In the modern business landscape, intangible assets have become increasingly significant, particularly in industries that rely on intellectual property, research, and exploration. Proper recognition, capitalisation, and impairment of intangible assets are crucial for financial reporting and decision-making. This blog delves into the key themes and practices surrounding intangible assets, drawing insights from relevant accounting standards and industry reports.

1. Defining and Recognising Intangible Assets

Intangible assets are non-physical assets that provide future economic benefits. According to IAS 38, an intangible asset must meet three key criteria:

• Identifiability: The asset should be separable (capable of being sold, transferred, licensed, etc.) or arise from contractual/legal rights.
• Control: The entity must have control over the asset’s benefits.
• Future Economic Benefits: The asset must generate economic benefits for the company.

For software-related assets, IAS 38 and IFRS 16 distinguish between a “right to use” intellectual property at the time of license acquisition and an ongoing “right to access” intellectual property throughout the license period.

2. Capitalisation of Exploration and Evaluation (E&E) Expenditure in Extractive Industries

Industries such as mining and oil & gas capitalise significant amounts of exploration and evaluation (E&E) expenditure. Key findings from industry reports highlight:

• High Capitalisation Trends: Many companies capitalise E&E costs, particularly in the mining and crude oil sectors.
• Company Stage Impact: Junior explorers show higher E&E intensity than established producers, reflecting their focus on discovery activities.
• Accounting Policy Influence: Policies such as the “Area of Interest” method lead to higher capitalised values compared to expense-all approaches.
• Impairment Risk: Despite high capitalisation, these industries face significant impairment risks. Data suggests a correlation between capitalisation practices and future impairments.
• Determinants of Capitalisation: Larger firms are more likely to capitalise E&E, whereas older firms tend to capitalise less. Companies with a history of capitalisation also continue to do so.

3. Intangible Assets in Business Combinations

When companies undergo mergers or acquisitions, intangible assets play a crucial role. Reports indicate:

• Prevalence of Goodwill: Goodwill often constitutes a significant portion of purchase prices in business combinations.
• Types of Intangible Assets: Customer contracts, relationships, and proprietary technology frequently appear in acquisitions.
• Industry Variations: Technology and telecommunications sectors typically have higher proportions of intangible assets.
• Impairment Patterns: Intangible assets with finite useful lives are impaired more frequently than goodwill.
• Compliance Factors: Firms’ compliance with accounting standards varies based on firm size, market development, and regulatory environment.

4. Amortisation of Intangible Assets

For intangible assets with finite useful lives, amortisation is a key accounting process. The amortisation method often depends on usage patterns, with some companies opting for sales-based amortisation to reflect asset consumption over time.

Conclusion

The accounting treatment of intangible assets is a complex but essential aspect of financial reporting. Companies, especially in extractive industries, face significant capitalisation and impairment challenges. In business combinations, goodwill and other intangible assets play a vital role in valuation and post-merger integration. Proper amortisation methods ensure accurate financial representation.

Understanding these practices helps investors, financial analysts, and corporate managers make informed decisions. As accounting standards evolve, staying updated on intangible asset recognition and capitalisation policies remains critical for financial transparency and strategic growth.