The Main Feature of Australian Financial Accounting - Assignment Example

Running head: INTANGIBLE ASSET Intangible Asset Name: Institution: TABLE OF CONTENTS Executive Summary…………………………………………………………………………….…3 Introduction ……………………………………………………………………………………….4 Discussion…………………………………………………………………………………….…...5 Conclusion……………………………………………………………………………...…………7 References…………………………………………………………………………...…………….9 Appendix…………………………………………………………………………………………11 Executive summary AASB 138 recognized intangible asset when its potential monetary benefit will be received by the entity and the value of the asset can be determined reliably. When the software is purchased externally this recognition criterion is met. The standard also highlights the requirements that necessary in order for the internally generated software to be documented (Picker et al, 2009). If the pattern is determinable on the future economical consumption, software program is amortized as per the identified pattern. On the circumstances that patterns are not identifiable, straight-line method of depreciation is used. Entities are allowed by AASB 138 to classify their intangible asset as either indefinite or finite in their useful life (Deegan 2010, p. 937). Introduction AASB has been changed to adopt IAASB. The AASB board decided to proceed to give the sector a neutral standard. Their principles are applicable to both non-profit which include public sector and profit entities (Deegan 2010, p. 937). IAASB is the foundation to which AASB add materials that give details of the coverage and their application standards in the Australian environment. The board intends to make additions that broaden the content on the areas that are not adequately address by IAASB and domestic, regulatory and other issues (Deegan 2010, p. 938). The AASB standards are equivalent IFRSs which are issued by IAASB 1-99. The standards also correspond to IAS series. The main feature of the AASB standard is its application to yearly reporting period starting from or after the beginning of first January 2005. Main objective of AASB is the promotion of comparability of the financial report of Australia entities. PART A Value of Text ltd intangible assets according AASB framework Consultant fee $100,000 on of-shelf software together with development fee of $50000 and pilot test fee of $4,00 qualify to be recorded as intangible asset in the books of account. The total cost of $154, 000 fall within the criteria of capitalizing. Tex limited can capitalize this cost under intangible assets. However, it also important to bring into the attention of Tex limited, that the consultant fee, development fee and testing fee do not qualify to be plant, equipment and plant. At that instance when software implementation fail it was prudent for Tex ltd report the cost as expense but since the project proved later to be viable Tex limited can report it as intangible asset. The upgrading cost worth $100,000, for the all organization qualifies to be treated as plant, equipment or plant. This is because the upgrading relates to hardware. The total cost $134,000, salaries for software developing staff, testing of the project, installation and training of staff is recommendable to Tex limited to capitalize. They meet criteria of capitalizing as intangible asset. The depreciation cost of $13,000, promotion on the staff $3,000 and customer promotion $20,000 should expensed. Justification AASB 138 on intangible asset specifically discloses the software as one of the intangible asset which is an Australian Equivalent International Financial reporting standard (AIFRS). This came to effect after January 2005 and it is being used in every financial year. AASB 138 is a general requirement that do not comprehensively deal with intangible assets. It is a replacement of six currently Australian standards. These standards include AASB 1041 revolution of short-term asset, AAS 4 depreciation, AAS 10 the amount that can be recovered of short-term asset, AAS 21 acquisition of asset, AAS 13 accounting for development and research costs and AAS 18 accounting for goodwill (Deegan 2010, p. 937). Some of the universal principals which are in accounting statement concept (SAC) 4 are also covered by AASB 138. The general requirement and main differences is outline in the existing AASB and AAS standard concerning intangible asset and new requirement of AASB 138. The ACT held software as the only intangible asset which the standard has major impact on. This policy summary results on emphasis of the application of the standards to software. The new requirement of AASB 138 define intangible asset as non-monetary asset that has no physical substance (Picker et al, 2009). Software falls in this category. The standard requires that software be included as property, plant and equipment instead of intangible asset. The software is taken to be integral and relates to hardware. On the other hand most ACT government agencies classify software as an asset that cannot be identified physically and not as a fixed asset. AASB 138 recognized intangible asset when its potential monetary benefit will be received by the entity and the value of the asset can be determined reliably (Picker et al, 2009). When software is purchased externally, this recognition criterion is met. On the internally generated software, AASB 138 outline is also another requirement that has to be satisfied so that the internally generated software can be documented. To determine if the software which is purchased internally can be recognized as per the criterion, two phases are used to classify the work performed internally (Eugene and Philip 2009, p. 1127). These two phases are development and research phase. The events which are categorized in the research phase are formulation, design, evaluation, activities that aim to obtain new knowledge and ultimate assortment of probable options for new or improved objects, processes, policies, product system or services. On the other hand activities which are classified in the development phase are structuring and testing of the program. Cost incurred to carry out research is not capitalized into the value of the software capable of being internally generated, but instead the cost is taken as an expense in the year it incurred (Eugene and Philip 2009, p. 1127). PART B Value of Tex ltd intangible asset applying appropriate AASB accounting Intangible asset are given it a