Accounting Standard and Regulation of Australia - Accounting for Intangible Assets - Essay Example

Order 45119 - Accounting Standard and Regulation of Australia - Accounting for Intangible Assets 1. Introduction: This paper seeks to answer five given questions in relation to tangible assets. The questions include difficulties on accounting for intangible assets in the context of conflict of standards among different standard setting bodies. The paper ends with a way on how to get out of the problems defined. 2. Questions and Answers: 2.1. Why is accounting for intangible assets problematic. The Australian Accounting Standards Board (AASB ) has not been able to settle the debate in producing am Australian consensus on accounting for identifiable intangible assets. The AASB after issuing an exposure draft on accounting for intangible earlier has not yet made a decision until 1999 came and thus it needed to re-affirm its view that assets such as brand names, mastheads, licenses and trademarks have depreciable amounts that are required to be depreciated. An equally influential part of the Australian capital markets, the Australian Securities and Investments Commission (ASIC) has further contributed to need to make a decision under pressure as it tool the position for companies to amortize such assets. This however generated reactions that resulted to a submission from the Group of 1000 and others in May 2000, hence this time the AASB must really have resolve to resolve the issues on intangible asset recognition for some kinds and since it wanted to know the US FASB position on the issue it will have to hasten its final position with the current proposals by the FASB to rather adopt non-amortization of goodwill and other intangibles with indefinite lives (Alfredson, 2001). 2.2. The nature of intangible assets with reference to the conceptual framework projects, and the relevant empirical research. The nature of intangible assets with references to the conceptual framework projects and relevant empirical research may be appreciated in reference to conceptual by the fact they there are those that are purchased (externally acquired) and those that are internally generated. More conceptually, intangible assets are not like physical assets that my readily be evaluated as to their values yet research confirm the value of their capitalization or recognition. Godfrey and Koh (2001) found an indication that the capitalization of intangibles is value relevant for Australia’s largest firms. The results of their study show hat investors place greater value on capitalized goodwill than other categories of capitalized balance sheet items. They also further found that capitalization of identifiable intangible assets also adds value to large firms as in goodwill. This would only speak of the great error to limit the definition of assets recognizable to ones that is traditionally defined. Finding support in theory that only those that may cause long term revenues should be capitalized as assets, Godfrey and Koh (2001) may have caused a clear distinction of a better definition of intangibles to be excluding those that are expended for research and development since they also found that research and development capitalization does not affect the value of the firms in our study. The result of the research could only confirm the validity of certain conceptual framework at to the difference between externally acquired and internally generated. This would indicate a need for further research as found by Jenkins and Upton (2001) about the need for recognition and measurement of internally generated intangible assets as these are also the need under the new economy. 2.3. How accounting information is used, and how this creates incentives for selecting accounting policies in relation to intangible assets. Accounting information is found in the financial statements that required to be prepared by business entities. The financial statements provide information for decision making and this helps investors in evaluating the evaluating the profitability, liquidity, efficiency and financial leverage of companies they invest with. From the point of the owners of the financial statement owners, their tendency is to make their financial statements look good to the investing public so that they could generate capital requirements for their business needs. Accounting policies are within the realm of management policies where the companies will try to influence how financial information is to be used or not used in the financial statements , the requirements for the recognition of some of the account in the financial statements , the manner of presentation of the accounting information as well how these companies view the interpretation of the accounting standards as passed accounting standard bodies such the Australian Accounting Standards Board. In the presence however of accounting standards that are effectively enforce discretion in setting accounting policies will be obviously restricted. 2.4. The major regulations applying to intangible assets and how they impact accounting policy choice. The majors regulation applying to intangible assets include the IAS 38, the FASB APB opinions and exposure draft of that is awaiting approval as of 2001 and UK’s FRS 10 the AASB exposure draft as of and which is awaiting finalization. Each of the regulation prescribes standards on accounting for intangibles and accounting policies may be used by companies especially those which operates globally may design their accounting policies in a manner that would paint the financial information of the companies favourable in the eyes of investors and which in real sense could influence the stock price of these companies. The main differences lies on which standard would allow the recognition of given kinds of intangible assets and whether the amortization of these intangibles may be allowed. The issue of recognition is of assets is material issue since recognition asserts addition to total assets and hence would make the organization look better. The issue of amortization is also material because the alternative would just be to record impairment of the assets which could not be a systematic allocation as contemplated in amortization since it could be done fewer times than when there is amortization over the life of