ACC701 Financial Accounting: AASB 138/IAS 38 Intangible Assets

This report delves into the accounting standards AASB 138 and IAS 38, focusing on the valuation of intangible assets. It examines the recognition and measurement of internally and externally generated intangible assets, highlighting the distinctions between them. The report discusses the importance of proper disclosure and explores the reluctance of companies to recognize internally generated intangibles. It provides an overview of intangible asset characteristics, including examples of both recognized and unrecognized assets. The report covers measurement models, including cost-based and valuation-based approaches, and explores the complexities in determining the fair value of these assets. The report also touches upon the impact of these standards on financial statements and business valuation, with an example from an Australian company. The report concludes by summarizing key points and referencing relevant sources.

Running head : AASB 138 / IAS 138
AASB 138/ IAS 38
NAME OF THE STUDENT
NAME OF THE UNIVERSITY
AUTHORS NOTE

1AASB 138 / IAS 38
Executive Summary
This purpose of this paper underlines the valuation of internally generated intangible
assets and also those intangible assets that has been acquired by the combination of business.
The various accounting techniques that mark the valuation of internally generated intangibles
asset will be revalued and further recognition of those assets will be taken into account and
further proposals are going to be made for the efficiency of the measurement and recognition
of all kinds of internally generated intangible assets.

2AASB 138 / IAS 38
Table of Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................2
Recognition................................................................................................................................2
Measurement..............................................................................................................................3
Distinguishes Between Internally Generated Intangible Assets and Externally Generated
Intangible Assets....................................................................................................................3
Disclosure...................................................................................................................................5
Companies are reluctant to press for changes in the AASB 138 to Require More
Recognition of the Internally Generated Intangibles.............................................................6
Characteristic of Intangible Assets.............................................................................................6
Intangible Assets Un-recognised................................................................................................7
Conclusions................................................................................................................................7
References..................................................................................................................................9

3AASB 138 / IAS 38
Introduction
Over the recent years it has been noted that more focused have started to be put on the
matter, where the calculation or rather the accounting of the intangible assets are involved.
This is due to the fact that it has been recognised more and more of the valuation these
intangible assets provide in the profits of the company. It has the power to create a value of
the entity. It should not be ignored the competitive advantages these resources have on the
company.(AASB 2008)
The Australian Accounting Standards Board (AASB) is the body that are responsible
for setting the standards and act like a regulating body for the regulation of the standards
specified. The requirements which the AASB prescribed are followed by all the companies,
non-profit organisations and also the public sector (AASB 2009). It is the responsibility of
the AASB to develop the standards and the interpretation of the events that will likely to
effect the financial statements of a enterprise. The AASB 138 lay out the description related
to the intangible assets of the organization. It has incorporated IAS 38 and it is issued by the
International Accounting Standard Board (IASB) (Anh, Thị and Tú, 2019).
Recognition
In order to understand the AASB 138 it’s important to understand the intangibles
assets of the company. The intangible assets are those, which cannot be seen physically;
however they possessed huge competitive advantages for the company. There are several
factors that are required to be taken under consideration while evaluating the intangible
assets. The intangible assets are required to be the non-monetary, which means that those
assets should be that those assets cannot be valued in terms of fixed amounts or the amounts
that can be drawn or determined. The assets must not have any kind of physical essence
attached to it, thus it can be referred to as the intangible assets for example patents or trade

4AASB 138 / IAS 38
mark. There should be a proper control over the usage of such assets, which means that it is
needed that the person has control and can use the assets and reap economic benefits from it.
Along with that there must be the power to stop others from reaping the economic benefits
from the usage of such assets. Economic benefits that will arise in future are a vital factor in
the recognition of the intangible assets and those benefits should be in the form of revenue
from sales and also if the assets induced in savings in the cost of the product and services.
However, example of the intangible assets are patents, soft wares, copyrights, mortgage
services, franchises, loyalty of the customers, market shares and so on. However there are
many intangible assets that does not meet the requirements of being the intangible assets as
per the AASB 138 and therefore, it is required to consider all the factors as per the AASB
138 as there are many examples that are not recognized as assets for example brands, internal
goodwill, publishing titles and the lists of the customer (Li, C., 2019).
As per the IAS 38 there is a difference in the treatment of accounts in the
development stages and the research stage due to the fact that during the development stage
there can be seen the strong results or the application of the research that helps in the
determination of future benefits. Also the IAS 38 states that the cost of the development of
the internally generated brands can never be recognized as the intangible assets as it cannot
be distinguishable from the expenditure that has been incurred for the development of the
entity.
Measurement
Distinguishes Between Internally Generated Intangible Assets and Externally
Generated Intangible Assets
As per AASB 138 all the assets are firstly needed to be measured via cost. Therefore,
when the assets has been recognized as the intangible assets as per the factors listed in the

