GAAP Vs IFRS on Intangible Assets Case Study

Introduction

There are a number of different areas of difference between US GAAP and IFRS. Nguyen (2017) points out that one of those areas of difference is with respect to the treatment of intangible assets. Intangible assets show on the balance sheet, but what types of intangible assets and how they are valued differ between these two different accounting systems. This report will highlight these differences, and their implications.

US GAAP Treatment

There are several areas of intangible assets that are covered by the different systems. These include R&D costs, advertising costs, goodwill, and impairment of intangible assets (IAS Plus, 2017). R&D costs, for example, are treated under GAAP on expensed as they occur. Further, intangible assets are measured at historical cost less accumulated amortization and impairments. For goodwill, the reporting unit can be an operating segment or one below. If the implied fair value of the intangible asset – including goodwill – is below the book value, then an impairment loss can be recognized (IAS Plus, 2017).

IFRS Treatment

IFRS differs on these particular areas that pertain to intangible assets. The first key difference is that intangible assets are recognized where it is probable that future economic benefits are attributable. This would be very important to a pharmaceutical firm, where the failure rate for new R&D projects is quite high – those costs are not recognized under IFRS whereas they are under GAAP. IFRS allows, contrary to GAAP, revaluation of historical costs for intangible assets.

Under IFRS, intangible assets are recognized at the lowest possible unit, and can go no higher than the operating segment. There is less leeway than under GAAP in this regard. Impairment is valued at fair value (not historical cost), and starts by reducing goodwill first, and only when goodwill has been exhausted is impairment of the other intangible assets allowed. This has implications for the valuation of goodwill on the balance sheet under IFRS (IAS Plus, 2017).

Changes

The implications for conversion from GAAP to IFRS are as follows. First, the company must determine the probability of future economic value for investments in things like R&D and advertising. The current financial statements will reflect all such costs, but the IFRS statements may require the exclusion of some of these costs. There is less incentive to pursue high risk activities under IFRS because there are fewer potential tax benefits to them – GAAP is more encouraging for investment in activities that…