Contents

Executive summary............................................................................................................................2
I. Introduction...............................................................................................................................2
II. Discussion...............................................................................................................................2
1. Intagible assets recognition and measurement...............................................................2
2. Effects of intangible assets on historical fiancial statement..........................................4
3. The effect of the balance sheet on misleading investors about intangible assets.........4
4. Omitting intangible assets in the balance sheet does not prove the quality of the
current reporting practises.........................................................................................................5
III. Conclusion..............................................................................................................................6

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Executive summary

The issue of involving intangible assets on the balance sheet has always been a problem
considered by many analysis and not yet disappear. It still leads to criticism about financial
reporting. In this paper, the content is illustrated around the evaluation of the appropriateness of
the current report practices if the intangible assets are not presented in the balance sheet. It cannot
be denied the necessity of appearance of intangible assets in the balance sheet, however, the above
criticism is not a credible one because there is not enough evidence to demonstrate its accuracy.
On the other hands, it is indicated that even when all of the intangible assets are reflected in the
balance sheet, it is still not enough to provide needed information to investors.
I. Introduction
Intangible assets are a long-term assets used in more than one year by the company, which make
difficulties in measuring and illustrating value in the balance sheet because of their undefined
value compared to other tangible assets (Wall Street Mojo, n.d., para. 2). In regard to the fact that
80% of a corporation's value is comprised of intangible assets such as patent, copyrights and
goodwill, the contribution of intangible assets is important and it is needed to evaluate the effect
of these factors in the balance sheet (Keye, 2012, para. 3). There is an opinion that the absence of
intangible assets on the balance sheet determines the inappropriateness of the current financial
reports. In this paper, the statement is considered carefully and then come to a conclusion that the
fiancial report has present all useful information on intangible assets and there is no need for a
new approach. In another words, the firm’s report is appropriate even when most of the intangible
assets are not illustrated in the balance sheet. The paper critically discusses the recognition and
measurement of intangible assets, the effect of financial report on misleading investors about
intangible assets in context of the old economy and the current situation. Last but not least, the
paper applies the IASB conceptual framework and the intergrated reporting framework
II. Discussion
1. Intagible assets recognition and measurement
Initially, it is required to understand the criteria to recognize and measure the intangible assets,
and then it is possible to identify its appearance in the balance sheet. Intangible assets are the types
of resource that are unidentifiable regarding money aspect and physical substance. Specifically,
the intangible assets do not have a physical presence, are difficult to touch, define, describe and
measure (Andriessen, 2004). There are different terms to define the types of intangible assets,
which are goodwill, copyrights, trademarks, license or human capital (IFRS, 2018). All of these
items should be identified because the company can acquire, purchase or even lease and rent them.
If there is a lack of recognition, the value of the company will be undervalued. For example,
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intangible assets as copyrights of the song created by the musician or song performance by singers
in the company can be sold and create sale revenue. Similarly, goodwill is an intangible asset that
always is carefully considered by investors before making the decision, it is important to consider
the fact that it can generate and affect the increase in the company’s value – stock price and the
price of the company’s products. 
In the recognition process of intangible assets, there are two required steps to go through, which is
meeting the definition and meeting the recognition criteria. In order to recognize an intangible
item, there are seven main elements analyzing the definition of the intangible assets (Gruber,
2014). The first requirement is that the intangible assets must be resources. This factor is
described as input to produce goods and services, which are limited in amount and need to be
allocated efficiently for the future development of the company. Apart from the direct input of
labor, land, machine or capital, intangible assets indirectly contribute to the producing process.
