Financial Accounting: AASB 138 and the Valuation of Intangible Assets

This report provides an in-depth analysis of AASB 138, the accounting standard for intangible assets. It examines the definition and characteristics of intangible assets, such as goodwill, intellectual property, trademarks, patents, and copyrights. The report explores the accounting treatment of these assets, including initial recognition, measurement at historical cost, and subsequent impairment. The case study revolves around a technology company involved in R&D, highlighting the challenges in valuing an intangible asset related to a new battery technology. It discusses the importance of fair value, the impact of accounting choices on financial statement comparability, and the implications of management's valuation attempts. The report also includes a response to a CEO's concerns about accounting practices, emphasizing the importance of adhering to accounting standards to provide transparent and reliable financial information to investors. Finally, the report concludes with a summary of the key findings and recommendations regarding the proper accounting for intangible assets. References to relevant literature are also provided.

FINANCIAL ACCOUNTING
2019

AASB 138
Executive Summary
The main aim of the report is to shed light on the concept of AASB 138 that is accounting for
financial assets. It reduces the comparability of the financial statements. The entire study is based
revolving around Technology Enterprises that functions in R&D and destined to produce a
modification of recharging battery utilized in the products. The report initiates with the
introduction followed by the project accounting and the problem present in the overall working.
Lastly, a response to CEO has been provided.
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Contents
Introduction.................................................................................................................................................2
Accounting for the project...........................................................................................................................2
But the right contention is going to be the following:.................................................................................3
The extent to which the rules of AASB 138 reduce the comparability of financial statements...................3
Response to CEO.........................................................................................................................................4
Conclusion...................................................................................................................................................6
References...................................................................................................................................................7
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AASB 138
Introduction
An asset can be termed as a physical quantity unit that is having utility and is helping the
organization to generate revenue thereby improvising the profit statement of the firm. Intangible
assets are those assets of an organization which are not having any kind of physical existence
because of which we cannot be seen, touched or felt physically but the benefit the organization in
many different ways if managed properly (Murphy, 2015). The assets of an organization are very
important for generating revenue, earning profit and benefiting it in many other ways. Intangible
asset generally includes goodwill, intellectual property, trademarks, patents and other copyrights
that are being owned by the organization. Intangible assets do not derive any kind of benefit
from the contractual claims (Melville, 2013).
Accounting for the project
It should be clearly noted that intangible assets of an organization will only be considered to be
economically beneficial if they can help the organization to generate revenue in the future. Also,
it is very important that the income generated can be quantified in nature because this is the only
situation in which it can be recognized. Intangible assets also require time to the time element of
research and development (Melville, 2013). The costs that are incurred in order to maintain the
intangible asset should be added to the capital assets in order to fulfill the criteria’s as per IAS 38
in which have been clearly stated that the assets must be valued at the cost of acquisition value
only. There should not be any other value that will be used by the organization to value its assets.
Every organization uses a different method in order to carry out the evaluation processes. The
top-level management structure of the organization tries to maintain proper research and
development of asset so as to improvise the financial statements of the organization (Bauer &
Hann, 2010). The top level management of the organization wants to show the net worth of
intangible assets to be worth $4 million which is $3 million more than the actual cost. It was
stated by the accountant that in accordance with the accounting standards, intangible assets are
measured at their historical cost. The accounting standards AASB 138 and IAS 38 clearly states
that the intangible assets should be measured at the historical cost. Any other costs or revenue
that has been incurred by the organization for that particular asset should also be treated
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AASB 138
accordingly (Mersland & Urgeghe, 2013). The top level management of the organization is of
the view that the accountant is not dealing fairly with the organization and is inclined towards the
investors so that their project can be completed successfully by earning maximum profit. the
organization also believe that the accounting principle used by the accountant are restricting the
organization from growing and hence these conservative accounting principles are decreasing the
share price of the company because of which it will make the investors believe that the project
was a failure and nothing worked in accordance with the plan that was being ascertained by the
organization (Henry & Hicks, 2015).
