International Accounting Regulations - Assignment Example

Various International Accounting Regulations and Capitalisation of Intangible Assets 0 Introduction: Under various accounting regulations like FRS10 (under ASB 1997a), IAS 38 under (IASB 2004), and SFAS 142 (under FASB 2001) discusses the 'Asset Recognition Criteria' that determines the capitalization of the revenue expenditures and intangible assets. Each of these regulations has prescribed the basic criteria that need to be satisfied by the respective assets so that it can be continued to be shown as a capital item and amortised over a period subject to the legislative provisions contained in these Standards. An analysis of these regulations goes to prove that the statement made by Forker that purchased intangibles must be capitalised is appropriate. This statement is made by Forker on the premise that "In these standards the application of the asset recognition criteria, that the expected future benefits from the asset are probable and will flow to the entity, is taken as satisfied by the existence of the purchase transaction (IAS38-Revised)" John Forker (2005) The validity behind this statement cannot be disputed, as irrespective of the intentions of these accounting regulations, the asset recognition criteria have been used by the large corporations and other entities as an aid for their 'Earnings Management' in order to present a better view of the financial position of the entity concerned. This paper intends to support the views expressed by Forker, by making reference to the financial indiscipline noticed in the income statements of the major football clubs of Italy. The paper also intends to make an analysis of certain income and capital items disclosed in the Financial Statements of Juventus Foot Ball Club of Italy, in the light of the different international accounting regulations. 2.0 FRS 10, Goodwill and Intangible Assets under ASB 1997a: This standard prescribes those intangible assets like goodwill should be capitalised and amortized over a period not exceeding 20 years. There are chances for the firms to extend the useful life beyond 20 years and may even be taken as indefinite so that the asset need not be amortised. The standard also prescribes for the impairment of the value of the goodwill or other intangible asset irrespective of the amortization provisions. The basic objective of FRS 10 is to ensure that: "(a) capitalised goodwill and intangible as sets are charged in the profit and loss account in the periods in which they are depleted; and (b) sufficient information is disclosed in the financial statements to enable users to determine the impact of goodwill and intangible assets on the financial position and performance of the reporting entity." (Neil D. Stein 1998) FRS 10 defines the classes of intangible assets that would be covered by the provisions. These intangible assets may include "licenses. Quotas, patents, copyrights etc and also other assets that is capable of being disposed of or settled separately without disposing of a business of the entity." (Neil D. Stein 1998) However FRS 10 has left certain important issues in connection with the intangible assets vague that makes the provisions unserious about the objective it intends to accomplish. FRS 10 has the following shortcomings which has made the treatment of goodwill and other intangible assets favourable to the firms: FRS 10 gives the firms the liberty to carry through the value of the goodwill or other intangible asset permanently at the purchased cost. This vitiates the chances of the true and fair valuation of the intangible assets as shown in the financial statements. Although there are provisions governing the impairment of the value of the intangible assets, the impairment process as detailed in the FRS 10 and FRS 11 are highly subjective and devoid of clarity. This allows the firms to postpone the impairment of the intangible assets as long as they want on the plea that the valuation and impairment procedure is costly and cumbersome. Moreover the treatment of the negative value of the goodwill under FRS 10 does not follow the normal accounting practices. The provisions of the Companies Act 1985 are not taken into account while allowing the goodwill to be carried for an indefinite period. Applying the rationale behind the above discussion to the Financial Results of the Juventus Football Club, the Net Players' Registration Rights of 147 million is clearly an intangible asset which the company has acquired without any real value to back this item. As stated in the Annual Report of the Juventus Club (2005) This value is arrived at by adjusting the capital gains or losses derived from the disposal of players' registration that are classified as extraordinary income and expense But the club is free to show this item as one of the intangible assets "even when it is highly speculative and casts a doubt on the prospect of recovery" (Forker 2005). This supports the view of Forker that the accounting regulations are not effective in the treatment of either the treatment of the value of the intangible assets or their impairment over the period. 3.0 IAS 38, Intangible Assets under IASB 20004: International Accounting Standards 38 (IAS 38) as laid down by the International Accounting Standards Board (IASB) allows the capitalization of some of the costs which are generated internally being intangible in nature. The regulation prescribes the satisfaction of a 'technological feasibility' by the expenditure for being eligible for capitalization. However, it is clear that the 'technological feasibility' is a vague term and is difficult for the firms to comply with. Under IASB 2004, IAS 38 Intangible Assets specifies the concept of 'technological feasibility' for capitalizing the expenditure in the 'development' phase. It further lays down certain other criteria for the capitalization of the expenditure in the development phase. Technical feasibility of completion for use or sale, Intention, technical and financial ability to complete and use or sell it, Existence of market or internal usefulness, and Measurability during the development phase (IASB 2004). (Phillip Siegel and Carl Borgia (2007) It is the existence of the 'internal usefulness' is the cover that the club can take for capitalizing the Players' Registration Expenses as an intangible asset and include in its financial statements. As pointed out by Baroncelli and Lago (2004) in their research paper "The relation between 'extraordinary cost' and revenue items can be used as a measure of the clubs' capacity to create value through the market. However, in this regard we should bear in mind that it is seriously suspected that a part of these extraordinary items have been faked." It is pointed out by the authors that the most recent figures in respect of the football clubs are far from reality in respect of the extraordinary items of revenue and expenditure and also that many of the valuations seem to be unreal making the intention of the clubs to avoid the recapitalization of these items at extra costs. Thus under IAS 38 also the statement made by John Forker is proved beyond doubt that the firms have all the loopholes that they can use to get the extra ordinary revenue expenditure captialised with a legal recognition. 