Implications of Accounting Research for the FASB's Initiatives on Disclosure of Information about Intangible Assets

Abstract

AAA Financial Accounting Standards Committee INTRODUCTION On January 9, 2002, the Financial Accounting Standards Board (FASB) added a project to its technical agenda titled Disclosure of Information about Intangible Assets Not Recognized in Financial Statements. The FASB undertook this action based on constituents' responses to the August 17, 2001 request for comments on the FASB's Proposal for a Project on Disclosure about Intangibles. Since adding the project to its technical agenda, the FASB decided to restrict the scope of the project to intangible assets that currently are not recognized in the balance sheet, but would be recognized if acquired in a business combination under Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (FASB 200la). Such intangibles encompass those grounded in contracts or other legal rights and those that are separable from the business. The project's scope also includes in-process research and development (R&D) costs that are written off to expense on the day they are acquired under FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. Although deliberations on the project have been temporarily suspended to allow the FASB's staff to work on higher priority projects, the FASB plans to resume the project at some point in the future. The Financial Accounting Standards Committee of the American Accounting Association (hereafter, the Committee) responded to the FASB's request for comments on a Proposal for a Project on Disclosure about Intangibles. Additionally, based on the FASB's request for information about academic research related to intangibles, the Committee prepared a document summarizing this research and its implications for the FASB's project on intangibles. The Committee and the FASB discussed this document at a meeting at the FASB offices in May 2002. This paper contains the Committee's summary of research related to intangibles and the Committee's evaluation of the implications of the research for disclosure related to and recognition of intangible assets, (1) We expand the discussion of intangibles beyond that contained in the FASB's project on intangibles in two ways. First, we discuss research that has implications for intangibles not included in the restricted scope of the FASB's project described above. Second, we examine implications of research for recognition of intangibles, in addition to implications for disclosure of information related to intangibles. RESEARCH RELATED TO INTANGIBLE ASSETS We categorize research on intangibles into three areas that we discuss in turn: (1) research related to current financial reporting for intangible assets, (2) research related to disclosures about intangible assets, and (3) research related to recognition of intangible assets. Most of this research is empirical-archival in nature and focuses on R&D-related intangibles. Overview of the Nature of Intangibles Research For pragmatic reasons, most research on intangibles focuses on those intangibles generated by R&D expenditures. Data on R&D spending are widely available because R&D expenditures must be disclosed separately under SFAS No. 2, Accounting for Research and Development Costs. Because there is no such requirement for other types of intangibles expenditures, Lev (2001, 54-55) notes that empirical-archival research on intangibles is hindered. The focus on R&D raises the question of whether the results of this research generalize to other types of intangibles. It seems to us that the answer to this question depends on whether R&D assets are economically similar to other intangibles and on how familiar investors are with information about other types of intangibles. If the economic process involved in developing these other intangibles is different from that of R&D intangibles, it is not clear that evidence based on R&D has direct implications for other types of intangibles. …