Project Pages

Intangible Assets—Project Plan

Project Description: The objective of this project is to provide users of financial statements with more complete and comparable information about intangible assets used in providing government services by expanding on the reporting requirements for intangible assets in Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. In particular, important objectives in expanding the intangible asset requirements would be to clarify the definition of intangible assets and to provide guidance on the appropriate reporting of different types of these assets. This would include considering alternative methods to recognize write-downs (for example, amortization and impairment). The scope of the project would include all governmental intangible assets.

Background: The definition of capital assets in paragraph 19 of Statement 34 has sparked many inquiries about intangible assets. Prior to Statement 34, NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, provided guidance on reporting fixed assets. NCGA Statement 1 did not define fixed assets and did not specifically address intangible assets (except for capital leases). However, we are aware that some governments do not report intangible assets. Paragraph 19 of Statement 34 defines capital assets to include all tangible and intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. Some have questioned whether that paragraph now requires governments to report all of their intangible assets.

Some question whether or not certain acquisition costs or donated items are assets and should be reported, what amount such items should be reported at, and how (or if) they should be written off. Inquiries have been made about easements related to road (rights-of-way); other easements, such as agricultural, development, and sewer easements); software costs (purchased and internally generated); rights to use assets such as sewer plants, software, buildings, and equipment; land rights including timber, mineral, and water rights; and miscellaneous intangibles such as good will, license agreements, patents, and radio licenses. Based upon these inquiries, staff is aware of some inconsistency in practice including capitalization of donated easements, capitalization of software, and approach to estimating the fair value of donated easements.

In addition, GASB staff has been asked several questions about applying the amortization provisions of Accounting Principles Board Opinion No. 17, Intangible Assets. Some government practitioners do not believe perpetual rights-of-way for roads, for example, should be written off over a forty-year period because they believe that the rights-of-way are inexhaustible assets under the provisions of paragraph 21 of Statement 34. Based on several discussions with practitioners, staff is aware that current practice for amortizing intangible assets varies.

Existing GAAP for State and Local Governments

Paragraph 19 of Statement 34 states that capital assets include intangible assets that are used in operations and that have initial useful lives that extend beyond a single reporting period. Further, paragraph 21 of Statement 34 explains that capital assets should be depreciated over their estimated useful lives and that inexhaustible capital assets such as land and land improvements should not be depreciated. The GASB literature contains no other guidance that specifically addresses reporting intangible assets.

Although Opinion 17 has recently been superseded by the FASB, most governments continue to follow that guidance on amortizing intangible assets. Paragraph 17 of Statement 34 requires governmental and business-type activities to apply all APB Opinions (as well as FASB Statements and Interpretations issued before November 30, 1989, and Accounting Research Bulletins of the Committee on Accounting Procedure), unless those pronouncements conflict with or contradict GASB pronouncements. Opinion 17, in paragraphs 2 through 29, requires intangible assets to be amortized by systematic charges to income over periods estimated to be benefited (not to exceed forty years).

Pronouncements Issued by Other Standards Setters

In June 2001, the FASB superseded the long-standing guidance in Opinion 17 with the issuance of FASB Statement No.142, Goodwill and Other Intangible Assets. Under FASB Statement 142, entities are required to write off intangible assets with indefinite useful lives only when they become impaired. Such intangibles must be tested for impairment annually. Intangible assets with finite lives continue to be amortized over their useful lives, but without the Opinion 17 constraint of a maximum of forty years. Intangible assets are defined as “assets (not including financial assets) that lack physical substance.” FASB Statement 142 was issued at the same time as FASB Statement No. 141, Business Combinations, which requires all business combinations to be accounted for using the purchase method of accounting, which entails, among other things, recognizing all intangible assets acquired. These assets consist of both separately identifiable intangibles and those that are recognized as a part of goodwill. Paragraph 39 of FASB Statement 141 provides guidance on when intangibles should be reported separately and when they are recognized only as a part of goodwill. “An intangible asset shall be recognized as an asset apart from goodwill if it arises from contractual or other legal rights (regardless of whether those rights are transferable or separable from the acquired entity or from other rights and obligations). If an intangible asset does not arise from contractual or other legal rights, it shall be recognized as an asset apart from goodwill only if it is separable, that is, it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged (regardless of whether there is an intent to do so).” For example, an assembled workforce cannot be recognized as an intangible asset outside of goodwill.

