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Abstract - The value of intangible assets has been the main focus in the debates between international

professionals and business world for many decades. Today, this concept interferes with the international process of assessment, but also with the convergence of accounting. The need to determine the value of these assets lies in the more virulent criticism brought to the traditional accounting system, placed face to face with an increasing vision of financial assets of a company. In an uncertain world with imperfect and incomplete markets (financial crisis), no particular measurement objective should be regarded as having a monopoly, and different measurements should be regarded as complementing one another. This paper analyses the answer of the questions regarding recogmition, presentation and evaluation of intangible assets, and also various controversial issues of this concept, as it is presented in the current project of the IASB and FASB. base of the concept of assessment, with no significant reduction in the transactions concluded in adverse conditions. On the other hand, evaluators should not confuse the economic concepts of value for intangible assets because if there is an active market, the fair value of these assets is easily determined, and when there is no active market, the value of intangibles can be determined only using valuation techniques and estimates based on future cash flows and discount rates adjusted according to risk. Given the relationship between the concept of fair value (used by accounting standards) and market value (used by the valuation standards), we can say that the value of intangible assets (including management) is positioned on the border between evaluation, accounting and audit. So, now we are at the border between traditional accounting of intangible assets and a new theory of evaluation of these assets that has a form established by the international valuation standards. Accountants, in their turn, reflect accounting estimates only in registers and certainly not the value generated by the presentation of materials. It is a clear dichotomy between the historical cost accounting and fair value in accounting measurement, which creates a productive tension in discussions related to economy based on knowledge. However, it is more likely for a


According to the Academic Merriam-Webster Dictionary, value can be defined as "1. a fair return or equivalent in goods, services, or money for something exchanged, 2. the monetary worth of something: market price, 3. relative worth, utility, or importance". It may be noted that the components of fair return, market price or relative worth are essential for the three basic assessment methodologies. The International Valuation Standards define valuation as an economic concept most likely on the price agreed by buyers and sellers of goods or services available for purchase, the value in fact not representing a fact, but a more likely estimate of the most probable price to be paid for goods and services at a particular date. In contrast, the concept of fair value is used in international accounting standards. When one can establish a market value for an intangible fixed asset, this value will be equal to fair value. However, under current economic conditions, markets lose liquidity or cease to exist; making assessments of intangible assets at fair value based on market information become irrelevant and are affected by uncertainty. In most financial reporting frameworks, the continuing assumption of business entity is at the

Open Journal of Economic Research


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING certain period of time to develop both paradigms in parallel and then become convergent, thus solving the paradox of intangible asset valuation.

In a world where success is mandatory, management activity is maintained at a high intensity due to complications also progressing with time: natural resources diminish, world population increases, globalization increases, demands grow in all areas of life. As a result, management records a trend of reducing direct experiments on systems and in this way, it has to strengthen the methodology for the development and use of models as a means of assessing new strategies designed to control the consequences of existing uncertainties. In accounting practice and theory several measurement bases have been accredited. Within the overall framework for preparing and presenting financial statements prepared by the IASB they are: historical cost, current cost, realizable value, the present value. - Historical cost: Assets are recorded at the amount of cash or cash equivalents paid at the time of their purchase or the fair value of the amount paid when purchasing. - Current cost: Assets are recorded at the amount of cash or cash equivalents that should be paid if the same or a similar asset would be purchased now. - Realizable value: Assets are recorded at the amount of cash or cash equivalents that could currently be obtained by normal selling of assets. - Present value: Assets are recorded at the present value of future cash inflows that are to be generated in the normal course of business. The problem is how to choose the best of them in the context of satisfying accounting information users requirements, on the one hand and complying with accounting principles and fundamentals, on the other hand.

Producers and users of financial statements consider that in the measurement and presentation of accounting information, the most widely used is the historical cost, although it has some weaknesses. This is usually combined with other bases of evaluation. Moreover, the tendency is to use current cost accounting in response to failure based on historical cost model to solve problems connected with noncash effect of changes in asset prices. The accounting value at which the intangible fixed assets of an enterprise are registered is specified and different according to the five sources of origin: 1) purchased separately; 2) internally generated; 3) acquired through a government grant; 4) acquired in exchange for other assets; 5) acquired as part of a business combination. The initial evaluation of intangible assets is based on their cost, which is determined differently, depending on the five sources of origin mentioned above. IAS 38 - Intangible assets - provides the following bases for assessing the intangible assets separately from goodwill: 1. intangible fixed assets acquired separately are measured at their acquisition cost, which includes the purchase price, plus any costs directly attributable to the asset purchased, including: wage cost for putting the asset in service, professional fees, expenses for testing; it does not include advertising expenses, expenses for transfer of activities caused by the use of the asset purchased, overheads as well as initial operating losses. 2. internally generated intangible fixed assets are valued at the production cost represented by direct costs, incurred only after the date on which the development costs of a research - development

Open Journal of Economic Research


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING project is recognized as an asset generating assets (e.g. a patent invention). Direct costs include costs of raw materials and services, personnel expenses, expenses resulted from registration of intangible assets obtained. The explanation for this accounting treatment is that only internally generated intangible fixed assets, which can be recognized are the result of a development project or of a development phase of a research - development project, provided the technical and financial feasibility of the project is demonstrated, as well as the technical and financial resources for its completion. At the same time, it is explicitly stated, that all research costs will be recorded in terms of current expenditure. IAS 38 adds that the marks, titles of publications, customer lists and other items similar in substance, internally generated, can not be recognized as an intangible asset, because the costs of these assets can not be separated from development expenditure of the enterprise as a whole. 2. intangible fixed assets acquired through a government grant (e.g. use rights at airports, radio and television broadcasting licenses, import licenses or quotas for access to certain restricted resources) can be initially recorded either at their fair value or at their nominal value (which includes expenses attributable to preparing the asset for its use), at the option of the enterprise. 3. intangible fixed assets acquired in exchange for other assets are valued at their fair value, except the case when, either the exchange transaction has no commercial value or the fair value of the intangible asset that traded can not be quantified reliably. Under these conditions acquired intangible asset is recorded at book value of the asset given. 4. identifiable intangible fixed assets acquired as part of a business combination are recorded at their fair value on the date of purchase, provided they meet the recognition criteria. The most credible estimate of the fair value of an intangible asset is the current purchase price of the same or similar intangible assets on an active market. IAS 38 adds the possibility to estimate the fair value of intangible assets, acquired Open Journal of Economic Research from a business combination through indirect estimation techniques, which consist in the application of either multiplying coefficients on some forms of income, or using the updating exemption method / net charge economy, by updating the future net cash flow that can be generated by an intangible asset. To eliminate confusion for the correct classification (as an intangible asset, according to IAS 38) we should appeal to professional reasoning to identify, based on relative or comparative importance, the most significant element. To ensure that only the assets which are capitalized and deferred amounts recoverable in future periods, it is required, under international accounting referential, to identify and recognize as many individual elements. This approach is useful because the residual value of the acquisition costs not allocated is treated globally, in goodwill; its depreciation is less likely than that of an identified asset, thus providing less transparency for investors. Usually, entities obtain or protect their ability to control by legal rights as copyright, patents, restrictions in trade agreements (if this is allowed) or legal coercion of employees to maintain confidentiality. Also, in the absence of rights to allow the protection or control of its relations with customers and their loyalty, the entity, usually, does not have sufficient control over any economic benefits arising from customer loyalty and relationships with them. Thus, considerable costs incurred for staff training, building a portfolio of customers, market share, customer relationship or their loyalty may not be still recognized as intangible assets, although these expenditures are investments in marketing and are considered "engines" that bring long term profits. For example the German accounting system all "useful" situations are not considered active for further business activity, to which the trader would assign a value, but it is limited the set of goods which are recorded as an asset to all material assets and real estate, receivables and intangible assets (intangible). The motivation of this limitation lies in the fact that if


