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Should More Internally Generated Intangible Assets Be Recognized? A Commentary

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  • Xuejing Xie
  • Weiguo Zhang

Abstract

This study analyzes whether financial statements should recognize more internally generated intangible assets with particular reference to China. This issue is significant because of the increasing importance of the ‘new economy’ and R&D investment, including in China. We present the current accounting requirements for intangible assets and illustrate that the failure to recognize internally generated intangible assets leads to a high ratio of unrecognized value to market capitalization, known as the asset light phenomenon among firms. We discuss and compare international and Chinese views supporting and opposing the recognition of more internally generated intangible assets. We identify and analyze the major issues in general, and in China particularly, that standard setters and their stakeholders have to consider if more internally generated intangible assets are recognized. We focus on areas of recognition, initial and subsequent measurement, and user reaction. We find that the most critical issues are the separability and measurability of internally generated intangible assets. Based on the issues identified, we discuss initiatives on non‐financial disclosure in relation to unrecognized intangible assets and firms’ value creation. The study elucidates the consequences of current accounting standards on internally generated intangible assets and, by identifying the critical issues, contributes to the debate on whether it is best to adopt recognition of internally generated intangible assets or a disclosure‐only approach.

Suggested Citation

  • Xuejing Xie & Weiguo Zhang, 2023. "Should More Internally Generated Intangible Assets Be Recognized? A Commentary," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 6-31, March.
    • Handle: RePEc:bla:abacus:v:59:y:2023:i:1:p:6-31
    DOI: 10.1111/abac.12276
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    References listed on IDEAS

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    1. Tami Dinh & Baljit K. Sidhu & Chuan Yu, 2019. "Accounting for Intangibles: Can Capitalization of R&D Improve Investment Efficiency?," Abacus, Accounting Foundation, University of Sydney, vol. 55(1), pages 92-127, March.
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    3. Stephen H. Penman, 2009. "Accounting for Intangible Assets: There is Also an Income Statement," Abacus, Accounting Foundation, University of Sydney, vol. 45(3), pages 358-371, September.
    4. Anne Wyatt, 2008. "What financial and non‐financial information on intangibles is value‐relevant? A review of the evidence," Accounting and Business Research, Taylor & Francis Journals, vol. 38(3), pages 217-256.
    5. Douglas Skinner, 2008. "A reply to Lev's rejoinder to ‘Accounting for intangibles – a critical review of policy recommendations’," Accounting and Business Research, Taylor & Francis Journals, vol. 38(3), pages 215-216.
    6. Torsten Jochem & Tomislav Ladika & Zacharias Sautner, 2018. "The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting," The Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4142-4186.
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