Measurement Subsequent To Initial Recognition Accounting

Table of Content

Intangible Assetss are identifiable nonmonetary long lived assets that dont have physical substance, which can be either acquired or developed internally by the company ; contribute in the production of the goods and services. Under US Generally Accepted Accounting Principles ( GAAP ) intangible assets with definite life are amortized over their estimated utile life while as in the International Financial Reporting Standards ( IFRS ) indefinite lived intangible assets have to be impaired in any period by carry oning an impairment trial in order to account for the intangible assets.

Brand rating originally started in the 1980s. The first trade name rating was done in 1988 by Rand Hovis McDougall ( RHM ) which thought that its trade name was undervalued when Goodman Fielder Wattie ( GFW ) offered 600? million to purchase the company. So, the RHM 1988 Financial statements included trade names in the intangible assets subdivision with a value of 680? 1000000s[ 1 ].

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Because of the increasing importance of trade name names in the economic life of the concern, the accounting intervention for trade names has been a affair of treatment and argument. IFRS foremost addressed accounting for intangibles in the International Accounting Standard 38 ( IAS 38 ) which established standards for clear uping the acknowledgment, measuring, amortisation, disposal and revelation of intangible assets, including trade name names.

We will discourse the accounting intervention of trade names under the undermentioned subjects:

Why should a company value its trade name?

Accounting for trade names separate from good will

Recognition of trade names as an plus.

Recognition of internally generated trade name names.

Recognition of acquired trade name names.

Initial measuring of trade names.

Measurement subsequent to initial acknowledgment.

Impairment trials under IFRS.

Intangible assets and trade name names under GAAP harmonizing to FASB.

Retirement and Disposal.


Why should a company value its Brand?

Many grounds drive companies to value their trade names, get downing with finding monetary value of trade names in state of affairss such as amalgamations, acquisitions, and joint venture, besides finding the value that brands add to those minutess. Brand rating is indispensable for doing concern and trade name investing determinations. Measuring the value of trade name agencies measuring trade name public presentation to heighten the returns related to the trade name. Establishing and pass oning trade name name as an intangible plus in the capital market is critical for back uping portion monetary value and obtaining financess. The company should value its trade names for intents such as legal minutess and licensing, and for instances of exposing the company into judicial proceeding for deciding differences. Because trade names are a valuable plus to any company ; it can be the money shaper that generates future hard currency flows if used sagely and reached its targeted groups. In other words, trade names can alter from merely a mark into an plus worth 1000000s even one million millions of dollars. In add-on, acknowledging the trade name name today as an intangible plus is important because of the extremely increasing value of the intangible assets. Although extremely valued it ‘s the least fathomed. To reason, trade names today are the most valuable resources in concern because they can force demand, motivate forces, and promote fiscal markets, taking companies to acknowledge their demand to recognize and analyse trade name equity and trade name value when doing strategic planning.

Accounting for trade names separate from Goodwill

Goodwill is an intangible plus with the quantifiable value owned by the company. It reflects the concern repute and clients ‘ trueness. It is considered to be portion of intangible assets on the balance sheet. Harmonizing to the United States Financial Accounting Standards Board, Goodwill is the extra cost of the acquired company over the amount of the sums assigned to identifiable assets acquired less liabilities. While the International Accounting Standards Committee defines goodwill as the surplus of the cost of acquisition over the acquirer ‘s involvement in the just value of the identifiable assets and liabilities acquired at the day of the month of the exchange minutess. On the other manus, trade name is a name, term, mark, symbol, or any other characteristic that identifies a company ‘s goods or services and distinct them from those of rivals. In accounting, trade names and good will portion the same features and they both contribute to heighten future hard currency flows. Therefore, trade names are treated about the same as good will. Many comptrollers use the same rating methods such as the present value of future hard currency flows computations for trade names and good will. For that ground, companies may unify trade names within good will and handle them as 1. This is implemented even by big corporations such as Cadbury Schweppes. Brand names are classified by the accounting criterions as intangible assets.In add-on, trade names are considered to be a legal belongings ; they can be transferred, sold, licensed individually and lawfully protected. So, Trade names proved to hold a lawfully separate individuality. Therefore, trade names are recognized on the balance sheet as intangible assets dissociable from good will.

