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Intangible Assets:-

What Does Intangible Asset Mean?

An asset that is not physical in nature. Corporate intellectual property

(items such as patents, trademarks, copyrights, business methodologies),

goodwill and brand recognition are all common intangible assets in today's

marketplace. An intangible asset can be classified as either indefinite or

definite depending on the specifics of that asset. A company brand name is

considered to be an indefinite asset, as it stays with the company as

long as the company continues operations. However, if a company enters a

legal agreement to operate under another company's patent, with no plans

of extending the agreement, it would have a limited life and would be

classified as a definite asset.

Amortization

What Does Amortization Mean?

1. The paying off of debt in regular installments over a period of time.

2. The deduction of capital expenses over a specific period of time (usually

over the asset's life). More specifically, this method measures the

consumption of the value of intangible assets, such as a patent or a

copyright.



Impair ment Defined

As with most generally accepted accounting principles, the definition of

"impairment" is in the eye of the beholder. The regulations are complex, but

the fundamentals are relatively easy to understand. Under the new rules,

all goodwill is to be assigned to the company's reporting units that are

expected to benefit from that goodwill. Then the goodwill must be tested (at

least annually) to determine if the recorded value of the goodwill is greater

than the fair value. If the fair value is less than the carrying value, the

goodwill is deemed "impaired" and must be charged off. This charge

reduces the value of goodwill to the fair market value and represents a

"mark-to-market" charge.

US GAAP

- Amortizationofintangibleassets:

a. An intangible asset with a finite useful life

amortized over its useful life.

b. If the useful life is not limited

by legal, economic or other factors,

useful life is indefinite (not infinite).

c. Amount to be amortized

= cost - residual value



d. If the pattern of economic benefits can be determined

Amortization method should reflect such pattern.

e. If the pattern of economic benefits cannot be determined

Straight-line amortization

G oodwill

a. Goodwill is not amortized.

Goodwill is tested for impairment

b. Impaired

fair value (carrying amount)

c. Test for impairment

on an annual basis

d. If certain events would reduce fair value below carrying

amount test for impairment between annual tests.,

The IAS:

Amortisation and Impairment

An intangible asset should be amortised over the best estimate of its useful life.

[IAS 38.79]



The Standard does not permit an enterprise to assign an infinite useful life to an

intangible asset. It includes a rebuttable presumption that the useful life of an

intangible asset will not exceed 20 years from the date when the asset is available

for use. If there is persuasive evidence that the useful life of an intangible asset will

exceed 20 years (cases should be rare), an enterprise should amortise the intangible

asset over the best estimate of its useful life.

The amortisation method should reflect the pattern by which the asset's economic

benefits will be used up. [IAS 38.88].

If an enterprise controls an intangible asset by contract, the amortisation periodshould not exceed the contract period unless the enterprise has a legal right to

renew and renewal is virtually certain. [IAS 38.85]

The residual value of an intangible asset should normally be assumed to be nil

unless either there is a commitment by a third-party purchaser to buy the asset or

there is an active market for this kind of intangible asset. [IAS 38.91]

The amortisation period and method should be reviewed annually. [IAS 38.94]

IAS 36, Impairment, applies to intangible assets. There is a compulsory annual test

if amortisation period exceeds 20 years or intangible is not ready for use), plus

special disclosures

Amortization methods include

(1) straight-line method

(2) diminishing balance method

(3) unit of production method



An intangible asset with indefinite useful life

required to test for impairment annually

G ermany G AAP

Accounting f or Goodwill

according Ger many GAAP :Definition of Goodwill

According to § 255 (4) HGB Goodwill is calculated as the difference

between the cost of the acquisition and the value

of the individual assets of the company acquired less the liabilities at the

time of the acquisition. In Germany, if the

acquisition cost is higher than the proportional net asset value of the

acquired subsidiary, the difference on first

consolidation must be allocated to the various asset accounts or be

compensated with certain liability accounts of the

acquired company (HGB, Para. 301 al. 1, s. 3). The part of the

consolidation difference which cannot be allocated to

Vol. 3, No. 10 International Journal of Business and Management

128

specific assets, has to be treated as goodwill (³Geschäfts- und Firmenwert´,

HGB, Para. 268 al. 2) which is disclosed

under the balance sheet heading of intangible assets.

