This summer the U.S. Securities and
Exchange Commission (SEC) proposed a timetable for the U.S. to jettison its own accounting standards in
order to embrace international financial reporting standards (IFRS) that
have already been adopted by many
countries. The move would let U.S.
companies with international operations maintain just one set of books
globally, allow easier comparisons
between financial results of corporate
competitors in differing countries, and
help the competitiveness of U.S. financial markets. The proposed switch to
IFRS would be phased in and would
require all U.S. companies to adopt by
2016, while allowing the largest companies to voluntarily switch as early as
December 2009.
The move to international standards,
and ongoing changes in both sets of
standards designed to facilitate their
convergence, will result in important
changes in how companies account
for IP. For example, beginning in 2009,
both U.S. companies and companies
reporting under IFRS will be required
to recognize the fair value of acquired
in-process research and development
(IPR&D) as an asset. Historically, the
fair value of IPR&D was required to
be expensed at the time of acquisition.
The values of these IPR&D assets will
then need to be prospectively monitored and evaluated by companies
for potential impairment because of a
project’s failure.
Also, on adoption of IFRS by U.S.
companies, internal IP development
costs meeting certain criteria as an
intangible asset would be capitalized (research costs would still be
expensed). This will result in recording
more of the costs of development of
IP as an asset. However, with IP, cost is
often not reflective of fair value.
Additionally, the International
Accounting Standards Board (IASB),
a London-based body that sets the
international standards, has an ongoing intangible asset research project
to consider the initial and ongoing
accounting for internally developed
intangible assets, including IP. The
IASB is considering ways to reduce or
eliminate inconsistencies in accounting treatment between acquired intangible assets accounted for at fair value
and internally developed intangible
assets which are recorded at cost, if
at all. This could potentially result in
significant changes in accounting and
disclosure requirements related to IP
assets, including potentially requiring
greater use of fair value to measure
and record IP assets.
Jay Howell is a San Franciso–based partner in the technology practice of BDO
Seidman, LLP, a national accounting
firm. Rick Nathan is a Chicago-based
managing director with Trenwith Valuation, LLC, a corporate valuation services
firm.
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