Executive Summary
The paper has the purpose to look into different standards in the accounting field with respect to Australian Accounting Standards. Different provisions and clauses within these standards have been discussed and they have been applied in the context of Australian accounting discipline. Moreover, some rules have been discussed while different types of assets have also been explained. Comparability of balance sheets and elements within them has also been discussed. The paper has been written with respect to Australian accounting standards and conclusions and recommendations have been drawn. The practical implications of this paper are quite strong because accounting standards help managerial practices very much.
Question 1
It is given that the accountant was unsure how to account for the project, so they used the New Project R&D account to accumulate the salaries of all engineers involved in the project during the year ended 30 June 2018. The expenditure was shown as
Further, it is also given that the CEO want to show $3 million as profit which, in his opinion, can be arrived at simply by deducting the costs ($1 million) from the value in use ($4 million). However, the fair value of the design is only $3 million.
The matter relates to the accounting treatment of an internally generated intangible asset. The major issues in this case are whether the salaries should be shown in R&D Account or not, and whether it would be correct to show $3 million as profit or not.
According to paragraph 126 of AASB 138/IAS 38, while preparing a balance sheet, a company is required to make disclosure to the effect of the amount spent in research and development as an expense during the period. Further, according to paragraph 127 of AASB 138/IAS 38, expense for the purpose of Paragraph 126, that is the expense incurred on the research and development is defined as the something that has director connection with the research and development activity. The details with respect to the cost of an internally generated intangible assets are contained under paragraph 66 and 67 of AASB 138/IAS 38. Further, according to paragraph 66, the cost of the internally generated intangible asset means the cost that that was important for the creation, production, and preparation of the asset so as to make it work as per the expectations of management (AASB 138/IAS 38, paragraph 66). For example, the cost of materials and services, employee benefits, cots related to the registration of a legal rights such as patent form part of the costs directly attributable to the internally generated intangible asset. Paragraph 66 of AASB 138/IAS 38 provides that the costs such as selling and administrative costs (among others) would not be treated as a cost having director connection with the internally generated assets unless they are, in fact, directly related to the preparation of the asset for use. Among others, paragraph 67 of AASB 138/IAS 38 also provides that the expenses incurred by a company to train the staff to operate the internally generated asset would not be taken into consideration.
If the above paragraphs are applied, the company is required to include the costs of patent in the expenses and exclude the cost incurred in training the staff. This is because the cost of patent is permitted expenditure attributable directly to the internally generated intangible asset. The other cost that is the cost incurred in training the staff would be disregarded as paragraph 67 does not permit the same. Accordingly, the revised expenditure shall be $800000 plus the costs incurred in the registration of patent. The salaries can be included but only to the extent they are incurred in the development of the intangible asset. That is why the cost of training has been excluded.
If a company is following the cost model, paragraph 74 of AASB 138/IAS 38 provides that it shall carry out an intangible asset at its cost which is reduced by the accumulated amortisation and impairment losses if any (AASB 138/IAS 38, paragraph 74). If the company follows revaluation model, paragraphs 75-87 of AASB 138/IAS 38 provide that the company would be required to carry out the intangible asset on the basis of the revalued cost being the fair value. Any increase as a result of the revaluation is recognized in the revaluation surplus created for this purpose. Similarly, any decrease in the carrying amount on revaluation shall also be recognized in the revaluation surplus (AASB 138/IAS 38, paragraph 86). Finally, the revaluation surplus is transferred to the retained earnings as and when it is realised when an intangible asset is retired or disposed of (AASB 138/IAS 38, paragraph 87).
Paragraph 87 of AASB 138/IAS 38 also provides that surplus to some extent may be realised as the asset is used. If the entity is doing so, the amount of the surplus realised shall be equal to the difference between the amortisation that has been arrived at on the basis of the revalued carrying amount and the amortisation that is recognised on the basis of the historical cost of the asset. In the given case, the revalued carrying amount is $3 million divided over a period of 10 years – that is $300000. The amortization on the basis of the historical costs is $800000 divided by 10 years – that is $80000. Therefore, only the difference between these two amounts shall be realizable, and that too without making it through profit or loss. Therefore, it can be said that the assumption of the CEO is incorrect. They cannot show $3 million as profit.
