible assets at fair value on acquisition such as customer lists, customer contracts, customer relationship, and the exclusive rights to distribute branded products in specific areas.
Under IFRS, the Group remains to armortise certain short life acquisition intangibles. The recognition of amortisation and impairment of acquisition intangibles, charged against profit from operations was £ 4 million in 2008 (207 charge was £18 million)
In Cadbury PLC, computer software is treated as an intangible asset when it is not an integral part of a related item of computer hardware. Capitalised internal-use software costs include external direct costs of materials and services consumed in developing or obtaining the software, and payroll and payroll-related costs for employees who are directly associated with and who devote substantial time to the project. Capitalisation of these costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. These costs are amortised over their expected useful life on a straight-line basis, with the lives reviewed annually (Cadbury PLC, 2009). The amortisation period for software intangibles is no greater than 8 years. In 2008, the software intangible was measured at £87 million while the amortisation of software intangibles was £31 million.