Question

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for intangible assets.

Short answer

Answer

The cost related or allocated to the research and development activity is treated as two different components in both GAAP and IFRS. The major difference is that GAAP is rule-based and IFRS is principle-based.

Step-by-step solution

Meaning of GAAP                                                                                                                  

GAAP stands for "generally accepted accounting principles," which are a collection of accounting principles, methods, and rulesthat organizations use to create or make financial statements for a given period of time. This increases the company's monetary information communication's comprehensibility.

Explaining the similarities and differences between GAAP and IFRS with respect to the accounting for intangible assets.                                                                              

There are several similarities between the two.

1. Research and development expenditures are split into two components in GAAP and IFRS;
2. IFRS and GAAP are comparable for intangibles acquired in a business combination. That is, if an intangible asset represents contractual or legal rights or can be separated or divided and sold, transferred, licensed, rented, or exchanged, it is recognized separately from goodwill;
3. Limited life intangibles are amortized under both IFRS and GAAP, but goodwill and indefinite life intangibles are not amortized; instead, they are assessed for impairment on an annual basis;
4. IFRS and GAAP are similar in accounting for impairment.

The following are notable differences:

1. While costs in the research phase are always expensed under both IFRS and GAAP, costs in the development phase are capitalized under IFRS once technological feasibility is achieved; and
2. The International Financial Reporting Standards (IFRS) allow limited capitalization of internally created intangible assets (e.g., brand value) provided a future benefit is likely, and the amount can be reliably determined. All expenses connected with internally developed intangibles must be expensed under GAAP.
3. For long-lived assets and intangibles, IFRS requires an impairment test at each reporting date; an impairment is recorded if the carrying amount of the asset exceeds its recoverable amount; the recoverable amount is higher than the asset's fair value, fewer costs to selling and its value in use. The future cash flows to be received from a certain asset, discounted to present value, are referred to as value in use. The impairment loss is calculated using GAAP as the difference between the carrying amount and the asset's fair value; and
4. When economic conditions or the assets planned use changes, IFRS permits impairment losses for limited life intangibles to be reversed. Impairment losses for assets to be kept and utilized cannot be reversed under GAAP; the impairment loss results in a new cost basis for the asset.