Understanding AASB 138/IAS 38 for Financial Accounting

This report discusses the AASB 138/IAS 38 accounting standard for intangible assets and the related disclosure requirements. It focuses on the case of Technology Enterprise Ltd and how they should value and disclose their intangible assets in their financial statements.

Running head: Financial Accounting
Financial Accounting
Name of the Student
Name of the University
Author Note

1
Financial Accounting
Executive Summary
The report deals with the AASB 138/ IAS 38 as it show how the company should deal with
the intangible asset and what are the related disclosure which the company should give in the
financial statement. It deals with the company Technology Enterprise and show they should
deal with the intangible asset as they have done the research upon the modification of the
battery and it become successful so the company should know how to deal with the intangible
asset and how it should value the same in the financial book of the company.

2
Financial Accounting
Table of Contents
Introduction................................................................................................................................2
Reduction of Comparability of Financial Statements................................................................5
Understanding of AASB 138/ IAS 38........................................................................................6
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

3
Financial Accounting
Introduction
Financial accounting is the process which keeps the records of the company financial
activities. It is that whether the transaction of the company is been recorded per the
prescribed standard or not. It check whether all the entry are been done in a proper and
systematic manner. As per the given case of the company it should check all the necessary
accounting standard while making the treatment of the intangible asset of the company. The
accounting principles should also be checked by them at the time of doing any entry as per
the intangible asset is been concern (Aasb.gov.au 2019.). As they should also take into
consideration the cost of research and development related to the intangible asset in the
business. AASB 138 is related to intangible asset and the company situated in Australia have
to follow this standard while dealing with the intangible asset of the company. This standard
also apply to the research and development cost which is been there in the intangible asset.
As per the case study is been concern it can be seen that it show that the company name
Technology Enterprise Ltd had undergone into research and development for the purpose of
doing some modification upon the method of recharging the batteries (Arrighetti, Landini and
Lasagni 2015). The report is basically will be upon how the company had done the treatment
related to the expenses which there done by the company Technology Enterprise Ltd so that it
can make a proper accounting treatment for the same. The treatment which is been given by
the company will be from the paragraph of IAS 38/AASB 138.
Accounting for the Project
The technique that is to be used by the company management for the valuation of the
project is by following present value approach as this will help the company to know the
present value of the project which the company will get form the project (Bianchi 2017). It
means what amount of the return the company will able to get from the project. In the given

4
Financial Accounting
case it can be see that if the company follow present value approach than the value of the
design is coming around $4000,0000 but if the company consider fair value approach than
the estimated value of the design is coming $3000,000. So it can be seen that there is a good
difference in the value of the design in both approach so to overcome this problem and to
make proper adjustment the co9mpany should consider the paragraph which are been present
in the standard of intangible asset as IAS 38/ AASB 138.
IAS 38/ AASB 138 – The standard is related to the accounting standard of intangible asset,
the definition which is been laid in the standard related to the intangible asset is that an
intangible asset is the one of type of non-monetary asset and which does not have any
physical form (Gamayuni 2015). So it can be said any asset which does not have any
monetary form or physical existence can be treated as intangible asset. There are two ways of
having intangible asset in the company as they can make intangible asset in the internal
organization or they can purchase it externally by taking the merger and amalgamation of
different company. Intangible assert can only be purchase with the help of merger and
amalgamation so it is very hard for the company to get intangible asset for the company.
Intangible Asset Recognition - As per the standard for the intangible asset as of AASB
138/IAS 38, it contain a paragraph which says that the company should take the intangible
asset in accountability if they see their can be profit to the business in the coming years and
also it will able to take the cost of the reliably of the asset (Helms 2016). So these conclude
that the company remove any expenses and cost related to the benefit and should account the
same. So in the given case as the company Technology Enterprise had to reduce the cost
which they incurred of $1000,000 as a cost upon the asset that should be shown in the
expenses in the financial books of the company.

5
Financial Accounting
Measurement of Intangible Assets – Standard of intangible asset IAS 38/ AASB 138
contain a paragraph 24 which say that an intangible asset is to be measured at the starting
stage in the cost of the asset. So as per the standard the company should record the value of
the asset as $4000,000 as it was the initial cost. The cost or expense which is been spend
upon the intangible asset by the company Technology Enterprise Ltd should be taken into
consideration as an different process which can be used for the analysis of the cost. So the
standard of intangible asset also suggest that the expense which is been incurred by the
company upon the research and development so that expense should be recognised by the
company as a sunk cost expense in the income statement of the company (Li et al., 2014).
There are two ways from which a company can able to have intangible asset in the
business so it can be generated by the company management over the years a can be recorded
the same in the balance sheet of the company (Malackowski et al., 2015). It can be gathered
by way of merger and acquisition of the business so in the case of acquisition the value of the
intangible asset will be the difference between the value of the asset and to the purchased
consideration paid by the company. If there is intangible asset it is been termed as goodwill
and this will be recorded in the consolidated balance sheet of the company. As per the
accounting standard of IAS 38/ AASB 138 the acquitions is the value which company had to
consider and should review the same so that it can get the details of the impairment.
Research Cost – As per the accounting standard AASB 138/ IAS 38, each companies should
require to plan and coordinate the research so that they able to get proper technical
knowledge of the same. As per the case given it can be seen that the company Technology
Enterprise Ltd have conducted the research of the battery so that they can able to increase the
life of the battery and they even got succeed in the research as it become 10 years of the life
so it added a very economic position to the company (Peters and Taylor 2017). So it can be
said that the company have follow all the rules and regulation as per the accounting standard

