fiQuestion 2:Non-current assets

Required

Describe, and critically analyse, the differences between the accounting treatment of self- constructed tangible non-current assets under IAS 16 Property, plant and equipment and internally generated intangible non-current assets under IAS 38 Intangible Assets.

For this assignment, the aim is to analyse the differences between the tangible non-current assets and intangible non-current assets. I will do this by demonstrating my understanding of the notion of the non-current assets under IAS 16 and IAS 38.

Assets are economic resources owned or controlled by an entity as well as being considered as a long term investment for a company. In financial accounting, assets could be divided into two categories in balance sheet: current assets and non-current assets. Non-current assets are the assets which are not expected to sold or exchanged and convert into cash within 12 months. Non-current assets could be subdivided into tangible or intangible.

Focusing on IAS 16 and IAS 38, IAS 16 Property, Plant and Equipment (PPE) and IAS 38 Intangible Assets outline respectively the accounting treatment for property, plant and equipment and intangible assets. Although they are both non-current assets and not made externally, they differ in many ways. The accounting treatment of tangible and intangible non-current assets hold many differences in which they are recognised, measured, revaluated, depreciated, impaired and disclosed.

The most obvious difference between them is that tangible non-current assets have physical existence while intangible non-current assets do not have. Tangible assets, therefore, could be seen, touched and felt literally. For example, computer is a tangible non-current asset while computer software is an intangible non-current asset.

It is easy to identify the existence of tangible non-current assets as they have physical forms. The intangible non-current assets are identifiable as well although without physical substance. However, the way of identification is different from each other. IAS 38 states that for an intangible asset to exist it must either be separable or through custody or other legal rights. (IAS 38 Intangible Assets) For example, patents and intellectual properties are the identifiable intangible non-current assets for an entity.

Basic on this reason, intangible non-current assets are more difficult to be bought or sold in market. For example, selling or buying equipment or computer is much easier and familiar than selling or buying a company logo or some information.

In a similar way, it is easy to see the value of a tangible non-current asset such as property in balance sheet. However, it is difficult to ascertain the real fair value of an intangible non-current asset such as a company logo. Determining the real worth of a company without the intangible non-current assets is a good way to realize the value of them.

Take the company logo for instance, it is difficult to calculate the accurate value of a company logo and economic benefits would be brought to the company from it. However, the company logo gives the first impression to people. A professionally well-designed logo might make a good impression to people and then make a person become a customer rather than a passer-by. A company with a bad logo or without a logo might look amateurish and give no confidence to clients. That might cause huge losses for the company. In that case, it can be imagined that the importance and value of the logo which is an intangible non-current asset.

Besides the identification and valuation, IAS 16 and IAS 38 also state that both tangible and intangible non-current assets are expected to bring some potential future economic benefits for the entity. In fact, the intangible non-current assets might be more essential in creating value for company than the tangible non-current assets though they have no physical existence and are hard to be