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING a concept of an active without restrictions, it would be difficult to distinguish the BSI crowd imaginable and many cases that do not represent a value that can be attributed unequivocally would be recorded in the balance sheet - such as image and business knowhow, quality or customer service staff or suppliers. At the same time, intangible assets (property rights or other immaterial) are allowed to be recognized in the active, in principle, only when expenses were made for them. But when there are direct costs related to acquisition of intangible assets, it is important to know, for the ability to recognize the active, if we are dealing with a right or a "purely economic good" (immaterial circle of customers or a secret recipe). Unlike rights, such as a patent, purely economic goods can be recorded as an asset only if a price was paid for their purchase by third parties (purchase derivative) but not when they were drawn on their own (original purchase). Future economic advantages (benefits) that can be associated to an intangible asset may be income from sales of products or services, savings, cost reductions and other economic benefits resulting from the use of intangible asset by the enterprise. The likelihood of future benefits currently is receiving a greater and greater importance, with the intention of raising the status of the threshold criteria for recognition set out in the international accounting standards specific, to that of component of the evaluation provided for in the IASB conceptual framework. The intention is based on the fact that when using the fair value approach, the value is determined by updating future cash flows, update performed, among others, in relation to the risk or likelihood of obtaining these flows. Even a low probability of occurrence of flows (at high risk) there is fair value, although decreased. As such, the asset will be recognized. So, even outside of business combinations, recognition of an asset would be recommended if it is more likely than not likely to generate future cash flows, the method of assessment (by discounting future cash flows) would counteract the uncertainties about the likelihood of flows . But if another treatment is chosen, namely reOpen Journal of Economic Research evaluation (alternative treatment) according to international accounting standards, namely IAS 38 Intangible Assets, the evaluation basis will be one of the existing, other than historical cost, reflecting the fair value of the asset established in the revaluation. At the international referential level, rightly converge more and more views to reflect the probability in evaluating an asset instead of its use as a threshold criterion of recognition, which will amend the framework. Credible evaluation of intangible assets is conditional on how to obtain them, so the initial assessment is done at their cost of production. There are cases when non-recognition of these assets is justified by the principle of prudence, involving failure to capitalize the costs rather than uncertainty about the valuation methods with the volatile nature of their value. Hence the unequal treatment of acquired intangible assets to the internally generated not only limited to their initial recognition, but also considering their depreciation policy. On the date of entry into assets or on initial assessment, intangible assets are recognized at their cost to the entity, whether purchased or internally generated. Over time, any future expenses incurred in order to improve asset performance will increase the baseline. Besides the most common situations of entry into the intangible assets of the entity that is purchasing and obtaining from own production, there are two other ways of entry. It is about contribution to social capital, respectively donations of such assets. In these two cases, assets are recognized at their fair value, estimated by a professional appraiser. There are exceptions: the prohibition of intangible assets recognized in the balance sheet with the title obtained free of charge (according to Article 248 of the German Commercial Code, paragraph 2) reduces the profit that can be distributed. Thus the legislature ensures that the outputs connected with a patent internally realized are not neutralized by the activation of a good that can not be sustainable. In the event of activation, the profit and loss would be calculated for higher gain. IFRS generally treats assets impairment according to


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING its IAS 36 standard Impairment of Assets. The standard requires a test of impairment meant to obtain the recoverable amount. The impairment test does not require the calculation of current values at this stage but consideration of the possible loss of value indexes, which are indicative for more examples. If the recoverable amount is less than the carrying amount of the asset, that is the book value can not be recovered by future results from the use of the asset, it must be depreciated. The recoverable amount is presented as the highest between the selling price and net asset value use. When speaking about intangible assets, the presentation dedicated to the depreciation provisions of the standards with those of another international standard is completed. It is IAS 38 Intangible Assets. In the original version of IAS 38 there is an addition that brings this standard to IAS 36. Thus, an entity must estimate the recoverable amount at least once a year, even in the absence of indications of impairment for the following cases: - an asset that is not available for use; - An asset that was amortized over a period of more than 20 years since it was made available to be used. In the current version, this requirement was removed, the depreciation of intangible assets by enrolling in general rules apply to all assets. Thus, the entity shall, for each intangible asset to its recoverable amount compare with the book value at the end of each financial year, and whenever there is a probable indication of a loss of value. For assets with indefinite useful life, IAS 36 Impairment of Assets requires annual testing, regardless of the existence of signs of impairment. In this case the asset for impairment testing requires comparing the recoverable amount to the carrying amount annually and whenever there are indications that restraint may be impaired. Other important details of IAS 38 refer to: First, intangible assets valuation is done at fair value (which in the opinion of IFRS 2007 is a similar concept with the concept of market value); Second, an intangible item, reported as a current expense can not be recognized later as part of the cost of an intangible asset; Open Journal of Economic Research Third, future expenses incurred with the intangible asset will increase the cost of that asset, only when these costs will allow the asset to generate future economic benefits over performance originally foreseen, and if they can be measured reliably; Fourth, intangible assets are not recognized as separate ones: - Formation expenses; - Expenses for training; - Advertising and promotion expenses; - The costs of moving or reorganizing the business; - Internally generated goodwill. Fifth, the intangible asset called educated labor (Assembled Workforce) can not be recognized as a separate asset (although it is evaluated separately from the need to ensure the accuracy of other techniques for assessing the other separate intangible assets). The explanation of non-recognition of this asset as intangible asset is the lack of power of an enterprise control over the benefits of such an asset, because, finally, when it is to be registered in the balance sheet, the assembled workforce must be included in goodwill. Sixth, the express reference to IFRS that in the case of business combination, the acquirer shall recognize separately from goodwill, a large number of separate fixed assets to ensure a more accurate reflection of the heritage entities; Seventh, in-process research and development Projects - IPR & D can be recognized as intangible fixed assets identified by the acquirer company; Eighth, some intangible fixed assets are closely related to other identifiable assets and sold, usually as a pack (group) of assets. In such a situation, the fair value is determined at the level of that package; Ninth, intangible asset revaluation, after their initial recognition and the adoption of the model based on revaluation, is made to fair value which has to be determined solely by reference to an active market, a market that meets the three conditions: (a) homogeneity of the elements that are traded; (b) the existence of permanent market a significant


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING number of interested buyers and sellers (c) prices are publicly available. But, these characteristics of an active market exist for a very limited number of intangible assets, such as taxi licenses, fishing licenses, quotas of production; examples of inactive markets are those for patents, trademarks, titles publications, because the intangible asset has a unique character. On such inactive markets, reevaluation is not possible and for this reason the cost model is used to account, where the accounting value is the historical cost reduced by accumulated depreciation and loss of value due to depreciation. Tenth, intangible asset amortization is permitted only for those who have a finite useful life, the depreciable asset being the cost or other cost less residual value substitutes value; depreciation regime may be chosen depending on the pace of consumer future economic benefits of intangible fixed assets, and if this rate can not be established, linear damping regime will be adopted; for intangible fixed assets with indefinite useful life, instead of calculating their depreciation, an annual impairment test is performed and the duration of their useful life is necessarily reviewed; However, the residual value of an intangible asset with a finite useful life is considered to be zero, unless, at the end of that term, there will be an active market to sell that asset or there is an obligation to a third Party to purchase the asset. Also, the residual value can be positive when the useful life is less than the economic life and business owner intends to sell the intangible asset before the expiry of his economic life. On the other hand, if there are intangible assets (e.g. licenses, permits, trademarks) there is the possibility of extending their control through contracts or renewal of registration (e.g. mark), the useful life of these assets will reflect this extension, too; Eleventh, on the closing date of each financial year as required by IAS 36 - Impairment of Assets, an enterprise should consider whether there are indications that intangible assets have lost some of their book value. If such indication exists, the enterprise should determine the recoverable amount Open Journal of Economic Research of that intangible asset defined as "the greatest value of the usefulness of the asset or cash-generating unit and fair value minus selling expenses"; also IAS 38 requires an annually test for impairment whether or not there is an indication of impairment, in the following two cases: (a) to the intangible asset with indefinite useful life and to those that were introduced in use, and (b) for goodwill acquired from a business combination; Twelfth, an intangible asset should be removed from the records to disposal or scrapping when no future economic benefits are expected to be obtained from its use; The thirteenth observation concerns the situation when the intangible asset is assessed by a method shown in the cost approach (e.g. management software) and the tax savings (tax benefit) will be taken into account; However, when using two or three approaches to value, the result of the most credible approach is selected and no arithmetic average is calculated; Fourteenth, two procedures using the same evaluation method are used and when two different values (but close) results, it may be proposed as final value, an arithmetic average of the two results; Moreover, it is always privileged the result of the assessment, based on direct market information; it is the case of appropriate intangible fixed assets which are traded on the market, respectively, either at current trading prices of identical intangible fixed assets (e.g. taxi licenses, fishing licenses) or at current transaction prices of similar assets to current assets, in the second case, some corrections are necessary, to reflect the differences between the selected elements of comparison (the differences between intangible asset intangible asset assessed and selected as appropriate comparable). Finally, the initial evaluation of identifiable intangible fixed assets with finite economic life, redeemable, following a business combination (IFRS 3), their fair value will include the tax benefit resulting from intangible asset depreciation. Therefore, intangible assets acquired in a business combination, including a project represented by an