6
Financial Accounting
and did the best type of research which can be done by them and also it even develop an
different model.
Asset Development – As per the standard of intangible asset AASB 138/IAS 38 it say that
that only the research of the business is over and due to the successful research company is
able to get developed asset. The standard have the provision which state that the company can
only record it after the technical things on the asset is complete and the company can either
able to use it for its own purpose or able to get a price in the market than only it will be able
to recognize it as asset in the company (Vetoshkina and Tukhvatullin 2014). So after
completing the required technical feasibility test company should record it in the balance
sheet of the company and so do the valuation of the asset proper account standard and
principles should be followed by the company. It can be seen from the case study that the
company Technology Enterprise Ltd have spend a huge amount upon the developing the
asset and it can be seen after completing the test company had value the asset as $4000,000.
Reduction of Comparability of Financial Statements
All the accounting standard and principle are been made so that the financial
statement is comparable and each organization should maintain the comparability in the
financial statement. So as per the Australian Accounting Standard Board is that the
applicability is that it able to see is that the process of the amalgamation and also the
valuation of goodwill in cost (Yallwe and Buscemi 2014.). It is also been consider as per the
standard that non-tangible asset should be consider as non-monetary asset and also there will
no physical existence of the same. So it is been clear that the valuation of such kind of asset is
not all fixed so it basically vary from the benefits which will be given by the asset to the
company so it will be consider as per the company to company and it vary very easily. The
company should verify the same as per the benefit so that no overvaluation of the intangible

7
Financial Accounting
asset can take place in the company. The company should also classify each kind of the
expenses as per the financial statements of the company.
As per the accounting standard it contain an provision which state that the company
should recognize the accounting profit which is been generated by the company in regards of
the intangible asset as similar as per the acquisition asset. So the company should do all the
accounting of the asset as per the standard so that it will help them to get a proper value of the
asset and also able to record the capitalization cost which is been incurred upon the
development and research of the asset. The company should present comparability in respect
of the intangible asset so that the financial user of the company can easily compare it with
different company and able to know the performance of the company. The comparison is
done within two companies upon the head like recognition, valuation and measurement of the
intangible asset. The comparison can affect the financial user as well as the company as they
both will able to know where the company is standing.
As per the accounting standard every company should do the accounting of its
expenses regarding the development in an different and correct manner so that it can be easily
understand by the financial user. The company should consider all the cost which are related
to the research of any product or the development so it will be treated as sunk cost in the
income statement of the company. They should also record the expense in the particular
accounting books as per the nature of the expenses.
Understanding of AASB 138/ IAS 38
The standard is related to the intangible asset and also the cost of the development and
research of the same. It is a very important for the company to check the standard before
doing anything in the case of intangible asset as it help them to know how the valuation will
be done and also how the company should disclose it in the financial statement so that each

8
Financial Accounting
user can know what are the details of this standard. The suggest that the intangible asset are
non-monetary asset and which do not have any physical existence. The standard also suggest
the techniques from which the company can easily generate the intangible asset it can be
done by the acquisition and merger of the company and it should be valued as per the
standard.
Conclusion
It can be concluded from the above discussion that the company should follow the
accounting standard related to the intangible asset so that it can able to do proper accounting
treatment to the asset. It help to know that each company should make the financial statement
by using accounting standard so that the understand the report and it will be increase in the
same and the financial user will able to take correct decision regarding the company. As per
the company Technology Enterprise Ltd is been concern they should provide the necessary
disclosure in the notes on account so that the financial users will able to know what are the
implication of the intangible asset is been done in the financial statement.

9
Financial Accounting
Reference
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
[Accessed 14 May 2019].
Arrighetti, A., Landini, F. and Lasagni, A., 2015. Intangible asset dynamics and firm
behaviour. Industry and Innovation, 22(5), pp.402-422.
Bianchi, P., 2017. The economic importance of intangible assets. Routledge.
Gamayuni, R.R., 2015. The effect of intangible asset, financial performance and financial
policies on the firm value. International journal of scientific & technology research, 4(1),
pp.202-212.
Helms, T., 2016. Asset transformation and the challenges to servitize a utility business
model. Energy Policy, 91, pp.98-112.
Li, E.X., Liu, L.X. and Xue, C., 2014. Intangible assets and cross-sectional stock returns:
Evidence from structural estimation. Available at SSRN 1560014.
Malackowski, J.E., Cardoza, K.M., Aylward, S.L. and Gray, C., Ocean Tomo LLC,
2015. Marketplace for trading intangible asset derivatives and a method for trading
intangible asset derivatives. U.S. Patent 9,058,628.
Peters, R.H. and Taylor, L.A., 2017. Intangible capital and the investment-q relation. Journal
of Financial Economics, 123(2), pp.251-272.
Vetoshkina, E.Y. and Tukhvatullin, R.S., 2014. The problem of accounting for the costs
incurred after the initial recognition of an intangible asset. Mediterranean Journal of Social
Sciences, 5(24), p.52.

10
Financial Accounting
Yallwe, A.H. and Buscemi, A., 2014. An era of intangible assets. Journal of Applied Finance
and Banking, 4(5), p.17.