Accounting of Intangible Assets and Treatment of Obsolete Factory Machines

This document discusses the provisions of AASB 138 for intangible assets and appropriate accounting procedures for accounting issues related to patents. It also addresses the concern of factory machines becoming obsolete and the implications of depreciation charges. The recommendations provided are in line with accounting standards and the Corporations Act 2001.

FINANCIAL ACCOUNTING
AND REPORTING
Module Number-
[DATE]
Hewlett-Packard
[Company address]

Table of Contents
Part-1.....................................................................................................................................................1
Issue 1...................................................................................................................................................1
Issue 2...................................................................................................................................................3
Part-B.....................................................................................................................................................5
References.............................................................................................................................................7

Part-1
Issue 1
Provisions of AASB 138, Intangible Assets:
Paragraph of
AASB 138
Provision set by the paragraph
Paragraph 9 The Paragraph 9 of AASB 138 specifies the elements to be included
in the definition of intangible assets. The items which constitute the
definition of intangible assets include the enhancement, acquisition,
development and maintenance of patents, and scientific or technical
knowledge.
Paragraph 18 To recognise intangible assets in financial statements, the
requirements of Paragraph 21 are must to be met.
Paragraph 21 &
Paragraph 22 &
Paragraph 23
The recognition conditions set by this paragraph are as follows:
Reliable measurement of cost of the asset by the management.
The estimated future economic benefits attributable to the entity form
the intangible assets are estimated to be measured by the
management.
Also as per Paragraph 22, the estimation of expected future economic
benefits is upon the best estimate undertaken by the management
considering the future economic conditions.
As per Paragraph 23, the estimation of these economic benefits is
taken into account considering the external evidence mainly (Russell,
2017).

Paragraph 24 The recognition of an internally generated asset is made upon the cost
of the intangible asset and not upon fair value basis at the time of
initial measurement.
Paragraph 52 & 53 As per Paragraph 52, the research phase and development phase of
the internally generated intangible asset has to be differentiated.
And, as per Paragraph 53, only the expenses incurred in the research
phase can be accounted for in the financial statements as an intangible
asset (Bianchi, 2017).
Appropriate accounting procedure for the accounting issues identified
 Patent HDBG459: this patent has been acquired by the company (Shadow Limited) from a
leather manufacturing firm at $541 000. The acquired patent qualifies the definition of
intangible asset as per Paragraph 9 of AASB 138; hence the same can be accounted as an
intangible asset. The checking of recognition criteria as per Paragraph 21 is not required here
in this case as the patent already was being recognised as intangible asset by the
manufacturing firm as it sold the same (showing benefits accrued to it). Hence, the patent is
able to be recognised as intangible asset. The recognition as per Paragraph 24 shall be done at
acquisition cost, i.e. for $541 000 (Hussinger, & Pacher, 2019).
The sample journal entry considering the purchase was on cash basis can be done as follows:
Patent (HDBG459) A/c
Dr
Cash A/c
$541 000
$541 000
 Patent UBF871: the patent has been acquired along with some other assets from a
conglomerate Underarmour Bag Fashions. However, the cost is separately specified for the
same being $1,500,000.in the same case again the provisions as discussed for Patent
HDBG459 is applicable. The acquired patent qualifies the definition of intangible asset as per

Paragraph 9 of AASB 138 hence the same can be accounted as an intangible asset. The
checking of recognition criteria as per Paragraph 21 is not required here in this case as the
patent already was being recognised as intangible asset by the manufacturing firm as it sold
the same (showing benefits accrued to it). Hence, the patent is able to be recognised as
intangible asset. The recognition as per Paragraph 24 shall be done at acquisition cost, i.e. for
$1,500,000 (Lim, Macias, & Moeller, 2018).
The sample journal entry considering the purchase was on cash basis can be done as follows:
Patent (UBF871) A/c
Dr
Cash A/c
$1,500,000
$1,500,000
 Application for a patent for a new process of softening leather: the application for the
patent for new process of softening leather is not an intangible asset if we consider it patent
wise. The patent has not been considered as an intangible asset as it is not acquired yet. As
the asset has not been created yet, it cannot be evaluated for considering as an intangible
asset.
 New process of softening leather: the process of softening leather can be considered as an
intangible asset however, if the asset satisfies the conditions as specified by the paragraphs of
AASB 138, Intangible assets as discussed above. The recognition can be made if those
conditions are specified.
Issue 2
The directors of entity are concerned about the company’s equipment, i.e. factory machines
are turning obsolete rapidly because of new technology inventions. Applications of
depreciation charge based upon the policies running since start are charging depreciation at
lower rates if rapid obsoleting assets are considered. The company is showing assets on cost
basis and have opted for cost basis of asset measurement and significant re-measurement in
books.
The company cannot suddenly charge higher depreciation rates. As per AASB 116, Property,
Plant & Equipment, the assets can be shown at historical cost and an accumulated

