Can an IAS officer invest in companies
Fülbier, Uwe Rolf and Honold, Dirk and Klar, Alexander
Accounting for intangible assets
RIW 2000, 833 (Issue 11)
I. Introduction »Money goes where there is knowledge. Not the other way around «1Neumann, Handelsblatt v. September 15, 1999, 57, with a quote from Kurt Biedenkopf .. Knowledge in the form of technological innovation secures the future potential of a company. Product and process innovations help to achieve competitive advantages, which are reflected in the development of sales and earnings. Trust in the future potential of a company is essential for investors to invest in this company. However, this presupposes that the technological innovation of a company can be recognized and assessed by external parties. The annual financial statements are still the central information tool for external parties involved in the company. Although it is conceptually based on the mapping of past events, it is used in the context of financial analysis as a starting point - ex post also as a control instrument - for forecasting models. Pellens / Fülbier, in: Baetge (Hrsg.), On accounting according to International Accounting Standards (IAS), 2000, p. 37 f .. Relevant data are to be made available that are helpful in the formation, correction or confirmation of forecasts . These data have to satisfy a certain degree of reliability, which goes hand in hand with image fidelity and intersubjective verifiability. for this z. B. FASB, SFAC 2.33, 2.46 ff .. The tension between relevance (relevance) and reliability (reliability) is responsible for the fact that it is difficult to depict technological innovation as a mainly immaterial value in a balance sheet. The nature of the physically intangible, pecuniary advantages 4 Cf. Buchner, in: Busse von Colbe / Pellens (ed.), Lexikon des Accounting, 4th edition 1998, p. 343; based on BFH, February 9, 1978 - IV R 201/74, BStBl. II 1978, 371: "all financial advantages of a company including actual conditions and concrete possibilities", which also illustrates the proximity of the tax law (but not commercial law) activation concept to the asset definition; further definitions z. B. in Haller, in: Möller / Schmidt (eds.), FS Coenenberg, 1998, p. 564 ff .; Kählert, The mapping of intangible assets in the annual financial statements under commercial law, 1995, p. 4 ff .; v. Keitz, Intangible goods in international accounting, 1997, p. 5 ff. And the associated uncertainties in their identification, objective review and quantitative mapping have resulted in German commercial law in the fact that intangible fixed assets that were not acquired in return for payment pursuant to Section 248, Para. 2 HGB may not be activated. What is more, the entire activation concept of the German commercial law, which is traditionally based on the principle of prudence and designed to determine distributable profit, rather privileges material values that meet the criterion of independent usability. Baetge, Bilanzen, 4th ed. 1996, p. 146 ff .; applied to intangible assets e.g. B. von Glade, Intangible assets in commercial balance sheet, tax balance sheet and statement of assets, 1991, p. 108 ff .; Hayn, IStR 1996, 355 f .; Kählert (fn. 4), p. 72 ff .; v. Keitz (fn. 4), p. 17 ff .; Niemann, Immaterial Wirtschaftsgüter im Handels- und Steuerrecht, 1999, p. 7 ff., It is precisely the intangible values Moxter, BB 1979, 1102. described as "the eternal problem children of accounting law" that have become decisive in recent years Developed value drivers in many companies. Even more so than in the case of companies in the "old economy", in those in the "new economy", e. B. from the fields of biotechnology, software or e-commerce, observe that the market values determined on the stock exchange differ significantly from the book values of equity. This suggests that important value drivers of these companies are not reflected in the balance sheet, but still have an influence on the investment decisions of capital market participants. Maul / Menninger, DB 2000, 529; Mullen, Accountancy, Nov. 1993, 92 ff .; Myers, CFO, Sept. 1996, 49 ff .; on the relationship between company valuation and intangible values, see also Haller (fn. 4), p. 581 ff .; The example of Coca-Cola is also interesting: It is estimated that 95% of the stock market value can be traced back to (unrecognized) intangible assets (especially brands); see Henzler, FAZ v. December 27, 1999, 23rd. High price-to-sales ratios, which can be found here again and again, also point in this direction. The restrictive accounting for intangible assets means that young, technology- and research-intensive companies often report high losses, as expenditure on creating such assets becomes an expense. Additional information, in particular within the framework of the management report on research and development required for corporations (§§ 289 Paragraph 2 No. 3, 315 Paragraph 2 No. 3) and the expected development (§§ 289 Paragraph 2 No. 2, 315 Paragraph 2 No. 2) may help. A look at the specialist literature, however, shows how disappointingly little is published here. especially Baetge / Dossmann / Rolvering, Handelsblatt v. Sep. 27, 1999, 56; Ballwieser, in: Fischer / Hömberg (ed.), FS Baetge, 1997, p. 153 ff .; Brotte, US-American and German annual reports, 1997, p. 183 ff .; Krumbholz, The Quality of Published Management Reports, 1994; critical to the mapping of innovations in the entire accounting z. B. also Haller (fn. 4), p. 562 ff .; Littkemann, DB 1998, 1973 ff .; Neumann (fn. 1), 57 .. A possible solution is indicated in connection with the New Market established in 1997 on the Frankfurt Stock Exchange. This new market segment was designed for young growth companies to make the difficult search for new venture capital easier. The rules of the Neuer Markt now place more stringent requirements on the entire corporate disclosure of the issuer and prescribe other accounting rules: the US Generally Accepted Accounting Principles (US-GAAP) or International Accounting Standards (IAS), which exclusively serve the information function. Deutsche Börse AG, Neuer Markt rules (as of July 1, 2000), Section 2, Art. 4.1.9 (3) and 7.2.2 (1); the SMAX will follow from 2002; see Deutsche Börse AG, SMAX Conditions for Participation (as of July 1, 2000), Art. 2 (10) and 3.2 (1); for information on the alignment of US GAAP and IAS see z. B. Pellens, International Accounting, 3rd ed. 1999, pp. 132 f., 412 f. In the following, it will be examined whether these rules are really more capable of dealing with intangible assets in accordance with their objective.10 Only intangible assets of fixed assets are considered (Intangibles); the derivative goodwill is largely excluded; see Lopatta, RIW 2000, 354. to be recorded in the annual financial statements. In the second chapter, the existing rules for mapping intangible values according to US GAAP and IAS are shown and exemplified with the specifics of a biotechnology company. In the third chapter, the practical relevance of the rules shown is clarified by evaluating the annual financial statements of the biotechnology companies listed on the Neuer Markt. An assessment of the US GAAP and IAS accounting with regard to the company analysis follows in the fourth chapter, before the explanations conclude with a summary. II. Accounting for intangible assets according to