Question 2
Defining comparability is a difficult task; however, it is perceived as to what makes similar things in a balance sheet look similar and dissimilar or unlike things look different. In general, it is an approach that ensures that the similar items in two different balance sheets of two different companies are shown alike so that an investor is in a better position to compare both the balance sheets (Zeff, 2007).
The countries signing to IFRS is seen as a departure from what the countries have been doing at the domestic level – following their own accounting methods and thus rendering the comparability of the balance sheet complicated, if not impossible. (Zeff, 2007) The adoption of IAS 38 has increased comparability of the balance sheet (Zeff, 2007; Cheong and Masum, 2010). However, issues might arise if IAS 38 is not adopted word for word and the countries insert some rules and regulations different in part or in whole from IAS 38. This can be elaborated with the help of the following examples:
In IAS 38, the positive goodwill is capitalized and is put on the asset side as a separate item (IFRS, 2019). It also categorizes goodwill as one with limited useful economic life and one with infinite useful life (Sharma and Neha, 2014). As per IAS 38, goodwill with limited useful life is amortized systematically over its useful life. As per FRS 10, the positive goodwill is capitalized and put in the asset side of the balance sheet (Sharma and Neha, 2014). It provides that 20 years’ duration will be considered for goodwill to have a limited useful economic life. After 20 years’ period, the goodwill is treated as the one having infinite life (Sharma and Neha, 2014).
While IAS 38 and FRS 10 has treated positive goodwill alike by putting it on the asset side, paragraph 48 AASB 138 goes completely against it and asks to derecognise the internally generated goodwill as an asset (Cheung, Evans and Wright, 2008). Further, IAS 38 does not cover the negative goodwill but in AASB 138 it is given that the negative goodwill shall be “eliminated by reducing proportionately the fair values of the acquired non-monetary assets” (Sharma and Neha, 2014). It also provides that the remaining balance, if any, shall be treated as revenue in the profit and loss account (Sharma and Neha, 2014). It is also said that the adoption of AASB 138 in 2005 has contributed in making intangible assets less visible in the financial reports (Halim and Jaafar, 2012). All these facts taken together can lead to the conclusion that the limitations and restrictions contained in AASB 138 has reduced the comparability of balance sheets.
After the adoption of AASB 138 in 2005, it is argued that information on intangibles is less visible in Australian companies’ financial reports. In view of this limitation, this study examines the nature, extent and intensity of intangibles disclosure by listed companies in Australia. We establish, explore, and demonstrate the concept of information intensity which indicates the strength of intangible information presented by firms. We analyse the narrative sections in annual reports and prospectuses of 30 companies from the Top 200 Australian companies. The overall findings suggest that capital-raising companies make intangibles information visible in both annual reports and prospectuses by signalling information through pictures and repetition of intangibles information which indicates more intense signal. However, we find that the level of disclosure in prospectuses is much lower than the disclosure in the narrative sections in the annual reports. We argue that disclosure in prospectuses is subject to more stringent reporting and disclosure obligations as compared to narrative sections in annual reports. As a result, more intangible information is observed in annual reports (Halim and Jaafar, 2012)
Question 3
AASB 138/IAS 38:
AASB 138/IAS 38 is mainly related to how the intangible assets in the financial statements of the Australian companies should be reported. It prescribes the accounting treatment of the securities that are not dealt with otherwise in other Standards (Australian Accounting Standards Board, 2015). It requires that an intangible asset shall be covered in the financial statement only if the criteria specified by AASB 138 are fulfilled (Australian Accounting Standards Board, 2015). Among others, it does not provide for its application to the intangible assets covered by another accounting standard, the financial assets that have been defined in AASB 132, exploration and evaluation assets (Australian Accounting Standards Board, 2015). First, it provides how the intangible assets shall be identified. Thereafter, it provides for the recognition and the measurement of the intangible assets wherein ways such as different ways of acquisition of intangible assets and internally generated intangible assets have been discussed.
Further, it also provides for how the expenses with respect to different intangible assets shall be recognized and measured after their recognition. AASB 138/IAS 38 provides for two methods cost method and revaluation method for the measurement after recognition. It also discusses the useful life of the intangible assets, amortization period and the methods of amortization as well as the residual value and the review of amortization period and amortization method. It also discusses the indefinite useful life of the intangible. Furthermore, AASB 138/IAS 38 also provides for accounting treatment in relation to the matter such as recovery of the carrying amount, and disposals and disclosures (among others).
