Financial Accounting Report: Internally Generated Intangible Assets

This report provides an in-depth analysis of the accounting treatment of internally generated intangible assets, focusing on the impact of AASB 138/IAS 38. It examines the recognition and measurement criteria for both internally generated and acquired intangible assets, highlighting the differences b...Read More

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student
Name of the University
Author’s Note

1FINANCIAL ACCOUNTING
Executive Summary
This report discusses about different aspects of the accounting treatment of internally generated
intangible assets. As per the findings of the report, business organizations now the appropriate
recognition and measurement criteria for internally generated intangible assets due to the inception of
AASB 138/IAS 38. The findings also state that the recognition and measurement criteria of acquired
intangible assets and internally generated intangible assets are not the same. Lastly, this report
shows the reasons for the reluctance of the managements of the companies to press the changes in
AASB 138/IAS 38.

2FINANCIAL ACCOUNTING
Table of Contents
Introduction............................................................................................................................................ 3
Impact of AASB 138/IAS 38................................................................................................................... 3
Acquired Intangible Assets vs. Internally Generated Intangible Assets.................................................4
Reasons for Reluctance of the Companies........................................................................................... 5
Conclusion............................................................................................................................................. 5
References............................................................................................................................................ 6

3FINANCIAL ACCOUNTING
Introduction
In the recent years, many of the business organizations are facing key challenges in the
accounting methods associated with intangible assets due to carry out wring accounting treatments of
the assets (Liao, Ling-Ching Chan and Seng, 2013). In some cases, the companies are accounting for
the internally generated intangible assets like patents, brands and others in accordance with the
accounting methods of the intangible assets that have been acquired; and this contributes to the
disclosure of wring accounting information and values. In order to ensure correct accounting
treatments of the intangible assets, the inception of AASB 138/IAS 38 can be seen that contain the
required principles and standards for the accounting treatments of both internally generated as well as
acquired intangible assets (Axtle-Ortiz, 2013). This report assesses how the introduction of AASB
138/IAS 38 has created impact on the accounting methods for internally generated intangible assets.
This report also assesses whether there is any difference in AASB 138/IAS 38’s accounting
treatments for internally generated intangible assets and intangible assets that have been acquired
separately or in a business combination. The reasons for which the managements of the companies
may be reluctant to press for the changes in AASB 138/IAS 38 are discussed in the last portion of the
report. Based on the whole discussion, a conclusion is provided at the end of the report.
Impact of AASB 138/IAS 38
The main objective of AASB 138/IAS 38 is in recommending the appropriate accounting
treatments for both kinds of intangible assets. The main requirement of this standards from the
business entities is to correctly recognize the intangible assets in case the provided recognition
benchmarks are met. It implies that the introduction of AASB 138/IAS 38 has a constructive effect on
the accounting methods for the intangible assets that have been generated internally. Business
organizations can follows this standard for undertaking the appropriate accounting treatments for
intangible assets that are generated internally (Gong, Sophia and Wang, 2016).
As per the rules and regulations in AASB 138/IAS 38, two kinds of internally generated
intangible assets can be seen which are internally generated goodwill and other internally generated
intangible assets. It is mentioned in the above that the companies are required to properly recognize
the internally generated intangible assets; and there are two phases that need to be take into
consideration in order to ensure that whether the recognition criteria are met by the internally
generated intangible assets; these are research phase and development phase. It implies that the
business organizations are required to take into consideration these two phases in case of internal
generation of intangible assets (Grüber, 2014). This creates impact on the accounting of the
companies for internally generated intangible assets. However, it required to be mentioned that a
company cannot consider an asset as the internally generated intangible asset in the research phase.
For this reason, the requirement of AASB 138/IAS 38 is to consider these expenses as expenses at
the time to incur. The key instances of these research undertakings are activities undertaken to gain
new knowledge, the search for the application of the findings of the research, the search for the
alternatives for materials and the preparation, design, evaluation and final selection of potential
alternatives (Dinh, et al., 2018).
At the same time, the standards of AASB 138/IAS 38 have created impact on the recognition
of expenses associated with the internal generation of intangible assets (Grüber, 2015). The
requirements of AASB 138/IAS 38 states that expenditures incurred for the internally generated
intangible assets need to be recognized as the expenses at the time to incur unless these develop
portion of the cost of the internally generated intangible assets and the acquisition is done in business
combination and the company cannot recognize it as an intangible asset (Gong, Sophia and Wang,
2016). It can be seen in the beginning of the article that customer relationship has been mentioned
and it requires to be mentioned that this cannot be considered as an intangible asset because it fails
to satisfy the definition of an asset. Even a company considers this an internally generated intangible
asset, this fails to satisfy the criteria of identifiability because of the fact that the company cannot sale
or exchange this (Boennen and Glaum, 2014).
Another crucial impact of AASB 138/IAS 38 on the internally generated intangible assets can
be seen on the amortization of intangible assets. In case the internally generated intangible assets are
recognized successfully, the requirement for the companies is to amortize them unless they have
indefinite lives. Under this method, the companies are responsible for allocating the asset’s
depreciable value on a systematic basis over the useful life. Therefore, it can be seen from the
discussion that the introduction of AASB 138/IAS 38 has created positive impacts on the internally