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING internal research and development, according to IFRS 3 are recognized as assets separated from goodwill if they meet the definition and recognition criteria for assets, if they are separable or arises from contractual or legal, and if the fair value of assets can be measured reliably. Also, the same standard states that "in some circumstances, the acquirer may be required to make a further payment to the seller as compensation for a reduction in value of assets given, equity instruments issued or liabilities assumed by the acquirer in the existing exchange control the acquired company. This is the case when, for example, the acquirer guarantees the market price of equity or debt instruments issued as part of the cost of business combination and he is required to issue additional equity instruments or debt to restore the originally determined cost. In such situations, no increase in the cost of business combination is recognized. For equity instruments, the fair value of the additional payment is compensated with an equal reduction to the value attributed to the instruments initially issued. For debt instruments, the additional payment is regarded as a premium reduction or increase in the original issue discount. " The emphasis in this standard is on the accounting treatment of acquisition. In particular, it states that all business combinations will be accounted using the purchase method. Under this method, the acquirer purchases net assets and recognizes the intangible assets acquired, including those not previously recognized by the acquired company. You can also use the option of issuing equity in exchange for control of mining assets and net assets of another entity. The evaluation of intangible assets of the acquirer is not affected by the transaction; neither additional assets of the acquirer are recognized as an acquiring result of the transaction, because they do not represent the object of the transaction. The procurement method for intangible assets includes the following steps: a) identifying an acquirer; b) assessing the cost of the business combination, and Open Journal of Economic Research c) allocation of the cost of the business combination or acquired intangible assets to determine the fair value of these assets of the acquire; d) determining the fair market value of net assets of the acquired entity. The acquisition cost also called the cost of business combination represents the sum of fair values of transferred assets, liabilities taken over and equity instruments issued by the acquirer in exchange for control of the entity acquired, on the transaction date. This includes direct costs, directly attributable to (such as professional fees), but not the costs of issuing equity or debt securities used to pay the obligation. When a contract concerning a business combination provides an adjustment to the cost of the combination depending on future events, the acquirer will include the value of the adjustment into the cost of combination on the date of acquisition, if the adjustment is probable and can be measured reliably. The acquirer shall disclose information to enable those who use financial statements to evaluate the nature and financial effect of business combinations carried out both during and before the financial statements are authorized for issuance (cumulatively, they are insignificant). This information includes: - Name and description of the entities to be combined; - Data of the acquisition; - Percentage of equity instruments with voting rights acquired; - Cost of the combination and cost components description, such as the number of equity instruments issued or issuable; and the fair value of those instruments as well as the basis for determining the fair value; - Details of the operations that the entity has decided to give away as result of combination; - Amounts recognized on the acquisition date for each class of assets, liabilities and contingent liabilities of the acquire; - The amount of any positive differences (negative goodwill) recognized in the profit and loss line item in the income statement that


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING acknowledges the difference; - Description of the factors that contributed to goodwill; - Description of each intangible asset that was recognized separately from goodwill; - The profit or loss of the acquire on the acquisition date included in the acquirer's profit or loss for the current period; - Revenue and profit or loss combined entity for the current period as the acquisition date for all business combinations effected during the period was the beginning of the period. The information that enables users to evaluate the effects of adjustment on previous business combinations shall be presented. The presentation is mandatory for all information needed to assess changes in the accounting value of goodwill during the period. Despite the solid principles embodied in IFRS 3, many analysts believe that the determination of fair value involves a considerable degree of managerial flexibility. Values of intangible assets such as computer software may not be easily validated when purchases are analysed. Managerial reasoning may be especially evident in the allocation of excess purchase price (after all other allocations of assets and liabilities). If, for example, the remained purchase price is allocated to goodwill, the net profit of the company will not be affected, because goodwill is not amortized (but it is tested for impairment). If surplus (positive difference) would be allocated to fixed assets, depreciation would increase, thereby reducing the net profit and generating inaccurate financial statements. Over time, goodwill has become one of the most controversial issues in accounting. Goodwill can not be measured directly. Its value is generally determined by appraisal, which is based on evaluators assumptions. As such, the value of goodwill is determined subjectively. Subject recognition of goodwill in financial statements found both supporters and opponents among professionals. Supporters of recognized Open Journal of Economic Research goodwill say that goodwill is "the present value of the surplus revenue that a company can get." This group claims to determine the fair value of these excess revenues is similar to determining the present value of cash flows associated with other activities and projects. Opponents of the recognition fund argue that the purchase price paid, many times proves to be based on unrealistic expectations, leading to further reductions default to zero of the goodwill. Both arguments have merit. Many companies are able to achieve revenues in excess out of their investments. As such, the prices of ordinary shares of these companies must register first a book value of intangible assets. Consequently, investors who buy ordinary shares of such companies pay for intangible assets (reputation, brand names, etc.). There are companies who receive low incomes from investments, despite the presence of a surplus revenue balance indicated in goodwill. The price of ordinary shares of these companies tends to fall below book value because their assets are overvalued. Therefore, it should be clear that only by paying a price above fair market value of the net assets of the acquired company it can not guarantee that the purchasing entity will continue to receive surplus revenue. In short, analysts must distinguish between accounting goodwill and economic goodwill. Economic goodwill is based on the entity's economic performance, while accounting goodwill is based on accounting standards. Economic goodwill should concern analysts and investors. Thus, when analyzing a company's financial statements, it is imperative that analysts to eliminate accounting goodwill from the balance sheet. Surplus revenue that the company will get will be reflected in the price of ordinary shares. Under IFRS 3, accounting goodwill must be capitalized and tested annually for impairment. Accounting goodwill is not amortized. Impairment of accounting goodwill is a non-cash expense. However, impairment of accounting goodwill affects reported net profit. When the fund is deducted from current profit period, reported current profit decreases, but future profit should increase reported when the asset value is reduced to zero or when it is no longer


