In late 2006, the Governmental Accounting Standards Board (GASB) issued an exposure draft (ED) on Accounting and Financial Reporting for Intangible Assets. This article will briefly examine the key proposals put forward in the ED.
Background. Many state and local governments control intangible assets (e.g., easements, water rights, computer software). For more than 30 years, Accounting Principles Board (APB) Opinion No. 17, Intangible Assets, was the source of authoritative guidance on accounting and financial reporting for intangible assets. In 2001, the Financial Accounting Standards Board's (FASB) Statement No. 142, Goodwill and Other Intangibles, superseded APB Opinion No. 17 in the private sector. Meanwhile in 1999, the GASB issued Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, which expressly included intangibles as a subclass of capital assets.
It has not been clear to many financial statement preparers and auditors how these various standards apply to state and local governments. Some believe that APB Opinion No. 17 continues to be authoritative. Others contend that GASB Statement No. 34 effectively put an end to specialized accounting for intangibles, thereby effectively superseding APB Opinion No. 17. Still others hold that financial statement preparers and auditors should turn to FASB Statement No. 142 for authoritative guidance. The ED aims to put an end to this practical confusion.
Proposed Guidance. The ED takes the position that intangible assets are no more than a subclass of capital assets (per GASB Statement No. 34) and therefore should be subject to all of the display and disclosure requirements that apply to other types of capital assets.
The ED acknowledges that practical problems can arise in the case of internally generated assets (e.g., computer software), which would include items produced under contract with third parties, as well as existing items acquired from third parties that require "more than minimal effort" before they can achieve expected service capacity (e.g., commercial software). To minimize these potential problems, the ED proposes four criteria that must be met before any outlays can be capitalized in connection with an internally generated capital asset:
* It must have been determined that the objective of the project is to create a specific internally generated intangible asset;
* The nature of the service capacity expected upon completion must have been determined;
* The technical or technological feasibility of completing the project in such a way that expected service capacity is attained must have been demonstrated; and
* The government's intention, ability, and ongoing effort to continue to develop/complete the project must have been demonstrated.
Because of the significant costs that commonly arise in connection with internally developed software, the ED proposes specific capitalization guidelines based upon when outlays are incurred during the software development process. …