FINANCIAL ACCOUNTING | AASSESSMENT

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Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:

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FINANCIAL ACCOUNTING
Executive Summary
The assessment would be focusing on proper reporting process for intangible asset of a business
considering relevant accounting standard. The analysis would be showing difference which
exists between internally generated goodwill and purchased goodwill for the business so that the
same can be reported appropriately in the financial statements. The provisions which are stated
in AASB 138 effectively provides the guidelines for making the classification and how the
different types of intangible assets are to be disclosed in the annual reports for a business. The
analysis would also be providing numerical examples relating to the treatment of acquired
goodwill and journal entry associated with the same are also portrayed in the assessment.
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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................3
Recognition and Measurement of Intangible Assets...................................................................3
Distinction Between Internally Generated Intangible Assets and Acquired Intangible Assets...4
Disclosure Requirements.............................................................................................................5
Conclusion.......................................................................................................................................6
Reference.........................................................................................................................................6
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FINANCIAL ACCOUNTING
Introduction
The focus of the assessment is to conduct an analysis on the reporting framework which
is related to accounting for intangible assets. The reporting for intangibles assets would be
considered for both internally generated goodwill and purchased goodwill for an entity. The case
of US firms is being analyzed who are following different accounting practices for recording
intangible assets such as brands, information technology and other assets. The analysis further
would be showing the main difference which exists between reporting for internally generated
intangible assets and purchased intangible assets. In order to provide appropriate justification in
this regard, the provisions of AASB 138 Intangible Assets” would be considered. The analysis
would also be recommending the company as to what action need to be taken by companies for
the purpose of reporting intangible assets (Ifrs.org. 2020). The discussion would be including
provisions and examples which would show treatment for intangible assets both in the case of
internally generated intangible assets and acquired intangible assets. The assessment would be
including numerical examples for the purpose of better presentation of treatments from the
perspective of accounting.
Discussion
Recognition and Measurement of Intangible Assets
The intangible assets for a business are portrayed in the annual statements and the same
covers both internally generated intangibles assets and acquired intangible assets. As per the
provisions of AASB 138 Intangible Assets”, an intangible asset shall be recognized only on the
basis of two conditions:
The asset would be bearing future benefits which is directly attributable to the asset and
would be flowing directly to the asset.
The costs which is associated with the intangible asset can be measured accurately.
The companies are required to adhere to the above principles of AASB 138 so that the
intangible assets of the business are measured in an appropriate manner. The above points
effectively show that future benefits which is associated with the intangible assets should be
accurately measured. In the case of Intangible assets which are internally generated, the reporting
process is similar and the same should adhere to recognition criteria which is cited in AASB 138
Intangible Assets”. As per para 24 of AASB 138 Intangible Assets”, an intangible asset shall
be measured initially at costs and would be portrayed in the annual report of the business
(Aasb.gov.au. 2020).
In certain circumstances internally-generated intangible assets are sometimes reported in the
books of accounts and the same qualifies for recognition. The qualifying criteria which is being
considered is related is the presence of assets and another criterion which needs to be met is the
accurate measurement of costs which is related to the asset. The internally generated intangible
assets need to be classified into two sections for generation of asset which are research phase and
development phase. On the basis of the classification of the activities for the generation of
internally generated intangible assets, reporting process which is to be followed by the business
is decided. As per the provisions of para 54 of AASB 138 Intangible Assets”, any intangible
asset which is generated from research activities should not be recognized as intangible asset for
the business (Wallstreet Mojo. 2018). The expenditure which is related to the research phase of

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FINANCIAL ACCOUNTING
the intangible asset should be recognized by the management of the company as research
expenses and the same needs to be recognized according in the income statement of the business.
Some of the research activities which can be recognized are activities of obtaining new
knowledge, requirements of materials which will be used for the purpose of conducting the
research.
Another phase which is considered for the purpose of recognition of intangible asset is
development phase where the asset would be recognized as intangible assets on meeting of the
following criteria (Su and Wells 2015). The conditions which needs to be met are effectively
listed below in details:
The technical feasibility which is associated with the research considering that the same
would be available for sale.