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING impaired. This results in the reduction of net assets and of equity on the one hand, but an improvement in return on assets, the asset velocity indicators, profitability indicators of equity and equity velocity is felt, on the other part. Even when the market reacts to these cuts regardless of value due to depreciation, it is for the analyst to carefully analyze a company's goodwill to determine whether or not it has been depreciated. Commercial goodwill can significantly affect the comparability of financial statements between companies using different accounting methods. As such, the analyst should eliminate any distortion, recognition, amortization or depreciation a commercial goodwill could create, by adjusting the financial statements of the company. Adjustments must be made by: - Calculation of financial indicators using balance sheet data without commercial goodwill; - Examination of operational trends using data that exclude commercial goodwill amortization or depreciation thereof; - Evaluation of future acquisitions of businesses, taking into account the price paid reported to net assets and earnings opportunities of the company acquired. Also, intangible assets are treated by two international accounting standards: IAS 38 Intangible Assets, and IFRS 3 Business Combinations. The objective of IFRS 3 is to prescribe the accounting treatment for business combinations. In these, the acquiring company must always be identified. A business combination should be accounted for under the purchase accounting method. An important innovation introduced by IFRS 3 refers to the recognition of intangible assets separately from goodwill. This is the most important change made in allocating the cost of the business combination. It provides that intangible assets must meet two criteria to be recognized separately; otherwise their value must be included in goodwill. IFRS 3 shows that the value / cost of an intangible asset at the entrance in the Heritage through a business combination is the fair value on that date. Open Journal of Economic Research IAS 38 reinforces that a business combination usually leads to the recognition criteria of an intangible asset, including the likelihood of these criteria to generate future economic benefits. These future benefits will be the basis to estimate the fair value of the asset. Further, related to the second criterion for recognition of an asset, including an intangible, that the fair value assessment is a condition for recognition separate from the goodwill acquired in a business combination. Even when an intangible asset can not be sold, exchanged, transferred or leased individually, it must be considered separable if it can be part of a transaction with a contract for an asset or liability. So often, the fair value of intangible assets resulting from business combination, other than commercial goodwill, may be estimated, even if the entity acquired as a result of combination was not recognized in their own accounts. There are two exceptions to this rule related to where the asset arises from legal or contractual specified by IAS 38, namely: - The asset is not separable; - The asset is separable, but its fair value can not be estimated reliably, as there are too many variables that can not be evaluated. For now, accounting rules encourage (not require) companies to disclose in the notes the categories of investment that have an impact on long-term performance of the company, but not exceeding the threshold for restricted recognition of their assets (IAS 38) in the financial statements . If an intangible asset does not meet the definition and criteria for recognition as an intangible asset, IAS 38 requires recognition of expense for the good as an expense when it is made. The standard also prohibits an undertaking to reinstate as an intangible asset at a later date, an expense that was originally passed in expenses. Intangible assets are initially measured at cost. In short, the IAS 38 is a restrictive accounting standard that would lead to an immediate depreciation of most internally generated intangible assets. This


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING standard codifies the traditional accounting approach which defines an asset so as to exclude "assets" that can not be directly related to the flow of revenue. The standard does not take into account the nature of the economic attributes of different types of intangible investment and the possible relevance of this information for people interested within companies. Moreover, in the context of asset valuation, impairment relates to adjustments to the cost of reproduction or replacement of the asset to reflect physical deterioration, functional impairment (technological) and external (economic), to estimate the asset value for a hypothetical exchange on a market where there is no information about sales. Unlike financial reporting where depreciation expense relates to reflecting the systematic allocation of the depreciable amount / depreciation of an asset over its useful life period. It is specific to a given entity and uses the asset and is not necessarily affected by the market. Accounting evolution is slow and there will always be a gap between the volume of immaterial investments and the level of recognized intangible assets, because you can not make a credible assessment of all components involved in the investment process.

The term fair value is the translation of the AngloSaxon expression fair value, which, in terms of literary value corresponds rather to honest or fair value. Fair value concept has aroused the interest of many theoreticians, practitioners and accounting standardization bodies that decide about its definition. For example, fair value, called by some authors and venal value represents the price at which an asset could be exchanged in a balanced transaction. Another variant of the previous definition is the amount for which an asset could be exchanged in a balanced transaction between informed and

determined parties otherwise than in a forced liquidation sale. Studying the literature, it releases the conclusion that there are several types of fair value: utility value (of use) or value of future cash flows (use value), market value, replacement value, net book value. Sometimes they put fair value and market value on the same level and show that fair value is an estimate and not a finding as in the case of market value. It says that market value is a variant of fair value. We appreciate that this definition is limiting, because it makes sense only in the context of transactions (salespurchases). For those assets, especially for intangibles, not intended for sale other applications related to their use in the holding entity should be sought. It can be said that together with the global economic crisis the first crisis of fair value occurs. Fair value is accused of exacerbating the crisis because of losses in the market value assessment observed in the result immediately in the public situation and the decrease of values and the risk emphasis on values contributed to market non-liquidity. London G20 Summit Declaration of April 2009 on strengthening the financial system calls for a single set of high quality accounting standards important for economic growth and seen as one of the pillars of financial reporting infrastructure. All these converge on the idea that there is not only national but also an international interest, a common asset for financial reporting to be quality. And fair value, correctly understood, determined, reported and controlled could make a substantial contribution here. A solution to improve the quality of accounting information, according to some specialists, would be fair value. The major objective of financial accounting, obtaining an accurate picture can be assured by fair value. Applying this concept of utility requires shaping, techniques for obtaining knowledge and provides better quality information than the historical cost accounting and adds safety to users as they can

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING avoid the negative aspects related to assessing the profitability and solvency of an entity property. A definition of attachable concept of fair value does not differ much from one theorist to another. The first definitions focused on market value. This association has its origins in the patrimonial element that has claimed in accounting estimate another value instead of the input property. As the nature, the usage method within the entity and their specific market conditions were different, proved not to be possible to track the actual market value. Furthermore, as stated in the standards, even if targeting a market value, the fair value acquired as accounting interest becomes a much broader concept than the market value. Many authors present the advantages of fair value but there are some who dispute this concept because of its volatility and tendency for bias, manipulation of models used for the valuation of intangible assets. Supporters of fair value consider historical cost the cause of confidence damage in the financial statements. Their arguments are based on the practical implications of the historical cost principle, which is to preserve, at the balance sheet structures, the input values which are historical values as follows: a) allows for more reliable financial statements: in the context of the most important qualitative characteristics of accounting information, namely the relevance and reliability of fair value measurement instrument is most relevant, especially for financial instruments, for which generally can be obtained sufficient reliable information. For example, fair value allows a reliable accounting treatment for operations of exchange rate hedging; b) provides a greater accounting objectivity and neutrality: this statement is especially true when there is an active market for that instrument, but otherwise the valuation models are based largely on market information; c) allows better comparability of tangible assets, especially of financial instruments: they are converted into current values, regardless of their original date of registration in accounts; d) allows a "more economical" vision of assets and capital attracted by the entity: investors welcome the concept when making their decisions, because it reflects the view of markets and better translates the present value of future monetary flows. We can say it is oriented towards forecasting. It also facilitates a fair value assessment by the entity (business); e) provides better information and better compares the entity's present and future performance: The statement is based on generalization of the fair value assessment system. The new manner of quantifying the outcome would improve the economic value of the accounting expression. Performance measure would be more comprehensive, since they are reflected in the profit or loss pluses or minuses overall latency, for example, financial instruments; f) reduces the difference between book value and stock value (for listed entities): the advantage of fair value, discussed here, concerns and financial instruments. Their offering on the market, increasingly more often, before contractual maturity, justifies an evaluation manner which allows a better reflection of economic reality; g) improves managers control over the assets of the entity: this could be achieved given that the financial statements in their entirety, would be valued at fair value. Such financial statements would provide an indication of overall shareholder value comes from the entity's ability to achieve a superior return on assets on the market, and on the other hand, how much is due to mere ownership of assets; h) provides a consistent active management of financial risks: especially banks can manage their daily interest rate and foreign exchange risk. However, those critical intangibles that account for at fair value do not seem to offer credible alternatives. Drawbacks presented by fair value, found in specialized literature, are presented below: a) do not always provide reliable information: estimates are by their nature, subjective. Intentional deformation of parameters can be added. This assessment model induces an inherent risk, and another one related to deliberate manipulation of information. Of course, to alleviate the harsh criticism