The indicated intangible assets, in this case, can be listed out as knowledge and skills of the labor
force or patent, and copyrights to produce unique products. The second considered requirement is
the future economic benefit, which can be the sale of the products or services or cost-saving
ability created from the use of intangible assets. For example, the goodwill is a worthy asset to
take advantages in producing process. With the goodwill, the company can utilize it and increase
the sale revenue and then convert it into cash. Or in another way, the patent of the new technology
or innovation in the process can reduce the cash outflow and bring higher productivity as an
economic benefit. The third requirement of the intangible assets is that they need to be controlled
by the entity to satisfy the definition of the asset. This is a way to ensure the right of the legal
company to use the assets and prevent others from accessing the benefits. The next criteria of
intangible assets are that they should be the result of the past events, which means that the
transaction of taking control of the assets must occur before the reporting date. Moreover,
identifiability is an additional criterion needs to be reached. This requires the intangible assets to
be separated and raised from contractual or legal rights. Furthermore, the definition of intangible
assets contains the fact of being non-monetary related. In other words, the asset cannot be fixed or
determined by a certain amount of money. Last but not least, intangible assets are defined as a
non-physical substance. This is the most typical characteristics to distinguish them with tangible
assets. In all, the company has to assess all factors or requirement of the intangible assets
definition to categorize them in the right groups, which affects the assets section in the balance
sheet.
Besides the seven elements in the definition, intangible assets will be recorded as they satisfy the
two criteria. First of all, the expected future benefits from intangible assets have to have a
probability of creating company cash flow. The required standard takes more consideration in the
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evidence of the ability to produce economic benefit. Regarding the cost of intangible assets, it has
to be measured reliably or all of the cost component attracted to the assets should be possible to
identify. It requires not only general acquirement of the items but also the context of specific
acquisitions.
In order to measure the intangible assets, there are two main stages of measurement. Starting with
the initial recognition, the way to measure intangibles depends on each type of acquisition. By
considering the five types of acquisition to identify whether the assets are separately acquired,
acquired in a business combination, internally generated acquisition, acquired by government
grant or acquired for non-monetary assets, the first measurement is set by measuring at cost or fair
value (CPA Australia, 2015). However, the two transactions of government grant and non-
monetary assets can be categorized as the first type of separate acquisition (Gruber, 2014).
Continuously, the intangible assets are taken into the subsequent measurement. In this phrase,
there are two models to be applied, which is the cost model and the revaluation model. Cost model
means that the intangible assets is carried at the value equals it cost less accumulated amortization
and accumulated impairment loss. While the revaluation model is the value of the intangible at the
date of revaluation less accumulated amortization and accumulated impairment loss.
2. Effects of intangible assets on historical fiancial statement
It is proved by the evidence that intangible always be important throughout the period from the
past until now (ICAEW, 2009). Although the quality and effect of intangibles such as intellectual
property, human resources, and goodwill go up with the time, it is difficult to demonstrate the
intangible new economy. Furthermore, the gaps between the market capitalization and net book
value in the balance sheet not only results from the increase of intangible assets but also other
different interpretations as followed (ICAEW, 2009). The first affecting element is the growth in
the optimism of investors. As the investors are hopeful about the company’s value, the market
capitalization also increases and leave a considerable gap between capitalization and the
company’s net book value. Secondly, the fact that the company has more intention to seek the
stock market listing, which enables the company to base on the future value rather than the current
existing assets and recorded data in the past. As a result, market capitalization also increases much
than the real net book value. Thirdly, the changes in the company’s business model also affect the
method of evaluating the company value. Therefore, the complexity of the business model will
increase with the gap between market capitalization and net book value.
Moreover, in the past, the financial reports did not show all of the intangible elements on the
balance sheet but except for the ones which did not show the current value. Also, it is indicated
that the problems in the financial report existed or in other words, it is always imperfect.

