Financial Reporting: IAS 38 Adoption Impact in Australia and Europe

This report critically analyzes the impact of adopting IAS 38 (International Accounting Standard 38) and its equivalent standards on financial reporting, focusing on the Australian and European contexts. The report begins by establishing the importance of accounting standards in ensuring the credibility and transparency of financial management. It explores the implications of IAS 38 adoption in Australia, highlighting changes in the recognition, measurement, and treatment of intangible assets, and its anticipated effects on financial statements. The report then examines the impact of IAS 38 in Europe, particularly in Italy, and the stringent requirements for capitalization of costs. Furthermore, it provides a global perspective on IAS 38, discussing research findings on the inclusion of 'other intangibles' and the significance of intangible assets in various industries. The report also addresses concerns about companies refraining from disclosing information related to intangible assets. The financial consequences, such as changes in debt-to-equity ratios and the impact on loan contracts, along with social consequences, such as brand image detriments, are also discussed. The report concludes by summarizing the varying approaches to intangible asset treatment and the resulting financial and social impacts.

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Accounting Theory
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Execute Summary
In this report the application of accounting standards is considered as a necessary precedent
for ensuring credibility and transparency of accounting management infrastructures all over
the world. The foremost advantage that can be drawn from the employment of accounting
standard setters such as FASB or IASB is the formulation of new regulations that could
ensure that organizations have to comply with a specific set of reporting standards in order to
provide a credible interpretation of their account management details.

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Contents
Introduction:...............................................................................................................................4
Impact of IAS 38 adoption in Australia:....................................................................................4
Impact of IAS 38 in Europe:......................................................................................................5
Understanding IAS 38 from a global perspective:.....................................................................6
Conclusion:................................................................................................................................7
References..................................................................................................................................8

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Introduction:
The implications of International Financial Reporting Standards are conveniently applicable
as challenges for financial accountants in determination of annual financial statements.
Furthermore, it is imperative to observe that the reforms introduced in the accounting
standards alongside the introduction of new standards frequently could lead to varying
outcomes pertaining to adoption. The profound impact has been observed in a specific area
pertaining to intangible assets. Therefore the following report aims to reflect critically on
sources of academic research in context of accounting standards to determine the economic
and social impact rendered by the adoption of IAS 38 and its equivalent standards around the
world.
Impact of IAS 38 adoption in Australia:
It is imperative to observe that there was not specific equivalent for the AASB 38 Intangibles
prior to the introduction of AIFRS, the Australian equivalent of International Financial
Reporting Standards. As per the journal paper, an analysis of the first ten volumes of research
in Accounting, Business and Financial History, the application of AASB 138 is applicable for
assets which could be associated with characteristics such as recognisability and non-
monetary aspects without physical presence (Anderson, 2002).
The examples of such intangible assets could be observed in the brand names, customer lists
or trademarks of an enterprise (Baker & Burlaud, 2015). The AASB 138 reflected on the
recognition of intangible assets that have been purchased at a specific cost while exempting
the internally generated intangible assets. In this case intangible assets classified as goodwill
acquired through business combination could be recognized. Therefore, IAS 38 (AASB 138)
could be identified as a major determinant of changes in the approaches for recognition,
measurement and treatment of intangible assets in Australia (Banerjee, 2014).
However, it is imperative to reflect on the approaches followed in the treatment of intangible
assets with respect to IAS 38 in order to perceive the outcomes of its adoption. The approach
followed for treatment of intangible assets according to the IAS 38 includes derecognise any
intangible asset that has been generated internally (Anderson, 2002).
Other implications of the approach include references to the discounting of intangibles that
had been re-valued previously according to historical costs in order to address the inability of
an entity to retain revaluation without a secondary market. The treatment of intangible assets

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in Australia also applicable when the subsequent measurement of cost is identified to be less
than re-valued amount and depreciation indicating dependence on an active market (Hitzel,
2013).
It is also imperative to consider the academic research which implies the identification of the
pre adoption period and the reported performance of concerned entities. The impact of AASB
138, the Australian equivalent of IAS 38 was anticipated by practitioners, academics,
financial commentators and consultants to have a formidable effect on the financial
statements of entities which would have to revise the identification of intangible assets which
may include brand names (Bonin, 2013). Therefore the concerns for social image of the
entities arise in context of the application of IAS 38 equivalent in Australia and since
majority of market value of the entities is ascribed to their brand name (Tsalavoutas, André &
Dionysiou, 2014).
The impact of IAS 38 on other entities in Australia was also reviewed other academic
research activities that were executed through analysis of financial statements of fictitious
entities. The findings of such research activities refer to the outcomes for the entity in the
form of depreciation in net assets and increase in the debt to equity ratio. Another detrimental
consequence that can be derived in terms of financial aspect refers to the pitfalls for a large
number of entities to address their existing debt contracts thereby emphasizing on the
requirement of financial statements by the organizations in order to address the precedents of
the banks’ debt contracts (Bryer, 2013). Therefore the financial and social consequences that
can be incurred by the application of the equivalent of IAS 38 in Australia could be
apprehended from the critical reflection on academic research related to similar context as
above.
Impact of IAS 38 in Europe:
The accounting standards adopted in Italy have been reviewed to identify the effect of
applying IAS 38 equivalent for financial reporting activities. The accounting principles from
Accounting Historians Journal suggest that the costs for start-up, additional company
transactions, cost for issuing capital stock, costs for establishing the company and the costs
for expansion of production activities have to be capitalized (Editorial Policy, 2017).
The IAS 38 standard also allows the capitalization of costs incurred in software development.
Therefore, it can be observed that the IAS 38 is accountable for considerable stringency