US-GAAP and IAS1. US-GAAPa) Activation concept and regulatory basis The rather dynamic asset definition according to US-GAAP goes beyond that of the asset according to German commercial law. It is based on the probable future economic benefit, which is concretized directly or indirectly in controllable future net cash flows at company level. An asset resulting from this is to be activated if its value can be determined with sufficient certainty and the activation generates relevant and reliable information. FASB, SFAC 5.63; in the application to intangible assets v. Keitz (fn. 4), p. 109 ff. In addition to the general asset definition set out in the framework of the Financial Accounting Standards Board (FASB), the casuistic system of US GAAP, as can be seen in Table 1, has a large number of Rules for accounting for intangible assets. The central regulation here is APB Opinion (APBO) No. 17, according to which all acquired intangible assets are to be capitalized at cost. Internally generated intangible assets are generally to be capitalized with their expenses, provided they can be clearly identified and have a limited useful life. Otherwise they have to be charged immediately as expenses for the respective period. The depreciation period should be based on the useful life; it must not exceed 40 years, even if the expected useful life is longer (APBO 17.27 ff .; AIN APB17). in more detail v. Keitz (fn. 4), p. 116 et seq. APBO 17 only applies if no special provisions apply. These regulations, which are not always consistent with one another, regulate the accounting of various, mostly industry-specific types of intangible assets and are only to be considered in the following to the extent that they affect biotechnology companies In Statement of Financial Accounting Standards (SFAS) No. 2.12, however, it is stipulated that all expenses in connection with R&D are generally to be offset as expenses for the period. Only parts of the R&D expenditures, which concern unspecific laboratory equipment and test materials that can also be used for other purposes, are to be capitalized under material assets and distributed over their useful life as R&D expenditures (SFAS 2.11 a). An activation requirement also applies to intangible assets acquired from third parties for the R&D area, such as B. Patents, provided that they can be used in several research projects and thus have “Alternative Future Uses” (SFAS 2.11 c). In contract research, SFAS 68 differentiates between classic contract research and hidden funding for one's own research. The latter occurs when a biotechnology company receives funding from a third party to carry out its own R&D and has to repay these funds regardless of its success. Here Table 1: Important US rules for accounting for intangible assets Standard content Goodwill accounting or treatment of a negative difference in the context of capital consolidation Activation requirement for clearly identifiable and depreciable intangible assets Activation prohibition for R&D expenditure; this also applies to the R&D prohibition for start-up expenditure, which is included in the purchase price of a subsidiary, activation requirement for certain R&D measures (e.g. expenditure for area development, test drilling, etc.) in the case of industries that extract raw materials; activation prohibition for freight transport licenses; Activation requirement for other licenses Activation requirement for the production expenses of master audio carriers, provided the artist has a high reputation Activation requirement or prohibition for expenses in the field of contract research depending on the drafting of the contract Activation requirement for expenses for software development from an unequivocal determination of the technical feasibility or - In the case of internal use - of a certain project progress Activation requirement for production expenses for master films Activation prohibition for advertising expenses with the exception of so-called direct response advertising. The company has to post a liability and offset the expenses incurred as R&D expenses in accordance with SFAS 2.12 (SFAS 68.5 ff.) 13 Cf. also Delaney et al., Wiley GAAP 98, 1998, p. 296 .. If, on the other hand, it is not a financing transaction, but the provision of a service in the field of R&D, the client has expenses for the service used, which are within the framework of own R&D use to be recorded as R&D expenditure for the period (SFAS 2.11 d). The contract partner, the company doing research on behalf of the company, on the other hand, provides a service that leads to sales revenues that are offset by the production costs of sales. If the R&D order has not yet been completed by the balance sheet date, the unfinished order must be capitalized in inventories. If the requirements of the Percentage-of-Completion Method apply, partial profits will also be realized in the course of the project work (ARB 45). The R&D activities (Purchased In-Process Research and Development) included in the purchase price of a subsidiary are subject to FASB Interpretation (FIN) No. . 4 to be charged immediately as an expense. FIN 4 is based on SFAS 2. 12. As part of the FASB-initiated project on “Business Combinations and Intangible Assets” in 1996, capitalization with subsequent scheduled depreciation was discussed as a new regulation before the FASB decided in 1999 to adopt this Question not to be pursued for the time being 14 Cf. FASB, News Release 7/28/99; to this, inter alia. FASB, Status Report, No. 309, Financial Accounting Series No. 193-A v. Jan. 13, 1999, p. 3 f .; FASB, Status Report, No. 318, Financial Accounting Series No. 202-A v. Oct. 12, 1999; P. 3 f .; see also Beckman, Journal of Corporate Accounting and Finance, Summer 1998, 55 ff .; KPMG (Hrsg.), Accounting according to US-American principles, 2nd edition 1999, p. 149 .. For the capitalization of internally developed patents, it must first be checked whether they are intangible assets in the sense of the asset definition. In particular, the future economic benefits of the patents must be proven. In the case of purely protective patents, which are intended to prevent third parties from accessing certain research results, this point is already critical. If the evidence is successful, as a result of the legal patent protection of 20 years, it is an identifiable intangible asset with a determinable useful life as defined by APBO 17. They are to be capitalized at production cost. The depreciation period is determined by the legal patent term or, if shorter, the economic useful life. However, due to the prohibition on activating R&D expenditure, it is only possible to activate expenditure directly associated with the application for a patent. The production costs of a patent that are accounted for in this way represent only a fraction of the costs actually incurred. If patent disputes subsequently arise, the unreimbursed litigation costs of a successful defense are to be attributed to the book value of the patent, as they ensure the validity of the patent and its enforceability. Kieso / Weygandt, Intermediate Accounting, 9th edition 1998, p. 597 f .; KPMG (footnote 14), p. 77 f .; Moody, in: Carmichael / Lilien / Mellman (ed.), Accountants' Handbook, 9th edition 1999, Vol. 1, p. 17.12 f..c) Other intangible assets Other intangible assets include advertising expenses and brands