Accounting Standards Analysis: Brands, Goodwill, and Restructuring

This report provides an in-depth analysis of the Australian Accounting Standards (AASB) concerning intangible assets, focusing on the recognition and measurement of brands under AASB 138. It discusses the criteria for identifying and valuing these assets, including the challenges standard setters face in recognizing all brands. The report further explores the circumstances under which goodwill is recognized and subsequently written off, and the implications of significant goodwill write-offs, suggesting potential flaws in investment strategies. Additionally, it examines accounting for restructuring provisions under AASB 137, with a case study on restructuring provisions in business acquisitions, detailing how the provisions are created and the impact of amendments to acquisition activities. The analysis covers the application of these standards, providing a comprehensive understanding of their practical implications.

Running head: AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS
Australian Accounting Standards Analysis
Name of the Student
Name of the University
Author’s note

1AUSTRALIAN ACCOUNTING STANDARDS ANALYSIS
Executive Summary
The report discusses on the accounting criteria that is set up by the Australian Accounting
Board regarding the principles of intangible assets. The recognition criteria and the
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 subsequently 2
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 expenditures that 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
business combination (Kabir and Rahman 2016). These assets should be identified
individually or recognised separately, they should be part of the business combination.

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 of business 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
management or significant reorganisations within the business (Aasb.gov.au 2019).
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.