depreciation account can be created. However, the depreciation accumulated to the account
cannot be done on inconsistent basis every year. A consistent policy has to be applied. Hence,
the option suggested by the directors to charge depreciation at a higher rate is explicitly not
permission by the accounting standards and accounting framework (Robin, 2016).
As per AASB 1041, Revaluation of Non-current Assets, the company can either adopt the
cost model or the revaluation model to measure the assets in the financial statements
subsequent to the phase of initial recognition. As the organisation has been constantly
following the cost model since several years, the adoption of revaluation model is not
justified. Adopting revaluation shall drastically bring a change in the financial statements
because of heavy amount of revaluation loss, as the technology used by entity is getting
obsolete. Considering the revaluation losses to this extent might give the investors a wrong
impression about the company’s asset management process. Some investors might even
consider it inappropriate considering the long term adoption of cost model since inception.
The guidelines of Corporations Act 2001 have always stressed upon the use of consistent
accounting policies over the years. The same applies to the depreciation policy of every
organisation (Yao, Percy, & Hu, 2015).
AASB 136, Impairment of Assets has been formulated under the section 334 of the
Corporations Act 2001. The application of this accounting standard disallows the
organisation from carrying any of its assets on a value which exceeds the recoverable amount
of them. The application of this standard seems more suitable in this case. The entity is
advised to account for impairment loss in the given case and maintain the carrying value
equivalent to the recoverable amount of assets. As per the provisions of this asset, asset
impairment can take place when the indicators of impairment are available which could either
be external or internal as well (Bond, Govendir, & Wells, 2016).
In case of the company external indicators of impairment are present being adverse or
unfavourable change in the technological market of entity’s operation leading to a decline in
the market value of asset as it has become obsolete. Also the internal indicator suggests that
the asset is obsolete because of newer technological innovations in the field of asset
operation. Given the existence of the indicators of impairment it is necessary for the
organisation to impair the assets as specified by AASB 136, Impairment of Assets. The
recoverable amount of the assets is computed by comparing the value in use and fair value

less cost of disposal. Higher of either of them is selected as the recoverable amount (Zhuang,
2016).
The carrying value when is higher than the recoverable amount is then reduced to the
recoverable amount and the difference is charged as impairment loss. This loss is to be
expensed in the profit & loss account. This impairment testing has to be conducted by the
organisation at every reporting date and the impairment loss cannot be eliminated to be
considered in the financials if the impairment indicators exist.

Part-B
Mr Martin Wahlburg
Managing Director, Shadow Limited
Level 5, 99 Mary Street,
Brisbane QLD 4000
Dear Martin,
I am writing this letter in response to the e-mail I received from your end. This is in regard to
the accounting issues that have been identified for year ending on 30th June 2019. I have
inserted the research based upon the accounting standard in relation to AASB 138, Intangible
Assets; AASB 136, Impairment of Assets; AASB 116, Property, Plant & Equipment; AASB
1041, Revaluation of Non-current Assets. The implications imparted by the Corporations Act
2001 have also been considered. Both the issues in relation to the Accounting of Intangible
Assets and the discussion of treatment of the value of company’s factory machines which are
turning obsolete have been considered.
The issues have been resolved keeping in line the practical implications of the solution of
issues upon the working and presentation of financial statements by the organisation. The
concerns of patent accounting both acquired as well as internally generated along with the
depreciation charge had been resolved considering the different approaches available. The
recommendation about the best acceptable and available option is suggested.
Hope the accounting issues shall get clear upon the suggestions made. In case any doubtful
situations arise, please feel free to talk. Expect to hear from you shortly.
Regards
Miley Jaspen
[e-mail]

18th March 2019

References
Bianchi, P. (2017). The economic importance of intangible assets. Routledge.
Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairments by Australian firms
and whether they were impacted by AASB 136. Accounting & Finance, 56(1), 259-288.
Hussinger, K., & Pacher, S. (2019). Information ambiguity, patents and the market value of
innovative assets. Research Policy, 48(3), 665-675.
Lim, S. C., Macias, A. J., & Moeller, T. (2018, June). Intangible assets and capital structure. In Paris
December 2016 Finance Meeting EUROFIDAI-AFFI.
Robin, A. S. B. (2016). Reconciliation and valuation of property, plant & equipment.
Russell, M. (2017). Management incentives to recognise intangible assets. Accounting &
Finance, 57, 211-234.
Yao, D. F. T., Percy, M., & Hu, F. (2015). Fair value accounting for non-current assets and audit
fees: Evidence from Australian companies. Journal of Contemporary Accounting &
Economics, 11(1), 31-45.
Zhuang, Z. (2016). Discussion of ‘An evaluation of asset impairments by Australian firms and
whether they were impacted by AASB 136’. Accounting & Finance, 56(1), 289-294.