Financial Accounting And Intangible Assets

Recognition Criteria for Intangible Assets

Discuss about the Financial Accounting And Intangible Assets.

The intangible assets are the assets those are not physical by nature. The corporate property in the nature of intellectual those include trademarks, patents, business methodologies, brand recognitions, goodwill and copyrights are regarded as intangible assets. as per AASB, the intangible asset is recognized only if (i) it is expected that the economic benefits for future with regard to the asset will come to the organization with the expectation that the economic benefit for future will represent the best estimate of the management’s economic condition and that will subsist over the asset’s useful life through proper assumptions and reasonable and (ii) the asset’s cost can be reliably measured (Russell, 2017).

Initially the intangible asset is recognized at cost and the cost includes the purchase cost and the cost incurred to bring the asset in a position to its intended use. The cost that is direct attributable are as follows –

• Fees paid for registering the legal right
• Cost of the service or material consumed or used for generation of the intangible asset
• Amortization of licences or patents used for generation of the intangible asset
• Employee benefits related costs that are generated from intangible asset.

To analyse whether the intangible asset that is internally generated meets the recognition criteria or not, the asset must be classified into development phase or research phase. The cost related to research as well as developments are taken into account as and when incurred. Further, the company is required to disclose all the amount regarding to the amount of development and research cost that is incurred under each period and for which the revenue statement is prepared (Steenkamp et al., 2016). The intangible asset whether at fair value or cost, subjected to the impairment and amortisation testing. Fair value of the asset is established through the references from the active market. Further, the revaluations shall be performed taking into consideration the required regularity in the reporting date and it must be checked that the asset’s carrying amount is is not materially different from the fair value. Any amount of accumulated amortisation shall be restated based on the gross value of revaluation

The shareholders stated 4 wide approaches for improving the accounting with regard to the intangible assets. The standard setters and FASB considered the alternatives fro verifying the degrees for several years. 4 potential strategies for providing more information to the financial statement users regarding intangible assets are as follows –

• Recognize the intangible assets that are internally generated at fair value or cost – Alternative 1
• Disclose the intangible assets that are internally generated – Alternative 2
• Adopt the IAS 38 – Alternative 3
• Recognize the cost of development or research at fair value

• Intangible assets that has indefinite useful life shall not be amortised
• At every period, the company shall test the intangible asset with indefinite useful life for the purpose of impairment annually and if there is any sign that the asset may get impaired that asset shall also be tested (Russell, 2014).
• At every period, the entity shall assess whether the circumstances or events supports the indefinite useful life of the asset. However, if it does not conform, the asset shall be changed to definite period that can be accounted for as the change on the accounting estimates as per AASB 108.
• De-recognition of intangible asset
• If the intangible asset is sold or disposed or there is no expectation that future economic benefit will arise from the asset it shall be derecognised. The loss or gain arising from the asset that was to be recognized in the comprehensive income statement shall be derecognised. Gains shall not be recognized as revenue, rather shall be shown as the gain under the comprehensive income statement.
• Amortisation of the intangible asset with limited useful life shall not be ceased while the intangible asset is not in use any more, unless it is fully amortised or the asset is classified under held for sale (Bond, Govendir & Wells, 2016).
• If the asset is recognized on the carrying amount of the asset then the replacement cost for that part of the asset shall be derecognized for that part of the asset. If the part is not recognizable then the replacement cost may be used as the indication for what the cost of the replaced part was there at the time when the internally generated asset was acquired.

The requirement of disclosure for the intangible asset that is internally generated and various other intangible assets shall include –

• Whether the life of the asset is indefinite or finite
• If the useful life is finite the amortisation rate or the useful life and the method of amortisation (Fasb.org/jsp/FASB, 2017).
• Detailed reconciliation for the carrying amount at opening and closing period
• The line items under the comprehensive income statement that includes the intangible asset’s amortisation

Other disclosure requirement includes –

• The description of the asset, remaining amortisation period, the carrying ampoun tof the intangible asset
• The intangible asset with indefinite period of life

Woolworths, the biggest chain of supermarket from Australia is owned by Woolworths limited. The company was established during 1924 and they were operating in the imperial arcade of Sydney. Various businesses those are carried out by Woolworths are petrol and food, supermarkets, hotel and drinks. The petrol and food sector is engaged for the procurement of petroleum and food products for reselling it to the Australian consumer. Likewise, the drink segment is engaged in procurement of liquor products for reselling it to the Australian consumer and the hotel sector is engaged in providing hospitality and leisure services that includes accommodation, food, alcohol, gaming and entertainment in Australia.

Accounting Treatment for Intangible Assets

As per the annual report of Woolworths for the year ended 2016, they recognised the following assets as intangible assets under the assets in their balance sheet –

• Goodwill
• Liquor license and other
• Brand names

It has been found that the cost of intangibles were amounted to $ 6,948.5 million, out of which goodwill amounted to $ 4,343.6 million, brand names amounted to $ 285.4 million and liquor, gaming and other licenses amounted to $ 2,319.5 million.

