Drawbacks And Benefits Of Intangible Assets – FAQ | IFRS

Drawbacks and Benefits of Intangible assets

Benefits of Intangible assets Drawbacks and Benefits of Intangible assets

Intangible assets form a major proportion of the modern businesses and are a primary area of discussion during the modern company analysis. Brand name, employee and management skills, Research and Development activities, IT systems, stakeholder relations are significant factors to determine any country’s success. The major factors such as customer satisfaction, continuous innovation, Product and service quality as well as the financial profitability and ability to leverage the opportunities present in the market depend upon these intangible assets. To summarize, the company’s future capacity for the growth and sustainability depends upon the intangible assets.

The major benefits derived from the intangible assets are discussed below: Drawbacks and Benefits of Intangible assets

  • Enhance value of business: Intangible assets play a significant role in enhancing the value of the business. Consumer perception and reputation of the company in the market are the core elements for the success of any company. As the world is largely converting into a global village the importance of the intangible assets like intellectual property, knowledge and business relationships etc are increasing. Intangible assets are becoming a greater percentage of most of businesses in the recent times as compared to the large space occupying and unnecessary cost incurring intangible assets. However, this concept is relatively new and most of the new businesses on the smaller scale don’t account for these . They don’t have the adequate understanding of how the company’s reputation or customer base could be beneficial for the company and how to account them properly in the books. Moreover, the more efficiently the intangible assets are managed over the life of the business, the higher the premium earned upon selling the business.

  • A great Investment: Efficiently managing and accounting for the intangible assets is a form of investment in the business as compared to developing a strong tangible asset base. The company earns a significant premium as compared to the costs incurred in order to acquire, develop or maintain them. For example, for the tangible asset the company would have to incur the buying / manufacturing cost, storage and maintenance cost, depreciation expense, obsolescence costs etc. While no such costs are born by the company for the intangible assets other than costs which the business has to incur in any case in order to remain in the longer run in the race. By merely putting all the efforts in enhancing the bottom line of the organization leads to overlooking several other areas of significance. In order to successfully stand out against the competitors in the industry, the company needs to recognize the intangible assets as unique elements.

Drawbacks of Intangible assets Drawbacks and Benefits of Intangible assets

Going forward, although a strong intangible asset base provides organizations a competitive edge, they also have their drawbacks as well which are explained below:

  • Complex task: Intangible assets valuation is a complex process and needs core understanding of the various methodologies, approaches and exercises. Often entrepreneurs and booming business don’t have the skills, knowledge and resources to carry out these activities and need expert services from and analyst or accountant. These experts may charge high fees that the company might not be able to bear at the initial phases.

  • Fraud: Intangible assets can significantly increase the value of a company. There recognition is relatively a newer concept and requires significant developments and rectifications. The management of the company may use creative accounting and window dressing to fraudulently increase the value of the business and earn significant premium on its disposal.

  • Taxes: Goodwill is reported on the balance sheet under the non-current assets, which is amortized over a time period of no more than 40 years in order to comply with the accounting principles. The company charges amortization on this goodwill periodically on the income statement that reduces the company’s profitability. Moreover, according to the recent tax regulations the amortization of goodwill is not deductible in the calculation of tax expense payable for the year.

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