Intangible Assets in the USA - Assignment Example

Intangible Assets Introduction AASB 138 dealing with ‘Intangible Assets’ has changed the entire scenario of accounting treatment of intangible assetssince January 2005. Prior to this intangibles were dealt by number of accounting standards like AAS 18/AASB 1013 ‘Accounting for Goodwill’, AAS4/ AASB 1021 ‘Depreciation, AAS 10/ AASB 1010 ‘Recoverable amount of non- current assets, AAS 13/ AASB 1011 dealing with accounting for research and development, AAS 21/AASB 1015 ‘acquisition of assets’ and AASB 1041 dealing with ‘revaluation of non current assets’. The changes brought in by AASB 138 are considered controversial at places, but those are more revolutionary nature being akin to IAS 38. In this write up an effort has been made to critically analyze the changes and problems relating to reporting of intangible assets. Contents Introduction Critical assessment of changes rules Reporting of Intangibles after the change Impact of adoption of AASB 138 Conclusion References Critical assessment of changed rules: Intangibles are either acquired or developed. Before the changes in 2005, internally generated intangibles could be recognized as such, but now internally generated intangible are only expensed with. Goodwill once acquired used to be amortized over its estimated useful life, and in situation like infinite useful life, no estimation can now be made about useful life. But now AAAB 138 has categorically debarred the amortization of assets with infinite useful lives. In general parlance the main characteristic of Intangibles is that they lack physical appearance or substance and that is how intangible has been defined by AASB 138. It is generally difficult to estimate the value intangibles and there is high degree of uncertainty regarding the length of time over which they will provide future benefits to the entity. The earlier requirements of accounting treatments of intangible have been provided by a range of standards, whereas now AASB 138 covers the entire spectrum of requirements and regulations governing the accounting treatment of intangible. However certain requirements those have been introduced newly introduced are analyzed hereunder: Separable Intangible Para 12 of AASB 138 specifically requires that to be identifiable an intangible has to have an attribute of separation from the entity to enable such intangible to be sold, transferred, licensed, rented or exchanged. The purpose is to distinguish intangible from the goodwill. This attribute may arise from a contractual or any other legal right. That means intangible that is not separately identifiable will not be capitalized as an intangible but will be expensed with. Para 54 states that intangible resulting from research shall not be recognized. That means all research expenditure will be treated as revenue expenditures, whatever may be the magnitude and purpose of such research. Therefore confusions about treatment of research expenditures have been settled once for all. All such expenditure will not be capitalized. Expenditure incurred during development phase shall be capitalized only when i) there exists intention, technical feasibility, and ability on part of entity to complete the intangible, ii) the intangible thus created would generate probable future economic benefits, and iii) the entity has ability to measure reliably the development expenditure incurred on intangible. Para 63 of AASB 138 makes an exception to recognition of development Expenditure as stated above. As per this Para internally generated brands, mastheads, publishing titles, customer lists and similar items that are in substance, shall not be recognized as intangibles. Thus a number of controversies on these accounts have been settled once for all.. Existence of active market for revaluation Intangible are permitted to be revalued only when there is an active market for the intangible. This is highly controversial introduction in view of the fact that the revaluation is compulsory after first recognition of intangible. That means highly valuable intangible will not be revalued in absence of its active market. Para 8 defines active market as one dealing with homogeneous items, buyers and sellers are found normally, and public has access to prices. Is it not impossible to find homogeneity among items lacking physical substance? The intangible assets having infinite life will not be amortized. There is certain appreciable logic behind this approach. It is not possible to amortize expenditure in absence of finite useful life. Computer software will be treated as intangible even when not used in entity’s operations. Reporting of intangibles after the change After 2005 most of companies have followed the AASB 138 in right spirit. Take the case of Admerex Limited. In order to find out the exact impact the company’s Annual Report 20061 was observed. Intangible has been dealt by the company in its Notes to Financial Statement no. 1 (c). The notes cover three intangible, namely, Goodwill, Software Development, and Intellectual Property. The goodwill has been recorded at purchase price or ownership interests in controlling entity exceeding the fair value attributed to net assets at date of acquisition. Further Good will is not amortized. This is exactly as per requirements of AASB 138, when the assets have infinite useful life. But Admerex Limited is testing the goodwill for impairment losses. Accordingly Goodwill is carried at fair value attributed at acquisition less impairment losses. In the case of Software development cost, the intangible has a finite useful life. Accordingly the company has amortized on a systematic manner matching future economic benefits over useful life. However intellectual properties have been recognized at cost of acquisition, and have been amortized over its finite life of three years. Thus Admerex Limited has followed the changes brought in by AASB 138. The second company examined in this regard is Bills Express Limited and its 2006/07 Annual Return2 has been examined with regard to intangibles. As per its notes to consolidated financial statements, Intangibles dealt with are Goodwill on consolidation, and Research and development expenses. In respect of Goodwill the note states that “Goodwill represents the difference between the cost of the acquisition and the fair value of net identifiable assets acquired. In respect of equity accounted investees, the carrying amount of Goodwill is included in the carrying amount of investment.” This shows that company is following both purchase method and equity method of accounting for acquisition. In other words company has not fully adopted the changes brought in by AASB 138. However the company is testing Goodwill for impairment losses. Naturally the Goodwill that is being tested would be the one recorded separately under purchase method. The company is allocating goodwill to CGUs and not amortizing it. The basis of allocation to CGUs is not clear. Negative goodwill on acquisition is being charged to profit and loss account. It appears that company is following changed standard in respect of Goodwill accounted for under purchase method, and earlier standards when the goodwill is added to investments while following equity method. With regard to Research and development expenses, the research expenses are directly expensed away with. Development expenses are capitalized where the development process is technically and commercially feasible and the entity has sufficient resources to complete the development. According with regard to research and development expenses, the company is following AASB138 in its letter and sprit. Impact of adoption of AASB 138 The above examination of two companies’ annual report reveals the in impact of changes in following two ways: Wherever the changes require the expenditure to be expenses with, as in the case of research expenses of Bills Express Limited, the profitability of the entity is suppressed even though the purpose of such research is to create intangibles. Sometime it is not possible to distinguish clearly between development expenses and research expenses. Under such circumstances the changed standard might not provide a fair view of the financial statements. Goodwill is not amortized due to its infinite nature of useful life. Such initiative may inflate the profitability. But when goodwill is allocated to CGU, the impact of increased profitability becomes temporary, as ultimately the expenditure of CGU would be allocated to products, and in the process the purpose of AASB 138 would be defeated. Conclusion The introduction AASB is welcome change not only from the point of view of consolidations of all accounting requirements of dealing with intangible under one standard, but at the same time it is an effort to bring uniformity with IAS. Settling up with any change takes some time. According the real impact of AASB 138 on financial statements would be realized only after few more years, when the impairments of intangibles added after the introduction of AASB 138 would start bringing effects on such intangibles. References: 1 Admerex Limited Annual Report 2006, Notes to Financial Statements 1 (c ), Intangibles, page 32, http://www.admerexgroup.com/images/stories/reportspresentations/2006AnnualReport.pdf 2 Bills Express Limited Annual Report 2006/07, Notes to Consolidated Financial Statements, note 1 (m), Intangible, page 68, http://www.billexpressltd.com/pdfs/BillExpress_AR07_LR.pdf Read More