GAAP vs IFRS on Intangible Assets

Introduction
There are a number of different areas of difference between US GAAP and IFRS. Nguyen (2017) points out that one of those areas of difference is with respect to the treatment of intangible assets. Intangible assets show on the balance sheet, but what types of intangible assets and how they are valued differ between these two different accounting systems. This report will highlight these differences, and their implications.
US GAAP Treatment
There are several areas of intangible assets that are covered by the different systems. These include R&D costs, advertising costs, goodwill, and impairment of intangible assets (IAS Plus, 2017). R&D costs, for example, are treated under GAAP on expensed as they occur. Further, intangible assets are measured at historical cost less accumulated amortization and impairments. For goodwill, the reporting unit can be an operating segment or one below. If the implied fair value of the intangible asset – including goodwill – is below the book value, then an impairment loss can be recognized (IAS Plus, 2017).
IFRS Treatment
IFRS differs on these particular areas that pertain to intangible assets. The first key difference is that intangible assets are recognized where it is probable that future economic benefits are attributable. This would be very important to a pharmaceutical firm, where the failure rate for new R&D projects is quite high – those costs are not recognized under IFRS whereas they are under GAAP. IFRS allows, contrary to GAAP, revaluation of historical costs for intangible assets.
Under IFRS, intangible assets are recognized at the lowest possible unit, and can go no higher than the operating segment. There is less leeway than under GAAP in this regard. Impairment is valued at fair value (not historical cost), and starts by reducing goodwill first, and only when goodwill has been exhausted is impairment of the other intangible assets allowed. This has implications for the valuation of goodwill on the balance sheet under IFRS (IAS Plus, 2017).
Changes
The implications for conversion from GAAP to IFRS are as follows. First, the company must determine the probability of future economic value for investments in things like R&D and advertising. The current financial statements will reflect all such costs, but the IFRS statements may require the exclusion of some of these costs. There is less incentive to pursue high risk activities under IFRS because there are fewer potential tax benefits to them – GAAP is more encouraging for investment in activities that have low probability of success. The income statement might show more profit but the balance sheet will show lower intangible assets as the result of this change.
Another step that will be required is that historical costs will need to be translated to fair value; the company will need to determine the fair value of the intangible assets that are on its books under the IFRS system. This will require research. This change will likely mean high valuation on the intangible assets that are still on the books. By determining fair value, the company will also be able to change the calculation of any impairments that occurred throughout the year. While under GAAP impairments relating to low probability activities can be used to lower the company’s tax burden, under IFRS there is the risk that the taxable income will be higher, because there will be fewer such opportunities for impairment – and the impairments that do exist will start with fair value, a lower number than the historical cost for any asset that is being impaired.

Example
An example would be R&D for a product that was abandoned. If the company spend $100,000 on R&D this year, then abandoned the project, the GAAP income statement would reflect that as an expense. The IFRS statement would not, so the expense will be decreased by $100,000 and taxable income increased.
Another example would be the historical investment on that project – let’s say that amount was $200,000. The income statement would reflect impairment of that $200,000. The IFRS statement will reflect will see a reduction of goodwill of $200,000 relating to that impairment. The reduction might not be goodwill in GAAP, so the company will see a change to whatever line item (i.e. R&D) under GAAP and a reduction of goodwill under IFRS. This would give the IFRS statement a lower level of goodwill than the GAAP statement, under the $200,000 impairment scenario.
If the relevant segment is an operating unit, there will not be any changes. So if this company just has one operating unit, that part will not reflect any changes between GAAP and IFRS. This will be assumed to be the case.
It is worth considering, however, that is there are differences in reporting units, that will affect the statements. There is nothing in the case that says that there is a difference in reporting units, so our assumption is reasonable, but it is worth keeping in mind that there might be differences and to look out for that in the future.

References
E&Y (2011) US GAAP versus IFRS: The basics. Ernst & Young Retrieved November 11, 2017 from http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec%202011.pdf
IAS Plus (2017) Goodwill and other intangible assets – key differences between US GAAP and IFRS. IAS Plus.com Retrieved November 13, 2017 from https://www.iasplus.com/en-us/standards/ifrs-usgaap/goodwill
Nguyen, J. (2017). What are some of the key differences between IFRS and US GAAP? Investopedia. Retrieved November 13, 2017 from https://www.investopedia.com/ask/answers/09/ifrs-gaap.asp