ECONOMIC CONSEQUENCES OF ACCOUNTING FOR INTANGIBLE ASSETS

Abstract

Financial statements have always been the major source of financial information used by economic agents in the decision making process. The economic consequences of accounting has been a matter of growing interest, as different accounting practices will have a different impact on the reported accounting numbers, which in turn give rise to different economic effects.

This study examined the probable economic consequences of accounting methods relating to goodwill and research and development costs. In selecting a preferred accounting method, management are likely to be guided by the perceived economic consequences of the various accounting alternatives. A cross county survey of accounting for intangible assets in the United Kingdom, United States and Singapore was undertaken in this study. The role of the International Accounting Standards Committee was observed to have been effective as national standards were often established in accordance with the International Accounting Standards. This may signify the harmonizing of accounting standards across countries as the pressures from globalization continues.

Based on the present Singapore economy, this study proposed changes in the accounting standard for goodwill. Firstly, all intangible and tangible assets that form the basis for the excess payment over fair values of net assets acquired was proposed to be capitalized and amortized over their useful life. Secondly, any remaining unidentifiable portion of the excess was proposed to be written off against equity on the date of acquisition. This is because under the assumption of an efficient market, amortization should not have significant impact on financial ratios, thus resulting in relatively small economic consequences.

Although it is argued that the time and effort involved in resolving the debate of accounting for intangible assets may not seem to be justified, the assumption of an efficient market may not hold in reality. Adjustment costs due to economic consequences are costly. Hence there exist areas for future research as political pressures continue to play a role in accounting.