in particular Employee know-how and licenses. Biotechnology companies operate their advertising activities i. d. Usually through presentations at trade fairs and through advertisements in specialist magazines. According to SOP 93-7.26, advertising expenditure is to be recorded as an expense when it is incurred or at the time of advertising. Only direct response advertising must be activated after certain criteria have been met. Direct mail exists if it can be statistically proven for a certain group of customers that some of them will purchase the product or use the service as a result of advertising. In order to be able to generate a future economic benefit, the resulting income must exceed the advertising expenditure. on SOP 93-7 more detailed Delaney et al. (Footnote 13), p. 299; v. Keitz (fn. 4), p. 162 ff .; Moody (fn. 15), pp. 17.18 ff .; also Maples / Earles, Journal of Accountancy, May 1999, 49 ff. Participation in a trade fair is initially a sales activity. In the context of trade fair activities, however, it is possible to carry out direct advertising and to construct a relationship between the advertising activity and the resulting future sales. Due to the difficult operationalization of the activation criteria, however, certain leeway remains. In addition, only the expenses associated with direct advertising may be capitalized and written off. The accounting of brands is based on APBO 17. The identifiability and determinability of the useful life required here is unproblematic due to the legal protection of the brand or the trademark. However, only the expenses incurred in connection with the registration may be included. If successful legal disputes arise in the course of use, the corresponding expenses may be capitalized as subsequent production costs. Moody (fn. 15), p. 17.18 .. Although this accounting is paged, it allows the book values of the brands to differ greatly from their market values. B. be determined in marketing using different brand valuation approaches. to evaluate brands e.g. B. Sattler, DBW 1999, 633 ff. With w. N .; on the importance of brands for high-tech companies Ward / Light / Goldstine, Harvard Business Review, July / Aug. 1999, 85 ff ..Only when the brands are acquired by another company does the acquirer's balance sheet reflect the market value at that point in time. For many companies in the biotechnology sector, highly qualified employees guarantee future cash inflows. The difference between highly qualified and other employees is within the company, e.g. B. due to salary differences to identify. The same applies z. B. for expenses for the search for suitable employees or further training measures. However, the activation of human capital fails due to the lack of control on the part of the accounting company. Employment contracts can be terminated at short notice by employees, and the use of intellectual abilities can hardly be forced during ongoing employment relationships. In addition, personnel expenses in the R&D area are subject to the activation prohibition of SFAS 2.12. Expenses for the conclusion of license agreements that allow the use of patented, copyrighted or proprietary products or processes must be capitalized and depreciated over the duration of the agreement. These expenses include all one-time payments, including legal fees. Due to the principle of periodization, periodic payments are to be recorded as expenses for the period, as they are related to the ongoing use of the product or process. KPMG (fn. 14), pp. 80..2. IASa) Capitalization concept and regulatory basis The IAS definition of assets essentially corresponds to that under US GAAP. In contrast to US-GAAP, the accounting of intangible assets has been regulated in a central regulation since September 1998, in IAS 38, which is based on the content of IAS 9, which it repealed. IAS 38 is to be applied for the financial years from July 1, 1999, whereby earlier application was recommended by the International Accounting Standards Committee (IASC) (IAS 38. 122). From the scope of IAS 38, those areas are excluded that are in other IAS, e. B. on inventories (IAS 2, 11), financial assets (including IAS 32, 39) or on derivative goodwill (IAS 22) are regulated (IAS 38.2). According to IAS 38.18, an intangible asset is generally to be capitalized as soon as it is the Asset definition and other criteria are sufficient. The intangible asset must be identifiable, i.e. H. be clearly separable from the original goodwill. Evidence of identifiability can be provided via the separability of the asset without this being a necessary criterion (IAS 38.11 f.). The identifiability is best described, such as B. in the case of patents, prove by an enforceable (protective) right. The same applies to the control criterion (IAS 38.13 ff.). If all recognition criteria are met cumulatively, the intangible asset must be capitalized at its acquisition or production cost (IAS 38.22) and depreciated over the best possible estimated useful life (IAS 38.63, 38.79 ff.). As an alternative to scheduled depreciation, according to IAS 38.64 et seq., Under restrictive conditions, the continuous revaluation that does not affect profit or loss - provided that it is above the historical costs - is possible. In the course of use, the capitalized intangible asset must be subjected to a value test on the respective balance sheet dates (IAS 38.97 ff.). Problems in assessing the general recognition criteria often arise with internally generated intangible assets. IAS 38 divides the process of creating intangible assets into a research and a development phase. The terms "research" and "development" are so broad that they include not only - as in IAS 9 - technological innovation processes, but all processes of creating all intangible assets. If this phase subdivision is not possible for individual projects, the entire project expenditure must be recorded directly as an expense for the period (IAS 38.40 f.). Otherwise, according to IAS 38.42, expenses of the research phase are generally to be offset as expenses for the period, while the expenses of the development phase must be capitalized under certain additional conditions (IAS 38.45). When these requirements are met for the first time, the corresponding production costs are to be capitalized. The post-capitalization of development expenses from earlier periods that have already been offset as expenses is not permitted (IAS 38.53, 38.59). In the opinion of the IASC, the expenses for setting up and starting up a business, for training and further education, advertising activities and reorganization do not meet the criteria of an intangible asset ( IAS 38.57). Self-created brand names, print titles, publishing rights, customer lists and essentially similar values are also excluded from the capitalization, since the related expenses cannot be separated from the general expenses for the (original) goodwill (IAS 38.51 f.). also Baetge / v. Keitz, in: Baetge et al. (Ed.), Accounting according to International Accounting Standards (IAS), 1997, E 50, marginal no. 14 ff., 50 f..b) Research and development including patents Since research expenditure is not capitalized in accordance with IAS 38.42, the focus is on development expenditure that can be capitalized under certain conditions. The exact differentiation between the research and development phase is