4FINANCIAL ACCOUNTING
generated intangible assets by providing the appropriate accounting treatments for all the aspects of
these assets (Pawsey, 2013).
Acquired Intangible Assets vs. Internally Generated Intangible Assets
Two major aspects related with the accounting of intangible assets are its recognition and its
measurement. It can be seen from the standards of AASB 138/IAS 38 that the recognition as well as
measurement criteria for acquired intangible assets and internally generated intangible assets are
different. These are discussed below.
Recognition Criteria
It needs to be mentioned that it is an easier process to recognize the acquired intangible
assets as compared to when intangible assets are internally generated. As per AASB 138/IAS 38, it is
only possible to recognize the intangible assets in the presence of the probability of economic benefit
associated with the asset inflow to the entity and in the presence of the scope of reliable
measurement of the asset’s cost (iasplus.com, 2019). In case of separate acquisition of intangible
assets, it is required for the business organizations to adopt the above methods of recognition
because of the scope to dependably measure the cost of the separately acquired intangible asset. If
the intangible asset separately acquired in a business combination, the same recognition criteria need
to be considered because of the presence of adequate information for reliably measure the assets’
fair value (aasb.gov.au, 2019).
However, the situation is different in case of internally generated intangible assets as the
same recognition standards is not followed in this type of assets. As per AASB 138/IAS 38, there are
internally generated goodwill and internally generated other intangible assets. AASB 138/IAS 38 puts
the obligation on the companies not to recognize the goodwill that are generated on internal basis. On
the other hand, two phases are considered in case of the other internally generated intangible assets;
they are research phase and development phase. According to the provision of AASB 138/IAS 38,
there is an obligation on the business entities not to recognize any intangible asset developing from
the research phase. At the same time, expenditures incurred with the intangible assets in the research
phase need to be recognized as the expenses when the company incur them (cpaaustralia.com.au,
2019).
In case of the internally generated intangible assets from the development stage, a company
has the obligation of recognizing it in the presence of the demonstration of the below aspects:
o The required technical viability to complete the asset;
o The company’s intention of completing and using or selling the asset;
o Its capability of using or selling the asset;
o The process of generating future economic benefit by the asset (Liao, Ling-Ching Chan and
Seng, 2013);
o The presence of adequate required resources for the completion of the development as well
as use or sale the asset; and
o The ability of reliably measuring the expenditures incurred on the asset on the development
stage (iasplus.com, 2019).
AASB 138/IAS 38 also states that the companies are not required to recognize certain assets like
brands, lists of customers, publishing titles and others as the intangible assets. Therefore, there is
vast variance between the recognition of acquired intangible assets and internally generated
intangible assets under AASB 138/IAS 38 (Anwar, Delaney and Winata, 2016). All these aspects
demonstrate that the recognition process of the internally generated intangible assets and the
acquired intangible assets are not the same in accordance with the provided accounting principles
and standards of AASB 138/IAS 38.
Measurement Criteria
Alike recognition criteria, the presence of difference can be seen in the measurement of
acquired intangible assets and internally generated intangible assets. As per AASB 138/IAS 38, there
is a need to use cost method for the measurement of intangible assets that have been separately
acquired and this comprises of the purchase price (aasb.gov.au, 2019). Fair value method at the date
of acquisition is used in order to measure the intangible assets that have been acquired out of the
business combination. Only fair value method is used for the measurement of intangible assets that