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING against the models for determining the fair value we can remind the ways to reduce the risk model given that would be an effective internal control, namely the establishment of provisions for this type of risk; b) determine its concrete state poses serious technical and financial problems: if the market value is not available and calls to specific methods of evaluation it is necessary to know the methodology to determine the valuation of assets and market expectations that are not directly observable. On the other hand, related to the words, the cost of obtaining the application of fair value can be raised; c) create difficulties in determining distributable income: greater volatility of results is not necessarily a bad thing, because, after all, is reflects reality. It can not be prosecuted while denying transparency and market-driven values. d) do not allow to reflect the value of intangible assets: some of the assets of this type have not been the subject of records, but a significant contribution to overall business value; e) provide short term financial position of the entity: getting the fair value can be an estimate of future performance of the entity's assets, followed by an update of the cash flows to be generated by these elements. Europeans are more skeptical about the usefulness of fair value for other users of accounting information and there are numerous criticisms of the accounting model marketisation. Moreover, the European Directives do not provide any indication of the definition of fair value, namely how to obtain it. They limited to recall, concerning the evaluation of accounting generally speaking, that other valuation bases can be used together with the historical cost. Following the arguments against him, it is unlikely to apply fair value in a stand-alone accounting system, especially in terms of loss of confidence on capital markets seen in recent years, exacerbated by the current global economic crisis. This is because fair value is an emanation of the capital market. Even if we take advantages offered by the fair value system in question, which shall balance the disadvantages, we can not say with certainty that this is more superior to the historical cost system. The latter has an incontestable advantage - that of being known and therefore, ruled. In this context the following questions arise: will we return to the initial cost accounting, in which intangible assets are recorded at values of date and therefore are not relevant or reliable? How important are the psychological factors in accounting measurement? What valuation model can ensure maximum quality of accounting information on intangible assets? The answer to these questions and to other various controversial issues upon the concept of fair value of intangible assets, are presented in the current draft of the International Standards Accounting Board (ISAB) and the American Accounting Standards (AAS). With regard to the U.S. accounting rules, it appears that the normalization body considers the market value an independent evaluation base of the elements of financial statements and not just an application of other valuation bases (e.g., as required ISAB). Thus, AAS stated that when determining fair value its purpose is to obtain the elements considered globally, and this could explain the market price, if any. Hierarchy of value under this standard group inputs to be used to estimate fair value into three categories or levels, as follows: a) Level 1 estimate, uses market references: It should be noted that active market entity has immediate access. If it has access on more markets, the most advantageous market will be chosen. If this type of estimate is used, market prices do not have to be adjusted as required at other levels of estimation. b) Level 2 estimate: it is found where you can not find market prices for identical assets and liabilities. Then we proceed to collect the market prices of assets (including intangible assets), adjusted for differences if data are available. In order to do so, it is explained that the effect of price difference should be determined objectively. The example of a guaranteed debt price can be used as a basis for estimating the fair value of unsecured claims of the same type is

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING offered, but only if the effect on the price guarantee (liquidity, safety, other benefits induced by guarantee) is objectively determinable. Otherwise, the estimate will be Level 3. c) Level 3 estimate: resorts to this level of value estimation, if assets and liabilities are not identical or similar, or can not objectively determine the differences between similar items. FASB Norm notes that Level 3 requires reasoning professional estimation in choosing and applying techniques and major inputs. Also, if multiple assessment techniques are used, the effects of their application should be analysed, having regard to the relevance and reliability of inputs used. However, even if the application is not restricted to market value for fair value, international and American normalizes point out that in order to get it, evaluation models whose parameters should be those anticipated by the market should be used. Of the explanatory project "Fair value measurement issued by the IASB results that an entity may use valuation techniques that are appropriate in situations where there is insufficient data available to assess fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. Periodically, the entity shall verify the techniques of evaluation used to determine the price of the observable current market transactions with the same intangible asset. When using multiple assessment techniques to assess fair value, the results will be evaluated and analyzed taking into account the fairness of the field values indicated by these results. After consulting this document, we found that when there is no observable market data, fair value can be determined using valuation techniques and estimates of future cash flows based on adjusted discount rates depending on risk. It is also stated that the project evaluation techniques used to determine the fair value of an intangible asset must be applied consistently, allowing, in certain circumstances, a change in the valuation technique or method of application, such given when considered that the change leads to identical or more representative results of the fair value. However, the revision resulted from a change in the valuation technique or its application will be accounted for as an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. As results from the analysis of international accounting standards, when considering intangible assets, fair value is estimated mainly in two situations: a) when determining the asset's revalued value to apply the allowed alternative treatment of IAS 38 Intangible Assets; b) when applying the impairment test at the end of the year, according to IAS 36 Impairment of Assets. Valuation methods applied to intangible assets are the same as those used in other types of evaluation. However, there are features of these assets which require adaptation of the known assessment approaches. One of the characteristics of intangible assets that influence their evaluation is how to use them within an entity. Such a distinction is: - Assets used in the direct operation, so in the entities own activity; - Assets used by indirect operation that is obtained by transferring an attribute or all attributes of ownership to another person. The transfer in question may be made by: license agreements, franchising agreements, joint venture, namely by selling all rights to the intangible asset. For the case where there is the possibility of acquisition of an intangible asset in return for the surrender of non-monetary assets, combined or not with monetary assets, the standard specifies the priority for fair value, an exception to this rule being the following situations: - The exchange transaction has commercial character, that is it is estimated that future cash flows of the entity will not change as a result of this transaction; - The asset given up is, in turn, measured at fair value; - Can not be reliably measured, neither the fair value of the asset received nor the one given.

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING In this case, the restraint acquired is measured at cost, being the cost of the asset transferred (its book value). The method used is the market comparison method which can not always be applied, requiring the use of valuation models. Specifically it is stated that fair value is reasonably estimated: - if the variability of reasonable fair value estimates series is not significant for that asset; - if the probabilities of different estimates of the same series can be reasonably assessed and used in estimating fair value. To emphasize the subjectivity of valuation models application without market comparisons, accounting standard recommends that, if reliable estimates of fair values of the two assets that have been exchanged, to prefer the value of the asset transferred. It is estimated that the reason is the availability of more internal data for evaluation. Unless it is evident that the fair value of the asset received is well-argued, the latter is preferred. According to Romanian accounting rules, the exchange of goods shall be accounted for as a sale and purchase concurrently, even if the result of these transactions is ultimately ineffective. In the case of intangible assets, sometimes it is necessary to use assessment procedures to determine the residual value of assets. Residual value is the asset at the end of its useful life when it can be exploited by sale. Representing a recovery - a probable sale at this value - of the initial investment in assets, residual value is involved in calculating the annual depreciation of the asset. For intangible assets seldom a residual value can be estimated. This is mainly due to their specific nature, being dedicated to current user only, and very long payback period (20 years or more) and it expires economically. There is however the case of intangible assets, such as software products, which have much shorter lifetimes and morally can withstand that they provide utility and value to a potential buyer at the end of their useful life. For intangible assets, IAS 38 Intangible Assets shows that, generally, their residual value is considered null and void, with certain exceptions. Specifically we are referring to: - An undertaking by a third party to purchase the asset at that date; - Immobilization has an active market, including the determining the residual value year. Regarding the latter case, some authors consider that the residual value is a fair value measured by market comparison method. Accounting norm thus equals the fair value with the amount recoverable on disposal, determined on the basis of the selling price of a similar property (it worked in similar conditions and had a life similar to that of the rated asset) minus the estimated costs of specific sales. So, in accounting terms, these estimate revisions are accepted in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. International evaluation standards show that assessments of intangible assets may be required for different uses including: purchases and sales of entities, parts of an asset or entity, mergers and the like. It states that fair value is an accounting term, while the fair market value is synonymous with market value, the concept being used in some countries. When referring to fair value, it is shown that its definition can be found in accounting standards, the term is generally compatible with the market value, even if these terms are not always exactly equivalent. In other words, in the opinion of the evaluation normalizations, fair value is generally used for financial reporting of the market value and of the market non-based values. The non-based market value is a so-called surrogate value, obtainable for an asset whose market value can not be determined. Practical application of fair value for this case is the net replacement cost or other value. A special role in shaping the place of the fair value within the accounting standards, namely within evaluation and implicitly in presenting the link between the two sets of standards, is standard IVA

