ABSTRACT

This study investigates how the embodiment of intangible assets in financial reports works and the impact it has on an organization. To effectively address the research topic the study uses quantitative research technique specifically correlation design where financial records of two different companies are found in the national stock exchange list. To increase the accuracy of the findings the study will focus on the financial data of the selected companies between 2016 and 2021 one of the companies selected will have embodied intangible assets in financial assets and the other selected will have not.

1.0: INTRODUCTION

1.1: Overview

The world is evolving so quickly. This is a result of regular changes in technology, new ideas or discoveries ad inventions as human beings try to not only solve the existing and future potential challenges but also make their lives better. The changes have forced many people and organizations to adjust or change their ways of doing things and operating for them to stay relevant to the market or overcome existing challenges. According to Yunis et al. (2018), the ability of a company to adapt to the changes in technology or to cope with the existing market challenges defines its performance in different sectors. For instance, if a company invests well in research and development and device new, simple and cheaper methods of production they are more likely to produce not only high-quality goods but also the high quantity that will be able to satisfy the existing market demand. This is likely to help them gain a competitive advantage in the market as well as increase their profit margin. It is evident that with regular changes in different sectors and changes in market demands many companies have opted to focus on or invest more in intangible assets such as research and development, software investments, human capital development, and developing product distribution systems among many others.

As much as many organizations are heavily investing in intangible assets because of some of the benefits it has to their operation few of these intangibles or investments appear as assents in the financial records which have raised a lot of concern and confusion in the financial recording. There is clear research that illustrates the impact whether positive or negative the company will have to face or enjoy if the investments intangible assets are included in financial records. This research, therefore, aims at using quantitative research techniques to collect and analyze data from the financial statements of different companies dealing with different categories of goods and services to determine how the embodiment of intangible assets in their financial records will affect them.

1.2: Research Objectives

• To determine how investments in intangible assets can be included in financial records.
• To determine the factors affecting the management choice of recording intangible assets
• To determine how the changes in weight of the intangible assets affect an organization
• To determine how including investments on intangible assets in financial records affects different elements in an organization.

1.3: Research Questions

• How can investments in intangible assets be included in financial records?
• What are the factors affecting the management choice of recording intangible assets?
• How changes in weight of the intangible assets do affects an organization
• How does including investments in intangible assets in financial records affect the performance of an organization, uncertainty preparedness, and financial management?

2.0: LITERATURE REVIEW

2.1: Intangible Assets

According to Nichita, (2019), intangible assets entail all the non-physical assets created or acquired by an organization and they include brand, copyright, software, and patent among many others. The author further classifies intangible assets into either definite or indefinite categories where he clarifies those indefinite intangible assets to be the ones that stay with the organization for all the period they will be operational such as the brand of the company. Definite intangible assets, on the other hand, have limited life in the organization such as an agreement by an organization to operate under another company’s patent. Nichita, (2019) further argues that the categorization of intangible assets has no limits and can be classified into many other different categories depending on the kind of operation the company is specialized in.

The argument is supported by Pechlivanidis et al. (2021) who defines intangible assets as identifiable non-monetary assets that have no physical substance but play a very great role in the success or failure of a company. The author accepts the existence of a lot of controversies as far as accounting for intangible assets in an organization is concerned but he further emphasizes that as much as the controversies exist how accurate the management of a company handles the intangible assets or accounts for them in most cases is directly proportional to their ability to succeed in the operations. Therefore if an organization accounts for their intangible assets and the investments or expenses on them there are high chances of them easily attaining their goals and also avoiding risks, however when not carefully accounted for there are high chances of a company getting loses or even closing down. According to Park, (2019), as compared to the previous centuries where major total value of S&P companies came from tangible assets in the current century intangible assets represent a total value of more than 80%.

Adopted from Park, (2019)

2.2: Accounting for intangible Assets

According to Dinh et al. (2018) among the elements that generated a lot of controversies in setting standards as well as practice is accounting for intangible assets. Different researchers have come up with different ways in which intangible assets can be handled most of which contradict each other. The author further clarifies that some intangibles such as goodwill cannot be clearly valued and therefore logically they are almost impossible to account for in the context of the historical cost system. This is supported by Zadorozhny & Yasyshena (2019) who argue that even with the great scrutiny intangible assets do provide very essential information in planning and investment. For instance, an organization with capitalized intangible assets is associated with lower absolute earnings forecast errors which dos not only attract investors to them but also give a clear picture about the company expenditure and financial position that will help them to accurately plan for their future.

As argued by Pechlivanidis et al. (2021) many businesses have evolved to an extent of heavily relying on intangible assets to maximize their profits and predicting future trends. Most companies have used the existing intangible assets accounting controversies to hide some of their financial details from the public and their competitors, therefore, using it as a means of attaining competitive advantage. As Osinski et al. 2017 note there are different methods by which intangible assets can be accounted for this including:

2.2.1: Amortization

Osinski et al. 2017 relate amortization to depreciation that only applies to intangible goods and emphasizes that it is an accounting technique that is used to lower the book value of an intangible asset over a specified period in which the asset is anticipated to augment future cash flows. Therefore in this option, if an intangible asset has a useful life its cost is amortized over the useful life and the residual value deducted. The residual value is assumed to be zero for intangible assets unless there is a guarantee that the asset would be sold to another party after the end of the useful life which is a rare case scenario. This is supported by Cañibano, (2018) who notes that the straight-line method is the most appropriate method of amortizing intangible assets because it has no residual or salvage value and is therefore used until the end of their lifetime. Definite intangible assets are therefore typically amortized using the straight-line method over their useful life while the indefinite intangible assets are assessed every year for impairment (Fils & Peirce, 2020).