5AASB 138 / IAS 38
AASB 138, then those assets are valued either as per the revaluation or the cost model, where
the specific requirements of each model is specified in the AASB 138. It has to be noted that
the AASB 138 also establishes the fact that all the intangibles assets including their various
classes are required to be disclosed making proper distinguishes between the intangibles
assets both which are generated internally and also the other intangible assets (LegalVision,
2020).s
As per the IAS 38 there has been the exploration of various types of the intangible
assets that are generated internally. This has been done in order to verify the correctness of
the accounting treatment that is getting used in the accounting of those intangible assets that
are internally generated and therefore there has been classification based on two broad
categories as follows. One being the planned intangible assets that are internally generated,
where all the intangible assets gets included that has been used during the specific period of
the project. The second one being the unplanned internally generated intangible assets, where
all the intangible assets that are generated from the day to day operations on then regular
basis in the business (Alawey, Khalaf and Ahmed 2019).
There are two configurations and models of cost that are applied to the internally
generated intangible assets and those applied for the acquired intangible assets in a business
and those are:-
 The cost based model that is based on the recognition of cost of the initially
generated intangible assets and
 The valuation based model, where there is the initial recognition of the
intangible assets that are acquired during the course of the business
combination.

6AASB 138 / IAS 38
There are further two conditions that has already been specified about in the
recognition section, where it shows the significant differences between the two models in
terms of their probable economic future benefits and their measurement and how much they
are reliable. However, it has to be noted that in the value based method both the conditions
are required to be met. It has been seen that the probable economic future benefits always get
met in terms of irrefutable presumptions. Therefore, in the IAS 38 establishes that the fair
value of the intangible assets help in the determination of the probable future outflow that are
likely to arise in the entity and it also helps in the market expectations of the gains that are
suppose to arise in the future. IAS 38 establishes that “the fair value of the intangible assets
that are acquired by the business combinations can easily be measured with the sufficient
reliability and has to be recognized separately from goodwill. However, if the intangible
assets acquired in the business combination has a useful finite life then there is rebuttable
presumption that the fair value can be measured reliably” (Blackwell et al 2019). However, it
is difficult to measure the fair value of the intangible assets which has an indefinite useful life
that has been acquired in the course of business.
Furthermore, it has been noted that it is easier to measure the fair value of the
internally generated intangible assets than calculating the fair value of the intangible assets
that are acquired in the course of the business. This is due to the fact that the entity has more
information about their own assets rather than those assets that they have obtained in the
business combination.
Disclosure
It has to be noted that as per the AASB established section, if the assets are note
recognized, measured or disclosure in the financial statements as per the requirements stated
by the AASB 138, then it might get expensed as well as penalized or rather even capitalized,

7AASB 138 / IAS 38
which will further lead to the reduction of the profits of the business and also will have an
impact on the taxes. The way the assets are classified, further adds value to the business. It
has to be noted if the intangibles assets are classified properly then it means that it can be
reflected in the balance sheet of the business; however leading to the increase in the valuation
of the business (Lowe and Middleton 2019).
AASB 138 specifies several conditions as per which the assets can be classified and to
understand whether or not they are the intangible assets of the company, In doing so properly
will ultimately leads to the inclusion of those assets will definitely ensure the rise in the
valuation of the business and the company.
Companies Reluctance To Press For Changes In The AASB 138 For More Recognition
Of The Internally Generated Intangibles
It has been noted that managers generally prefer to inflate the future profits. It has
been noted that all the massive investments in the development and research are written off
and therefore, it can happen that all the earnings and revenue that is earned from these
acquisitions, can go free without any claims or the liens leading to much easier for them to
share and transfer those acquisitions, which means the amortization of the intangible assets.
The probable futuristic effects of the ratios like the rate of return in the assets and equity are
better if the write off occur at the present and just one time instead of periodic amortisations
later (Turlington, Fafatas and Oliver 2019)
Investors generally prefer writing off one time and they take them as the one-time
consequences for the valuation. They prefer to bear the hit of one-time write off over the
periodic amortisations. Investors discount the effect that the one-time write off has over that
period and however prefer the improved profitability that will arise over the subsequent
years.

