Financial Accounting and Reporting: AASB 138 Intangible Assets Report

This report analyzes the application of AASB 138, Intangible Assets, in the context of Pewter Limited's acquisition of Fishy Tales Limited. The report addresses the accounting treatment of intangible assets like fishing licenses and goodwill, acquired in the business combination. It discusses the implications of the acquisition on Pewter Limited's financial statements, particularly the treatment of repair costs related to an environmentally conscious initiative and the impact on goodwill, amortization, and impairment charges. The report references relevant paragraphs of AASB 138 and provides recommendations on accounting practices, emphasizing the importance of considering the marketing manager's advice regarding the treatment of repair costs as amortization expense. It also highlights the need for annual impairment tests and the challenges in measuring the internal transfer of brand names due to the absence of an active market.

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial Accounting and Reporting
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1FINANCIAL ACCOUNTING AND REPORTING
McKenzie and Associates
668 George Street
Melbourne, VIC 3000
6 July 2018
Mr Con Pewter
Managing Director
Pewter Limited
Respected Mr Pewter:
Based on the provided information, the relevant financial standard that would be
applicable for the acquisition of Fishy Tales Limited is “AASB 138 Intangible Assets”. As
mentioned in “Paragraph 9 of AASB 138”, the business organisations often acquire assets and
liabilities on acquisition of trademarks including publishing titles and brand names. One of the
items under these headings includes fishing licences and it is identified that both Pewter Limited
and its acquired unit, Fishy Tales Limited are the producers of canned and frozen fish. In
addition, it has been identified that goodwill related to Fishy Tales Limited has been acquired in
business combination. In this context, “Paragraph 36 of AASB 138” states that intangible assets
like goodwill acquired in business combination might be differentiable; however, with an
associated contract, identifiable asset and liability.

2FINANCIAL ACCOUNTING AND REPORTING
In accordance with the provided information, it could be stated that Pewter Limited has
boosted its environmentally social image by assuring to repair any damage to the ship, Steve
Irwin due to the aim of disrupting the Japanese whalers. As per “Illustrative Example 7 of
AASB 138”, it is necessary for the acquiring firm to renew the trademark continuously and thus,
evidence should be inherent in supporting its ability (Steenkamp and Steenkamp 2016). Evidence
needs to be gathered through product life cycle studies, trends in market, competition and
environment and opportunities related to brand extension.
In this case, it is not possible to treat the repair cost as expense; instead, the effect would
be on goodwill. Amortisation and impairment charges are to be deducted from goodwill, which
would have direct impact on the balance sheet statement of the organisation (Hoyle, Schaefer
and Doupnik 2015). Since the repair cost would not be treated as expense, there would be no
impact on the profitability of Pewter Limited. According to “Paragraph 78 of AASB 138”, there
is no active market for brands like fishing licences due to their uniqueness. Even though such
intangible assets are acquired, the contract is negotiated between the purchaser and the seller due
to relatively infrequent transactions. According to the provided information, Pewter Limited has
acquired its subsidiary and hence, there is internal transfer of intangible asset within the business
organisation.
In addition, such internal transfer of brand name could not be measured due to the
absence of any active market; the carrying value of the asset is required to be re-valued at the last
revaluation date by subtracting accumulated amortisation and impairment losses. However, in
this case, amortisation expense could be debited, while the accumulated amortisation is credited
in accordance with AASB 1018 (Scott 2015). This could minimise the profitability of the
organisation and as a result, retained earnings could decline as well. The impairment of asset

3FINANCIAL ACCOUNTING AND REPORTING
would be carried out annually in accordance with AASB 136 and at the time indication is
observed, the asset needs to be impaired. These are the following explanations that Pewter
Limited needs to take into consideration in preparing its restated financial statements after the
acquisition. Hence, the advice of the marketing manager of Pewter Limited should be considered
by debiting the repair cost as amortisation expense and crediting accumulated amortisation.

4FINANCIAL ACCOUNTING AND REPORTING
References:
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
LegalVision., 2018. AASB 138 (Intangible Assets) Summary for Businesses - LegalVision.
[online] Available at: https://legalvision.com.au/aasb-138-intangible-assets-summary-for-
businesses/ [Accessed 8 May 2018].
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Steenkamp, N. and Steenkamp, S., 2016. AASB 138: catalyst for managerial decisions reducing
R&D spending?. Journal of Financial Reporting and Accounting, 14(1), pp.116-130.