5FINANCIAL ACCOUNTING
have been acquired by the firms free of charge or by government grant. As per AASB 138/IAS 38, the
main difference is that cost method is use for the measurement of intangible assets that are internally
generated where the company determine the costs as the sum of incurred expenses from the date of
first satisfying the recognition criteria by the intangible assets (Sinclair and Keller, 2014).
Reasons for Reluctance of the Companies
Alterations in AASB 138/IAS 38 would lead to the additional requirement of more recognition
of internally generated intangible assets in the financial statements. However, the managements of
the companies may be unwilling to press and the reasons are shown below:
1. The absence of additional requirement of recognizing internally generated intangible assets
provide the managements of the companies with the scope develop the intangible assets in
low costs and sell the same assets to other companies in large amounts. This can be
considered as an additional way for increasing the earning of the companies. This may not be
possible in case of the increased recognition of internally generated intangible assets (Pastor,
et al., 2017).
2. It needs to be mentioned that the intangible assets that the companies have generated
internally are subjected to amortization. Increased recognition of the internally generated
intangible assets demands charging amortization on the same that is the process to expense
the intangible assets’ costs over the projected life of the asset. Therefore, the period
amortization on the intangible assets will be considered as the expenses of the firm that will
contribute to the fall in the overall profitability of the company. This is a major reason for the
companies to be reluctant (Gamayuni, 2015).
3. The investors of the companies consider write-offs as one time item that does not have any
consequence for valuation. For this reason, to the investors, a number of large write off are
preferred that the payment of periodic amortization. In this process, the investors discount the
impacts of one write-offs and applaud the improvement in the company’s profitability in the
coming years. This is another major reason.
4. The intention of the managements of the companies is to expand the future profits. It is
possible to register unencumbered revenue and earnings by the major expenses items
through writing off large investments in research and development (Maxfield, 2013).
Conclusion
The above discussion discusses about different aspects associated with the financial
accounting procedures associated with intangible assets. The introduction of AASB 138/IAS 38 has
created major influence on the accounting of internally generated intangible assets through the
implementation of increased requirements of recognizing as well as measuring them. In addition, this
also puts the obligation on the companies to take into consideration the expenses incurred on the
internal generation of intangible assets. The discussion shows that there are major differences in the
recognition criteria and measurement criteria of acquired intangible assets and internally generated
intangible assets under AASB 138/IAS 38. Furthermore, the managements of the companies may be
reluctant to press the improvement in AASB 138/IAS 38 because this will employ more strict
recognition and measurement criteria of internally generated intangible assets that will reduce the
scope of inflating the profit, increasing earnings through selling internally generated intangible assets
and others.

6FINANCIAL ACCOUNTING
References
Aasb.gov.au. 2019. Intangible Assets. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPjul17_01-20.pdf [Accessed
30 Dec. 2019].
Anwar, Y., Delaney, D. and Winata, L., 2016. Intellectual Capital Disclosures-Does Social Media
Make A Difference? Evidence frm Australia and Indonesia.
Axtle-Ortiz, M.A., 2013. Perceiving the value of intangible assets in context. Journal of Business
Research, 66(3), pp.417-424.
Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature. Available at SSRN
2462516.
Cpaaustralia.com.au. 2019. IAS 38 INTANGIBLE ASSETS. [online] Available at:
https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/professional-resources/
reporting/reporting-ifrsfactsheet-intangible-assets.pdf?
la=en&rev=2713a8f0b1ad43b69e52db9b5f3b0819 [Accessed 30 Dec. 2019].
Dinh, T., Kang, H., Morris, R.D. and Schultze, W., 2018. Evolution of intangible asset accounting:
Evidence from Australia. Journal of International Financial Management & Accounting, 29(3), pp.247-
279.
Gamayuni, R.R., 2015. The effect of intangible asset, financial performance and financial policies on
the firm value. International journal of scientific & technology research, 4(1), pp.202-212.
Gong, J.J., Sophia, I. and Wang, L., 2016. Changes in the value relevance of research and
development expenses after IFRS adoption. Advances in accounting, 35, pp.49-61.
Grüber, S., 2014. Intangible values in financial accounting and reporting: an analysis from the
perspective of financial analysts. Springer.
Grüber, S., 2015. Foundation and Challenges of Intangible Values in Financial Accounting and
Reporting. In Intangible Values in Financial Accounting and Reporting (pp. 35-109). Springer Gabler,
Wiesbaden.
Iasplus.com. 2019. IAS 38 — Intangible Assets. [online] Available at:
https://www.iasplus.com/en/standards/ias/ias38 [Accessed 30 Dec. 2019].
Liao, P.C., Ling-Ching Chan, A. and Seng, J.L., 2013. Intellectual capital disclosure and accounting
standards. Industrial management & data systems, 113(8), pp.1189-1205.
Maxfield, S., 2013. Accounting paradigm changes and their impact on corporate social and
environmental responsibility. Providence College School of Business, Paper, 4.
Pastor, D., Glova, J., Liptak, F. and Kovac, V., 2017. Intangibles and methods for their valuation in
financial terms: Literature review. Intangible capital, 13(2), pp.387-410.
Pawsey, N.L., 2013. IFRS Adoption: Costs and Benefits for Listed Australian Companies. Charles
Sturt University.
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally
developed. Journal of Brand Management, 21(4), pp.286-302.