AICPA

The AICPA issued Statement of Position (SOP) 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, which addresses accounting for software. SOP 98-1 provides detailed guidance on which costs should be capitalized and which should be expensed. SOP 98-1 also specifies that software should be amortized on a straight-line basis unless another method is more representative of the software's use. However, SOP 98-1 specifically states that it applies only to nongovernmental entities.

Other Standards Setters

The Public Sector Committee of the International Federation of Accountants has not addressed intangible assets. The Australian Accounting Standards Board has addressed specific intangible assets, but has not addressed intangible assets in a comprehensive manner. For example, Australian Accounting Standard 18, Accounting for Goodwill, requires purchased goodwill to be recorded as a noncurrent asset and amortized over a period during which benefits are expected to arise, not to exceed twenty years. Australian Accounting Standard 4, Depreciation, applies to intangible assets that have limited useful lives. Australian Accounting Standard 13, Accounting for Research and Development Costs, permits such cost to be deferred and amortized when future benefits are expected beyond any reasonable doubt to be equal to or to exceed such costs. The Canadian Institute of Chartered Accountants has not addressed intangible assets in a comprehensive manner. Their Public Sector Handbook provides guidance only on accounting for goodwill associated with the acquisition of a business enterprise. That guidance permits goodwill to be recorded in the investment account.

Constituent Request to Address Issue of Fair Value of Easements

In June 2004, the Governmental Accounting and Auditing Committee of the California Society of CPAs formally requested that the Board address the issue of how the fair value of donated easements should be determined, citing concern over the divergence in practice occurring in California. Staff presented this letter, the prospectus for the intangibles project, a paper on determining fair value of easements written for analysis of a question in the Comprehensive Implementation Guide, and an informal survey of practices of reporting easements drawn from CAFRs of California cities and counties to the Agenda committee of GASAC for further input. GASAC did not support moving a specific project on easements ahead of the intangible assets project on the technical agenda.

Research Issues

1. What intangible assets do governments own?

2. How is/would information about intangible assets be used by users of governmental financial statements?

Accounting and Reporting Issues

1. How should intangible assets be reported?

2. How should intangible assets be measured? Those acquired through purchase would be reported at historical cost. However, some intangibles are acquired through donation, and existing guidance in paragraph 18 of Statement 34 requires donated capital assets to be reported at their estimated fair value at the time of donation. How would fair value on these assets be determined?

3. What additional guidance, if any, should be provided for writing off intangible assets?

Current Developments: A survey of existing practice on reporting intangible assets was conducted in the Fall 2004 through the GASB website. The survey requested information on what types of intangible assets governments have, whether and how they are currently reporting them, how the amount at which they are being reported was determined, whether and how they are being amortized, and information about how significant intangibles are to the overall government. Staff is currenlty analyzing the results of the 72 responses to the survey.

Work Plan

The work plan is divided into two components: the research phase and the Board deliberations phase. The staff research phase includes the following objectives:

• Survey governments to better understand what intangible assets they own; what intangible assets they are reporting; how they have measured these intangible assets, especially when they have been donated; whether and how the reported intangible assets are being amortized; and whether there are types of intangible assets that we have not previously considered.

• Obtain feedback from users of financial statements about how information about the types of intangible assets identified in the surveys of governments would be used.

• Interview appraisers and other appropriate experts to determine and understand the approaches to measurement of intangible assets. We would like to understand the methodologies and assess the reliability of the information produced.

• Form a task force to provide feedback on results of research and tentative Board decisions during deliberations. However, it does not appear necessary to hold a task force meeting.