International Accounting Standard 38 on Intangibles - Assignment Example

International Accounting Standard 38 on Intangibles INTANGIBLE ASSETS The difference between the method used before and the method used now is that it is easier for the companies using IAS 38 now can be compared with all other companies implementing IAS 38 also. The standards used before are based on generally accepted accounting principles (GAAP). Most Italian and European companies follow the United States generally accepted accounting principles. The standards used under GAAP is also good since it was agreed to by most sectors of the business community in Europe, United States and other countries because comparing financial statements was also possible during those previous accounting periods. But now that IAS 38 has been AGREED with finality to be the new compulsory accounting procedure, then we have to follow suit. INTERNATIONAL ACCOUNTING STANDARD 38 According to the European Council of Finance Ministers, on December 13, 2001 “ agreed to a 'general orientation' on a proposed regulation that would require all EU listed companies, including banks and insurance companies, to prepare their consolidated financial statements using IAS. ECOFIN agreed that this requirement should go into effect in 2005 at the latest. However, companies that currently apply US GAAP as their primary financial reporting standards would not have to apply IAS until 2007. The 2007 extended deadline for companies using US GAAP was inserted at the request of the German government. EU Internal Market Commissioner Frits Bolkestein said: The International Accounting Standards Regulation will introduce a new era of transparency and put an end to the current Tower of Babel in financial reporting. It will help European firms to compete on equal terms when raising capital on world markets and allow investors and other stakeholders to compare companies' performance against a common standard. However, I regret the Ministers' decision to grant some big companies the right to apply US GAAP standards until 2007, two years after the Lisbon deadline for completing the Internal Market in financial services.” (http://www.iasplus.com/pastnews/2001dec.htm) Comment: The main purpose that all countries are “rushed” to apply these international accounting standards is to have a comment yardstick to compare one company in the European Union with another country selling the same products and services. If we call an item “goodwill” in England, then in the same situation in another far away place like Australia or United States, we can confidently call the same item bought as “goodwill”. Accounting is defined as “the language of business”. Therefore, when we follow the same accounting procedure of recording, adjusting, closing and reporting daily business dealings. We can easily understand what the company is presenting to the potential investors, customers, management, suppliers, and government agencies, among others interested financial statement users. In particular, according to article 4 of the Regulation (EC) 1606/2002, from 2005 companies (i) listed on stock exchanges in the European Union and (ii) obliged to arrange consolidated accounts must present their accounts according to International Financial Reporting Standards. (http://www.investinitaly.com/context_investmentguide01.jsp?ID_LINK=371&area=17) COMMENT: The companies listed stock exchanges in the European Union are REQUIRED to transfer starting January 2005 to the accounting procedure using International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS). Included here is the IAS 38 (Intangible Assets). But all companies using the United States Generally Accepted Accounting Principles (GAAP) are given until 2007 to use the US GAAP. According to Veneziani, Monica; Teodori, Claudio University of Brescia, Accounting, Brescia, Italy on the topic The Impact of the IAS 38 on Financial Performances: A Survey of the Italian New Market his opinion is that the “Introduction of the IFRS will entail important changes in Italy, including assessment and accounting of intangible assets, with the impossibility of capitalising some values, an option which is currently possible in Italy. … and in which the intangible assets are some of the most critical elements of company management: assessment of them will therefore have a significant impact on financial performances.” REFERENCE: (http://www.handels.gu.se/eaa2005/Paper_Poster_database/INA/INA033_abstract.htm) COMMENT: The effect of change to the new IAS 38 on intangible assets, in particular and change to all the IFRS and IAS accounting procedures effective January 2005 will have effects on the balance sheet and income statement. But the over all effect will always be beneficial because now investors, both prospective and present, employees of companies like Pirelli, the government, suppliers and customers will now have a common benchmark with comparing the financial position and results of operations of one company with another company in the same specific business sector or the entire business environment within Italy or within the entire world.A Study by the University of Melbourne, University of Ferrara and NYU Stern study of the measurement of intangible assets and associated reporting practices prepared for the Commission of the European Communities Enterprise Directorate General in April 2003 Shows the following in a pdf