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Business: Financial Reporting 3 - Coursework Example

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Financial Reporting a) All intangible assets except those specifically treated in any other IAS, would fall under IAS 38. And there are exceptions to such intangibles under IAS 38 too. Intangible assets are those that are not tangible without a physical form…
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Download file to see previous pages The intangible asset must be identifiable, non-monetary and formless. It is a resource controlled by an entity as a result of past events with potential to give future economic benefits to the entity (ICAP.org). In order to be recognised as an intangible asset, the intangible must conform to the definition and meet the criteria of IAS 38 above. The criteria emphasizes the requirement that it should be probable that economic benefits of the asset will flow to the entity in future and measurement of cost of such as an asset should be capable of being measured in a reliable manner. (Kirk, 2008). While permitting some internally generated intangible assets such as computer software, copyrights etc, IAS 38 specifically prohibits internally generated brands, mastheads, publishing titles, customer lists and similar items from being recognised. They are not recognised even though they meet some of the criteria for recognition of intangible assets. IAS 38 specifically states internally generated brands among others to avoid confusion (IFRS.org). b) Capitalization of internally generated brands would bring advantages to an entity as much as the acquired brands would give. Thus, internally generated brands if valued and shown in the balance sheet, would give a better picture of the entity. The ratio : Profit After Tax (PAT ) / Fixed assets + Net current assets would show a much higher Return on Investment (ROI) if brand value whether acquired or self-generated is excluded. With its inclusion, the resultant ROI will be a better indicator of the company’s position. If not included, the return on assets would represent a realistic figure. If allowed to be included, the entity’s brand management will be more sharpened. Debt equity ratio of the entity will show improvement. Since it will reduce gearing ratio, entity’s borrowing capacity will increase. In the case of companies in the services sector where there are low levels of assets but strong cash flow and customer base , capitalisation of brand whether acquired or otherwise would help them show a much better picture of strong asset-background. With brands capitalised, it would prevent hostile takeovers as the entity’s value would be prohibitive. Brand value having no depreciation would not impact on the Profit & Loss Account. With consistent promotional efforts brand value can be maintained. In case of acquisition by the entity, the goodwill value will be at a minimum with the presence of internally generated brands also on the balance sheet. It would be helpful while comparison with other companies operating in the same markets or between companies showing mixture of acquired and internally generated. In an insolvency situation, creditors would stand to gain by conversion of brand value into cash especially when worthless inventories are shown as current assets in the balance sheet. Brand value on the balance sheet gives business a competitive advantage. Without the capitalisation of internally generated brands, comparability with a rival entity is not possible. The brands whether acquired or generated internally entail heavy expenditure but help the entity earn substantial income thus contributing to the entity’s net worth. There are instances of entities selling their own brand to third party companies and later reacquiring from them. Unless they have a real value, this would not be possible (caprofesion.com, n.d.). If internally generated intangible are excluded in the balance i.e not allowed to be capitalised, it w ...Download file to see next pagesRead More
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