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING International Valuation Application 1, entitled Assessment for financial reporting. Under this standard it is stipulated that international accounting standards adopted two models for the recognition of assets in financial statements: a cost model, called the basic accounting treatment, a model based on fair value, which is the alternative treatment, allowed in some cases. Therefore, it is shown here that other bases, than historic cost valuation, are representations of fair value. In that valuation standard, it is still the idea that, where the model is applicable based on fair value, market values will be determined, and sometimes different values of market value. To capture the differences between international accounting standards in terms of determining the fair value of intangible assets we can make the following comparative analysis: Table 1. Comparative analysis of IAS38, IAS 36, IFRS 5
IAS 38 The obligation of determining fair value Frequency of fair value estimation accounting of changes in fair value Option as valuation policy Depends on changes in fair value equity, period results IAS 36 mandatory when there are indications that an asset has lost / recovered from the value period result IFRS 5 mandatory on asset classificati on and financial statement date period result Realizable value (or return on assets, respectively settlement obligations) Actual cost (current)

Table 2. Accounting measurement bases and their applications

Evaluation basis Content Assets are recorded at: - The amount paid, if economic transaction settlement is in cash or - Value of goods received, whether the settlement transaction is economic in nature. Liabilities are recorded in the required amount of a debt settlement. Assets are recorded at amounts which should be paid if they would acquire the same active today. Liabilities are recorded in the required amount of a debt settlement. Assets are recorded at the amount that could be obtained today from the sale of assets. Liabilities are recorded in the required amount of a debt settlement. Assets are recorded at the present value of cash flows that the asset will generate in the future. Liabilities are recorded at the present value of the amount they will settle debts in the future. Specific applications

Historical cost

Practical application is the historical cost: the cost of purchase price of the service, delivery price, market value, others.

For assets, practical application of current cost is the replacement cost (net).

When referring to assets, the practical application of the realizable value is the market value minus the costs of completion and sale of the asset. Ii is obtained by applying a discount rate (depreciation) of estimated cash flows. If it is active (minus debt), the practical application of present value is the amount of use.

In Romania, the fair value is obtained through the application of three measurement bases shown in Table 2 below, namely: the current cost, realizable value and present value (discounted).

Present value (current)

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING The current cost reflects the cost of maintaining operating capacity of the entity, depending on specific developments of prices of various categories of assets. The process of estimating this cost is as follows: - Estimated cost of new, valid on the measurement date for an identical asset or similar to the assessed one, and there are two solutions: - Either to gather information regarding the prices of recent transactions on the specific market of these assets or price rates of suppliers; - Or, in the absence of current market information, update the asset's historical cost, and then apply an index that reflects the accumulated currency depreciation, and commodity price developments on raw materials and workmanship incorporated in that asset; - the new cost as such reconstituted is applied appropriate discounts to reflect the location, actual physical wear, condition, suitability for routine use, the influence of external factors. The application value of achieving is the market value of the price at which an asset could be sold if there is a specific asset exchange market, open to all. The market value is obtained, as a rule, by collecting, from the market, discounted prices for identical assets or similar to the evaluated one, which is more or less corrected to account for differences in type, model, age and operating conditions of valued asset and its standard of comparison. In the French version of the general Accounts Plan, aimed at a net amount of ancillary expenses, the market value, referred to as the venal and established on the inventory sheet represents the net amount that could be obtained from sale of an asset in a transaction concluded under normal market conditions, reduced by the exit costs. The output costs are the external costs directly attributable to an active output, excluding financial expenses and tax expense on the result. For intangible assets, the application of present value is the value of usage, which corresponds to the present value of expected cash inflows or outflows of Open Journal of Economic Research future use of assets, including a possible cash flow at the end-of-use. In another paper it is stated that the usage value is particularly applied to property and represents the sum of expected future economic benefits obtained by using the asset. These advantages achieved during the life of the asset are added the residual value on the asset sale. According to another opinion, the usage value, which is also called utility value, is the value of expected future economic benefits from the use and output of an asset. A similar presentation of the usage value provides accounting standards in their current form. According to the IASB, it reflects the economic benefits that the entity expects to obtain from the future use of assets, including its residual value when it is sold. Lately, in the academic and professional world, there is a growing concern to encourage the use of fair value model. But there are accountants who believe that the use of fair value was one of the main factors that led to the current financial crisis. In conditions of uncertainty, risk, price volatility and limited liquidity, intangibles accounting at their fair value has to face new challenges. Another potential danger in fair value estimation is the tendency to confirm which may lead to unjustified confidence in the design or the preference previously established. In conclusion, the fair value represents neither a basis for assessing the accounting concept nor a certain value type. It is a pure accounting concept that professional evaluators and their representative bodies have tried to analyze and master it, finding clear correspondence in practice especially for intangible assets. We believe that fair value remains an important concept, defining the current accounting rules. It gives them new qualities, reflecting the economic reality of the entity and its assets. It increases the role of the accountant who becomes a true professional consultant of the entity getting involved in its management and who can provide relevant


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING communications to the capital market and other users of accounting information. Moreover, the ratio between the historical cost and fair value could lead to a definition and, in some cases, to the application of one of the following accounting systems presented in Table 3 below: Table 3. Scenarios for using fair value in accounting systems
Mixed system, based on historical cost and fair value, which involves the use of historical cost and in some cases, fair value for the current record of transactions and for preparing financial statements. In developing financial statements, the fair value can be used as follows: In the separate In the unique financial financial statements, in situations, which all with the cost elements are of the reflected at remaining fair value, a historical situation that elements will join the evaluated cast at historical cost

System based on historical cost, which involves using the historical cost for the current record of transactions and for preparing financial statements

System based on fair value, which implies the use of fair value for the current record of transactions and for preparing financial statements

measurement. However, none of these standards can be said with certainty that represent the best solution. In the past 10 years, FASB issued or made changes to its accounting rules, requiring estimates and publication of the fair value. The significant use of fair value has led to the development of two dedicated measurement rules, namely the Fair Value Measurements FAS 157 - Measuring the fair value (2006) and FAS 159 Fair Value Option for Financial The Assets and Financial Liabilities - The fair value option for financial assets and liabilities (2007). About the first document, we consider that there is the most comprehensive one in the accounting and valuation standards, since the solutions have relatively detailed estimate of fair value. Therefore, the replacement of the historical cost with the fair value one is implicitly accepted by international and the U.S. normalization bodies by reference of them

We are witnessing a struggle between static accounting (fair value accounting) and dynamic accounting (historical cost model assessment). The two systems have alternated over time as specific regulations. In practical terms, however, it can be summed up that in Europe that the historical cost system won the game. After the Second World War, fiscal concerns increased, and to a lesser extent, the economic issues that have prioritized the system based on historical cost to peer-review the input values of individual assets and important results in terms of entity's management and fiscal terms. Both the U.S. standardization body (FASB) and the International one (IASC / IASB) have launched a series of standards which require fair value

Uncertainties in the current crisis caused by both economic and accounting make assets impossible to be measured, and only estimated. Unfortunately, this allows you to create a distortion of the quality of financial information, creating uncertainty about the consistency and comparability of information for users, in which case we are dealing with an accounting of intent, in other words, we enter the field of creative accounting. Creative accounting, operating at shade - area - where accusations substantiated by non-compliance with professional or legal norms can be brought, but where common sense logic notifies the presence of a certain dose of "forcing the note. Such accounting has developed mainly in AngloSaxon economies due to the freedom of the accounting profession. It was placed on the edge of the legal form and economic substance of transactions and events. Discussed in terms of accounting practitioners, creative accounting was facilitated the