Goodwill

The goodwill of the company represents excess of cost of acquisition over its fair value of share for the net identifiable acquired assets. After the initial recognition, the goodwill is calculated at cost after subtracting the accumulated losses for impairment, if any.   

Other intangible assets

The other intangible assets of the company are calculated at cost after subtracting the impairment losses and the amortisation, if any. Where the intangible asset is acquired under the business combination, the cost indicates the fair value on the acquisition date. Moreover, the intangible assets with limited useful lives are amortised on the basis of Straight-line method for their forecasted useful lives. However, the useful life for each of the intangible assets is reassessed regularly in each period. Useful lives of the intangible assets were assessed as follows –

Intangible asset	Useful life
Brand names	Normally it has indefinite useful life
Victorian entitlements for gaming	It has finite useful life as per the gaming entitlements up to 10 years.
Gaming and liquor licences	It has indefinite useful life.
Other intangible assets like rights of property developments and relationship with regard to primary customer	It has both indefinite useful life as well as definite useful life for a term of up to 20 years.

Impairment

The intangible assets are examined for the purpose of impairment as per the impairment policy for the non-financial assets as follows –

Critical estimates for accounting

Estimates for the useful remaining lives and assessment for the useful lives requires the significant judgement from the management. The brand names are normally assessed as they have indefinite period of useful lives depended on the strength of the brand, forecasted ongoing profitability and the continuing support. Further, the brand names integrate  the complementary assets like product offerings, networks, gaming and liquor license and store formats were assessed to have indefinite period of useful lives based on the licences that are expected to get renewed as per line in association with the ongoing requirements of regulations.

Though the intangible asset does not have any physical existence, it has great importance to Woolworths and must be disclosed properly under the financial reports. While some companies recognize the company trademarks and software as intangible assets while Woolworths recognizes Goodwill, Liquor license, Brand names and other as intangible asset (Ji & Lu, 2014). The accounting standard for AASB 138 suggests the businesses for the treatment of the intangible assets, however where the particular criteria for an asset is fulfilled then only the asset is recognized as the intangible asset. The intangible asset shall fulfil the below mentioned criteria –

• Non-monetary by nature – the asset to be recognized as intangible, the asset shall be of non-monetary nature. This fact is needed so that the receivables are not taken into account as the intangible asset by the organizations simply as the money is just recognized but not yet received (Yao, Percy & Hu, 2015).
• Identifiable – the asset to be considered as identifiable must meet one of the criteria like – (i) the asset is capable to be sold, rented, licensed, exchanged or transferred that can be resulted from the separate things from the business (ii) the asset must be separable, so that the asset can be recognized as a separate asset from goodwill (iii) the asset arise from the contractual right or any other legal right, irrespective of the fact that it is inseparable or separable.
• Lack of the physical substance – this criterion is required with regard to the fact that the tangible assets like plant, property shall not be recognized as intangible assets.

Woolworths in their annual report clearly mentioned the description regarding whether the asset’s useful life is finite or indefinite. It is reported that 4 out of total 5 asset classes are there with indefinite useful life, therefore, no amortization cost was charged. Further, the report revealed that every class of the assets are separated with their own headings and the respective amounts were mentioned under each respective head. Further, Woolworths consistently applied AASB 138 for recognizing and disclosing the intangible assets. the intangible assets recognized in the balance sheet are non-monetary in the nature, were separable and do not have any physical substance (Initial Accounting for Internally Generated Intangible Assets, 2017). Moreover, the disclosure rules with regard to the intangible assets were complied with the relevant accounting standards.

As the guidelines as per the AASB 138 already obliged the organizations to scrutinize the intangible assets strongly and expose every detail regarding their financial statement, the improve ment that can be suggested can be stating under the guidelines the type of the report and where under the report the information shall be disclosed, so that the users can have access to the required files without being going through all the files for searching the specific information regarding the intangible asset of Woolworths.

References   

Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), 259-288.

https://www.fasb.org/jsp/FASB/ (2017).  https://www.fasb.org/jsp/ FASB/Document_C/DocumentPage?cid=1176168357653&acceptedDisclaimer=true. Retrieved 4 September 2017, from https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168357653&acceptedDisclaimer=true.

Initial Accounting for Internally Generated Intangible Assets. (2017). https://www.aasb.gov.au/admin/file/content105/c9/ACCDP_IGIA_10-08.pdf. Retrieved 4 September 2017, from https://www.aasb.gov.au/admin/file/content105/c9/ACCDP_IGIA_10-08.pdf

Ji, X. D., & Lu, W. (2014). The value relevance and reliability of intangible assets: Evidence from Australia before and after adopting IFRS. Asian Review of Accounting, 22(3), 182-216.

Russell, M. (2014). Capitalization of intangible assets and firm performance.

Russell, M. (2017). Management incentives to recognise intangible assets. Accounting & Finance, 57(S1), 211-234.

Steenkamp, N., Steenkamp, N., Steenkamp, S., & Steenkamp, S. (2016). AASB 138: catalyst for managerial decisions reducing R&D spending?. Journal of Financial Reporting and Accounting, 14(1), 116-130.

Yao, D. F. T., Percy, M., & Hu, F. (2015). Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), 31-45.