problematic. From a procedural point of view, research precedes development and aims at the discovery of new knowledge by means of which new goods, processes or technologies can be developed or existing ones can be improved. Although a product idea may already exist in the research phase, the identification of a feasible new product or process is only in the foreground in the development phase: production and marketing are planned here. Pellens, supra note 9, p. 432; also IAS 38.7; SFAS 2.8; Kieso / Weygandt (fn. 15), pp. 608 f .. The (experimental) evidence that the underlying process can be carried out could mark the transition to the development phase. similar to the delimitation of software development expenses Epstein / Mirza, Wiley IAS 2000, 2000, p. 296 f .. At least under laboratory conditions, the practicability of a procedure would be proven from this point on, so that the implementation in a concrete product could begin However, it is not a straightforward process, there are always modifications and research activities to already developed processes and prototypes. Furthermore, there are often so-called spin-offs. This includes innovations and further research activities occurring as a by-product in the development phase. A clear phase separation is at least difficult here. This only seems possible if an intact project management and a correspondingly efficient cost accounting and controlling system is established. Otherwise, in accordance with IAS 38.41, there is a risk that all R&D expenses will be charged immediately. If the expenditures of the development area have been identified, they can only be capitalized in accordance with IAS 38.45 if the biotechnology company additionally fulfills six criteria: - Technical ability to complete the project and bring it to use : How this proof is to be provided remains open, especially in light of the fact that tests and official approval procedures often have to be passed through before the actual market launch of the product. In the health sector, therefore, the activation of any development expenditure for pharmaceuticals is regularly rejected with reference to clinical tests still to be carried out. on behalf of many Bayer AG, Annual Report 1995, p. 60; Bayer AG, Annual Report 1996, p. 66; on this Cairns, Applying International Accountings Standards, 2nd ed. 1999, p. 396 .. Furthermore, it is argued that only after the last modification of the product - when the CE marking for the product is issued after successful tests and the actual market launch can begin - the proof of the technical feasibility can be really reliable. Menn, in: Baetge et al. (Ed.), Accounting according to International Accounting Standards (IAS), 1997, IAS 9, no. 50 ff .. This strict interpretation would, however, be tantamount to a de facto activation ban, which should not be in the interests of the IASC. Even if toxicological risks cannot be ruled out due to ongoing clinical tests, it seems plausible that not only final drugs have product properties but ultimately all salable (partial) findings from the previous R&D. For these preliminary stages there are i. d. R. Markets, regardless of the chances of realization of the associated end product. In addition, results of development activities that have already been patented can lead to future economic benefits in the form of license income. However, a third party would have to have undertaken to license the process later during the development phase, as subsequent activation of development expenses already offset as an expense at the time the license is granted is prohibited (IAS 38.59). B. for in-vitro diagnostics is not required, so certain approval procedures still apply. In order to obtain the CE mark, in-vitro diagnostics have to go through various conformity assessment procedures, during which the safety, function and compatibility of the product are checked. RWTÜV e. V., information folder: CE marking (medical products 93/42 / EEC), 1998, p. 4, 25 f .. If a quality management system is established and certified in the form of DIN EN ISO 9001, the conformity assessment procedures and the CE Marking run smoothly. The need to subject the product to documented feasibility tests remains unaffected. - Intention to complete the project and sell the project result (product, process) or use it yourself: This second criterion is also not further specified. In the literature, however, it is required that a concrete and feasible plan for the marketing and use of the intangible asset must already be available. Menn (footnote 24), para. 55. There is a large margin of discretion for the balancing party, since it is not specified how binding and how specific these plans ultimately have to be. Young biotechnology companies in particular often use the services of third parties for the actual production and marketing of their products. It is questionable whether a contract must already be concluded here or whether it is sufficient if it can be proven that initial negotiations are conducted - Ability to sell the project result (product, process) or to use it yourself: Again, IAS 38 does not specify this in IAS 9 criterion not yet included. It even seems redundant, as it can be derived from the fulfillment of other criteria (No. 2, 5). be proven by the existence of a market for the subsequent product or process. Expenditures for necessary market research studies must not be activated here, as they are incurred before the criteria are met. Menn (footnote 24), para. 58 .. Unless external utilization is planned, the company's internal benefit must be proven. The proof of benefit can also be made using IAS 36 and the methods described there (IAS 38.48) - Sufficient availability of technical, financial and other resources for project implementation: The corresponding proof can be provided with the help of a business plan that names the required resources and quantifies them and demonstrates the company's ability to dispose of these resources (IAS 38.49) - Reliable measurability of the attributable development expenditure: The expenditure of the individual R&D projects must be identifiable and clearly distinguishable from one another. A powerful project controlling should do this i. d. R. ensure (IAS 38.50) 28 Cf. Baetge / v. Keitz (footnote 20), para. 48 f .; Menn (footnote 24), para. 47 ff..IAS 38.45 is characterized by a large number of discretionary leeway. Baetge / v. Keitz (footnote 20), para. 36 ff .; Pellens, supra note 9, p. 437; cf. general on questions of interpretation in the IAS Wollmert / Achleitner, WPg 1997, 211 f .. In the case of interpretation, it is to be expected that accountants and, above all, auditors will fall back on national accounting concepts. A German auditor who (still) thinks in the categories of the precautionary principle will probably (over) emphasize the aspect of reliability here in cases of doubt and advocate greater expense accounting. IAS 38 does not have the depth of regulation of the US rules in their entirety. There are also no clear regulations on contract research. However, IAS 38.2a can be interpreted in such a way that, analogously to US GAAP, the contracted company has to account for a service that - if not yet completed - leads to capitalization in current assets on the balance sheet date. In the case of long-term contract research, IAS 2 for inventory accounting and IAS 11 