Accounting for Intangible Assets - Relevance Lost?

Abstract

Background and Problem Discussion: Intangible assets are getting more and more important to companies and their owners. The reason for this is that the economy has changed from being industrial to knowledge-based. It is no longer the industrial value chain that creates value, it is innovation and constantly seeking new ways of meeting market demands. Companies can no longer differentiate themselves or create competitive advantages without intangible assets. With increased importance of values in intangible assets, the need for financial information about companies has changed. However, current accounting systems have not been able to keep up with this development. Because of the uncertainty connected with intangible assets, accounting cannot capture their increasingly important value. Consequently, investors and other users of financial information are not provided with sufficient information to make good decisions. This poses the question whether relevance has been lost in accounting for intangible assets? Further, because of this possible lost of relevance, perhaps alternative approaches on reporting of intangible assets are needed? Purpose: The main purpose of this essay is to discuss whether relevance in accounting for increasingly important intangible assets has been lost. Method: To be able to discuss whether relevance in accounting for intangible assets has been lost, we have laid a foundation consisting of existing regulations of accounting for intangible assets, as well as literature and articles on the subject. Further, we have examined the accounting for intangible assets in two Swedish groups, AstraZeneca and the Volvo Group, in order to get a more practical view on the subject. The investigation of the two groups has been made by contducting interviews and studying their financial reports. Delimitations: The discussion of this essay will be delimited to the accounting for intangible assets in big Swedish groups listed on the stock market. Consistently, the discussion will be based on the accounting regulations for intangible assets applied in these groups, namely IAS 38 – Intangible assets and IFRS 3 – Business Combinations. Results and Conclusions: The lack in current accounting systems lies in the fact that it cannot capture all important intangible values. This results in traditional incomes statements and balance sheets being misleading to investors and other users of financial information. Further, because great values in intangible assets are kept hidden in today’s accounting, investors are compelled to make difficult assessments about these values in order to make their decisions. However, we do not find the solution in taking all intangible assets into the balance sheet at any cost. The important qualities of today’s accounting, such as reliability, cannot be jeopardized. Information about hidden intangible assets would therefore be better provided through some kind of alternative reporting. However, this kind of reporting has its errors in possibly being too subjective.