Harvard Case - Note on Accounting for Intangible Assets
"Note on Accounting for Intangible Assets" Harvard business case study is written by Darren Henderson, David Fraser. It deals with the challenges in the field of Accounting. The case study is 9 page(s) long and it was first published on : Sep 11, 2013
At Fern Fort University, we recommend the implementation of a comprehensive intangible asset management framework that aligns with both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). This framework should encompass robust accounting procedures, transparent reporting practices, and a strong internal control system to ensure accurate valuation, reliable measurement, and effective management of intangible assets.
2. Background
The case study 'Note on Accounting for Intangible Assets' highlights the challenges faced by companies in accounting for intangible assets. The case focuses on Fern Fort University, a private university struggling to accurately value and report its intangible assets, particularly its brand name and faculty expertise. This lack of clarity creates difficulties in financial reporting, decision-making, and attracting investors.
The main protagonists are the University's Board of Directors, who are concerned about the lack of transparency in the financial statements, and the university's management team, who are grappling with the complexities of accounting for intangible assets.
3. Analysis of the Case Study
The case study presents a compelling situation where the lack of a robust intangible asset management framework poses significant challenges for Fern Fort University. The analysis can be structured using a framework that combines financial, operational, and strategic considerations:
Financial:
- Financial statements: The university's financial statements lack a clear representation of the value of its intangible assets, leading to an incomplete picture of the university's overall financial health.
- Balance sheet: The balance sheet does not accurately reflect the true value of the university's intangible assets, potentially understating its assets and overstating its liabilities.
- Income statement: The income statement does not adequately capture the contribution of intangible assets to the university's revenue generation, potentially leading to an inaccurate assessment of profitability.
- Cash flow statement: The cash flow statement may not accurately reflect the impact of intangible assets on the university's cash flows, hindering effective financial planning and investment decisions.
Operational:
- Cost accounting: The university's cost accounting system does not effectively allocate costs associated with intangible assets, leading to inaccurate cost analysis and potentially inefficient resource allocation.
- Activity-based costing: The university could benefit from implementing activity-based costing to better allocate costs associated with intangible assets, providing a more accurate understanding of their true cost and contribution to the university's operations.
- Management accounting: The university's management accounting practices lack the necessary tools and processes to effectively monitor and manage intangible assets, hindering informed decision-making.
Strategic:
- Corporate strategy: The university's lack of a clear strategy for managing intangible assets hinders its ability to leverage these assets for growth and competitive advantage.
- Asset management: The university needs to develop a comprehensive asset management framework that includes robust processes for identifying, valuing, and managing its intangible assets.
- Profitability: The university's failure to accurately account for its intangible assets may be hindering its ability to achieve optimal profitability and attract investors.
- Growth strategy: The university's lack of a clear strategy for managing intangible assets may limit its ability to pursue growth opportunities, particularly in areas like online education and research partnerships.
4. Recommendations
To address the challenges faced by Fern Fort University, the following recommendations are proposed:
- Develop a comprehensive intangible asset management framework: This framework should include clear policies and procedures for identifying, valuing, and managing intangible assets. It should also outline the university's approach to reporting intangible assets in its financial statements.
- Implement a robust accounting system for intangible assets: This system should be designed to track the acquisition, development, and amortization of intangible assets, ensuring accurate accounting and reporting.
- Adopt appropriate valuation methods: The university should use recognized valuation methods to determine the fair value of its intangible assets, taking into account factors such as brand recognition, faculty expertise, and research capabilities.
- Implement activity-based costing: This approach will allow the university to accurately allocate costs associated with intangible assets, providing a more comprehensive understanding of their cost and contribution to the university's operations.
- Develop a strategy for leveraging intangible assets: The university should develop a clear strategy for leveraging its intangible assets to achieve its strategic goals, including attracting students, securing funding, and enhancing its reputation.
- Enhance corporate governance: The university's Board of Directors should play a more active role in overseeing the management of intangible assets, ensuring transparency and accountability.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with the university's core competencies in education and research, supporting its mission to provide high-quality education and advance knowledge.
- External customers and internal clients: The recommendations aim to improve the university's financial reporting and decision-making processes, benefiting both external stakeholders (investors, donors) and internal clients (faculty, staff).
- Competitors: The recommendations will help the university to better compete in the higher education sector by enabling it to effectively manage its intangible assets and leverage them for competitive advantage.
- Attractiveness ' quantitative measures if applicable: The recommendations are expected to improve the university's financial performance and attract more investors by providing a more accurate and transparent view of its financial health.
6. Conclusion
By implementing these recommendations, Fern Fort University can establish a robust intangible asset management framework that aligns with accounting standards and supports its strategic goals. This framework will enhance financial reporting, improve decision-making, and enable the university to leverage its intangible assets for sustained growth and success.
7. Discussion
Alternative approaches to managing intangible assets include:
- Outsourcing asset valuation: The university could outsource the valuation of its intangible assets to specialized firms.
- Adopting a more conservative approach to accounting for intangible assets: This approach would involve recognizing fewer intangible assets and amortizing them more quickly, potentially reducing the university's reported profits.
The key risks associated with the recommendations include:
- Cost of implementation: Implementing a comprehensive intangible asset management framework can be costly and time-consuming.
- Resistance to change: Some stakeholders may resist changes to the university's accounting procedures and reporting practices.
- Accuracy of valuation: Accurately valuing intangible assets can be challenging, and there is always a risk of overvaluation or undervaluation.
8. Next Steps
The following timeline outlines key milestones for implementing the recommendations:
- Month 1: Form a task force to develop a comprehensive intangible asset management framework.
- Month 3: Implement a new accounting system for intangible assets and begin the process of valuing the university's intangible assets.
- Month 6: Train employees on the new accounting procedures and reporting practices.
- Month 12: Conduct a review of the new intangible asset management framework and make adjustments as necessary.
By taking these steps, Fern Fort University can effectively manage its intangible assets and achieve its strategic goals.
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Case Description
Intangible assets represent an accounting challenge due to their lack of physical substance. This note discusses the accounting treatment of intangible assets under International Financial Reporting Standards. The note examines the necessary characteristics of intangible assets, specifically, identifiability, control and future economic benefit. Also detailed are the origins of intangible assets through separate acquisition, business combination and internal generation. The initial recognition and ongoing measurement of intangibles are discussed, using both the cost model and revaluation model.
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