for long-term contract manufacturing are generally used here. Baetge / v. Keitz (footnote 20), para. 19 .. According to IAS 38, there are no regulations for »contract research«, which in SFAS 68.5 ff. Is viewed more as financing. However, the IAS immanent compulsion to present an economically correct presentation would also have to lead to a "normal" R&D activity and a financing transaction in the research company. The accounting treatment of R&D knowledge acquired for a fee is based on the general criteria of IAS 38, the apply regardless of how ownership was obtained. Unprotected experimental results, which the company cannot control in such a way that the exclusion of third parties from use, proves to be problematic. At least the same knowledge also exists with the seller. Duenbostel, The relevance of a paradigm shift in accounting in Germany for the mapping of research and development in the annual financial statements, 1998, p. 187 f .. Here it is necessary that the contractual conditions and possible declarations of commitment document that the sole power of disposal lies with the acquiring company. In addition, it is not imperative that a future economic benefit is concretized in the acquisition and the price paid32So Duenbostel (fn. 31), p. 187. B. analogous to IAS 38.45 or with reference to an »Alternative Future Use« within the meaning of SFAS 2.11. If patents that are still in the registration phase are acquired for a fee, the activation criteria are checked in the same way as for acquired R&D knowledge. In the case of patents developed in-house, it must also be proven that an intangible asset has been created and the recognition criteria have been met. This is largely unproblematic due to the identifiable and enforceable property right. However, it must be checked whether the patents will generate future economic benefits. As already mentioned, this is not necessarily the case with pure protective patents. v. Keitz (fn. 4), p. 209 .. In the case of biotechnology companies, there is also the problem that an R&D process in its sub-phases is secured by patents right from the start. Since companies try to protect research results from third-party access as early as possible, a considerable part of all patents can usually be assigned to the research phase. Since research expenditures may not be capitalized (IAS 38.42), a patent capitalization is possible - if at all - for the expenditures directly connected with the application of the patent. If there are subsequently successfully conducted legal disputes with regard to these patents, the capitalization of the expenses incurred in this connection can also be justified. If a process or product is patented that originates from the development phase and meets the activation criteria according to IAS 38.45, the patent is with its production costs to activate. These are made up of individual and attributable overhead costs (IAS 38.53 ff.). In addition to the expenses of the patent application, there are already capitalized development costs, which are to be allocated to the patent and have to be reclassified accordingly. Compared to US GAAP, patents that have not been acquired for consideration tend to be valued higher according to IAS. C) Other intangible assets The capitalization of advertising expenses and self-created trademarks is expressly prohibited in accordance with IAS 38.57 and 38.51. There are no major differences between IAS and US GAAP on this point. The conservative valuation according to US-GAAP is de facto close to an activation ban. Here as there, the efforts of many biotechnology companies to build up and establish their own brands are recorded as expenses for the respective period. Only when a brand is acquired does the market value of the same flow into the annual financial statements, is capitalized and depreciated over the expected useful life. also Stolowy / Haller / Klockhaus, Accounting for Brands in IAS 38 of IASC (Intangible Assets) Compared with French and German Practices, Working Paper, HEC School of Management & Treuhandseminar of the University of Cologne, August 1999 .. The balance sheet asymmetry between Purchased and self-created intangible assets become clear again. Analogous to US-GAAP, the problem of a lack of control weighs on the accounting of employee know-how. According to IAS, however, at least the salaries of laboratory employees including ancillary costs can be capitalized, provided that they are allocated to a development project that has to be capitalized.They thus represent a component of the production costs (IAS 38.53 ff.). The accounting treatment of expenses for licensed products and processes does not differ from the treatment according to US-GAAP.III. Practical relevance 1. In order to gain an insight into the specific accounting practice, the annual and consolidated financial statements of the biotechnology companies listed on the Neuer Markt were evaluated for the year 1999 with regard to the accounting for intangible values. The financial statements were taken from the annual report for the year in question or - if not available - from the relevant sales prospectus. The company selection was based on the composition of the NEMAX Biotechnology Industry Index as of September 15, 2000 and comprises 17 companies. The questions to be answered were whether and to what extent intangible assets had been capitalized, which value categories were involved and which (subsequent) evaluation they are subject to. Here, the central interest was directed towards self-created intangible values and the question of whether and to what extent the companies considered Some of the very restrictive approach requirements have been met. In this context, in addition to the calculators, information in the notes was also evaluated. A more detailed examination of the information located outside the annual or consolidated financial statements was problematic, however, since annual reports and sales prospectuses cannot be compared. The investigation of the situation reports was equally problematic. Some companies do not have a management report - there was probably not (yet) a legal obligation to compile a report - others publish the extensive Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), while others publish a more HGB-oriented management report35 not according to IAS and US-GAAP, see Küting / Hütten, WPg 1999, 12 ff..2. Although the rules of the Neuer Markt include the basic obligation to prepare IAS or US-GAAP consolidated financial statements, it is also possible to use German commercial law for a transitional period. Deutsche Börse AG, (fn. 9), Section 2, Art. 4.1.9 (3) and 7.2.2 (1)., None of the companies examined makes use of this exception rule. Only IAS and US GAAP financial statements are available. Since group-free companies are the exception, this is i. d. Usually about consolidated financial statements or proforma consolidated financial statements37 In proforma financial statements, for reasons of comparability, the effects z. B. a recently established establishment or a major acquisition neutralized by certain fictions. The dominance of US GAAP that can be observed here results from the strong US orientation of biotechnology companies. In addition, US GAAP consolidated financial statements are (still) a mandatory requirement for a stock exchange listing in the USA. All