Intangible assets in the age of 4IR: current accounting and the way forward

The world we live in

The Fourth Industrial Revolution (4IR) that has churned up today’s world is significantly different from earlier industrial revolutions as it has impacted our daily lives at an unprecedented scale and speed. 4IR ideas complement and even replace human intelligence, while earlier industrial revolutions focused primarily on building tangible assets to reduce or replace physical labour.

4IR – claim to fame

4IR businesses, particularly in areas such as e-commerce, fintech and edtech, have disruptive technologies as their foundation and claim to fame. This has spawned a new generation of companies with an “asset light” business model. Disruptive technology, though off-balance sheet, is often argued to be a key driver of astronomical enterprise valuations due to the following factors:

• the high barrier for entry of competition it creates,
• the quick scale-up capability it provides with minimal incremental cost,
• the continuous optimisation it provides to business economics, and
• its disruption and dominance of conventional business models.

What are the current accounting guidelines for intangible development costs?

The current accounting guidelines for intangible assets, in IAS 38, “Intangible Assets” and SIC 32, “Intangible Assets – Website Costs”, set a higher threshold for capitalisation of costs related to internally developed IA in contrast to the requirements of IAS 16, “Property, Plant and Equipment” for tangible assets. Beyond the assessment of future economic benefits and cost measurability required for tangible assets, internally developed intangible asset recognition requires evaluation of technical feasibility to complete the asset development, prevailing intention to use or sell the asset, and the availability of resources to complete the development and then sell or use such asset.

Considering that IA by their nature are not physically existent and their value to one company may differ from another due to subjective factors, the above additional criteria provide a more robust framework for assessment before recognition. The reality is that in applying these criteria, enterprises tend to be conservative rather than prudent, with an understandable scepticism about recognising internally generated IA on account of cost-benefit commensurateness in a finance function. Factors affecting this reluctance include:

• the additional investment requirement in processes such as project costing, time sheet records, future economic benefit projections, and periodic impairment testing that will need to be continuously updated in this rapidly changing world of technology; and
  
  
• in certain jurisdictions, preparers’ preference for an earlier tax deductibility of the development expense when incurred, rather than to defer the tax claim for expense by capitalisation.

Where are accountants heading in the accounting for intangible development costs?

The IASB Research Forum initiated a discussion with a variety of interesting perspectives presented in its November 2020 meeting. The issue is proposed to be further deliberated in November 2023, with the IASB calling for research papers using analytical approaches, empirical archival methods, field study methods, experiments, and surveys.

The way forward

Accounting for IA today is as relevant, if not more so, as the accounting of tangible assets and working capital. There is an urgent need for the standard setting process to be closely informed of the fast-paced changes of the 4IR world, and for the publication of more comprehensive guidelines sooner than in a couple of years.

Meanwhile, companies need to closely examine the need to recognise IA with the aim to set up adequate processes to appropriately reflect the substance of an enterprise value on their balance sheets and ensure transparent disclosures in financial reporting. Contributions to the ongoing research by all stakeholders will lead to the development of a highquality standard of IA assessment suitable to the needs of the 4IR age.

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