This report discusses the recognition and measurement criteria for intangible assets, specifically brands, as set up by the Australian Accounting Standard Board. It also covers the writing-off of goodwill, provisions for restructuring, and a case study on acquisition activity.
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Running head: AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS Australian Accounting Standards Analysis Name of the Student Name of the University Author’s note
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1AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS Executive Summary The report discusses on the accounting criteria that is set up by the Australian Accounting Boardregardingtheprinciplesofintangibleassets.Therecognitioncriteriaandthe measurement of the intangible assets are stated. The report is specifically focussed towards the guidelines set up for the recognition and measurement of brands. The next section of the report talks about the limitations that occur due to writing-off of the goodwill by the firms. Further the report moves on to discuss about the provisions that had been laid down regarding the process of restructuring in business. Under this heading, other concepts are also discussed such as provisions due to acquisition activities. A specific case is elaborated in this context which talks about acquisition activity conducted in an organisation. In this respect, suitable provisions are highlighted regarding this acquisition activity of the acquirer.
2AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS Table of Contents Introduction................................................................................................................................2 Discussion..................................................................................................................................2 Response to question 1...............................................................................................................2 Accounting for brands under AASB 138...................................................................................2 Response to question 2...............................................................................................................2 Circumstances under which goodwill is recognised and subsequent written-off subsequently2 Reasons why a significant goodwill write-off may signal a “flawed investment strategy”.......3 Response to question 3...............................................................................................................3 Accounting for restructuring provisions with reference to AASB 137......................................3 Creation of a provision for restructuring by Tooth Ltd. as a part of its acquisition accounting entries.........................................................................................................................................3 Changes due to amendments in the acquisition activity of Tooth Ltd.......................................4 Conclusion..................................................................................................................................4 References..................................................................................................................................5
3AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS Introduction The report primarily aims to look at the principles and the guidelines which have been set up by the Australian Accounting Standard Board. The specific criteria which have established in this report include criteria of intangible assets. The recognition and subsequent measurement of intangible assets are stated which is particularly related to goodwill. The writing-off criteria of goodwill is also highlighted. Along with this, the provisions that have been formulated regarding the restructuring programme of a particular entity are also noted down accordingly. Discussion Response to question 1 Accounting for brands under AASB 138 Brands have been recognised as intangible assets according to AASB 138. Some of the recognition criteria set up by AASB 138 are identifiability, non-monetary, control, future economic benefit and lack of physical substance (Aasb.gov.au 2019).As brands and other trademarks meet all these criteria, therefore they are considered to be intangible assets under AASB 138. The measurement method of these intangible assets are also stated in AASB 138. These assets are measured at cost at the initial stage. After recognition, these assets are measured either through cost or revaluation model. Cost model suggests that an intangible asset shall be accounted at its cost which is excluded from accumulated amortisation and any loss from impairment (Aasb.gov.au 2019). Revaluation method suggests that that the intangible asset shall be measured at the revalued amount. The revalued value can be the fair value of the asset at the revaluation date. This value is excluded from any accumulated depreciation and impairment losses. Difficulties of standard setters in allowing the recognition of all brands and formulae on statements of financial position The intangible assets have such a nature that they cannot have any addition or replacement. The intangible assets such as brands should have future economic benefits. It is sometimes difficult for the standard setters to realise the future economic benefit of the brands. Another criteria to be met is the accounting for the subsequent expenditure that would be incurred due to the intangible asset (Ji and Lu 2014).This is sometimes very difficult to estimate especially for brands. It is difficult to predict the future expenditure that would be associated with the branding. Another difficulty that is realised by the accountants is to identify the expenditure that is particularly associated with the brand (Ji and Lu 2014). Sometimes the expenditures from brands are difficult to segregate with those of the entities. As a result, the carrying amount of the brand would rarely include these expendituresthat would be generated in subsequent times. Response to question 2 Circumstances under which goodwill is recognised and subsequent written-off subsequently Goodwill can be recognised through many criteria set up by AASB 138. The goodwill arising from the business combination is the asset that is supposed to provide future economic benefits. The economic benefits should arise due to other assets which are also part of businesscombination(KabirandRahman2016).Theseassetsshouldbeidentified individually or recognised separately, they should be part of the business combination.
