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The importance of intangibles to organisations and the complexity of recording these in the financial accounts.

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Introduction

'The concepts and conventions of accounting provide very clear guidelines for the accounting of assets within the balance sheet'. Knowledge is becoming the new engine of corporate development with fewer companies relying heavily on tangible assets such as machinery and buildings to measure their value. Successful companies are more inclined to invest heavily in their employees and knowledge base, which prompts the question, How much are they really worth?. Intangible assets such as knowledge and patents are often over looked in company accounts whilst more forward thinking organisations have realised that these are an integral part of their business. Historically the failure to include intangible assets in financial accounts has fuelled the confusion as to their precise description. Henderson and Peirson 2002 described intangible assets as 'rights rather than objects'. The International Accounting Standards (IAS) defines an intangible assets as an 'identifiable non-monetary asset without physical substance'. It would seem reasonable to expect a degree of inconsistency with regard to their treatment in financial accounts especially in light of the above definitions. The article from 'Accounting' magazine mentions the vast sums of money (£1m) ...read more.

Middle

Critics have often blamed the inability of many organisations to submit transparent accounts for the spectacular market failures over the last few years (Holland 2002). So why are intangible assets and intellectual capital so hard to measure in company financials if they are so important to the future success of organisations. Accounts were traditionally designed to measure tangible items such as machinery and buildings and secondly some intangibles are much harder to measure than others. Companies such as the pharmaceutical giant, GSK as mentioned in the case study place considerable value on innovation and market differentiation, but what is important to one company may be worthless to another. This creates another problem for the finance managers as how can you place a value on creativity. Intangible assets can be separated into Human capital, Relational capital and Organisational capital, example of each are shown below: Human capital * Know-how * Education * Qualifications * Work related knowledge Relational capital * Brands * Customers loyalty * Channels * Company names * Company logos Organisational capital * Patents * Copyrights * Design rights * Trade secrets As mentioned earlier in this discussion the financial reporting for intangible assets ...read more.

Conclusion

The ASB provided guidance in January 2003 for the contents of the OFR's and stipulated that it should include commentary on the following: * Corporate reputation * Intellectual capital * Licenses * R&D * Trademarks and copright * Customer relations * Market position and dominance (CIMA website) This discussion has focused on the importance of intangibles to organisations and highlighted the complexity of recording these in the financial accounts, as large investments in intangibles don't appear as positive assets in traditional accounting methods. The comments of one senior accountant (Nick Winters, PKF 'Accounting Magazine') shone much sceptism on how the inclusion of intangible would actually work in practice as the 'balance sheet would be jumping up and down all over the place'. He concludes that despite these problems 'it would be ridiculous for a business with good ideas not to put them down in the balance sheet, but in practice it is much more difficult'. It is highly likely that a recognised model for accurately recording the value of intangibles will take a long time to develop but it extremely important that organisations continue to experiment with different approaches as modern day investors require a much higher degree of transparency. ...read more.

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