This article is the tenth in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we provide an overview of some of the most significant differences between IFRS and U.S. generally accepted accounting principles (GAAP) with regard to the accounting for intangible assets. Actual differences in the accounting treatment between the two frameworks depend on specific circumstances.
The accounting treatment of intangible assets is an area where significant differences exist between IFRS and U.S. GAAP. Under IFRS, International Accounting Standard (IAS) 38, Intangible Assets, is the primary accounting standard for intangible assets, and it uses a very principles-based approach. On the other hand, relevant U.S. GAAP consists of very specific and detailed guidance, which denotes a substantial antithetical overall approach to the subject.
With regard to internally generated intangible assets, IAS 38 distinguishes between the research phase and the development phase. All costs incurred during the research phase are expensed as incurred. Costs incurred during the development phase are capitalized only when an entity can demonstrate that certain criteria are met. In a nutshell, IAS 38 requires that development costs be capitalized after commercial viability has been assessed. To assess commercial viability, IAS 38 explains that the principles in IAS 36, Impairment of Assets, have to be followed. Therefore an analysis of projected cash flows to be generated by the development costs is a crucial step in demonstrating that the recognition criteria are met. Costs are capitalized only from the moment in time at which all the criteria in IAS 38 are met.
Generally, under U.S. GAAP, internally generated costs are not capitalized unless a specific rule requires capitalization. For example, specific rules apply to costs associated with the development of software. U.S. GAAP distinguishes between software developed for sale to third parties and software developed for internal use. IFRS do not contain any specific guidance for software, and therefore the international accounting for software follows the general criteria of IAS 38. Also, under U.S. GAAP, specific rules apply to direct-response advertising costs, which are eligible for capitalization if certain specific criteria are met. Under IFRS, advertising costs are always expensed as incurred.
For subsequent measurement of intangible assets, IFRS allows preparers to use both the cost method and the revaluation model. However, the revaluation model can be used only when the fair value is determined by reference to an active market. IAS 38 provides an extremely restrictive definition of an active market, resulting in very few circumstances in which it is possible to use the revaluation method. U.S. GAAP only allows the cost method for subsequent measurement.
As already highlighted in previous articles, IAS 38 also interacts with many other standards. This can lead to a series of other differences that are indirectly triggered by those standards. In particular, application of IAS 36 and IFRS 3, Business Combinations, might further significantly increase the gap between IFRS and U.S. GAAP in accounting for intangible assets.
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group.
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