Over the years, as economies have become more modernized, firms have in recent times begun to give centre stage to intangible assets in their decision making and everyday activities. This is because wealth and progress are now driven mainly by intangibles which can be defined as “claims to future benefits that do not have a physical form” (Hand & Lev, 2003, p. 1). This has become so, in contrast to normal assets which are now easily accessible to firms, and earn, at most competitive returns. As such, in order for firms to gain the competitive advantage, they bring intangible assets into the picture.
This introduction of intangible assets by organizations has led to the inclusion of intangibles and their treatment by accounting regulators into accounting standards, and eventually financial reporting. As such, in the UK and Europe, this is currently covered by International Accounting Standard 38 (IAS 38), put forward by the International Accounting Standards Board (IASB). This was made effective for all European publicly listed companies in 2005, before which in the UK, Financial Reporting Standard 10 (FRS 10) put forward by the UK-based Financial Reporting Council (FRC) was applicable for intangibles. In context, according to Epstein & Mirza (2006) IAS 38 is an encircling standard which establishes the recognition criteria, measurement bases and disclosure requirements for intangible assets.
Accordingly, in order for a certain asset that is viewed as intangible to qualify for treatment under IAS 38, it would need to satisfy the recognition criteria. This criterion thus comprises of expectations of future benefits from the intangible, ability to measure its cost reliably, it being a separate entity from the organisation and the ability to gain benefits from it, resulting from its past actions. However, if an intangible fails to meet both the definition and recognition criteria, it is recognized as an expense.
Therefore, this leads...