Recognition of trade names as assets:

Brand name can be recognized as an plus if it complies with the plus definition. Both GAAP and IFRS define intangible assets as “ identifiable, nonmonetary assets without physical substance held for usage in the production or supply of goods and services for rental to others, or for administrative intents ” . To see an point to be an plus, first it should ensue from past events, and in future economic benefits to the concern.

US GAAP provides standards for acknowledging intangible assets similar to IFRS ( IAS38 )[ 2 ]:

If the plus can be identified individually from other facets of the concern entity

If the usage of intangible plus is controlled by the entity as a consequence of its past actions and events.

Whether future economic benefits are expected to flux to the entity.

Whether the cost of the plus can be measured faithfully.

Harmonizing to the criterions, intangible plus is identifiable if it is dissociable and can be distinguished from good will and if it arises from contractual or other legal rights. Trade names are included in the definition of intangible assets that should be recognized and accounted for. Brand names are either internally developed or acquired in a concern combination.

Internally generated trade name names:

Accounting intervention for internally generated intangible assets differs from acquired intangibles. Both IFRS and GAAP prohibit the acknowledgment of internally generated intangible assets including trade name names.

Outgos ensuing from researches are expensed while costs ensuing from development are capitalized if they meet certain standards “ IAS 38.57 ”[ 3 ]:

The proficient feasibleness of finishing the plus so that it will be available for usage or sale ;

The purpose to finish the plus and usage or sell it ;

The ability to utilize or sell the plus ;

The plus will bring forth likely future economic benefits and show the being of a market or the utility of the plus if it is to be used internally ;

The handiness of equal proficient, fiscal and other resources to finish the development and to utilize or sell it ; and

The ability to mensurate faithfully the outgo attributable to the intangible plus.

Companies may incur outgos to better trade name names e.g. advertisement runs. It ‘s possible that these outgos may be capitalized as portion of trade name names after subtracting the costs related to research from the cost of creative activity, nevertheless it ‘s argued which of these outgos and how much can be capitalized. That ‘s why IFRS prohibit the capitalisation of internally generated trade name names. In other words, the whole thought is based on direction judgement of the sum to be capitalized sing the trade name name. When an internally generated trade name name is recognized, the cost is determined utilizing the acquisition rules.

Besides, the guidelines prohibit the acknowledgment of internally generated intangible assets even if the just value can be measured faithfully. Under US GAAP the criterions prohibit the acknowledgment and ne’er capitalise trade name names as an plus unless otherwise it was acquired.

The ground behind the non-recognition of internally generated trade names is that we can non separate the cost of these points from the cost of developing the concern.

Acquired trade name names:

The accounting governments require that past events be reported at nonsubjective historical cost instead than the subjective just value in order to do the fiscal statements more consistent, comparable and dependable. Purchased trade names are ab initio recognized at cost ( the amount of the purchase monetary value plus any straight attributable costs ) , while acquired trade names in a concern combination can be recognized at their just value at the acquisition day of the month.

It ‘s necessary that the acquirer of trade name names in a concern combination record them as intangible assets even though they were non recognized by the acquiree since they are internally generated.

Cost of acquired trade names is determined based on conditions of the acquisition. This includes[ 4 ]:

Its acquisition monetary value, including legal and securities firm fees, import responsibilities, value added and other nonrefundable purchase revenue enhancements, after excepting price reductions.

Other direct costs in fixing the plus for the concluding usage. For illustration, labour costs.

Initial Measurement of trade name:

With the increased importance of trade names, there has been increased creative activity of rating methods and techniques, even constitution of entities that specialize in mensurating trade name value. Valuation methods vary in techniques, but the most and widely used is the present value technique.