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pertaining to capitalization (Editorial Policy, 2017). The IAS 38 also assumes that the other
intangible assets that were purchased or generated internally by an entity could be classified
as assets with the additional consideration for the factor that the asset would facilitate
capabilities for economic benefits in the future. It is also necessary that the cost of the assets
is recognized precisely in order to comply with IAS 38 (Christensen and Demski, 2002).
The measurement of such assets is based on manufacturing or procurement cost alongside
implying amortisation of the asset based on a straight-line approach over the estimated useful
lives (Bryer, 2013). The intangible assets which do not have indefinite useful lives cannot be
amortized and hence they are subject to annual tests for impairment. Another profound
highlight that can be observed in the reforms brought by application of IAS 38 in Italy could
be observed in the writing off of net book values of intangible assets requiring expenses of
IAS/IFRS and those that are capitalized according to the accounting principles of Italy.
The net book values are then offset in the shareholder’s equity on the date of transition. The
financial consequences could be profoundly observed in this case to be in the form of
negative impact on IAS equity. The accounting reversal of intangible assets can be assumed
as a major determinant of negative consequences of IAS 38 on entities. The involvement of
IAS 38 in accounting reversal can be observed in the form of demands of IAS 38 to recognize
the reversal of intangible assets when they are incurred (Deegan, 2013).
Understanding IAS 38 from a global perspective:
There have been several academic research activities in the domain of accounting theory
pertaining to the financial and social consequences that are derived from introduction of new
accounting standards or reforms in existing ones. The reflection on Journal paper
Accounting's role in the financial crisis provides the platform to emphasize comprehensively
on the wider picture of adopting IAS 38 and its equivalent standards in financial reporting
frameworks all over the world (Hitzel, 2013).
On a generic basis, the research findings were emphasized on the inclusion of an additional
feature of ‘other intangibles’ which allows the identification of a distinct class of intangibles
in the financial statements of majority of companies across the world. It has also been
inferred from these research studies that other intangibles represent almost 5.28% of the total
assets of an organization (Tsalavoutas, André & Dionysiou, 2014).

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The share of intangible assets in total assets of companies in countries such as France,
Belgium, the Netherlands and UK is estimated to be 30% which is also inclusive of goodwill.
The investments of the sectors of health care and customer service in intangible assets and
goodwill have been improving substantially with the share of intangible assets being 40% and
36% respectively (Ghanbari, et al., 2016). Therefore the significance of intangible assets
could be identified explicitly from these research observations thereby classifying them as
one of the crucial assets for entities in the larger global stock markets.
The application of IAS 38 in a global perspective is often subject to the implications of
companies refraining from disclosing the nature of useful lives of the intangible assets or the
amortization rates used for the same. Furthermore, it has also been observed that companies
also refrain from disclosure of line items pertaining to income statement which could have
provided an impression of any included amortization (Bryer, 2013). However, the
organizations in the consumer goods and services industry have provided such disclosures
frequently as compared to entities in the sectors of basic materials and utilities.
Another concern that could be drawn forward from the critical reflection on implementing
IAS 38 is that the companies identifying intangible assets with indefinite useful life do not
provide reasons for supporting the evaluation or the factors which helped in determining that
the useful life of the asset is indefinite (Tsalavoutas, André & Dionysiou, 2014). Therefore,
refraining from disclosure has been identified as a major aspect in the implementation of IAS
38 standard which can be validated on the grounds of social and financial consequences
feared by the entities that would be subject to IAS 38 (Bryer, 2013).
Conclusion:
The report explicitly described the impact of introducing IAS 38 in Australian and European
contexts which illustrated the varying approaches for treatment of intangible assets. The
primary objective of the report was addressed through the observation of financial and social
consequences rendered by IAS 38 on entities. Financial consequences were determined in the
increment of debt to equity ratio and failure to address loan contracts while social
consequences could be derived from the detriments for brand image due to derecognization
of internally generated intangible assets such as brand name.

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References
Anderson, M., 2002. An analysis of the first ten volumes of research in Accounting, Business
and Financial History. Accounting, Business & Financial History, 12(1), pp.1-24.
Baker, C.R. and Burlaud, A., 2015. The historical evolution from accounting theory to
conceptual framework in financial standards setting. The CPA Journal, 85(8), p.54.
Banerjee, B., 2014. Cost Accounting Theory And Practice. PHI Learning Pvt. Ltd..
Bonin, H., 2013. Generational accounting: theory and application. Springer Science &
Business Media.
Bryer, R., 2013. Americanism and financial accounting theory–Part 3: Adam Smith, the rise
and fall of socialism, and Irving Fisher's theory of accounting. Critical Perspectives on
Accounting, 24(7), pp.572-615.
Bryer, R., 2013. Americanism and financial accounting theory–Part 2: The ‘modern business
enterprise’, America's transition to capitalism, and the genesis of management
accounting. Critical Perspectives on Accounting, 24(4), pp.273-318.
Christensen, J.A. and Demski, J., 2002. Accounting theory. Irwin/McGraw-Hill.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Editorial Policy. 2017. Accounting Historians Journal, 44(1), pp.113-114.
Ghanbari, M., Manesh, M.Z., Hamid Khorasani, M.H. and Nejad, H., 2016. PAT (Positive
Accounting Theory) and Natural Science.
Hitzel, C. 2013. Accounting's role in the financial crisis. African J. of Accounting, Auditing
and Finance, 2(2), p.146.
Tsalavoutas, I., André, P. and Dionysiou, D., 2014. Worldwide application of IFRS 3, IAS 38
and IAS 36, related disclosures, and determinants of non-compliance.