Answer to Question VI Introduction to AASB 138

FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING 2 2 FINANCIAL ACCOUNTING FINANCIAL ACCOUNTING Author’s Note: Answer to Question VI 2 Introduction to AASB 138 “Intangible Assets” 2 Recognition Criteria 3 Disclosures 4 Limitation of AASB 138 4 Reference 6 Answer to Question VI Introduction to AASB 138 “Intangible Assets” Intangible assets are assets which assets which are not physical in nature. As per the standard issued by AASB 138 which is on Intangible Assets,

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

1
FINANCIAL ACCOUNTING
Table of Contents
Answer to Question VI....................................................................................................................2
Introduction to AASB 138 “Intangible Assets”...............................................................................2
Recognition Criteria.........................................................................................................................3
Disclosures.......................................................................................................................................4
Limitation of AASB 138.................................................................................................................4
Reference.........................................................................................................................................6

2
FINANCIAL ACCOUNTING
Answer to Question VI
Introduction to AASB 138 “Intangible Assets”
Intangible assets are assets which assets which are not physical in nature. However, such
are considered as an asset as it helps the business in generation of revenues. The examples which
can be given for intangible assets are goodwill, copyrights, patents and other similar kinds of
assets (Ivanov and Mayorova 2015). In other words, intangible assets of the company can be
used by the business to generate revenues for the business. Most of the companies have some
intangible assets which it shows in the balance sheet of the company. The most common
intangible asset which is shown in the financial statement of most of the companies is goodwill
which can be purchased or self-generated. Accounting for such intangible assets. As per the
AASB 138 an asset is identifiable if it is separation or is capable of being separated or the assets
which can arise from contractual or other legal rights which is associated with the asset (Hu,
Percy and Yao 2015).
As per the standard issued by AASB 138 which is on Intangible Assets, states the initial
recognition of intangible assets and also disclosure of the same (Russell 2017). The initial
recognition criteria for intangible assets are given below in details:
1. Separately Acquired Intangible Asset: Such assets are recognized at cost which consists
of purchase cost and cost directly attributable to the assets (Legislation.gov.au. 2018).
2. Intangible assets acquired in a business: The assets which are acquired in business
combination are measured at fair value at acquisition date.
3. Intangible assets which are acquired free of charge: The intangible assets which are
acquired by the business free of charge are recognized at fair value (Legislation.gov.au.
2018).

3
FINANCIAL ACCOUNTING
Recognition Criteria
As per the provisions of AASB 138, after initial recognition either cost model or revaluation
model is followed and even all other assets in the same class will be recognized under the same
model (Carvalho, Rodrigues and Ferreira 2016). The methods which is used for recognition is
based on either cost model or revaluation model as per the requirement of AASB 138
(Legislation.gov.au. 2018). The methods which are used for the measurement of Intangible assets
are given discussed below:
1. Cost Model: Under this method intangible assets are measured at cost less accumulated
charges of amortization and also impairment loss.
2. Revaluation Model: In this method, an intangible asset is measured at revalued amount
and this method also considers accumulated amortization and accumulated impairment
loss.
The basis of charging amortization of an intangible assets will be on the life of the intangible
assets of the company (Bauman 2013). Intangible assets which have a finite life is to be
systematically amortized over the useful life of the asset. In case of an intangible assets that arise
from contractual or other legal rights, the management can reduce the value of the asset over the
expected useful life of the asset.
In case of an intangible assets with an indefinite life, the assets shall not be amortized and
rather it will be subjected to impairment tests whenever there is an indication that the assets
might be impaired which will be in accordance with IAS 36 which will be dealing with
Impairment of Assets. Moreover, there is a provision in the standard which provides that the
assets are to be derecognized in case the assets no future benefits or the intangible assets can be
also be derecognized when the asset is disposed. The gain or loss which arises from

4
FINANCIAL ACCOUNTING
derecognition of the asset is the difference between the any proceeds which is received from the
disposal of the intangible assets and the actual carrying amount of the asset (Ji and Lu 2014).
However, the gains which are procured from disposal of the intangible asset are not to be
classified as revenue.
Disclosures
As per the AASB 138, the various disclosures which are needed to be provided in the
standard are given below in point form:
 The useful life and amortization rate of the intangible assets
 The method in which the amortization is charged on the asset.
 The gross carrying amount of the intangible asset.
 The accumulated amortisation and impairment loss which is to be charged on the
intangible asset.
 The basis of determining whether the intangible asset has an indefinite life.
 The various commitments which the business has made to acquire the intangible assets.
Limitation of AASB 138
The intangible assets of the company generally have various complex issues which are to
be handled properly by businesses for effective disclosures. Therefore, Australian Accounting
Standard Board (AASB) has issued the respective accounting standard with relation to intangible
assets. The board has issued AASB 138 which relates to intangible assets in order to ensure that
the treatment of intangible assets of the business are appropriately done (Legislation.gov.au.
2018). However, the standard does not cover all aspects and certain limitation still exists which
are discussed below:

5
FINANCIAL ACCOUNTING
1. In most cases, manipulation may exist in the valuation of intangible assets of the
company which the standard issued by AASB is not able to solve. The figures which are
given in the intangible assets of the company may be fairly represented which means it
might be overvalued.
2. In some cases, other standards also apply together with the standard of intangible assets
of the business. The intangible assets of the business might not be compatible with other
accounting standard.
3. AASB 138 Intangible assets might also not be applicable where other financial
statements are applicable such as financial instruments which is covered in AASB 132
Financial Instruments (Legislation.gov.au. 2018).
4. The standard relating to intangible assets are not applicable to the recognition and
treatment of evaluation and exploration assets which is related to evaluation and
exploration of mineral resources. This does not fall under the purview of the AASB 138
Intangible Assets (Legislation.gov.au. 2018).
5. In addition to this, the standard is not able effectively applicable in case of self-generated
assets such as goodwill which is self-generated by business.

6
FINANCIAL ACCOUNTING
Reference
Bauman, M.P., 2013. The adequacy of fixed asset disclosures under US GAAP. Research in
Accounting Regulation, 25(2), pp.149-156.
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.
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.
Ivanov, G. and Mayorova, E., 2015. Intangible assets and competitive advantage in retail: case
study from Russia. Asian Social Science, 11(12), p.38.
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.
Legislation.gov.au. (2018). AASB 138 - Intangible Assets. [online] Available at:
https://www.legislation.gov.au/Details/F2005C00146 [Accessed 2 May 2018].
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting &
Finance, 57(S1), pp.211-234.