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4AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS The goodwill is generally allocated to the different cash generating units (AASB 2014). This process is not applicable for cash-generating units individually, but only to the groups of cash-generating units. Therefore, many of the cash-generating units of the internal management are devoid of the goodwill. Impairment loss is another significant loss that occurs when the goodwill of a related cash-generated unit is not being allocated to that particular unit (Bepari, Rahman and Mollik 2014). In such cases the respective cash-generating unit is tested for impairment through the comparison of the unit’s carrying amount with its recoverable amount. All the above mentioned factors might lead to subsequent “write-off” of the goodwill. Reasons why a significant goodwill write-off may signal a “flawed investment strategy” Generally goodwill is written off by the firms when they do not desire to disclose the real asset or liability figure. It is known that goodwill is not considered to be a real asset and is only treated as an accounting term (Bodle, Cybinski and Monem 2016). For a firm that has less number of real assets, there is always a probability that it would want to shrink its balance sheet. In such cases, the firm would highlight the existence of these assets as goodwill. Goodwill under normal circumstances, does not represent anything on its own (Bugeja and Loyeung 2015). Therefore, writing off of the goodwill may indicate less conduction of business activities or overpayment of assets by an acquired company in the expectation of higher earnings in future. It also indicates that the real assets of the companies are undervalued as compared to goodwill which is reported to have been overvalued by the companies. Response to question 3 Accounting for restructuring provisions with reference to AASB 137 Under AASB 137, a restructuring ofbusiness is said to have occurred when there is sale of a segment of a business or a closure of business locations, change in the structure of managementorsignificantreorganisationswithinthebusiness(Aasb.gov.au2019). Restructuring costs can have provisions which are suitably recognised with the help of general recognition criteria. An entity can have restructuring provisions only if it identifies the concerned business or its parts, the future expenditures to be incurred, implementation of the plan and the details of the employees who would be affected due to restructuring process. All the provisions would be reviewed at the end of the reporting period and should be adjusted for showing the best estimated value (Aasb.gov.au 2019). A provision shall only be used for denoting the expenditures that have been used for the original recognition of the provisions. Creation of a provision for restructuring by Tooth Ltd. as a part of its acquisition accounting entries According to the recognition criteria for provisions formulated in AASB137, Tooth Ltd. should create a provision for its restructuring procedure. This is because all the important recognition criteria of the business have been met. Tooth Ltd. has mentioned the part of business that is involved in the restructuring procedure (Aasb.gov.au 2019). The approximate number of employees have been estimated and informed accordingly. The estimated cost has also been identified and the period of implementation of the plan has also been stated. Due to all these reasons the provision for the restructuring can be done by the company which would be a part of its acquisition accounting entries.
5AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS Changes due to amendments in the acquisition activity of Tooth Ltd. Due to closing down of one of the facilities of the parent company, that is, Tooth Ltd. the company might not have restructuring provisions. This is because it would not fall under the restructuring programme as a part of business combination. Generally, for individual businesses the restructuring provisions might not be amended for which AASB 3 is applied. However, the general rule for recognition and measurement of the provisions remain the same for any kind of acquisition activity. Conclusion From the above report, an inference can be drawn regarding the different recognition and measurement criteria that have been formulated by Australian Accounting Standard Board. The principles governing the intangible assets and the provision of restructuring are explained in a detailed way.
6AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS References AASB, C.A.S., 2014. Business Combinations.Disclosure,66, p.77. Aasb.gov.au. (2019). [online] Available at: www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf [Accessed 21 Sep. 2019]. Aasb.gov.au. (2019). [online] Available at: www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf [Accessed 21 Sep. 2019]. Bepari, M.K., Rahman, S.F. and Mollik, A.T., 2014. Firms' compliance with the disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis and other firm characteristics.Journal of Accounting and Organizational Change,10(1), pp.116-149. Bodle, K.A., Cybinski, P.J. and Monem, R., 2016. Effect of IFRS adoption on financial reporting quality: Evidence from bankruptcy prediction.Accounting Research Journal,29(3), pp.292-312. 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. Ji, X.D. and Lu, W., 2014. The value relevance and reliability of intangible assets: Evidence from Australia before and after adopting IFRS.Asian Review of Accounting,22(3), pp.182- 216. Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia.Journal of Contemporary Accounting & Economics,12(3), pp.290-308.