special recognition in the financial report. They are asset of kind with qualification criteria depending on numerous factors. The cost of $154, 000, new software which later on was confirmed to be viable should be kept in record as intangible and be depreciated like other asset. The depreciation is provided on the software base on determinable means to every organization but most in cases straight-line method is use by many organizations. The upgrading cost is reported as property, equipment or plant. It relates to hardware and it meets all the criteria of asset rather than intangible assets. It is depreciated using the three common methods of depreciation. Depreciation is expense in the income statement. Salaries for staff on software development, pilot testing, installation expenses and training qualify to capitalize and should be reported in balance as intangible asset. Depreciation and promotion are treated expenses in income statement. Justification Development associated cost is only capitalized to the value of the software that can be generated internally only if all the required criteria can be demonstrated. The criteria are completion of the technical feasibility to make it available for use. The entity should demonstrate the usefulness of the software and the ability to use the software once its implementation is completed. The entity should also be in a position to measure reliability on the expenses incurred during the development of the software (Deegan 2007, p. 947). Once all these criteria are satisfied the software is recognized as intangible assets and it is included in the accounting of the asset record. Computer software that fails to meet the definition and recognition criterion are recorded as expenditure in the statement of financial account and are not capitalized in the subsequent years. According to AASB 138, software which is externally purchased is valued at their original cost. This cost includes the cost to acquire the software and any direct attributable costs. Costs which are referred to as attributable are professional fee and employees cost of testing the software and bring software into working order. The cost of training staff, administration and other overhead costs are not capitalized (Stefan 2007, p. 678). On enhancing the software which was previously capitalized, expenses incurred to modify system is capitalized if the cost incurred is capable of enhancing the potential and functionality of the available software in future. The amortization of the software occurs as under AASB 138 on regular basis through out its life after subtracting the outstanding value. If the pattern is determinable on the future economical consumption, the software program is amortized as per the identified pattern. On the circumstances that patterns are not identifiable, straight-line method of depreciation is used. The amortization of the software commence when it is put into use and cease when is retained for commercial purposes or when the software is derecognized. If there is no obligation from third party to purchase the software, its residual value is measured at zero. Entities are allowed by AASB 138 to classify their intangible asset as either indefinite or finite in their useful life. The obsolescence rate for software is very high and their life time is finite at a maximum period of five years (Stefan 2007, p. 681). PART C The events that happened in the month of July 2009 are deemed more reliable. Therefore the cost of $11,000 paid as a consultant fees to obtain an understanding of off-the-shelf software is more reliable than the rest values. This is because, the information received satisfies the customer who in this case is the Tex Ltd. The information is faithful in what it represents. Tex Ltd rely fully on the information obtained from the consultant’s which is to initiate the project to develop in-house specialized software. The value is thus a representation of the information from the consultants (Stefan 2007, p. 678). Justification The software meets the definition of intangible asset. It is non- monetary asset which has got no physical substances. The software do not relates to hardware so it should be treated as a property, equipment and plant. It meets all the criteria to treat as intangible asset. Its future profit generation is probable and its cost for implementations is measurable as per the AASB. It is justifiable for Tex limited to expense the cost incurred to implement the project. It respects the requirements of AASB 138 that all cost on research internally generated software cannot be capitalized. Conclusion According to the definition from AASB 138, Intangible asset is an asset that does not have any physical substance (Picker et al, 2009). This definition includes software according to the laid down standards, when the software is integral to, this software should not be included as an intangible asset but as a fixed long term asset. However, when it is separate from the hardware, it can be classified as an intangible asset (Stefan 2007, p. 678). The recognition criterion of the intangible asset according to the AASB 138, requires that for an asset to be included as an intangible asset, there must be a likelihood that the financial settlement related to the asset can be received by the entity and its value can be determined reliably. Software is to be valued at its original cost including the price of acquiring it. Amortization is carried out regularly throughout the lifetime of the software. References Deegan C, 2010, Australian Financial Accounting, 6ed, McGraw-Hill Australia, Sydney. Deegan C, 2007, Australian Financial Accounting, 5ed, McGraw-Hill Australia, Sydney. Eugene F & Philip R, 2009, Intermediate Financial Management, Cengage Learning, Melbourne. Picker et al, 2009, Australia Accounting Standards, John Wiley and Son, Sydney. Stefan G, 2007, the Development of the Australian Accounting Standards after the End of the G4+1, GRIN Verlag, Sydney. Appendix Cost of new software which is generate internally Consultant fee 100,000 Development cost 50,000 Pilot testing cost 4,000 154,000 Expenses that qualify to be capitalize Salaries for software staff 90,000 Testing software cost 8,000 Installation cost 21,000 Staff training cost 15,000 134,000 Expenses that do not qualify to be capitalize Depreciation expenses 13,000 Promotion on the staff 3,000 Promotion on 20,000 33,000 Read More