It’s possible to appreciate the broad purpose of IAS 38 Intangible Assets while still finding it inherently rather peculiar…

For example, anyone who’s had to spend time puzzling over how an amount of purchase price consideration might be allocated between, say, customer lists, marketing rights, patents and/or goodwill will appreciate that such exercises are often as much matters of art, of constructing a narrative, as of science. In his Accounting Miscellany blog, Peter Clark recently astutely surveyed the area and suggested among other things that IAS 38’s outdated definition of an asset should be updated to reflect more recent changes to the conceptual framework, along with relevant supporting material. He suggested that this would

• lead to a clearer focus on identifying the precise nature of the rights constituting various types of intangible asset. Identifying the nature of those rights would make it easier:
  (a) to select the most appropriate accounting treatment for those assets.
  (b) to evaluate requests for financial statements to recognise some broader class of intangibles that (in some people’s eyes) do not meet the definition of an asset.
• encourage a more accurate discussion of control (which) would focus on control of a right, not on control of the future benefits. That discussion would be a useful foundation for discussing relationship assets and assets that will produce economic benefits in only some scenarios.

The IASB did consider a few years ago whether to develop a project to change the recognition criteria for identifiable intangible assets acquired in a business combination, noting among other things:

• several preparers and auditors questioned the usefulness of the information about intangible assets that are difficult to value reliably, such as customer relationships and brands.
• These stakeholders said that:
  • valuing intangible assets is complex, subjective and costly;
  • distinguishing some intangible assets, such as brands and customer lists, from the rest of a business is difficult because doing so requires an arbitrary allocation of cash flows; and
  • applying the separability criterion is often difficult.

In the end though the board didn’t propose any changes, noting among other things that “reducing the proportion of intangible assets recognized separately would not respond to the frequent calls to improve financial reporting by providing more information about intangible assets that are increasingly important in modern economies” (which is another story) (they more recently discussed the area again, without deciding on a project direction). And so with that being the case, and in the absence of the changes proposed by Clark, we muddle on as best we can. The Ontario Securities Commission has occasionally commented on aspects of the area, for example in the Corporate Finance Branch’s 2019 annual report:

•  As part of our CD and prospectus reviews, in circumstances where an issuer has acquired intangible assets and has recognized such assets within its financial statements, we may request that the issuer provide both its quantitative and qualitative analyses that it has previously prepared or provided to its auditors to support the probability of economic benefits attributed to each of the acquired intangible assets flowing to the issuer, as well as the issuer’s corresponding purchase price allocation to each of the assets based on such analyses. Additionally, for acquisitions involving non-cash consideration (i.e. shares), staff may also request the issuer to explain how the consideration was valued and how the resulting purchase price allocations reconcile to the original book values of the acquired intangible assets. Finally, where necessary, we may request that the issuer disclose certain supporting assumptions of the above analyses in order to provide a clearer understanding of how the assigned values for these intangible assets were determined by the issuer.
• This is an area of heightened interest to staff in circumstances where the fair values assigned to certain intangible assets upon acquisition by an issuer are substantially higher than their respective original book values (e.g., acquired licenses, etc.). This is especially the case for certain internally generated intangible assets (e.g., brands, titles, customer lists, etc.), which are only permitted to be recognized as assets upon acquisition by another entity.

It’s a bit hard though to imagine the staff’s efforts would often lead to uncovering grievous errors (there don’t seem to have been any during the last three years at least, based on the “refilings and errors” list maintained on the OSC’s website). The reference to requesting explanations of how “purchase price allocations reconcile to the original book values of the acquired intangible assets” is peculiar, as if anything would be gleaned from such “reconciliations.” As the extract notes, the assigned fair values might indeed be higher than their previous book values, but that’s a function of the accounting model rather than (as the extract almost seems to imply) a sign that something might be awry. Still, one can perhaps understand the concerns in broader terms, as an expression of disquiet regarding an area unusually subject to significant assumptions and judgments (which, as noted, may not always have been clearly disclosed)…

The opinions expressed are solely those of the author.