companies that are already listed there, such as B. Qiagen N.V., or are planning the same, will therefore follow US GAAP. In view of the (partial) recognition of the IAS by the International Organization of Securities Commissions (IOSCO), it is clear whether the clear predominance in favor of US GAAP will continue in the future. IOSCO, Press Release v. May 17, 2000: IASC Standards. and the proposal of the EU Commission to require listed companies in the EU to have IAS consolidated financial statements from 2005 onwards. Commission of the European Communities, Communication from the Commission to the Council and the European Parliament, EU Accounting Strategy: Future Approach, Brussels, 13 June 2000; see Pape / Fey, FAZ v. June 19, 2000, 30th, but questionable. In addition, it cannot be ruled out that the choice of accounting system may have an impact on the effect of different mapping rules. Table 2: Activation of intangible assets in NEMAX biotechnology companiesCompaniesCompletion; AccountingActivated intangible assetsActivated intangible assets (amount /% of total assets) Balance sheet disclosure of which goodwill (amount /% of capitalized intangible assets) of which self-created intangible assets (amount /% of capitalized intangible assets / type) Subsequent valuationOther closing informationBB Biotech AG, Schaffhausen, SwitzerlandCapital increase costs 100% Capital increase costs over two years Note that depreciation modalities also apply to formation costs (not capitalized in the reporting period) curasan AG, Kleinostheim concessions, industrial property rights and similar rights and values as well as licenses to such rights and values; Goodwill; Advance payments made1003 TDM 26.9% Development costs Purchased intangible VG are amortized on a straight-line basis over four to ten years; No information on the depreciation modalities for development costs (start of depreciation only in the following year) Capitalization of development costs for internally generated drug approvals in accordance with IAS 38 at direct costs plus directly attributable overheads CyBio AG, JenaImmaterial assetsek. A. (main component) k. A. (no or subordinate role) Straight-line depreciation of goodwill over one or ten years Expenditures for advertising and R&D were immediately offset as expenses EVOTEC BioSystems AG, Hamburg No separate disclosurePatents are depreciated on a straight-line basis over ten years Activation of acquired patents and licenses; no capitalization of R&D and software development expensesGeneScan Europe AG, Freiburg i.Br.Proforma-KA 1999 US-GAAPImmaterial assets after deduction of accumulated depreciation; Goodwill after deducting accumulated depreciation A. (no or minor role) Straight-line amortization of goodwill over seven years and the acquired company name over eight years In addition to goodwill, acquired software licenses and the acquired company name are capitalized; No allocation of the difference in the capital consolidation to ongoing R&D projects; R&D expenditure was immediately offset as an expenseGirindus AG, BensbergProforma-KA 1999 US-GAAPImmaterial assets; Goodwill (no or subordinate role) amortization of goodwill over five years Appendix information on goodwill only GPC Biotech AG, MartinsriedProforma-KA 1999 US GAAP goodwill, net; intangible assets, nettok. A. (no or minor role) amortization of intangible assets over four years; Patents are amortized over ten years Activation of the intangible assets acquired as part of a company acquisition, e.g. B. Patents, workforce, key technologies; R&D projects that have not yet been completed were (initially) offset against the consolidated earnings carried forward; R&D expenditures were immediately offset against LION bioscience AG, Heidelberg Self-developed software, net; other assets, nettok. A. (none or minor role)? 908 thousand? 72.2% software development costs I. d. Usually straight-line depreciation over a maximum of three to four years Activation of software development costs that have been incurred after the technological feasibility has been achieved; Activation of (acquired) software licenses and relevant technology; R&D expenses were charged immediately as an expense MacroPore, Inc., San Diego, USA R&D expenses were charged immediately as an expense MediGene AG, Martinsried R&D expenses and advertising were charged immediately as an expense Table 2: Continuation of the company conclusion; AccountingActivated intangible assetsActivated intangible assets (amount /% of total assets) Balance sheet disclosure of which goodwill (amount /% of capitalized intangible assets) of which self-created intangible assets (amount /% of capitalized intangible assets / type) Subsequent valuationOther financial statementsMorphoSys AG, MartinsriedImmaterial assets, Biotech AGWWW Ebersberg concessions, industrial property rights and similar rights and values as well as licenses to such rights and values; Goodwill; Advance payments made 2703 TDM 24.8% development costs Linear depreciation of development costs from the following year over four years; Straight-line amortization of goodwill over five or 15 years Capitalization of development costs, as the requirements of IAS 9 are considered to be met November AG, Erlangen concessions, industrial property rights and similar rights and values as well as licenses to such rights and values k. A. (no or subordinate role) Straight-line depreciation over ten years Mainly capitalization of acquired patent applications and similar Right; Breakdown of R&D expenses by business area; No capitalization of development costs because the requirements of IAS 38 are not fully met or the amounts to be capitalized are of subordinate importancePlasmaSelect AG, TeterowProforma-EA 1998/99 US-GAAPImmaterial assetsLinear depreciation over 12 or 18 yearsActivation of acquired intangible assets, the know-how and include patents and patent applications based thereon; Activation of acquired IT licenses and operating systems Qiagen N.V., Venlo, Netherlands Intangible assets, net patents and licenses are amortized over five to seven years; the goodwill over seven or ten years activation of acquired patents, licenses, technologies, marketing information, know-how; in the case of acquisitions, R&D activities that are paid for in the purchase price are offset against incomeRhein Biotech N.V., Maastricht, NetherlandsGoodwill; other intangible assets, net ok. A. (no or subordinate role) Straight-line amortization of goodwill and other intangible assets over five to ten years In addition to goodwill, acquired licenses and patents in particular are capitalized Sanochemia Pharmazeutika AG, Vienna, Austria Goodwill; other intangible assets (less accumulated depreciation) k. A. (no or minor role) Straight-line amortization of goodwill over five to ten years; Straight-line amortization of other intangible assets over three to 15 years In addition to goodwill, almost only acquired licenses and trademarks are capitalized; Development costs are not capitalized because, due to the existing risk of success until the market launch, the prior. of IAS 38 are not fully met; Breakdown of R&D expenses u. a. can also be traced back in the area of intangible assets 40 Cf. d'Arcy / Leuz, DB 2000, 389 f .; Pellens / Fülbier (fn. 2), p. 57 f..The accounting for immaterial values results in a comparatively homogeneous picture. As can be