file below : “ “ Taken from the web under topic “financial statements intangibles Italy” or similar import. There are many interpretations from all fronts as to how to interpret intangible assets. This was based on the prior Generally Accepted Accounting Principles. Under the New IAS 38 standard, the new method tries to make clearer which items to include as intangibles and how long to amortize the intangible amounts. International Accounting Standard no 38 accounting procedure for Intangible Assets valuation is as follows: copies could be had from any CPA organization or thru the website “ ” The above shows which assets to include as intangible assets in the balance sheet and how much and how long will the intangible asset will be amortized. In the study entitled “How Accounting Standards Approach and Classify Intangibles – An International Survey” by Professor H Stolowy and A Jeny (assistant) of the HEC School of Management (Groupe HEC) Dept of Accounting and Management Control of France, Their findings are: The study diagram above shows that different countries have different “interpretations” of intangible assets. There are also various differing opinions on how long the intangible assets will be amortized. The conclusion of the study above indicates that all countries recognize the concept of intangible fixed assets and clearly defines criteria for recording these assets. The lack of homogeneity in the approach to intangibles is proved that no generally accepted conceptual framework exists. Many have different interpretations of what intangibles are and how long to amortize the questioned intangibles. No country prescribes only one treatment of intangible valuation and amortization. This lack of INTERNATIONAL commonality or homogeneity arises from lack of NATIONAL homogeneity. The study shows that there three classifications of intangibles. First, the inventory type approaches, The usual list of intangibles accepted by accounting standards as capitalizable. Second, the account standards also suggest simplification of the distinction between n research and development costs, goodwill and other intangible assets, such as patents, licenses, etc.. Third, It is considered that an implicit classification method is emerging from recognition criteria for purchased or internally generated intangibles). The clue here is CONSISTENCY. The intangible valuation and amortization method you will use this year must be the same intangible valuation and amortization you SHOULD use the following year. International Accounting Standards and International Financial Reporting Standards must also be complied with for COMPARABILITY with financial statements of different companies of the same business activity. The financial statement of Pirelli head office, taken from the internet under subject “financial statements – Pirelli 2003” or similar import, which was taken from the internet under the topic “financial statements 2003 Pirelli” or similar import, is as follows: COMMENT: There is a loss of 27,000,000 euros for the period January to March 2003. Intangible Assets are shown in the Balance Sheet as follows: The intangible assets are “hidden” in the other noncurrent assets portion of the Balance Sheet below which was source from the internet under topic “financial statements 2004 Pirelli” or similar import. Pirelli SPA Top of Form Annual Balance Sheet All amounts in millions of except per share amounts. Bottom of Form View: Annual Dec 04 Dec 03 Dec 02 Assets Current Assets Cash 390.2 386.2 338.8 Net Receivables 1,322.0 1,361.8 1,132.6 Inventories 947.2 862.5 592.1 Other Current Assets 171.5 0.0 0.0 Total Current Assets 2,831.0 2,610.5 2,063.5 Net Fixed Assets 1,462.0 1,520.7 1,562.8 Other Noncurrent Assets 3,017.1 2,899.3 2,533.7 Total Assets 7,352.2 7,030.5 6,160.1 Liabilities and Shareholders' Equity Current Liabilities Accounts Payable 1,066.5 974.1 689.1 Short-Term Debt 554.6 636.6 386.9 Other Current Liabilities 574.9 588.6 368.1 Total Current Liabilities 2,196.0 2,199.2 1,444.1 Long-Term Debt 1,251.9 1,195.4 957.5 Other Noncurrent Liabilities 1,010.7 1,040.1 769.2 Total Liabilities 4,458.5 4,434.7 3,170.8 Shareholders' Equity Preferred Stock Equity 0.0 0.0 0.0 Common Stock Equity 2,644.7 2,419.9 2,870.6 Total Equity 2,893.7 1,890.0 2,989.2 Shares Outstanding (mil.) (http://www.hoovers.com/pirelli-&-c./--ID__41369,period__A--/freeuk-co-fin-balance.xhtml) COMMENT: The Income statement for the period January to March 2004 is shown below. (This was taken from the internet under topic “financial statement Pirelli 2004)” or similar import. REFERENCES: http://www.iasplus.com/pastnews/2001dec.htm http://www.investinitaly.com/context_investmentguide01.jsp?ID_LINK=371&area=17 International Accounting Standard 38 on Intangibles International Financial Reporting Standards Generally Accepted Accounting Standards Veneziani, Monica; Teodori, Claudio University of Brescia, Accounting, Brescia, Italy, The Impact of the IAS 38 on Financial Performances: A Survey of the Italian New Market http://www.handels.gu.se/eaa2005/Paper_Poster_database/INA/INA033_abstract.htm How Accounting Standards Approach and Classify Intangibles – An International Survey” by Professor H Stolowy and A Jeny (assistant) of the HEC School of Management (Groupe HEC) Dept of Accounting and Management Control of France http://www.hoovers.com/pirelli-&-c./--ID__41369,period__A--/freeuk-co-fin-balance.xhtml Read More