2.2.2: Combination

This method is applicable when intangible assets are operated as a single asset and generate cash flow as one entity. All the intangible assets are combined and their income is categorized as one entity (Barker et al. 2021). However, when the assets generate cash independently, can be used by different groups, or can be sold separately the method cannot be applicable.

2.3: Factors affecting management choice of recording intangible assets

As noted by Wyatt, (2018) intangible asset management has an unregulated choice as far as recording identifiable assets is concerned and in most cases, many companies just focus on underlying economic factors. However, the author further emphasizes that despite there being an unregulated choice of recording intangible assets there are three major factors that most organizations mostly base on while making their choices of recording the intangible assets, these include:

2.3.1: Strength of the technology affecting the firms’ operations

The strength of technology plays a major role in recording assets in an organization. With a stronger and more reliable technology companies can measure the value of their assets over a certain useful life. The stronger the technology the more accurate and the more reliable the results or the better the choice of measurement on the other hand the poor the technology the less the chances of getting the not only accurate value of their assets over time but also reduces the chances of even determining the value of their assets (Visvanathan, 2017). Therefore the choice of a company recording intangible assets is heavily influenced by their ability to measure the value of the intangible assets over time which hugely depends on the strength of their technology.

2.3.2: Benefits associated with the choices of recording intangible assets

Since intangible assets recording is not heavily regulated the management of most organizations makes accounting choices to record intangible assets based on how the company can benefit from the choice. For instance, if a company realizes that a choice of recording intangible assets will attract more investors or share positive values of the company to the general public they are more likely to go by the choice (Castilla-Polo & Ruiz-Rodriguez 2017). On the other hand, if they realize that the choice of recording intangible assets will expose their company to risks there are more likely to avoid it.

2.3.3: Property right related factors

According to Lhaopadchan, (2020) the biggest problem in intangible asset management is defending and securing property rights. This is because most intangible investments are tied to factors such as human development which cannot be ‘owned’ and is easily transferable to rival companies. This, therefore, illustrates that they are most directly exposed to business uncertainties and drastic value changes, Companies are therefore more likely to avoid intangible assets recording choices that will in one way or the other expose their decisions or investments to the rival firms and focus more on choices that somehow secure their ideas even if it means not recording them at all.

2.4: Relationship between financial report quality and organizational performance

According to GG, (2016) asset utilization plays a major role in determining how an organization has performed in different fields. Asset utilization is majorly based on clarifying the assets that are crucial to the operation that drives the financial performance of an organization. It is significant in organizational performance based on its significance in identifying and measuring the capabilities of different assets used by the company to ensure they attain specified goals or targets. Therefore if an organization invests more in quality financial records which are accurate there are higher chances of it having a clear track of how its assets have performed in comparison to the expenditure. This will enable the company to make informed decisions about its future by either reducing or increasing expenditure on specific aspects that will maximize its profits as well as satisfy the needs of its customers (Gamayuni, 2015). Also, quality financial reporting is more likely to build the public trust in the organization an element that will not only increase brand awareness but also attract investors to the organization which will boost its performance of the organization.

3.0: RESEARCH METHODS

This study will adopt a quantitative research technique whose main focus is on numerical data which be used to test the hypothesis and identify the correlation between data collected and come up with a reliable conclusion or findings. The research will focus more on correlational research design where the relationship between the embodiment of intangible assets in financial records and the company’s performance will be analyzed. To facilitate this data from two categories of companies will be collected, a company that has practiced embodiment of intangible assets in their financial reports and a company that does not record intangible assets. An analysis will be done to ascertain how each of the decisions of whether to record or not record intangible assets affects their performance. To improve the accuracy of the data and results of the research will focus more on companies that are listed on the national stock exchange from a wide range of industries.

4.0: SIGNIFICANCE OF THE RESEARCH

As analyzed there is no clear rule or regulation that guides organizations on how to record intangible assets. It is therefore optional for the organization some do include the intangible assets in the records and some do not hence developing a lot of controversies in accounting and financial records analysis at large. The greatest problem that exists in as far as recording or not recording intangible assets in financial reports is concerned is inadequate research on how the companies will be affected either positively or negatively when they make that decision of whether to embody or not embody intangible assets in financial records. The findings of this research will provide answers to these questions, therefore, filling the research gap and also ensuring that companies make appropriate decisions based as far on the embodiment of intangible assets into financial records is concerned. Also, the research targets different categories of companies comparing their performance to the other which will clear the doubt or confirm the controversy on whether the embodiment of intangible assets into financial records has different effects on different categories of companies or not. In addition, the findings of this study will not only offer organizational solutions but will also create a room or form a base for other researchers to exploit the topic further to offer business persons enough information for them to make appropriate and reliable decisions in as far as accounting is concerned.