seen in Table 2 on p. 840 f., With two exceptions, intangible assets are capitalized in all companies under review and are almost always shown openly. The importance of the capitalized intangible assets is, however, small in relation to the total assets on the balance sheet. Only three companies have more than 20% of their assets tied up in intangible assets; many companies do not exceed five percent. Self-created intangible values are almost completely irrelevant. From the not always precise information in the notes i. d. It usually shows that no self-created intangible assets have been activated or that they play no or only a subordinate role in relation to the acquired assets. The curasan AG and MWG Biotech AG accounting according to IAS are key exceptions here. Around a quarter of the already comparatively high proportion of intangible assets consists of capitalized development costs. The restrictive capitalization requirements of IAS 38.45 are considered to have been met41 MWG Biotech AG still accounts in accordance with IAS 9; IAS 9.17 does not differ significantly from IAS 38.45 .. Among the companies reporting under US GAAP, only LION bioscience AG reports intangible assets it has created itself; (Software) development costs are capitalized here. In the case of all other companies, any R&D expenditure incurred is immediately offset as an expense. Another exception is BB Biotech AG, which accounts according to IAS, which has capitalized so-called »capital increase costs «42 In the appendix it is pointed out that establishment costs are also capitalized and depreciated, which is surprising in view of IAS 38.57 (a) recognize that internally generated intangible assets are therefore more likely to be capitalized by the companies reporting in accordance with IAS. As far as the balance sheet report and the notes in the notes can be seen, the companies under consideration show under the total intangible assets primarily the (derivative) goodwill from the capital consolidation. This is followed by (acquired) patents and licenses. In individual cases, also called acquired technologies, marketing information and know-how that were acquired in the course of company acquisitions and capitalized in the consolidated balance sheet. In spite of the IAS accounting, some companies orientate themselves in the balance sheet according to § 266 Paragraph 2 Letter A No. I HGB and list in particular concessions, industrial property rights and similar rights and values as well as licenses to such rights and values. Software is recorded as property, plant and equipment at some companies and as intangible assets at others. Capitalized intangible assets are amortized on a straight-line basis over a period of up to 18 years. I. d. As a rule, the period of amortization of goodwill is longer than that of other intangible assets. The depreciation modalities for internally generated intangible assets see - if explicitly mentioned at all - an i. d. Usually straight-line depreciation of no more than four years ago. The revaluation alternative of IAS 38 does not play a role in the accounting practice of the companies reporting according to IAS. The companies follow the request of US GAAP and IAS to quantify the annual R&D expenditure, but not always in the context of the consolidated financial statements. The R&D expenditure is often listed separately in the group income statement, usually as the largest single item in the operating expenditure. Some companies go so far as to differentiate these expenses in the appendix according to business areas or cost components. Information important for investors about future products and the status of ongoing R&D is not included in the consolidated financial statements, in the management report and in particular in the free section of the annual report or in the rest of the sales prospectus , given. Most of the companies examined report in great detail on the status of the clinical tests and the development stages of the individual products. In connection with market descriptions and analyzes, first rough estimates of the possible success of future products are possible. In the other reporting, more or less detailed reports are given on patents and collaborations. The number, the location and possibly even the qualifications of the employees are usually the subject of an often very general reporting. IV. Consequences for the company analysis 1. Insufficient insight into intangible assets Although US-GAAP and IAS (want to) provide "capital market-oriented" and thus exclusively serving the information function mapping rules, the corresponding regulations rather give an inadequate insight into intangible assets. similar z. B. Deng / Lev / Narin, Financial Analysts' Journal, May / June 1999, 20 ff. The regulations for accounting for intangible assets are dominated by the criteria of reliability and verifiability and are also interpreted conservatively in accounting practice. The biotechnology companies examined are only partially aware of the possibilities for activating self-created intangible assets. Acquired and self-created intangible assets are treated differently, so that companies that purchase intangible assets from third parties are better off than with their own efforts in this regard. De facto, there is therefore no significant difference to accounting practice under commercial law. The result is similar to Wehrheim, DStR 2000, 88 .. The initially obvious assumption that the examined, predominantly German biotechnology companies are still strongly adhered to the principle of caution, is not mandatory. Most of these companies have only existed for a few years, so they do not have a long accounting tradition under commercial law. In addition, other studies show z. B. US companies that self-created intangible values do not acquire any significant significance there either. z. B. AICPA, Accounting Trends & Techniques, 49th ed. 1995, pp. 209 ff; IAS examples cites e.g. B. Cairns (fn. 23), p. 397 ff. US GAAP and IAS financial statements are therefore of little help in corporate analysis with regard to intangible values. The few companies that activate certain self-created intangible values even have to fear that their deviation from industry behavior will be interpreted negatively as a profit improvement. similar to Littkemann (footnote 8), 1976; In the rules of the IAS, however, industrial practices are less important than in the US GAAP system. Chan / Martin / Kensinger, Journal of Financial Economics 1990, 255 ff. Lev / Sougiannis have also been able to show that in the case of chemical and pharmaceutical companies, almost three dollars in operating profit out of every dollar spent on R&D over a period of nine years 48 Cf.Lev / Sougiannis, Journal of Accounting and Economics 1996, 120 ff .; further studies name z. B. Ettlie, Management Science 1998, 1 ff .; Stimpert / Duhaime, Academy of Management Journal 1997, 560 ff. For this reason alone, the justification for the immediate cost allocation in SFAS 2.41, according to which a relationship between the expenditures for R&D and subsequent income cannot be established, is not tenable. similarly critical to SFAS 2 z. B. Bierman / Dukes, Journal of Accountancy (Apr.) 1975, 48 ff. Approaches to the recording of intangible assets a) Extended accounting recording The demand for greater accounting transparency in