The intention of the business to use or sell the intangible assets so that it can provide
value to the business and thereby the same can be reported.
The ability of the business to fully use or sell the intangible assets to third party.
The ability of the business to appropriately measure the future benefits of the intangible
assets and the same can be measured in an appropriate manner in the financial terms by
the management of the company.
The developmental phase expenses are considered to be qualified for intangible assets if the
above criteria are appropriately met and intangible assets are developed in an appropriate
manner. Some of the example of developmental research expenses are design, construction and
pre-testing of products, the design of tools, jigs and other instruments which cab effectively save
the costs which is associated with the business (Carvalho, Rodrigues and Ferreira 2016). The
above analysis effectively shows that intangible assets which are internally generated are
frequently recognized in the financial statements depending on the fulfillment of the conditions
which are specified in the accounting standard of AASB 138. However, it is to be noted that
internally generated intangible assets also have certain exception which are stated in AASB 138
Intangible Assets”. As per the provisions of para 63 of AASB 138 Intangible Assets”,
internally generated brands, , titles of publishing houses, lists from customers and similar
substances items should not be recognized in the financial statements as intangible assets (Chang
and Tsai 2013). In case such items are recognized in the financial statements then the same
would be treated as violation of this accounting standard and would be giving an inappropriate
presentation of the financial position of the business.
Distinction Between Internally Generated Intangible Assets and Acquired Intangible
Assets
The provisions which are stated in AASB 138 Intangible Assets” states different
regarding the treatment of the two different types of intangible assets for a business. The
recognition criteria for both the types of goodwill are quite similar considering the criteria which
is present for measuring the intangible assets of the business. Th criteria for recognition remains
the same which is accurate estimation of the future benefits associated with the intangible assets
and effective estimation of costs of the business. It is to be noted that intangible assets which is
acquired needs to be portrayed in the financial accounts on an immediate basis. The costs of such
acquired intangible assets needs to be incorporated along with the purchase price of the
intangible assets. The purchase price of intangible assets means the purchase consideration
which the business needs to pay for acquiring the intangible asset (Mohr and Batsakis 2014). In
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addition to this, such acquired intangible asset would also be including the costs which is
attributable to such an intangible asset. Therefore, it is to be noted that internally generated
intangible assets need to satisfy some of the criteria which is stated in the provisions of AASB
138 Intangible Assets”. The acquired assets need to be portrayed in the financial accounts with
proper disclosures associated with the same.
In the case of internally generated intangible assets there are some criteria which needs to
be met and, in some cases, effectively does not require the management of the company.
Therefore, it can be said that the main point of different arises in the reporting criteria which is
related to the financial statements of the business (Devalle, Rizzato and Busso 2016). The
management of the company also needs to disclose proper notes in the draft notes. The analysis
which is presented below includes examples for acquired intangible assets for a business. An
extract of the financial position of Company A is presented below:
Company A Book Value Fair Value
Cash $ 5,000.00 $ 5,000.00
Account Recievables $ 75,000.00 $ 67,000.00
Inventory $ 35,000.00 $ 32,000.00
PPE(net) $ 201,515.00 $ 235,000.00
Intangible Assets $ 20,000.00 $ 20,000.00
Total Assets $ 336,515.00 $ 359,000.00
Total Liabilities $ 150,000.00 $ 150,000.00
Net Assets $ 186,515.00 $ 209,000.00
The above table effectively presents the book value and fair value of the assets and
liabilities which are possessed by the business. The company is then purchased by Company B
for the purpose of enhancing the value of the company. Company B has acquired the business of
Company A for a value of $ 250,000. The computed or acquired goodwill for the business of
Company B would be as shown below:
Company B purchased Company A $2,500,000
$
Purchase Price of Company A $ 250,000.00
Fair Value of Assets of Company A $ 209,000.00
Acquired Goodwill $ 41,000.00
The journal entry for acquired goodwill entry would be shown below:
Assets A/c ………………………………………………..Dr 209,000
Goodwill A/c……………………………………………..Dr 41,000
To Liabilities A/c 150,0000
To Cash A/c 100,000
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The internally generated goodwill for a business can be generated by technological
advancements but the same needs to be measured in an appropriate manner. The internally
generated goodwill or intangible assets are directly shown in the annual reports of the business if
the same satisfies the criteria which is stated in the AASB 138.
