Question

Give three possible reasons why immediate expensing of intangibles may be justified. Do you agree with these reasons? Explain

Answer 1

The immediate expensing of the cost of intangibles is usually justified on three grounds:

(a)The cost of some intangibles is an allowable deduction for income tax purposes inthe period in which the cost is incurred. While it may be convenient to use thesame treatment for both taxation and financial reporting purposes, it may not beappropriate to do so. Accounting profit should be measured using accounting concepts and standards.Therebis no expectation that taxable income and accounting profit should be the same.

(b)Accountants sometimes suggest that recognising the cost of intangible assets asexpenses in the period in which the cost is incurred is justified because ofuncertainty about the amount and timing of the future economic benefits fromthem. The Framework 2010 provides that assets should be recognised in thefinancial statements when the receipt of future economic benefits is probable andthe cost or other value of the asset can be measured reliably. In the case ofintangible assets acquired in an arm’s-length transaction, there is no reason tobelieve that the probability of receiving future economic benefits is consistentlylower than the probability of receiving future economic benefits from acquiredtangible assets, or that the measurement of the cost or other value is consistentlymore unreliable. However, in the case where intangible assets are developedinternally, there may be more uncertainty about the recovery of future economicbenefits and the amount that should be recognised as the cost of the asset.

(c) Another reason for the immediate expensing of the cost of intangible assets is that the amount may be frequently immaterial. If the cost of an intangible asset is not material, then the immediate expensing of the cost would be justified. However, this argument would not support immediate expensing in all cases, but only in those cases where expenditure on intangibles was immaterial. Further, as noted in the answer to question 3, businesses appear to be spending more, not less, on intangibles hence the materiality argument may apply less and less.