However, here are five methods used for trade name rating[ 5 ]:

Historical cost method: this method considers the entire cost of the trade name. A job arises when capitalising the costs related to the trade name that were expensed a long clip ago and can non look on balance sheet which represents the collection of costs non yet charged to the net income and loss history instead than those that have already been expensed.

Market value Method: when the trade name is being sold or acquired, the realizable value depends on conditions at that clip such as the competitory state of affairs in the market. The value of the trade name so is equal to the replacing costs involved in making trade name trueness, trade name consciousness and so on.

Price premium method: this method determines the extra or premium gross of a trade name by subtracting the income of unbranded viing merchandise from the income of a comparable branded merchandise. The chief intent of many trade names is to accomplish highest degree of future demand so the value of these trade names lies in future demand instead than premium monetary value. Under this method, the trade name value is assessed by projecting the trade name ‘s future net incomes and dismissing them to the net present value at a price reduction rate. However, Many troubles originating from this method:

Subjectivity in hard currency flows building and in taking the appropriate price reduction rate.

There is seldom unbranded merchandise to compare with the branded merchandise.

This method concentrates on monetary value and ignores costs and other commercial factors such as fabricating economic systems of graduated table from a high-volume trade name.

Net incomes Valuation method: this method applies price/earnings multiplier or another multiplier to a trade name ‘s net incomes. Net incomes arise after subtracting the net incomes from any unbranded merchandise viing with the branded merchandise and extinguishing net incomes from assets that are non necessary to the trade name ‘s strength. Troubles originating from this method:

It ‘s hard to take a baseline twelvemonth for brand-related net incomes to use a multiplier.

There ‘s an unjust premise that price/earnings multipliers of brand-related net incomes can be valued in the same manner as the full concern.

Royalty payments method: it requires the finding royalty income from the licencing out of a trade name. In other words, when a trade name keeping company license the trade name to another operating company, the monetary value paid by the operating company to the trade name company is the royalty rate. The value of the trade name to the concern is so calculated as the net present value of all projected royalties. A major failing is whether royalties are an effectual replacement for brand-related premiums.

Measurement subsequent to initial acknowledgment:

There are two alternate methods used to mensurate intangible assets after they have been ab initio measured:

Cost Model: intangible assets are carried at its cost less any accrued amortisation or damage losingss.

Reappraisal Model: intangible assets are carried at just value and are capable to amortisation and damage charges.

When utilizing the reappraisal theoretical account, the just value is determined based on the active market of the intangible plus. There are three conditions for an active market: the points traded are homogeneous, purchasers and Sellerss are available anytime, and monetary values are available to the populace. However, trade name names and hallmarks are non involved in an active market with such features because they are alone. Therefore, they can non be measured at just value utilizing the reappraisal theoretical account ; instead they can merely be measured at cost, and are capable to damage.

Impairment Trials under IFRS

Intangible assets may hold finite or infinite utile lives. If finite, so the plus is amortized over its utile life. However, if the plus has infinite utile life so it ‘s tested for damage. The company should find whether the intangible plus is expected to hold finite or infinite utile life, based on analysis that the plus has or does n’t hold foreseeable bound to the period over which the plus is expected to bring forth net hard currency influxs for the entity.

Under the International Standards, categorization of trade name names as infinite-lived assets must hold some conditions:

The place of the trade name in the eyes of its clients globally in footings of market portion and repute.

Have projected hereafter long term net incomes.

Its exposures to hazard.

A chief event impacting the hereafter of the trade name.

The age of the trade name name.

