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Accounting for Intangible Assets: Thinking It Through

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  • Stephen Penman

Abstract

With the modern corporation investing more in intangible assets, the issue of appropriate accounting for these assets is very much at the fore and formally on the agendas of accounting standards boards. Some commentators advocate that internally generated intangible assets should be booked to the balance sheet, just like tangible assets. This paper explains that this apparently straightforward solution is not so simple. There are subtleties that, when recognised, indicate that such accounting would often make both balance sheets and income statements less informative. In response, the paper outlines an accounting for intangible assets that preserves, indeed enhances, the information conveyed by both the balance sheet and the income statement and satisfies the financial reporting objective of providing information to investors about ‘the amount, timing, and uncertainty of future cash flows’.

Suggested Citation

  • Stephen Penman, 2023. "Accounting for Intangible Assets: Thinking It Through," Australian Accounting Review, CPA Australia, vol. 33(1), pages 5-13, March.
    • Handle: RePEc:bla:ausact:v:33:y:2023:i:1:p:5-13
    DOI: 10.1111/auar.12394
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    References listed on IDEAS

    as
    1. Penman, Stephen & Zhang, Xiao-Jun, 2020. "A theoretical analysis connecting conservative accounting to the cost of capital," Journal of Accounting and Economics, Elsevier, vol. 69(1).
    2. Luminita Enache & Anup Srivastava, 2018. "Should Intangible Investments Be Reported Separately or Commingled with Operating Expenses? New Evidence," Management Science, INFORMS, vol. 64(7), pages 3446-3468, July.
    3. Stephen H. Penman & Xiao-Jun Zhang, 2021. "Connecting book rate of return to risk and return: the information conveyed by conservative accounting," Review of Accounting Studies, Springer, vol. 26(1), pages 391-423, March.
    4. Stephen H. Penman, 2009. "Accounting for Intangible Assets: There is Also an Income Statement," Abacus, Accounting Foundation, University of Sydney, vol. 45(3), pages 358-371, September.
    5. Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
    6. Peters, Ryan H. & Taylor, Lucian A., 2017. "Intangible capital and the investment-q relation," Journal of Financial Economics, Elsevier, vol. 123(2), pages 251-272.
    7. Baruch Lev, 2018. "The deteriorating usefulness of financial report information and how to reverse it," Accounting and Business Research, Taylor & Francis Journals, vol. 48(5), pages 465-493, July.
    8. Richard Barker & Stephen Penman & Thomas J. Linsmeier & Stephen Cooper, 2020. "Moving the Conceptual Framework Forward: Accounting for Uncertainty," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 322-357, March.
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    Cited by:

    1. Baines, Joseph & Brian, Hager Sandy, 2024. "Rentiership and Intellectual Monopoly in Contemporary Capitalism: Conceptual Challenges and Empirical Possibilities," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue OnlineFir, pages 1-29.
    2. Hyung Il Oh & Stephen Penman, 2024. "Income statement mismatching has not reduced the informativeness of earnings over time," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 51(3-4), pages 756-782, March.
    3. Lin Li, 2025. "The Role of Intangible Investment in Predicting Stock Returns: Six Decades of Evidence," Papers 2505.16336, arXiv.org.
    4. Yaowen Shan & Sue Wright, 2023. "Editorial," Australian Accounting Review, CPA Australia, vol. 33(1), pages 3-4, March.
    5. Lin Li, 2025. "The Role of Intangible Investment in Predicting Stock Returns: Six Decades of Evidence," Post-Print hal-05074264, HAL.

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