The FASB’s efforts to tackle intangibles could open a huge can of worms if done too broadly, and therefore the board should steer its efforts toward areas that lack consistency, board advisors said.

Currently, there is a lack of consistency in reporting costs for internally generated intangibles, including research and development (R&D), which are required to be expensed, while the same assets, if acquired, have to be capitalized.

Investors find that odd, according to Small Business Advisory Committee (SBAC) discussions on May 12, 2022.

“R&D is where we see a large disparity, especially for life science companies and others [whereby] that is what they do,” Dominick Kerr, partner, Global Accounting Standards & Professional Practice at Connor Group, said. “It always is a bit odd if we see you’ve grown that yourself, it’s expensed as incurred, but if you buy that from somebody else who’s grown it themselves, now you have an asset on the books,” he said. “And that is a challenge from a comparability standpoint."

Companies with significant R&D programs in place generally do offer disclosures in a line item “but it doesn’t always actually capture the value which I think is really important,” Kerr said. Once beyond the research phase following a capitalization model makes sense, he said.

“We see this a lot and it’s always a challenge when you have two entities that could be similar in what they are doing - one purchases that R&D asset if you would and one develops internally - those financials look completely different,” Kerr added. “Easier to just expense as incurred but I don’t know that that produces the best economic answer.”

Discussions by the SBAC, a panel that advises the board on small public company matters, surround the FASB’s research on whether to add a project to its technical agenda on disclosure and accounting for intangibles.

Intangibles “can open Pandora’s box in my mind because there’s a lot of intangibles that go beyond” in-process research and development (IPR&D), Ryan Siurek, chief accounting officer, at Biodesix, Inc., said. The FASB should narrow its efforts “just to make improvements from a GAAP perspective in areas that we know there is inconsistency,” he said.

Current R&D rules

Current guidance for intangible assets, including R&D, span several areas of GAAP, a FASB staff member explained to the panel. Initial accounting guidance, including R&D, depends on whether they are internally generated or acquired.

Under Topic 730, Research and Development, R&D costs are required to be expensed as incurred. An entity is required to disclose the total amount of R&D expense in each period for which an income statement is presented. The guidance for internally generated intangibles specifies that the cost of internally developing, maintaining, or restoring intangibles that are not specifically identifiable, have indeterminate lives, or are inherent in continuing business and related to an entity as a whole are an expense when incurred.

Other than that guidance, GAAP does not have over-arching recognition and measurement guidance for internally generated intangibles, staff said. Instead, GAAP has different guidance for some internally generated intangible assets, including software, website development costs, cable television, broadcast and others.

In contrast, intangible assets acquired either individually or with a group of assets are required to be capitalized and initially measured at their cost to the acquiring entity. For a group of assets, entities are required to allocate the cost of the individual assets acquired based on their relative fair values.

Further, intangible assets acquired in a business combination are required to be capitalized and initially measured at their value at the acquisition date.

Project on software development costs?

So far, the board - at a prior meeting - signaled it might add a narrow project on accounting for software development costs only, separate from the broader intangibles topic and R&D matters. No formal votes have yet been made.

Currently, there are two different models in GAAP for software costs which have largely remained unchanged since they were developed in the 1980s and 1990s.

SBAC members said there is a disparity in current accounting guidance for development costs of internal and external use software. Members suggested that development costs for software that is revenue generating, including hosted software arrangements, should follow one model, while development costs for software developed strictly for internal use should follow a separate model.

The increased use of agile methodologies for software development introduces challenges under the current accounting models, some on the SBAC also said.

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