4.0 SFAS 142, Goodwill and Other Intangible Assets under FASB 2001: Like the other two standards SFAS 142 also deals with the initial recognition and measurement of goodwill as well as other intangible rights. SFAS 142 does not consider the intangible assets acquired under business combinations. This standard allows the goodwill and other intangible assets to be carried forward after initial recognition for an indefinite period. By allowing this, the provisions of SFAS 142 result in a much larger volatility in the reported incomes by the individual firms. SFAS 142 states that "An intangible asset that is not subject to amortization shall be evaluated each reporting period for the indefinite life criterion, and tested for impairment annually if circumstances warrant" The provision has removed the mandatory requirement of amortization of the goodwill and other intangible assets which is the distinguishing feature of this regulation, while the other standards prescribe a time limit on the amortization of the intangible assets. SFAS 142 thus has created an accounting environment in which the entities having substantial internally generated intangible assets can be continued to be carried as assets without amortization for an indefinite period. The provisions of SFAS 142 also support the stand taken by Forker in claiming that the firms are at liberty to waive the requirements of impairment and amortization, even in cases where the intangible assets are speculative in nature and where there are no possibilities of recovering the value as indicated in the financial statements. It is highly probable that only based on this anomaly that the Italian football clubs are supposed to have faked the 'extraordinary items' of revenue and expenditure resulting in a close scrutiny by the European Union of the decree issued by the Italian government allowing the clubs to spread the financial losses over a period of 10 years. 5.0 Assessment of the financial Statement of Juventus Football Club Italy: This section of the paper attempts to make an analysis of the reports and financial statements of Juventus Football Club with particular reference to the Extraordinary Expenses and the Captialisation of intangible assets. 5.1 Intangible Assets under the Balance Sheet: As against the total tangible fixed assets of 28.703 million, the intangible assets representing 'net players' registration rights' is 147.458 million. This figure as stated in the annual report of the company is arrived at after amortising an amount of 59.336 million and also this represents the market value of the registration rights. It is highly speculative that the value of this intangible asset will be realized by the Club at any point of time, if it wants to transfer the entire pending registration rights. Moreover the value placed on these rights depends on the players contracted with the company and their performances, which is a highly unreliable standard. In all probabilities the major clubs would have entered into some sort of agreement to trade in these rights according to their individual financial positions, as all the major football clubs of Italy were sailing in the same boat at any particular pint of time. (Annual Report of the Juventus Club 2005) 5.2 Income Statement: While the Gross operating margin is maintained at 37.053 million for the year 2004 and at 45.745 million for the year 2005, the depreciation and amortization for the years are very high at 63.029 million (2004) and 59.094 million (2005). These figures representing extraordinary items overtake the gross margin figures. The income statement absolutely lacks any reliability because of these figures. Similarly the net income out of players' registration rights also represents the transaction that does not have any logical reliability. 5.3 Cash flow Statement: The cash flow statement shows an amount of 105.576 million as invested in intangible assets representing the players' registration rights. Against this pay out the club has received an amount of 52.813 million by way of 'disposal of registration rights'. This situation gives rise to the following intriguing but interesting questions about the veracity of these cash flow transactions: Who determines the market value for the players' rights What is the basis for such valuation How does the clubs spend these monies received by them If only the payment of salaries to players is the only major item of expenditure out of these receipts, then are the clubs not under the potential danger being at the mercy of the players themselves with respect to the market value of the registration rights Answers to these questions will solve the mystery behind these anomalous figures 5.4 Costs in Relation to Player Management: The Notes on Accounts under the head 'Income and Expenses' explains that the capital gains and losses deriving from the disposal of players' registration are classified as extraordinary income and expenses in accordance with the accounting recommendations of the Apex body of the club. Although the accounting treatment of the items can be considered as appropriate, what is in question is the value assigned to such rights. 6.0 Conclusion: While there are hundreds of accounting issues that may have the effect of vitiating the opinion of readers of the financial statements as presented by the business entities, it is quite impossible to pinpoint all of those issues. Similarly the objectives of the international accounting bodies in bringing out various standards with respect to the disclosure and reporting requirements must be taken in the prosper perspective and followed ceremoniously. However the intentions and business pressures often make the entities to find out the possible lacunae to present a better than real state of affairs to achieve their aim of sustaining the market level achieved by them in terms of the valuation of their shares. It is not quite possible that standards can be developed to put a stop to such activities. This is especially true in the case of financial items like intangible assets where there cannot be any reasonableness can be identified. In spite of the shortcomings the various accounting standards try to bring the best possible disclosure and reporting by the firms and it is for the business entities themselves to post a true picture of their transactions. References: 1. Annual Reports and Financial Statements of Juvntus Football Club 30th June 2005 http://www.juventus.com/fmknet/View.aspxda_id=7658 2. Baroncelli, Alessandro and Lago, Umberto"The financial crisis of Italian Football" 3. John Forker (2005) Discussion of Accounting, Valuation and Duration of Football Player Contracts Journal of Business Finance & Accounting Volume 32 Issue 3-4 Page 587 - April 2005 4. Neil D. Stein 1998 FRS 10, Goodwill and Intangible Assets Association of Chartered Certified Accountants http://www.accaglobal.com/archive/2888864/30169 5. Phillip Siegel and Carl Borgia (2007)The Measurement and Recognition of Intangible AssetsJournal of Business and Public Affairs Volume 1, Issue 1, 2007 Read More