Disclosure Requirements
The management of a company which is recognizing the intangible assets of a business
needs to appropriately consider the model which is to be followed for the purpose of measuring
the intangible assets. The provisions of AASB 138 effectively shows that there are two models
which the business can follow which are revaluation model and cost model for the purpose of
effectively reporting the intangible assets of the business (Arrighetti, Landini and Lasagni 2014).
The management of the company needs to appropriate provide proper disclosures in the notes to
accounting statements so that information is available to the users regarding the type of
intangible asset which is used by the business. The disclosure requirements which is required to
be portrayed is shown below:
whether the intangible assets have definite or indefinite lives considering their useful lifes
the amortization methods used for intangible asset
the gross carrying amount and any accumulated amortization
a reconciliation of the carrying amount at the beginning and end of the period
impairment losses reversed in profit or loss during the period in accordance with AASB
136
The disclosure requirements for the business needs to be appropriate and the same effectively
provides better clarity of the financial position of the business (Peters and Taylor 2017). The
financial situation of the business appropriately presents the intangible assets if the same is
disclosed using the provisions which are provided in AASB 138.
Conclusion
The above discussion effectively shows the reporting process which is followed for
reporting of intangible assets of a business. The analysis which is presented in the above
discussion shows that there are two types of intangible assets which involves acquired goodwill
and internally generated goodwill for a business. The assessment also shows differences which
exists between reporting process of both the types of goodwill. The analysis also shows reporting
criteria separately for both the types of intangible assets and also cites provisions which are
stated in ASSB 138. In addition to this, the analysis also includes examples which is of a
hypothetical company and journal entries are also portrayed along with the same. The numerical
example makes it clear regarding the treatments which needs to be shown in the notes to
accounts section. Further proper notes and disclosures are also required as presented in the above
discussion. Therefore, it can be concluded that reporting framework for both types of goodwill is
different considering the nature of disclosures as well.

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Reference
Aasb.gov.au. (2020). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPjun14_07-14.pdf
[Accessed 14 Jan. 2020].
Arrighetti, A., Landini, F. and Lasagni, A., 2014. Intangible assets and firm heterogeneity:
Evidence from Italy. Research Policy, 43(1), pp.202-213.
Carvalho, C., Rodrigues, A.M. and Ferreira, C., 2016. The recognition of goodwill and other
intangible assets in business combinations–The Portuguese case. Australian Accounting
Review, 26(1), pp.4-20.
Chang, S.C. and Tsai, M.T., 2013. The effect of prior alliance experience on acquisition
performance. Applied Economics, 45(6), pp.765-773.
Devalle, A., Rizzato, F. and Busso, D., 2016. Disclosure indexes and compliance with mandatory
disclosure—The case of intangible assets in the Italian market. Advances in accounting, 35, pp.8-
25.
Ifrs.org. (2020). IFRS . [online] Available at: https://www.ifrs.org/issued-standards/list-of-
standards/ias-38-intangible-assets/ [Accessed 14 Jan. 2020].
Mohr, A. and Batsakis, G., 2014. Intangible assets, international experience and the
internationalisation speed of retailers. International Marketing Review, 31(6), pp.601-620.
Peters, R.H. and Taylor, L.A., 2017. Intangible capital and the investment-q relation. Journal of
Financial Economics, 123(2), pp.251-272.
Su, W.H. and Wells, P., 2015. The association of identifiable intangible assets acquired and
recognised in business acquisitions with postacquisition firm performance. Accounting &
Finance, 55(4), pp.1171-1199.
Wallstreet Mojo. (2018). Goodwill (Example, Accounting) | How to Calculate Goodwill in
M&A?. [online] Available at: https://www.wallstreetmojo.com/goodwill/ [Accessed 14 Jan.
2020].
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