the assets which may be definite or indefinite as certain periods in time. Amortization therefore connote lesser expense than immediate impairment hence it could be favourable to the financial position of companies as earlier points in time. To name few of the characteristic of each major regulation, it may be posited that IAS 38 as an accounting requires an enterprise to recognise an intangible asset if, and only if, certain criteria are met. Examples of possible intangible assets under IAS 38 include: computer software, patents, copyrights, motion picture films, customer lists, etc. As to recognition criteria, IAS 38 requires an enterprise to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if: (a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and (b) the cost of the asset can be measured reliably. In contrast to AASB position under AAS 4 and AASB 1021, Alfredson (2001) explained that IAS prohibits “the recognition of internally generated brands, masthead, publishing titles and similar items, and the revaluation of recognized intangibles only where an asset’s value can be determined by an active market, were undoubtedly strong disincentives because of their disparity with accepted Australian practice.” On the other hand, US FASB Exposure Draft as of 2001 requires among others that goodwill should not be amortized, but should be reviewed for impairment when an event or series of events occur indicating that goodwill of a reporting unit might be impaired and that its impairment will be considered if the fair value of the reporting units goodwill is less than its carrying amount. (Alfredson, 2001) UK FRS 10 on one hand requires that internationally identifiable asset may be capitalized only if it has a readily ascertainable market value as contrasted what IAS 38 requires. 2.5. The likely regulatory developments with respect to intangible assets. The more likely regulatory development with respect to intangible assets in Australia would be leading to fair value accounting which is actually to follow that US of FASB which as of 2001 made a proposal of impairment testing for goodwill and other intangible assets with indefinite lives. With the still lack of similarity with IAS 38 on some points, Alfredson (2001) posited that Australian Accounting Standards Board (AASB) it required to influence to IASB to do likewise if the AASB would fulfil its declared stated International Harmonisation Policy. Alfredson (2001) however see only the possibility o this scenario in the short term as far as accounting for acquired intangible assets rather than internally generated assets is concerned. One still remains therefore to be resolve with the issue of accounting for intangibles after Australian Accounting Research Foundation (AARF) has issued an exposure draft (ED49) some time in 1989 which is still unresolved as of today and said topic is whether internally generated identifiable intangible assets shall be recognized. This is of course very important as Alfredson (2001) explained that in the light of the so-called new age economy in which “soft assets” has assured increased importance. The solution that was proposed by Alfredson (2001) is for the AASB to “assist in the achievement of international convergence,” by accepting an interim solution which entails the adoption of a more restrictive recognition and valuation approach than Present Australian practice. This is of course referring to the adoption of UK FRS 10, which is less restrictive that IAS 38, and which requires that an internally developed identifiable asset may only be capitalizes if it has a readily ascertainable market value. Another option suggested by Alfredson (2001) is for the AASB, could be to convince the IASB and other national standard-setters to rather a less restrictive approach than what the IAS 38 provides. Alfredson however qualified that “AASB’s ability to do will depend significantly on whether standard setters can be convinced that a less restrictive approach will be sufficiently reliable and more relevant for decision-making by users of financial reports.” By appearing to be banking on conservatism as an accounting principle he suggested the academics to play a role by conducting relevant empirical studies that could at least confirm his recommendation. (Alfredson, 2001) 3. Conclusion This paper found that to resolve the impasse on accounting for Intangibles for was a need for the AASB to reconcile its standard with other standards such that the UK FRS, the US FASB APB Opinion and IAS 38 of the IASB. To do the same, AASB need to assist in harmonization of policies with international counterpart by accepting an interim solution which entails the adoption of a more restrictive recognition and valuation approach. In so resolving the issue AASB must also have the backing of legislation to give teeth to compliance of professional standards. This is in the light of research findings of widespread non-compliance as found by Wines and Ferguson (1993) and Motocsya and Wyatt (2006) whose findings cast doubt on the quality of the restrictive capitalization rules under IAS 38 on Intangible Assets and AASB 138 on Intangible Assets. Such situation was further was further supported by the analysis of Wyatt, et.al (2001) indicating a substantial accounting discretion to capitalize intangible assets. 4. References: Alfredson, K. (2001) Accounting for identifiable intangibles--an unfinished standard-setting task Australian Accounting Review; Jul 2001; 11, 2; Accounting & Tax Periodicals, pg. 12 Godfrey and Koh (2001) The relevance to firm valuation of capitalising intangible assets in total and by category; Australian Accounting Review; Jul 2001; 11, 2; Accounting & Tax Periodicals, pg. 39 Jenkins and Upton (2001) Internally generated intangible assets: Framing the discussion Australian Accounting Review; Jul 2001; 11, 2; Accounting & Tax Periodicals, pg. 4 Matolcsya and Wyatt (2006) Capitalized intangibles and financial analysts, Blackwell Publishing Ltd Oxford, UK Wines and Ferguson (1993); An Empirical Investigation of Accounting Methods of Goodwill and Identifiable Intangible Assets: 1985 to 1989 Wyatt, et.al (2001) Capitalisation of Intangibles - A Review Of Current Practice and The Regulatory Framework, Australian Accounting Review; Jul 2001; 11, 2; Accounting & Tax Periodicals, pg. 22 Read More