Until the twelvemonth of 2004, trade name names under IFRS had been amortized and had been appointed for as definite intangible assets where the amortisation was calculated retrospectively from the day of the month of the acquisition. Updates that took topographic point in 2004 started to see trade name names to hold infinite life. Since so, hallmarks and trade name names acquired are considered to hold infinite utile life because they are expected to bring forth hard currency influxs indefinitely. For that ground, the criterions required trade name names to be tested yearly for damage and whenever there ‘s an indicant that they may be impaired. The premise that a trade name name has indefinite life must be reviewed yearly.

The damage of intangible assets such as patents, right of first publications and trade name names is treated in the same manner as durable touchable assets. Harmonizing to IAS 36, impairment loss is the sum by which transporting value exceeds recoverable sum. Transporting value is compared to recoverable sum ( the greater of just value less costs to sell or value in usage ) . The intent of impairment trial is to do certain that the transporting value of the plus does non transcend its recoverable sum. The company does n’t hold to do the damage trials yearly, merely when there ‘s an indicant or intuition that a certain damage of the plus occurred. However, IFRS emphasize that there are some assets that need to be tested yearly on a regular footing. Those assets include infinite-lived intangible assets. The ground for impairment trial is that the transporting value of these assets is unsure because it ‘s non capable to amortisation. This leads us to reason that trade name names should be tested yearly for damage.

In contrast with US GAAP, retrieval of impairment loss under defined conditions is recognized under IFRS. The effects of impairment acknowledgment and reversals will be reflected in net income or loss, if the intangible assets are being accounted for utilizing the cost method.

Intangible Assets & A ; Brand names under GAAP Harmonizing to FASB:

Americans ‘ or any other companies or corporations, who follow GAAP criterions, in their accounting for trade name names as portion of an indefinite lived intangible plus must carry through two types of appraisals: Qualitative & A ; Quantitative appraisals. Those two types of trials are done to calculate the damage of the indefinite intangible plus in order to reflect its market value. Qualitative trials are judgmental trials conducted by professionals based on groundss and events and can be optional to find whether it ‘s of import to carry on a quantitative appraisal. In other words, the company can jump the qualitative appraisal and execute the quantitative straight. Qualitative appraisal besides can assist disintegrate the cost and elaborateness of the impairment trial. To carry on a qualitative appraisal companies evaluate and test events and conditions related to the market value of the intangible plus. Any lessening in value of the indefinite intangible plus must be recognized as an impairment loss and look in the twelvemonth end income statement, which is non allowed to be retrieved in following old ages if any addition in market value occurred. Examples of factors impacting the rating & A ; appraisal of the just value of the trade name plus include:[ 6 ]

Any alterations of the costs of production as natural stuffs, labours, or any variable costs that have harmful effects on the hereafter hard currency flows of the company.

Negative descent of fiscal public presentation due to a comparing between the existent and the jutting hard currency flows that have effects on the major inputs used in finding the just value.

Legal, contractual, political, concern, or other factors, including asset-specific factors that could impact important inputs used to find the just value of the indefinite-lived intangible plus.

Other related company-specific events such as change in direction, cardinal employees, plans, or clients ; observation of bankruptcy ; or cases.

Business and market considerations such as a worsening in the environment of the industry where the entity operates, an increased competition, obsolescence of the company ‘s merchandises and services, demand, or other economic factors or other factors such as technological progresss.

A major impairment of macroeconomic conditions such as restrictions on holding capital, fluctuations in foreign exchange rates, or any other betterments in equity and recognition markets.

The quantitative damage appraisal should include a comparing of the just value of the plus with its transporting sum. If the book value of an intangible plus exceeds its just value, an entity should place an impairment loss in an sum equal to that extra. As we mentioned above, the accounting criterions “ FASB 30-35-19 ” prohibit subsequent reversal of antecedently recognized impairment loss. Therefore the adjusted sum is the new value for the intangible plus.