the area of intangible assets is therefore still open. The information deficit in accounting motivates biotechnology companies and other companies of the "New Economy" to use alternative information instruments, with the help of which, in particular, intangible assets are to be assessed i.a. Behr / Kind, Der Schweizer Treuhänder 1999, 63 ff .; Boulton / Libert / Samek, Cracking the Value Code, 2000, p. 213 ff .; Conrads, Human Resource Accounting, 1976, pp. 155 ff .; Hartmann, Technologie-Bilanzierung, 1997; on the real options approach for the "New Economy" see Hommel, WM 2000, 1535 f .; Kellogg / Charnes, Financial Analysts' Journal, May / June 2000, pp. 76 ff .; Schäfer / Schässburger, Finanzbetrieb 2000, 586 ff. There are certainly opportunities within accounting to take greater account of intangible values. The ability to capitalize certain development expenses inherent in IAS 38 is a first step here. However, the IASC or the Standing Interpretations Committee (SIC) would still have to succeed in specifying the relevant criteria in order to counteract a (too) narrow interpretation. In the context of a traditional, pagatorially secured accounting convention, the goal can only be to improve the accrual of all expenses for projects that have an effect across periods. It is Z. It has been shown, for example, that the capitalization and scheduled depreciation of all R&D expenses, supplemented by the immediate total depreciation in the event of impending failure of the project (Successful Efforts Method), seems best suited to provide the balance sheet reader with information relevant to decision-making. Healy / Myers / Howe, R&D Accounting and the Tradeoff between Relevance and Objectivity, Working Paper, Harvard Business School, Jan. 1999; see already Wurl, ZfB 1974, 173 ff. with further details; In this country an increased activation of intangible values, especially as a balance sheet aid, was discussed, which would be covered by 78/660 / EEC, Art. 37; see inter alia Kählert (fn. 4), pp. 149 ff. With further details; Veit, DB 1992, 641 ff .. Although the discrepancy between balance sheet equity and market capitalization cannot be bridged in its entirety, since the fundamental difference between individual and overall valuation remains even when all expenses related to the creation of intangible assets are capitalized, should already be a step of the accounting parameter in the direction of the market value in the sense of the information function. b) Additional information It seems unproblematic but helpful to locate information on intangible values (also) outside the accounting system, in the appendix or even outside the financial statements. The previous reporting in the appendix, management report and in the free part of the annual report would have to be more differentiated and, due to cross-company comparability, also more standardized. This is the direction in which proposals aim to establish its own "intangible value calculation" within which a company reports in a standardized manner on the type and scope of its intangible assets. z. B. the suggestions in Batchelor, Accountancy International, Febr. 1999, 81; Haller (fn. 4), p. 583 ff .; Littkemann (fn. 8), 1978 f .; Maul / Menninger (fn. 7), 529 ff .; Mintz, CFO, Febr. 1999, 29 ff .; Myers (footnote 7), 49 ff .; Pellens / Fülbier (fn. 2), p. 66 ff. This own arithmetic unit could be tailored to the specifics of the respective branch and thus also take into account the special features of the biotechnology branch. It is also proposed to publish certain key figures on intangible assets. z. B. Sveiby, Wissenskapital - das undiscoverte Vermögen, 1998, p. 223 ff. Show other, if possible standardized information, in particular about patents, planned products, market volume and growth, brands, advertising, cooperations, employee know-how, etc. further solutions on 54 Cf. z. B. Kählert (fn. 4), p. 193 ff .; Pellens / Fülbier (fn. 2), p. 64 ff. The disclosure regulations of the US stock exchange supervisory authority, the Securities and Exchange Commission (SEC), according to which listed companies regularly e.g. B. have to report on the development status of announced products or the importance of patents and brands. z. B. SEC's Annual Report Form 10-K or 20-F; also Afterman, Handbook of SEC Accounting and Disclosure, 1999-2; B 9, E; Brotte, (fn. 8), p. 151 ff .; MacLaughlin / Hambleton, in: Carmichael / Lilien / Mellman (eds.), Accountants' Handbook, 9th edition 1999, Vol. 1, pp. 3.38 ff .; the question of whether this type of publicity is mandatory can only be clarified in the context of regulatory studies; see similar z. B. Fülbier, The regulation of ad hoc publicity, 1998; see e.g. B. on the voluntary publicity of R&D Entwistle, Managing Disclosure: The Case of Research and Development in Knowledge-Based Firms, 1997, and Human Capital Nagar, Journal of Accounting Research, Suppl. 1999, 167 ff., Also aim in this direction z. B. the German stock exchange law issue disclosure, which - albeit not regularly - detailed information about the business activities of the issuer, among other things. about new products and activities, site conditions, dependency on patents, licenses, contracts or new manufacturing processes, about important investments and activities in the field of R&D. § 5 VerkProspG i. V. m. § 20 BörsZulV .. Ultimately, however, it is left to the market participants how they evaluate this mainly qualitative information. Above all, it is questionable whether information outside of the traditional arithmetic systems has the same relevance for market participants as information contained therein. for this z. B. Davis-Friday et al., The Accounting Review 1999, 403 ff .; Gassen, Internet-based German annual financial statements, work report, chair for international business accounting in the experimental test, Ruhr University Bochum, Oct. 2000 .. In order not to lose the reference to these arithmetic units and the final examination, there are primarily extended appendices for immaterial values - and management report information to V. The previous accounting under commercial law is hardly able to provide capital market participants with information relevant to decision-making about young, technology- and research-intensive companies. The high proportion of intangible assets is hardly reflected here in the balance sheet. The accounting according to US-GAAP or IAS, which is prescribed on the Neuer Markt in Frankfurt, does not significantly alleviate this problem. According to US-GAAP and IAS, the accounting regulations are rather shaped by the criteria of reliability and verifiability. In addition, the accounting practice of biotechnology companies on the Neuer Markt shows that the already restrictive rules are still interpreted conservatively. If the "capital market and information-oriented" accounting also wants to meet its requirements in companies of the "New Economy", new efforts are necessary to record intangible values more strongly inside and outside the accounting systems. This is the only way to generate the decision-relevant data that capital market participants need for (dis) investment decisions. This is the only way to ensure that the required capital in the sense of the allocation function also flows into the most innovative and promising companies.
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