Journal of Financial Reporting and Accounting

Running head: RESEARCH INDIVIDUAL ASSIGNMENT
Research Individual Assignment
Name of the Student
Name of the University
Author Note

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RESEARCH INDIVIDUAL ASSIGNMENT
Executive Summary
The aim of the assignment is to conduct an analysis on the Mags Ltd Company regarding the
procedures and actions that they specifically take for the purpose of treating Intangible Assets. In
order to well guide and apply the concepts of Intangible Assets in accordance with the Australian
Accounting Standards the key principles of AASB 138 has been applied. The application of the
guidelines and principles given by AASB 138 would be well helping the company in
understanding the recognition and measurement of the Intangible Assets of the company. Other
Issues like capitalization of the marketing costs which the company has incurred has also
discussed under the accounting standards of AASB 138. There are various set of guidelines
about the measurement of the carrying amount of the asset and the disclosures related to
intangible asset that has been well discussed and analysed.

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Table of Contents
Introduction..................................................................................................................................2
AASB 138 guidelines on Intangible Assets.................................................................................2
Conclusion...................................................................................................................................6
References....................................................................................................................................8

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Introduction
The situation is related to Mags Ltd., an Australian mail order company. There has been a
significant growth in the sales and net income of the entity in the recent years. The future of the
company is believed to be very promising and the valuation of the company has also gone up
significantly in the recent times. However, the entity believes that the reasons for its success are
its marketing flair and expertise in the field. As a part of these innovations, the company is
undertaking some uncertain accounting practices related to the recognition and measurement of
intangible assets. One of them is the capitalisation of the direct mailings sent by it to the
customers and amortising them on a straight line basis (Steenkamp and Steenkamp, 2016). This
is because the company believes that the customers are obtained and retained with the help of
these mailings. Other intangible assets which have been recognised by the entity as a part of their
financial statements include customer list purchased from a competitor for $80000 on July 2019.
The final issue is related to the capitalising of the market costs (AASB, 2015). If these costs are
not capitalised and marketed instead, then the net income earned by the entity would be much
lower. The related solutions to these issues will be provided with the guidance of AASB 138,
which deals with the accounting for Intangible Assets in the Australian Territory (Russell 2014).
AASB 138 Guidelines on Intangible Assets
The main purpose of AASB 138 is to prescribe the treatment for intangible assets which
are not specifically dealt with the help of any other standard. In order to recognise an item as an
intangible asset, it is necessary that specified criteria related to the asset are met. There are also
certain guidelines about the measurement of the carrying amount of the asset and the disclosures
related to intangible assets (Kung et al., 2013). As per the paragraph 8 of AASB 138, an
intangible asset is a non-monetary asset which is identifiable but does not have substance.

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Paragraph 12 of the standard states that the asset is identifiable if it is capable of being separated
and sold by the entity by either leasing, contracting or some other manner or arises due to a
contractual or legal right even if those assets cannot be sold by the entity. Paragraph 21 of the
standard states that the asset is to be recognised only if the future benefits which are attributable
to the asset will flow to the entity and the value of the asset can be measured reliably. Similarly,
the value of the benefits arising from the asset can be said to be reliably measured only if there
are reasonable and supporting assumptions to support the estimates of the management. These
set of economic conditions should also exist over the lifetime of the asset. Some other
expenditure which form the part of the cost of the asset include the R&D expenditure which is
related to an in-process R&D project acquired separately is recognised as an intangible asset (Su
and Wells, 2018).
Similarly, paragraph 68 of AASB 18 states that any expenditure on an asset should be
recognised as an intangible asset only if it is the part of an asset meeting the requirement criteria
(Steenkamp). This is also the case even when an expenditure is incurred but no recognisable
asset is created by the business. However, there are no generalised regulations or guidelines
which can be applied to any given situation to understand whether a particular expenditure can
be capitalised as a part of an intangible asset or not. As per paragraph 16 of AASB 138, any
business entity may have a portfolio of customers or a market share and expect that this market
share will likely to continue because of the efforts taken by the entity. However, as there is no
legal contract or a document binding this relationship, the entity does not have a measurable
control over the relationships with the customers or the expected economic benefits arising from
the relationship (Steele 2015). On the contrary, if the entity is able to prove that there is
sufficient evidence to suggest that it is able to control the economic benefits arising from such a

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relationship, then the customer relationships meet the criteria of the definition of an intangible
asset.
In case of Mags Ltd., there is no evidence to suggest that the cost of direct mailings
creates long lasting customer relationships for the entity. There is also no guarantee that the
economic inflow of the entity would be sustainable or consistent. Hence, the $4.2 million
incurred by the entity cannot be capitalised by the entity. They are a part of the promotional and
advertising expenditure incurred by the entity and should be expensed and reduced from the
profits of the entity.
The next asset regarding which the appropriateness of the accounting policy is to be
determined is the mailing list purchased from a competitor for $800000. According to the AASB
guidelines, if a mailing order company purchases a customer list from a competitor, then it will
be considered as an intangible asset of the company. It needs to be amortised on the basis of the
best estimates of the company. The period of amortisation, should not, under any circumstances
exceed the best estimates of the useful life initially estimated by the entity. In certain
circumstances, like the one faced by the entity, additional names may be added to the existing list
possessed by the entity. However, these additional names should not be considered as a part of
the additional benefits provided by the asset acquired by the entity. The expected benefits
received by the business should only be limited to the date the asset was acquired by the
business. Any impairment occurring on the customer list should also be constantly checked by
the business in accordance with the guidelines of AASB 136 Impairment of Assets. This should
be done by assessing the asset at the end of the accounting period and analysing whether there is
any indication of the asset being impaired.

