Non-recognition of internally generated brands: implications for the usefulness of financial statements

Pieter Van Aardt Van Der Spuy

doi:10.4102/jef.v8i3.123

Abstract

International Accounting Standard 38 (IAS38) prohibits the recognition of internally generated brands as assets. This article explores the implications of this prohibition for the usefulness of financial statements, focusing on the implications for note-disclosure. A theoretical doctrinal research approach is taken in which the literature on intangible assets and current accounting standards is examined and evaluated. The article highlights the information content relevant to unrecognised brand assets that is not currently disclosed to users of financial statements. Furthermore, the article argues and explains how this situation may compromise the usefulness of financial statements. Practitioners compiling financial statements may find the conclusions and recommendations useful in improving voluntary note-disclosure when a reporting entity owns significant unrecognised brand assets. The International Accounting Standards Board (IASB) may find the article useful in reviewing IAS38’s mandatory note-disclosure requirements in order to improve the usefulness of financial statements.

Highlights

AND BACKGROUND‘What is essential is invisible to the eye’ (De Saint-Exupéry, 2009:70)
To what extent may the subtle indictment in this quote be directed at accountants, as far as internally generated brands are concerned? This investigation was precipitated by marketers’ claims regarding ‘brand-related information’ that is hidden from financial statements (Sinclair & Keller, 2014)
As opposed to the comprehensive disclosure requirements that are imposed on and pertain to recognised brands, users of financial statements are not informed about the existence of internally generated brands, nor about management’s intention to sell such brands in the near future, and not about impairments in the value of these assets

Summary

Introduction

AND BACKGROUND‘What is essential is invisible to the eye’ (De Saint-Exupéry, 2009:70). Generated brands are not recognised as assets on the Statement of Financial Position (SFP). This prohibition may invariably exempt internally developed brands, in stark contrast to acquired brands, from informative and complementary note-disclosure. Drawing from De Saint-Exupéry’s (2009) quote, this article investigates whether that which is truly essential regarding internally generated brands may not be disclosed to users of financial statements. This investigation may serve to highlight the importance of extending the existing mandatory note-disclosure that is applicable to recognised brands to include unrecognised brands as well

Objectives

Methods

Findings

Conclusion