Goodwill may either be positive or negative. Positive goodwill represents

benefits attributable to a business which are



derivedform the combination of the assets of a business rather than from

any identifiable asset. Examples include a

favourable reputation, customer loyalty, the skills of management, or the

workforce. Negative goodwill may result from

a bargain purchase or where disadvantages exist, such as poor market

perception or on unmotivated workforce.

3.2 Accounting Principles for Goodwill According to HGB and GAS

Treatment

The general prohibition to recognize self generated assets applies

accordingly to self-produced goodwill (HGB § 255,

Para. 4). Accounting for acquired goodwill is regulated by a system of

individual rules whereas according to IAS or US

GAAP, goodwill accounting rules follow the economic content of the

transaction. Therewith, the commercial code does

not underlie a continuous conception.

According to HGB § 255 Para. 4, goodwill originated from an asset deal

may be taken up into the balance sheet. It

represents the difference between the consideration paid on the acquisition

of an enterprise and the current value of the

individual assets less its liabilities at the date of acquisition. This rule

enables preparers to invest significant amounts in

goodwill without rendering an account.

If the goodwill is capitalized it must be either amortized in each succeeding

year by at lease 25 percent or be distributed

systematically over the years that are likely to benefit (HGB § 255, Para. 4).

If not recognized, the corresponding



amount must be expensed. It is not allowed to charge goodwill directly

against reserves.

Negative Goodwill

The standard also sets out rules for accounting for negative goodwill.

Requirements for the presentation of negative

goodwill exist for the group accounts only (§ 309 (2) HGB). In individual

company¶s accounts a corresponding accrual

(provision) can be set up. Negative goodwill should be shown separately in

the balance sheet, within the equity section on the liabilities side of the

balance sheet (§ 301 (3) 2 HGB). Itshould be released to income when

future expenses or losses relating to the acquisition are incurred. If there is

noconnection to future expenses or losses, the amount by which the

negative goodwill is lower than the fair values of the

non-monetary assets acquired should be recognized on a systematic basis

over the weighted average of the remaining

useful life of the depreciable assets. The remaining difference should be

recognized as income immediately at first

consolidation. (GAS 4-38-41) Overall, GAS 4 is intensely influenced by IAS

Impairment Reviews

German GAAP does not have a notion of impairment reviews. However,

exceptional amortisation should be provided

for a permanent diminution in value. (§ 253 (2) 3 HGB)



When the circumstances that caused a permanent diminution in value to be

recognised change, reversal of the original

write down must also be recognised in the profit and loss account. (§ 280

HGB)

C onclusion

Differences between us and Germany gaap about amortization and

impairment:-

Both Germany and US GAAP require purchase consideration to be

allocated to the net assets acquired at their fair value on the date of

acquisition.

Under Germany GAAP, goodwill arising and separately identifiable and

separable intangible assets acquired on acquisitions made on or after 27

September 1998 are capitalized and amortized over their useful life, notexceeding a period of 20 years.

Prior to 27 September 1998, all goodwill and separately identifiable and

separable intangible assets were written off to reserves on

acquisition.Under US GAAP, identifiable intangible assets are separately

valued and amortized over their useful lives. The separately identifiable

intangible assets included in the US GAAP balance sheet are principally

comprised of brand rights which are being amortized over 25 to 30 years .

The Company adopted SFAS No. 142, ³Goodwill and Other Intangible

Assets´ (SFAS 142) with effect from 1 July 2001 and accordingly goodwill



generated on acquisitions after this date was not amortized. For purchase

transactions prior to 1 July 2001, goodwill was capitalized and amortized

over its useful life.

From 29 September 2002, in accordance with SFAS 142, the Company no

longer amortizes goodwill but rather tests such assets for impairment on an

annual basis or where there is an indicator of impairment. The Company

completed an annual impairment review under SFAS 142 at 30 September

2003 and no impairment charge of goodwill was indicated.

Differences between US and IAS GAAP of intangible assets:

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