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING emergence by basic and alternative treatments used to solve and same problem. Of course, issues of evaluation of intangibles are cases of creative accounting practice that involve subjective reasoning as it applies to professional accountant or expert appraiser. Using creative accounting for intangible assets, especially in her gray area favored by accounting rules, makes it difficult or even impossible to guess the true value of these assets. This manipulation of accounting information can be done within the law and accounting rules or outside them. In the latter case we are witnessing an illegal practice: accounting fraud. Although there is a clear difference between creative accounting and deliberate violation of the law (fraud), "there is always a clear demarcation between the situation of creative accounting practices and accounting malpractice. Accounting engineerings are defined by some authors as representing "the process whereby, given the existence of gaps in the rules to manipulate accounting numbers and taking advantage of flexibility, those practices are chosen for measurement and information that allow transforming synthesis documents from what they should be in what managers want" or "the process by which transactions are structured in such a way as to allow " to produce" the desired accounting result. The different methods of recording intangibles through creative accounting can be classified into four categories: - Sometimes accounting rules allow a company to choose between different accounting methods. For example, a company can choose the accounting policy which gives the desired image (it is allowed to choose between treating development costs as expenses when incurred, or to absorb these costs throughout the project life); - Some accounts of intangible assets involve a degree of estimation, reasoning and prediction, especially when there is no market for that asset. These estimates are usually made in the company or by an Open Journal of Economic Research expert evaluator and the creative accountant are able to assume a position of caution and optimism in setting the estimate; - Artificial transactions can be recorded to manipulate intangible amounts on the balance sheet and to transfer profits between accounting periods (sale and lease-back); - And real transactions involving intangibles can be planned at various times in order to create the desired impression to accounting information users. Property entity management is free to choose the year when they will sell the intangible investment, increasing the profit in the financial statements. The methods in which some processes reveal creative accounting for intangible assets can be grouped in: - Processes which have the effect of modeling the result and management decisions; - Processes and techniques meant to improve the effect of balance sheet information; - Processes which impact the presentation of the results; We propose to refer briefly to some of these attitudes, mechanisms and practices. Of procedures, techniques and practices used for intangible assets having as effect shaping the outcome, we mention: First, an optimistic attitude regarding the chances of success of a development project will lead to the capitalization of development costs, with implications for the size of the result, the capitalization for the year. In future exercises, expenses recording with amortization will impact the result in the sense of decreasing it. If the enterprise has the interest payment of development costs in the profit and loss (expenditure) it will claim that at least one of the conditions stipulated by IAS 38 para. 43 is not met. Second, undervaluation of assets acquired by the company leads to increased goodwill. Capitalization and amortization of goodwill over its useful life will influence the outcome in future years (goodwill amortization costs lead to diminished results, with consequences on the course of action and competitiveness of competitive stock takeover bids).


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING Charging goodwill on equity to reduce their lead, results in their diminishing, the result of future exercises not being influenced by goodwill amortization expenses. Among the procedures that have an impact on the balance sheet we are mentioning the following positions: 1. assets and equity: the choice to use the revaluation of tangible assets impacts on capital increase (increased depreciation), and / or increase equity within the limits of fiscal rules. 2. loans: de-leverage in fact - arrangement by transferring assets to a trust company, which incorporates both debt and management which has the effect of reducing the debt ratio, the increase of financial autonomy, increased financial profitability. 3. customer receivables: receivables transfer mechanism from a pool of receivables for obtaining liquidity affecting the slight decrease in working capital (derived from the difference between the claim and transfer price) decrease in working capital needs, Treasury increase. 4. Equity: the issue of hybrid securities reclassified from equity and debt makes it difficult to obtain a change in debt and return on equity. One criticism of the procedures above concerns that they contain a certain "dose" of creative accounting with the character of subjectivity with the realization that they change the presentation of accounts, but are nonetheless the result of an option, when selected from among more methods, which makes us say that they are within the accounting regulations. Referring to development costs, for example, their positioning on the boundary between evaluation and accountability requires the existence of a bias caused by handling interest income. If the enterprise has a policy aimed at transferring these expenses in the profit and loss (expenditure) account, we can claim that at least one of the requirements for classification as an intangible asset development costs - which would affect the balance - is not met. The Fourth Directive states that these expenses must be charged to the profit and loss, unless national law Open Journal of Economic Research does not provide for their capitalization. These provisions were acquired differently by the EU countries, in Germany is forbidden to capitalize these expenses. France is the opposite, considering them capitalizable and depreciable in 5 years. In Belgium, Italy and the Netherlands, the capitalization of the costs of research is questionable, the trend being the exclusion of these expenses from the asset. Development costs can both be capitalized and amortized within 5 years (Belgium and Italy) or during their useful life (the Netherlands). In Spain and the UK, research costs are non-capitalizable under certain conditions and can be amortized for a period of 5 years, respectively during the useful life. Another source of difficulty in the analysis of intangible assets represents the mass of formation expenses. These are capitalized in Spain, France, Italy, and the Netherlands and in Belgium and the UK cannot be capitalized. IASB's conceptual framework prohibits the capitalization of these expenses. The cases of Romania and Germany are more special. As a proof of consistency in inconsistency, the national accounting normalization body allows the capitalization of expenses, giving favors to the European referential act and violating the international one. The accounting regulatory bodies who wish to limit creative accounting must address these approaches in several ways: 1. The choice of accounting methods should be diminished by reducing the number of permitted accounting methods or by specifying the situations in which each method should be used. The imposition of consistent methods is useful because a company who chose a method that gives a positive image in a year, will have to use the same method and during the years when the result will be less favorable. 2. The abuse of reasoning can be nipped in two ways: by mapping rules to minimize the use of reasoning or by imposing consistency so that if a company chooses an accounting policy that favors one of the years, they will have to apply it during the coming years even if no longer favors them.


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING 3. For artificial transactions "the prevalence of substance over form" concept can be invoked, according to which the economic substance rather than the legal form is the one that determines the accounting substance. Thus, linked transactions must be accounted as one. 4. The time of the transaction is clearly a matter of leadership. However, the purpose of their use can be reduced by requiring the regular review of the elements so that gains or losses of values change accounts are recognized in accounts for the years in which they appear (and not entirely in the year are transferred). All these measures against "fraudulent" accounting practices must have the purpose to ensure a capital accounting information on qualitative intangible asset that faithfully represents reality and to allow decisions to ensure an optimal allocation between participants in value creation. In specialized literature it is often circulated the idea that creative accounting seems to be regarded ethically questionable in the accounting profession. In a study in Australia performed on 1,500 accountants three ethical issues related to accounting for intangible fixed assets, most often cited, were found(Table 4): Table 4. Ethical issues in Australia
Ethics Conflict of interest Customers proposal to manipulate accounts % of respondents 13.1 50.1 36.8

Table 5. Auditors attitudes in UK

Agreement on sentence: Using creative accounting is a legal practice Creative accounting is a problem that will not be solved Great Britain (%) 36 64 Spain (%) 31 69

Customers proposal for tax evasion

In Spain and the UK studies have been conducted by Lev, B., Sarath, B. and Sougiannis, T. 2005 on creative accounting to the auditors opinion regarding intangible assets. The summary of the results of the studies on the auditors attitudes is presented as follows(Table 5):

As we can see, creative accounting provides a challenge for the accounting profession and beyond. The problem is internationally, accounting policy choice is a particular problem for the AngloAmerican tradition and transactions handling regarding intangible assets are a particular problem the European continental tradition. The interests determined by factors such as intensity of competition in a context of crisis or increased pressure on businesses to communicate the "digestible" results, especially from investors and analysts make the information collected by market valuation experts and accountants to determine some interpretation to mitigate the possible effects of creativity. If the purpose of creative accounting is to improve the accounts (or the image created for the company), taking advantage of the weaknesses and deficiencies of accounting regulation, we appreciate that this concept is nothing new, because the principle of accounting options is known for a long time. We appreciate that the emergence of creative accounting was influenced by the flexibility of international accounting rules. Creative accounting is treated in most cases negatively (negative creation), designed to lead to achieving value for intangible assets able to respond to the wishes of managers on the company's financial position and performance. Simultaneous treatment of creative accounting as a tool to achieve the interests of accounting and accounting engineering is based on the accounting policies adopted by a patrimonial entity to produce and communicate information.