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Paragraph 5 of AASB 136 suggests that the standard also applies to assets that are carried
and revalued according to the guidelines of AASB 138. As per paragraph 10 of AASB 136, an
intangible asset with indefinite useful life or an intangible asset not yet available for use should
all be tested for the purpose of impairment. This is done by comparing the carrying amount with
the recoverable amount of the asset. However, it should be noted that the term amortisation is
used for intangible assets instead of depreciation. Hence, any amortisation in the value of an
intangible asset is a reduction in its useful life. There is no definite time period for testing the
impairment of an asset. Different assets may be tested for impairment at different points of time.
In the given case, the Customer list is amortised on a straight line basis with its useful life taken
as the base for calculating the amount. This is then deducted from the cost of the asset to arrive at
its fair value.
Calculations:
Calculation of Intangible Assets of Mags Ltd.
Particulars Amount Reason
Cost of direct mailings to perspective
customers N/A
Lack of sufficient evidence for the intangible
assets
Cost of Customer List 800000
Useful Life 5
Additions made to the names in the list N/A
Annual Amortisation amount 160000 AASB 136
Marketing costs asset N/A
Lack of sufficient evidence for the intangible
assets
Amortisation of costs N/A Uncertainty of economic inflows

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Actual Net Income of the entity
$10,000,00
0 Marketing Costs are Expensed
In the given situation, the customer list acquired by the business should be considered as
an intangible asset. This is because the nature of the business is that of a mail order and having
additional customer list helps the entity in conducting the business in a much smoother manner.
There is also the aspect of visibility of the asset and the company has sufficient evidence to
prove the existence of the intangible asset. However, in relation to this asset, there should be
some guidelines which should be followed in the measurement of the asset. The guidelines of
AASB should be followed in the measurement of the asset and its impairment. The value of the
asset should be recognised at $800000. The useful life of the asset should be on the basis of the
best estimate of the entity. Hence, the useful life of the asset should be considered to be 5 years
as the asset is considered to be useful for such a period by the business. However, the additional
benefits provided the addition of the names after the acquisition should not be taken into
consideration.
The details related to the asset are as follows:
Recognisable Value of the Customer List $800000
Expected useful life of the asset 5
Annual value amortised $160000
Additional names added to the list Should not be taken into consideration in
calculating the asset value

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The next aspect regarding which the advice needs to be provided to the business is the
marketing expenses incurred by the entity as a part of conducting the business. As discussed
previously, AASB 138 suggests that an asset should be recognised as an intangible asset only if
the business has sufficient evidence to prove that the expenditure is relevant in providing
sustained returns to the business which are likely to continue for a foreseeable period in the
future (Hu, Percy and Yao, 2015). However, in this case, the only basis for the accounting
practice followed by the business is the past experience of the entity. These practices are also not
guaranteed by any copyright or protection by the entity. Hence, they are relatively easy to
replicate by the competitors. This is a reason for the uncertainty in the economic inflows
received by the business from the expenditure. Incorrect accounting practices by the entity also
result in the overstatement of the profits earned by the entity and the financial statements can
become misrepresented due to the accounting policies of the entity (Russell, 2017).
Conclusion
On the basis of the above discussion, it can be stated that the accounting for intangible
assets is done on the basis of the guidelines of AASB 138. This suggests that the cost of an
intangible asset should be capitalised only when the entity is certain that the economic benefits
arising out of the asset will be certain and continuous. In case of expenditure or assets which are
not evident to the outsiders, then the assets should have a sufficient evidence to prove that the
benefits received by the entity will be existing for a longer duration. In case of Mags Ltd., the
expenses incurred for the prospective customers cannot be considered to be a part of the
intangible assets of the company. The customer lists purchased by the entity should be a part of
the intangible assets of the company. However, any additions made to the list should not be

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considered to be a part of the benefits received from it. Similarly, the marketing expenses are
also not to be included in the intangible assets earned by the company.

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References
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
AASB, C.A.S., 2015. Intangible Assets.
Bugeja, M. and Loyeung, A., 2015. What drives the allocation of the purchase price to
goodwill?. Journal of Contemporary Accounting & Economics, 11(3), pp.245-261.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Kung, F.H., James, K., Cheng, C.L. and Jaafar, S.B., 2013. The Association between Goodwill
Amortisation and the Dividend Payout Ratio. AJBA, 6(2).
Russell, M., 2014. Capitalization of intangible assets and firm performance. The University of
Queensland, pp.1-67.
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting &
Finance, 57, pp.211-234.
Standard, I.A., 2015. Presentation of Financial Statements. Balance Sheet, 54, p.80A.
Steele, N., 2015. Accounting: Get the numbers right. Company Director, 31(5), p.41.
Steenkamp, N. and Steenkamp, S., 2016. AASB 138: catalyst for managerial decisions reducing
R&D spending?. Journal of Financial Reporting and Accounting.
Steenkamp, N.S.S., Journal of Financial Reporting and Accounting.

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Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable
intangible assets in business combinations pre-and post-IFRS adoption. Accounting Research
Journal.