But the right contention is going to be the following:
There are two situations within which the organization has to make a choice. The organization
can either record the value of the asset as $1 million or show it in the balance sheet at the
acquisition cost from which accumulated impairment have been deducted. It is observed that the
intangible assets are written off or impaired on the basis of the approximate useful life. However,
if any situation the accountant is able to clearly evaluate the actual fair value of the intangible
asset, the same can be recorded in the balance sheet. The fair value of the intangible assets is a
representation of the market value of the net realizable cost of the asset that is owned by the
organization. The top-level management structure of the organization was trying to include the
value of the assets. They wanted to record the intangible assets at and value of $4 million which
was $3 million more than the actual cost. This will not only inflate the balance sheet by a total
net amount of $6 million but will also make the balance sheet vulnerable in nature. These values
not at all are acceptable in nature because of which if they will be mentioned in the balance
sheet, it will put a false picture to the investors and other stakeholders.
The extent to which the rules of AASB 138 reduce the comparability of
financial statements
There are multiple ways present that can be used by an accountant in order to record the value of
the intangible asset in the financial statements. For the purpose of research and development
expenses, it is observed that the intangible assets are being recorded at their cost of the
acquisition value. This cost of acquisition values is observed to include different type of
expenses that are being incurred by the organization for bringing effective changes and
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AASB 138
researches while using the intangible assets (Madura & Fox, 2011). In the personality was
observed that the research and development costs valued up to be $1 million but were of no use
because the fair market value and liquidation scenario of the firm helped to determine the value
that was needed to be recorded in the books of account. It is a very important task for the
organization to determine the value of the intangible asset. The determination of this value can
be evaluated with the help of an accounting team that presents viable data. The management
structure of the organization is observed to compute the correct value by the use of proper
research and development techniques for the calculation of fair value (Laux, 2014). The values
that are being determined by the organization are found incorrect, can be very harmful to the
business. It has been clearly stated in the IAS 38 that any kind of wrong practice or evaluation of
intangible asset at the acquisition cost will be illegal in nature if not determined at the fair market
value.
It is of common knowledge that intangible assets cannot be revalued or impaired during their
useful life. The restrictions present in the accounting policies make it difficult for the accountants
to prepare and compare the financial reports. The method of valuation that is being used by
organizations can be different for various businesses while valuing the intangible assets at cost or
fair value. Also, the changing values make it necessary for the organization to compare the
results (Albrecht, Stice & Stice, 2011) Every organization owns intangible assets like Goodwill,
generated goodwill and accidental Goodwill which are needed to be valued properly. If the value
of assets recorded is observed to be higher in the financial statements of the organization then it
is incorrect or illegal in nature.
The organization is having the capability to value the intangible assets at the fair market value.
The organization should mention the source of computation so that reliable information is being
provided in the financial statements which will help to increase the strength of the organization.
The increase in the value of investments will also help the organization to increase the profit that
will further improve the share price of the organization (Lister, 2018).
Response to CEO
Intangible assets of an organization are the invisible investments of the business that are helping
it to increase or decrease the financial position of the organization in the market. Hence, it is very
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AASB 138
important for the organization to evaluate the actual price of the intangible assets. Auditing
standard AASB 138 and IAS 38 clearly states the methods of classification, treatment of profit
and valuation of intangible assets.
The investors and the stakeholders of the organization completely depend on the financial
statements of the organization for conducting the decision making task. Hence, if a false picture
is portrayed by the company in the financial statements then the investors will make inefficient
decisions and damage will be suffered by them. Hence, in order to make the investors believe in
the organization, proper evaluation techniques should be used for valuing the intangible assets of
the organization. It was previously observed that the organization was not having proper
accounting skills. Also, the accountants were using methods of inflating the prices of the
intangible assets to improvise the reputation of the organization. More than $100,000 was spent
by the organization for the evaluation purposes and purchase of alternative materials. $700000
were spent for designing and constructing the model and prototype that were going to be used by
the organization for estimation of the values of intangible assets.post was also being incurred by
the organization for training the workers and employees to understand the functioning of the new
and improved methods that was going to be adopted by the organization. The total value which
was estimated using the present technique amounted to $4 million. Because incurred by the
organization while designing the procedures should also is addressed. Every party is having a
different Outlook for the evaluation processes that are been opted by the organization for valuing
intangible assets.