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Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING Accountants who accept the ethic challenge of creative accounting should be aware of the abuse to both the choice of accounting policies, and handling transactions.

Accounting estimates of intangible assets being made by the management entity is a risk that they may not be correct, so we have to analyze and better understand the assumptions used for this purpose, to pursue compliance with the accounting standards and the concrete conditions of their application. Equally it is necessary to identify the real purpose of these accounting estimates, so that they ensure the credibility of beneficiarys recognition, measurement and disclosure of intangible value. We must not forget that the exercise of caution in the presentation of intangible assets due to uncertainties surrounding all the events and circumstances related to these assets. Prudence means finding those accounting estimates on the intangible assets which associated to the given conditions of uncertainty does not lead to management under / over-evaluation as intangible asset. The International Auditing Standard ISA 540 "Audit of Accounting Estimates notes that accounting estimates are an approximation of the value of an element in the absence of precise means of measurement. An understanding by the auditor of the procedures and methods, including accounting and internal control systems used by management in making accounting estimates is often important to plan the nature, timing and extent of audit procedures. Basically, the auditor should obtain sufficient appropriate audit evidence, certifying that these estimates are reasonable, that if the data they are based on is accurate, complete, relevant, and the procedures and methods used to achieve them are appropriate to their presentation. Many measurements based on estimates, including

the fair value of intangible assets, are inherently imprecise. If fair value measurements, particularly those that do not involve contractual cash flows or for which no market information is available, this is the case of intangible assets, when accounting estimate is made, the estimates may be based on assumptions about conditions, future transactions or events whose outcome is uncertain and therefore are subject to change over time. The auditor's consideration of such assumptions is based on the information available at the time of the audit. However, the assumptions used in assessing the fair value of intangible assets are similar in nature to those required when developing other accounting estimates. In the evaluation of the criteria for recognition in financial statements, the elements should be compared with materiality. Recognition of an element must take into account the interdependence of structures. If an item meets the definition and recognition criteria for a given structure, for example - management as intangible asset, it should automatically recognize a different structure, for example, the economic benefits it generates. An estimate may be changed if the circumstances behind it have changed or if we have new information or future experiences. A change in the assessment base used is considered a change in the accounting policy and not a change in the accounting estimate. When it is difficult to distinguish between a change in the accounting policy and a change in the accounting estimate, the change is treated as a change in the accounting estimate, asking and providing adequate information. The change in accounting estimate for intangible assets is applied by way forward (applying an adjustment on the financial statements starting from the date it is counted) by including it in profit or loss as follows: during the period the change occurs if it affects only that period, or in the period the change occurs and during future periods if the change has an effect on them. These accounting estimates for intangible assets are often made under uncertainty in terms of determining their value as it involves the use of judgment. As a result, the risk of material misstatement is greater

Open Journal of Economic Research


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING when these estimates are involved and in some cases the auditor may determine that the risk of material misstatement is greater and it requires special attention in the audit. Because of the inherent uncertainties in accounting estimates of intangible assets, assessing differences between accounting estimates made by management and auditors may be more difficult than in other sections of the audit. Where there is a difference between the auditor's estimate of the value of the management as intangible asset best supported by audit evidence available and the estimated value of this asset included in the financial statements, the auditor should determine whether this difference requires adjustment. If the difference is reasonable, for example, because the intangible value in the financial statements is included in a range of acceptable results, it may not require adjustments. However, if the auditor believes the difference is not reasonable he will ask the management to review the estimate. If the management refuses to revise the estimate, the difference will be considered an error and will be considered together with all other errors to assess whether the effect on the financial statements is significant.

Basically, international accounting bodies and the assessment ones pay attention to quality standards and implicitly to the methods for estimating their fair value of intangible assets. For example, IVSC (International Valuation Standards Committee) aims to standardize the assessment, claiming that it is vital to reduce the investment risk, to increase confidence in financial reporting and to provide consistent approach of the assets. In turn, the IASB (International Accounting Standards Board) has stressed the determination to use the assessment bodies opinions when discussing the assessment for financial reporting. As a result, international cooperation between professional bodies is crucial. In conclusion, the accounting treatment of intangible

assets is far from being accepted and defined in the economy based on knowledge. Recognition and measurement of goodwill are looking for accounting regulations in the context of unresolved accounting convergence phenomenon. On the other hand, for example, the personal goodwill (diplomas, certificates, patents and licenses professional and certifying the level of training and professional qualifications, professional goodwill and the reputation) does not reflect, most of the time, the terms of intellectual accounting capital and knowledge of the company which optimizes and creates sustainable value. To prevent alteration of comparability of financial statements of companies, it is recommended that financial analysts to consider the intangible asset in determining the economic performance of the entity and not the general goodwill according to the accounting regulations. Although the use of creative accounts is not illegal, it indicates that the experts evaluators and accountants under financial pressure seek solutions without question and often compliance with ethical standards. This pressure lies and that "today to be creative is a very difficult task and it is also a need for this millennium" as Bill Gates recognizes. Basically, annual accounts lifting covering intangible assets remain the privilege of evaluation and accounting practitioners. So far, theoretical and normative approaches regarding management assessment as intangible asset, in general, were based on theory. At present, the theory is not so much accepted and there is more and more discussion on a conceptual reorientation of accounting evaluation which could be a prerequisite for the establishment of an improved valuation model. Abandoning the principle of historical cost is encouraged by the application of new evaluation methods that best meet the needs of users of financial statements. Other users oppose restatements as outlined above, because they lead to a loss of credibility of accounting information. IASC is not far from this second perspective, because as we have seen, the effects of inflation finding are not required

Open Journal of Economic Research


Ionica Oncioiu REFLECTIONS ON INTANGIBLE ASSETS POSITIONING ON THE BORDER OF EVALUATION, AUDIT AND ACCOUNTING only when it reached very high levels. So, we must not forget the international conceptual framework which leaves a possibility to keep accounting in current values. However, returning to the restatement of accounts under intangible assets in excess of hyperinflationary attorney presents advantages, in principle, inconvenience caused probably by higher costs from further processing. The auditor should consider also whether individual differences of intangible assets were accepted as reasonable or oriented in one direction as cumulated can have a significant effect on the financial statements. In such circumstances, the auditor must assess the intangible assets accounting estimates taken as a whole. Therefore, it can be said that accounting estimate on intangible assets is one of the challenges of international accounting and auditing in the context of convergence.

1. Arya, A. and A. Reinstein, Recent Developments in Fair Value Accounting. The CPA Journal, 2010, August. 2. FASB, Fair Value Measurements, Statement of Financial Accounting Standards No. 157, 2011. 3. IASB, IFRS 13 Fair Value Measurementwww.ifrs.org, 2011. 4. IASB, International Financial Reporting Standard for Small and Medium-sized Entities, London, International Accounting Standards Foundation, 2009. 5. Lamoreaux, M. G., AICPA Expresses Concern on FASB Financial Instruments Proposal. Journal of Accountancy, 2010, October. 6. McConnell, P., Response to Fair Value Accounting, Financial Economics, and the Transformation of Reliability. Accounting and Business Research, 2010, Vol. 40, No. 3.

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