For illustration ; in 2012 one-year testing of damage for AT & A ; T trade name name, no impairment loss was recorded because through their computations no alteration on trade name names was recognized. Unlike 2011revaluation testing of trade name names, the corporation recorded an impairment loss in the amalgamate income statements of $ 165 in 1000000s when the book value was $ 5,150 in 1000000s compared to its just value of $ 4,985 in 1000000s computed through discounted future hard currency flows. Back to qualitative appraisal an illustration of a factor that caused AT & A ; T trade name name to diminish is a gross revenues lessening from 2011 to 2012 or if gross revenues has grown in a little sum that ‘s non attributable to trade name name.

Retirement and Disposal:

GAAP and IFRS both have the same the accounting interventions for retirement and disposal of intangible assets including trade name names. Procedures are the same as that for belongings, works and equipment. Under those criterions, trade name names are retired when disposal or when they no longer bring forth future hard currency flows. Additions and losingss on disposal are computed as the difference between the returns of disposal and the book value at the clip of sale.


Disclosures are auxiliary paperss accompanied with the fiscal statements, supplying a complete description and inside informations about the fiscal information recorded. IFRS both require revelations for intangible assets such as trade name names, flags, package, right of first publications and patents. These revelations should include information sing ab initio acknowledgment method, addition or lessening in the trade name value as consequence of damage and the sum of impairment loss.

GAAP require a full revelation when a trade name name is acquired in a concern combination. The revelations must be done by composing the just value and all the information about the trade name name purchased. Under GAAP, The revelations before was voluntary while after the fiscal accounting criterion board meetings in 2002 to carry on an updated criterions for revelations of the intangible assets they worked in front to do the revelation required instead than voluntary. The board called for quantitative revelations for the intangible assets as in our instance the acquired trade name name through two attacks ; the fair-value-based and cost-based attacks. Those two attacks are used for unwraping quantitative information. Fair value information could be disclosed utilizing several options as follows ( board, 2012 ) :

Pro forma Statement 142 accountingA for unrecognised intangible assets. That might unwrap values of freshly generated assets, amortisation, write-downs, and stoping balance.

Valuess of unrecognised intangible assetsA at the terminal of the current twelvemonth ( s ) .

Valuess of all intangible assetsA at the terminal of the current twelvemonth ( s ) .

Valuess and alterations in the values of all intangible assets, analyzed to separate assets added or disposed of from alterations in values of assets retained.

While the cost-based attack has different options for unwraping the quantitative information such as ( board, 2012 ) : A

Pro forma successful attempts accounting, value-relevant costs that are spent during the twelvemonth on the acquired intangible plus.

Pro forma retroactive successful attempts accounting, this method includes write offing the costs to develop the intangible plus and retroactively capitalise them

At the terminal, the board narrowed the usage of one attack in unwraping the quantitative information. First, unwraping the just values of all intangible assets at the terminal of the current twelvemonth ( s ) , or unwraping outgos in the current twelvemonth ( s ) .A

Chapter Two: Case Study

AT & A ; T Co. versus PALTEL Group

To finish our survey we took two instance surveies to back up our research and consequences ; AT & A ; T planetary company in USA and PALTEL group in Palestine. Although the two companies sit within two different markets ; USA market which is considered one of the biggest economic system in the universe and the Palestinian market which is little comparative to its opposition. We have chosen those two companies to analyze in our research because they ‘re in the same industry, provide about the same services, and the easiness of acquiring their fiscal information since they are publically traded corporations. Besides, we chose those two companies for an nonsubjective comparing.

In this chapter, we will convey the two companies into treatment, get downing with a brief account and definition of each company and its history. We considered analyzing the trade name names of those two companies from two points of position: selling and accounting. On one manus, we will concentrate on trade name equity, selling schemes and the manner they communicate their trade name names to their clients. On the other manus, we will turn to the accounting interventions used by each company to account for their intangible assets and exactly their trade name names. Then we will implement the premium monetary value method discussed in the first chapter to cipher the value of their trade names financially. The last portion of this chapter includes a comparing between the two companies, clear uping the most of import consequences and differences we came up with when analyzing AT & A ; T and PALTEL group.

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