Efficient Market Hypothesis:
In the efficient market hypothesis, the market is said to be efficient in relation to a set of information if the prices reflect that information (Sewell, 2011). It means that the stock market is efficient in reflecting information about both the individual stocks as well as the stock market (Malkiel, 2003). It claims that when information is revealed, it spreads quickly among the market players and is reflected in the price of the securities without delay. It also says that neither the technical nor the fundamental analysis of financial information could lead an investor to a greater return that is more than the returns received from the basket of securities he holds (Malkiel, 2003). For example, an unfavourable news that surfaces out has the potential to negatively impact prices and a favourable news shall, however, do the opposite. The idea is that the information shall help in adjusting the prices. However, since the news is unpredictable, the resulting changes are also unpredictable (Malkiel, 2003). Due to which it can be said that the prices reflect only what is known to the investors. The collective judgement of the investors can make mistakes as well (Malkiel, 2003). The price irregularity and predictability can also be seen in the market where some market participants are “less than rational” (Malkiel, 2003). Furthermore, it is also claimed that the market cannot be fully efficient because then it would not be any scope for the professionals engaged in uncovering information to be incentivized (Malkiel, 2003).
Conclusion:
The paper concludes that accounting standards play important roles in measuring costs and making projections in the accounting practices. The ability of accounting standards to calculate different accounting records and information shows that standards make smooth and efficient calculations of accounting records. There are different rules under accounting standards and some of them have been explained in terms of their nature and application ability. Overall, they have made accounting calculations smoothly and businesses as well as organizations are able to practice based on them. These standards are mainly based on Australian standards, and it is also noted that intangible assets and comparability of balance sheets has been discussed.
Recommendations:
The paper recommends that accounting standards should be adopted in calculations of accounting and different tools of accounting. There are diverse types of assets and liabilities in a balance sheet and several types should be treated in different ways so that they can come up with needed requirements of treatment. It is also recommended following rules within standards of accounting so that the application of accounting standards can be possible step by step. It is also recommended to conduct research on accounting standards so that the application of these standards can remain up to date. In the end, it is also recommended to take these topics further so that more literature can be added into this field.
References:
Australian Accounting Standards Board (2015). Intangible Assets (AASB 138). 1st ed. [ebook] Online: Australian Accounting Standards Board, pp.4-30. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf [Accessed 11 May 2019].
Cheong, C. and Masum, M. (2010). Financial Analysts’ Forecast Accuracy : Before and After the Introduction of AIFRS. Australasian Accounting, Business and Finance Journal, [online] 4(3), pp.65-81. Available at: https://ro.uow.edu.au/cgi/viewcontent.cgi?article=1095&context=aabfj [Accessed 12 May 2019].
Cheung, E., Evans, E. and Wright, S. (2008). The adoption of IFRS in Australia: The case of AASB 138 (IAS 38) Intangible Assets. Australian Accounting Review, 18(3), pp.248-256.
Halim, H. and Jaafar, H. (2012). Ntangibles Disclosure And Capital-Raising In Australia: An Analysis Of Information Intensity. Asian Academy Of Management Journal Of Accounting And Finance, 8(4), pp.69-91.
IFRS (2019). IAS 38. [online] Ifrs.org. Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/ [Accessed 12 May 2019].
Sharma, M. and Neha (2014). Comparative Analysis– A Study of Accounting Standards on Intangible Assets Of Five Countries. International Journal of Business and Management Invention, [online] 3(2), pp.10-17. Available at: https://www.ijbmi.org/papers/Vol(3)2/Version-2/C0322010017.pdf [Accessed 11 May 2019].
Sewell, M. (2011). History of the Efficient Market Hypothesis. RN/11/04. [online] Online: Ucl Department Of Computer Science, pp.2-14. Available at: http://www.cs.ucl.ac.uk/fileadmin/UCL-CS/images/Research_Student_Information/RN_11_04.pdf [Accessed 12 May 2019].
Zeff, S. (2007). Some obstacles to global financial reporting comparability and convergence at a high level of quality. The British Accounting Review, 39(4), pp.290-302.