8AASB 138 / IAS 38
Characteristic of Intangible Assets
There is an Australian company Healthy Communication whose asset part of the
balance sheet is constitutes of either cash or the assets in the intangible form. In the 2017-
2018 annual report it has been noted that out of their combined assets of $40 million, there
were cash assets amounting to $ 15.4 million and the intangible assets were $3.4 million and
the plant and machinery were only amounting to $ 1.2 million. There were a characteristic of
change
The company was having a difficult phase when they had plans to sells prescripted
information that has been collected from the general practitioners, and to disclose the third
parties that were possibly pharmaceuticals companies. Therefore the matter has been referred
to the privacy commission and however it has been clear that since the company has an
information that does not give them the right to utilise it as per their own discretion. Though
Healthy Communication owns a particular information; however it does not give them the
same ownership rights just like the ownership of plant and machinery.
Intangible Assets Un-recognised
According to the annual reports of 2018-2019, the total assets of the $14.93 billion out
of which 11.12 million has been devoted to the intangible assets. However the stuckey
believes that the intangible assets of the company are far greater importance for the company.
Qantas forms an important brand which is the intangible assets and they maintain their planes
which is the heap of capital-intensive tangible assets. When the Qantas were the under-
performer in the industry, they have eternally came out and performed extremely well.
Conclusions
This paper focusses on pressing the fact that more internally generated intangible
assets should be a part of the financial statement, where the AASB establishes asset as per the

9AASB 138 / IAS 38
planned and unplanned one and the AASB proposes the application of the technique based on
the hypothetical combination of business.
As far as measurement is concerned it has been proposed that the intangible assets
that are generated internally required to be measured at the fair value in order to improve the
effectiveness of the values presented in the financial statements for various stakeholders and
for the probable investors and thereby pressing on the application of the technique based on
the hypothetical combination of business in all kinds of internally generated intangible assets.
The AASB also pointed out that if the IASB wanted the valuation of the intangible
assets that are generated internally at the fair value then they have to make certain
information related to the methods adopted for the fair value measurement available in the
balance sheet footnotes and even those assets that does not meet the conditions of the
recognition also required to be specified in the footnotes. Furthermore the AASB proposes to
make use of the disclosure only policy for those internally generated intangible assets that
does not met the conditions of the recognition. AASB unlikely like the IAS 38 does not
accept the rebuttable presumption of reliability in the determination of the fair value of the
intangible assets that posses the finite useful lives. However the reliability does not exist
when the estimates that are used to measure the fair value and there are different probable
outcomes along with different probabilities and therefore the measurement of fair value
surrounds with uncertainty. Infact the expenditure that are related to the intangible assets that
are generated internally and their cost are difficult to identify and measure and it has been
evident that if the greater amount of such expenditures and its measurement at the fair value
would however lead to the unreliable information being present in the financial statements.
Furthermore even the investors are hesitant at the recognition of periodic amortisations and
however prefer the usage of one-time write off.

10AASB 138 / IAS 38

11AASB 138 / IAS 38
References
“Initial accounting for internally generated intangible assets”
AASB (Australian Accounting Standards Board) (2008), Discussion Paper titled
AASB (Australian Accounting Standards Board) n. 138 (2009),
Alawey, M.H., Khalaf, Y.M. and Ahmed, Y.A.K., 2019. Measurement and disclosure of
intangible assets and their implications for investment decisions A comparative application
study in light of the requirements of IAS 38 and the uniform accounting system. Tikrit
Journal Of Administrative and Economic Sciences, 4(44), pp.1-27.
Anh, T.C., Thị, N.B. and Tú, O.L.T., 2019. Relationship between Experts and Enterprises
Viewed via the IFRS Application: An Empirical Study in Vietnam. Asian Economic and
Financial Review, 9(8), pp.946-963.
Blackwell, B., Bodle, K., Hunt, J., Hunter, B., Stratton, M.J. and Woods, M.K., 2019.
Methods for Estimating the Market Value of Indigenous Knowledge Intangible Assets.
LegalVision. (2020). AASB 138 (Intangible Assets) Summary for Businesses - LegalVision.
[online] Available at: https://legalvision.com.au/aasb-138-intangible-assets-summary-for-
businesses/ [Accessed 9 Jan. 2020].
Li, C., 2019. Analysis of annual report of Meridian Energy Limited for 2018. The Frontiers
of Society, Science and Technology, 1(4).
Lowe, P. and Middleton-Jones, R., 2019. Financial statements.
Turlington, J., Fafatas, S. and Oliver, E.G., 2019. Is it US GAAP or IFRS? Understanding
how R&D costs affect ratio analysis. Business Horizons.