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Therefore, the increase in the number and quality of intangible assets has an insignificant effect on
maintaining problems.
3. The effect of the balance sheet on misleading investors about intangible assets

According to the report of Developments in new reporting models information for better markets
initiative conducted by ICAEW in 2009, it is indicated that investors can be misled even when
they use all information in the balance sheet. However, the fact that investors are all misled about
intangible assets and in a systematical way is a surprising problem to be considered. For example,
the investors can make the mistake of comparing the total net assets amount in the balance sheet
and the market capitalization to make the conclusion that it is overvalued and stop investing by
selling all shares. Moreover, the way of record intangible assets is said to promote bubbles and
volatility in the stock market. If the investors are not informed about the changes, they can become
excessively optimistic. There is the argument that the investment in intangible assets can be well
directed if the intangible assets are better reported. However, this opinion does not have enough
evidence to be demonstrated. There is always risks in the investment of new products, regardless
of intangible or tangible one. Moreover, there is many misdirected investment in tangible assets,
therefore, it is no reason to state that the investors are misled by the balance sheet.
4. Omitting intangible assets in the balance sheet does not prove the quality of the
current reporting practises
The difference in price-to-book ratio demonstrates the importance of the intangible assets’ value
in company valuation. However, it does not always require a certain record of intangible assets in
the balance sheet because the value of these items can be listed in the income statement, which can
be regarded as remedies for the deficiencies of the balance sheet. Taking Coca Cola as an
example, even the company does not list its value of the brand name in the intangible asset in the
balance sheet, the earning and cash flow created from the brand name is all presented in the
income statement. Therefore, the company can be valued through from the revenue but not an
asset and it is misconceived to identify all intangible assets in the balance sheet (Penman & May,
2009).  
Moreover, intangible assets are not consistency evaluated by the companies and the formal
measurement. In other words, reporting on financial reports may not enhance the clarity of the
factors (Accountancy Daily, 2002). In spite of the fact that only 20% of the firm’s value is
reflected by financial assets or tangible assets, the concept of the balance sheet still works and it
requires investors to consider both current asset and concurrent assess. However, the criticism that
the absence of many intangibles from the balance sheet shows that current corporate reporting
practices are inappropriate is not proved with enough evidence.
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Furthermore, the existences of intangible assets are flexible according to the changes in the
financial reporting of business combination (ICAEW, 2009). For example, when there is a change
in the financial reporting, the unrecognised intangible assets now can be written down in the
company accounts and add their current price to the firm’s value. Also, the estimation of the value
is considered as so subjective and unverifiable, as a result, the investors or users of the financial
reports usually ignore them. This fact supports the idea that the balance sheet with supplement
intangible assets is not provide useful information, therefore, investors do not take this balance
sheet into consideration when evaluate the business value. Other reasons affect the report of
intangible assets are the different point of view in identifying the intangible asset’s value and the
fact that the benefit of intangible assets are usually produced when combined with other assets.
It is indicated in the IAS 38 about intangible assets that together with the increase in the amount of
investment in intangible asset over the last two dedicates, the lack of recognition of intangible
assets in the financial statement distort the measurement of the company’s performance as well as
leading to the wrong assessment of return on investment of these intangibles (IFRS, 2018).
However, there are still some uncertainties about the requirement of cost, therefore, the intangibles
assets are not recognized. As a result, it is not considered as the mistake of the corporate's
reporting. 
As stated above, not all the information about intangible assets is needed. Furthermore, although
the financial reporting illustrates its limitation of not providing non-financial information of
intangible assets, it is indicated that there is no need to come up with a new reporting approach.
Even when all intangible assets are reflected in the financial reports at current values, this attempt
still does not provide useful information to investors. In contrast, useful information can be
provided without the need of recognise all intangible assets in the balance sheet ( Financial
reporting council, 2019).
As stated in the annual report 2016 of Britvic Plc, both International Financial Reporting Standard
(IFRS) issued by the International Accounting Standard Board (IASB) and United Kindom
generally accepted accounting practise (UK GAAP) are complied as the accounting standard by
the Britvic Plc when preparing the fianancial statement. Regarding the Britvic Plc’s balance sheet
as an example, the intangible asset is recorded generally in the table with a total amount of £417.9
million rather than specifically indicating each type of intangible asset. It is more specifically
explained by the note of the company that it has intangible assets consist of software costs,
trademark, franchise rights and customer lists (Britvic, 2016). Applying the definition and criteria
of recognizing intangible assets, Britvic indicates that the software costs are recognized as an
intangible asset only when its specialized attainability and business feasibility can be illustrated.
The software licenses and software created in-house are calculated by the total expenses incurred
6
and needed to brings the software into use. Regarding trademarks, franchise rights and customers
list, these intangible assets gained independently are estimated at the fair value after consideration
paid. Following beginning acknowledgment, these intangible assets are conveyed at cost
less accumulated amortization and impairment losses.
In total, it can be seen that even most of the intangible assets are not clearly defined in the balance
sheet, Brivic Plc still has a specific and detail process in defining intangible assets and there is no
inappropriate part is found in the financial report of the company.

III. Conclusion
In a nutshell, it is important to consider the role of intangible assets on the balance sheet, however,
the paper proposes that the absence of almost intangible assets from the balance sheet does not
imply that the financial report is in a general sense misdirecting. It is proved by other factors that
the difference between the market capitalization and the net book value is generated from different
processes. This difference can be explained by the effect of growing optimism of investors, early
seeking stock market listings of the company or the changes in the business model. In total, the
absence of intangible assets does not effect the appropriateness of the company’s financial reports.

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