Accounting for Intangibles: A Literature Review

Abstract

The purpose of Financial Accounting is to provide users of financial statements with information that is useful for efficient decision making. According to the FASB [1978, par. 34], financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. Consequently, any event that is likely to affect a firm's current financial position or its future performance should be reported in its annual accounts. In order to provide the users of financial statements with relevant information for investment and credit decision making, standard setting bodies should develop guidelines for the identification of intangible elements, a set of criteria for their valuation and adequate standards for financial reporting. This paper intends to provide a starting point for that endeavor by reviewing the literature published to date in three areas: (i) the economic nature, definition and classification of intangibles, (ii) the relevance of intangibles for investment and lending decisions, and (iii) the ways in which the current accounting model may be modified in order to provide useful information on the determinants of the firms' financial position in their financial statements.

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