It has been mentioned by the accountant that the final book of accounts has not been produced
but he sure that the valuation of the intangible assets has been done in accordance to the
accounting standards AASB 138 and IAS 38. The valuation of the intangible assets have been
done in accordance with the historical costs and also the cost that has been incurred after the
capitalization working included as revenue expenses and were treated accordingly (Hamilton,
Hyland & Dodd, 2011)
The top level management of the organization tries to determine whether the accountant is able
to evaluate the value of assets by fair means or not. The business of the organization is
continuously growing and earning a profit that will be very good for it in the future. The use of
proper accounting principles will not only help the organization to grow but will also when the
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AASB 138
trust of the investors because of which the capital can be increased. The acquisition cost of the
asset was valued at $1000000 and also the fair market value is ascertainable which will help the
organization to gain an advantage in the market. It is very unethical for an organization to show
the higher value of financial statements and misleading the investors and stakeholders.
Conclusion
It was clearly observed that the organization was trying to remove the risks from the investors by
trying to create a false impression of the company. The company tried to falsify the financial
statement of the organization by inflating the values and not highlighting the points in the notes
to accounts. This method not only helped the organization to increase the share price or the
shares of the company but it led the asset's share price to rise immensely. This also led to an
overall increase in the value of the financial statements of the organization because of which the
company stood strong in the market. The organization should have noted all the points in the
notes to accounts or alternatively it would have recorded the value of assets at the fair market
value and mentioned the sources of the computation so that the information could have been kept
reliable and the trust of the investors could have been maintained. The accounting practices that
have been used by the organization will not only help to increase the value of assets in the
financial statement but will also increase the profits that are being earned by the firm. The
increase in profit will further help the organization to attract more investors and also increase the
share price at the same time.
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References
Albrecht, W., Stice, E. & Stice, J. (2011) Financial accounting. Mason, OH: Thomson/South-
Western.
Bauer, R. & Hann, D. (2010) Corporate environmental management and credit risk. Maastricht
University.
Hamilton, K., Hyland, B. and Dodd, J. L. (2011) Impairment: IASB-FASB Comparison. Drake
Management Review. 1(1), 55–67. Available from:
https://pdfs.semanticscholar.org/8d8f/5fd070193d6fa52e79d1dee9cc6632159d8a.pdf [Accessed
10 May 2019]
Henry, B. & Hicks, M. (2015) A Survey of Perspectives on the Future of the Accounting
Profession. The CPA Journal, 85(8), 6. Available from:
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/
education/shaping-the-future-final-report.pdf?la=en [Accessed 10 May 2019]
Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting.
Accounting and Business Research. 44(4), 380-382. Available from:
https://doi.org/10.1080/00014788.2014.897867
Lister, J. (2018). Advantages and Disadvantages of Financial Risks Within Companies.
Available from: https://smallbusiness.chron.com/advantages-disadvantages-financial-risks-
within-companies-16048.html [Accessed 10 May 2019]
Madura, R., & Fox, J. (2011). International financial management (2nd ed.). South Western
Melville, A. (2013). International Financial Reporting – A Practical Guide (4th ed). Pearson,
Education Limited, UK
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Mersland, R., & Urgeghe, L. (2013). International Debt Financing and Performance of
Microfinance Institutions. Strategic Change. 22, 36-47. Doi:10.1002/jsc.1919.
Murphy, G. (2015) A vision for the future: by using the most current technology and keeping
their skills up to date, management accountants can enhance their careers and their organizations.
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