Critical Evaluation Of Financial Reporting: Accounting For Tangible And Intangible Assets, And Creative Accounting

Accounting for Intangible Assets

By using the regulatory discussion and relevant international accounting standards (IASs) which are taught in the module APC311, you are required to provide a critical evaluation of the following areas of financial reporting.

Accounting for tangible assets

Accounting for intangible assets

Creative accounting 

In the period 1973 to 2000, there was the introduction of the International Accounting Standards commonly known as IASs. The IASB took the place of the IASC in 2001. From that point forward, the IASB has corrected some IASs and has proposed to change others, has supplanted some IASs with new International Financial Reporting Standards (IFRSs), and has received or proposed certain new IFRSs on themes for which there was no past IAS (Nobes, 2014). Germany is an EU part state. Therefore, the organizations of Germany which are recorded on the EU/EEA securities showcase take after IFRS since 2005. The European Commission (EC) intermittently which gives a rundown of the utilization of alternatives of the IAS control which are executed by the European Union part states

In Japan under the Tokyo understanding, between the bookkeeping Standards leading body of Japan (ASBJ) and the International Accounting Standards Board (IASB) marked in August 2007. The meeting between the IFRS and the Accounting Principles Accepted in Japan is under advance. As a result, IFRS is incorporated into the Japanese accounting standards. For IFRS appropriation in Japan, nine organizations have just begun to apply IFRS by March 2013, in light of the beginning of wilful selection of IFRS from March 2010. The quantity of organizations that choose wilful reception of IFRS is exceptionally prone to extend in light of expanding cross-outskirt exercises and systems involving the mid-and long haul designs of Japanese organizations.

The intangible assets are of greater importance for both the managers and the investors. There is a significant increase in the intangible assets such as trademarks, goodwill, brands, and patents. The intangible assets are basically those assets whose value cannot be touched or calculated in a quantified manner but can only be determined in a qualitative manner. The tangible assets are of utmost importance and its recognition at the early stages there has always been a debate in the case of the definition of the intangible assets. Basically, the intangible assets are measured at the cost on the date of the purchase. To measure the assets at the fair value the relevant requires of 255(4) shall be applicable while calculating. All the expenses related to the development of the intangible asset must be included in the cost from the date on which the recognition criteria were met (Adeyemo, et al 2017). 

Definition and classification

The practice and the methods for recording the intangible assets must be kept on the same track within the boundaries of the objectives to cater the requirements of the financial statements as a whole.

One of the basic objectives of making the financial statements is to give the reliable and the suitable information to increase the process of the decision making and facilitate the users with a better understanding (Ball, 2006).

Under Germany, the assets of intangible nature are not defined legally. In Germany, the definition of the intangible asset is the fixed asset other than the intangible or the financial asset.

Intangible assets Category	Example
Human Capital	A workforce which is trained and assembled, the contracts of the employment and agreements
Artistic	Copyrights and maps
Contracts	Favourable supplier contracts
Marketing	Brand names, logos, and trademarks
Technological Process	Patents and patents application
Location	Leasehold Interest, mineral exploration rights and water rights.
Engineering	Industrial design, blueprints, engineering drawings.
Goodwill	Institutional goodwill, going concern value, personal goodwill.

According to 255(4) HGB, the goodwill can be calculated as per cost of acquisition less the liabilities.

According to the HGB 225(4) goodwill originated from an asset shall be recorded in the balance sheet. Further, the method of the amortisation is applicable if the goodwill is capitalized. The same shall be done in the upcoming year or by at least 25 percent which is to be distributed and are likely to benefit in the future. On the other hand of the goodwill is not recognized it must be treated as an expense (Kim, Shi, and Zhou, 2014).

According to the HGB 309 Para 1, there are various ways for the treatment of the goodwill

1. Amortisation of the goodwill over the period of the four years following the first consolidation. The first consolidation shall be done quarterly each year.
2. Amortisation over its economic life irrespective of the description of the maximum period.
3. The balance can also be set off against the group reserves
4. Additionally along with these individual practices or the combination of both along with the proportional set off against the reserves (Chandra, Erlina, Maksum and Supriana, 2018).
5. In case of the impairment the German GAAP lacks in knowledge of the impairment however, amortization is mandatory except for the permanent diminution in value.

In case of Japan the concept of intangible assets in case of the assets which are currently not available for use or having an indefinite life. In case of any slight indication for the impairment, the annual impairment testing is not required yet all the intangible assets are tested along with the goodwill as well. Generally the business units are in benefit due to the goodwill and is not required otherwise but permitted; so that it can be allocate to the different group of assets for assessment of the impairment (PWC, 2013). 

Accounting treatment of concessions, Brands Patents, and similar Intangible assets

Concessions and similar rights, patents, licenses, brands processes are not explicitly recorded in the balance sheet according to 266(2) HGB. According to the HGB 248(2), an intangible asset generated internally cannot be capitalized. Both the purchased software and the internally developed and during their useful life of asset are capitalised and amortised (Bryan, Dafferty, and Wigan, 2017).

In Germany most recently it has been decided that if the acquired-in-process research project is continued at the risk of the entity for the development of the intangible asset the recognition option in the 248(2) section sentence 1 of the HGB shall be applicable. If the previous option is considered than the carrying amount of the research project is partially or fully clubbed with the production cost of the new intangible asset (Vetoshkina and Tukhvatullin, 2015).

Definitional of Goodwill

In the case of the finite-lived non-current intangible assets, the accounting treatment of the assets is to amortize the same over the expected entity specific useful life of an asset. In case there is confusion regarding the specific useful life of asset than the assets are amortized over the period of 10 years.

Further, there are certain assets which are used for the indefinite period and they are not amortized (Heng Wang, 2016). The brand’s mastheads, customer lists, the publishing titles and other similar non-current intangible assets fall under the section 248(2) of HGB they cannot be used indefinitely as they have a definite life and therefore they must be amortized (Osinski, Selig, Matos and Roman, 2017). In the concept of the intangible asset with indefinite useful life the useful life under tax law is often used under the Japan GAAP.

In association with the 266(2) of the HGB, the internally generated assets of the intangible nature are recorded in the heading A.I.1. In addition to the disclosure of the accounting policies, the statement of changes in the intangible asset must also reflect the notes. The expenses related to the consumption of the goods, or the use of the services for the purpose of the research and the development must be clubbed in the aggregate amount and shall be disclosed only if the recognition option under the section 248(2) sentence 1 of the HGB is activated (Bianchi, 2017). Under the Japan GAAP, all the soft wares that fall under the particular criteria are capitalised. However, the recognition criteria are different from IFRS (PWC, 2013).

Tangible assets

To generate the revenue for the company the tangible assets are one of the good sources. Tangible assets are either current or fixed in the nature. The items which are generally followed in the list of the current assets are cash, inventory and the marketable securities. These items are readily available for cash as these are used within a period of one year (Contractor, Yang, and Gaur, 2016). 

The tangible fixed assets are initially recorded at the historic purchase as per the section 255 subsection 1 or manufacturing costs as per the section 255 of subsection 2. The treatment is according to the German tax law; German GAAP does not permit revaluation of fixed assets in excess of original cost as reduced by depreciation (Accounting Standards Committee of Germany, 2017). In case of Japan the fixed assets are recorded at the cost less market value. The acquisition cost of machinery and equipment used solely for the purpose of a specific research and development project which cannot be used for any other purpose is expensed as research and development cost when acquired (PWC, 2013).

Treatment of Goodwill

The valuation of stock is done on the basis of market value; replacement value; net realisable value or another value permitted by tax rules whichever is lower as per section 253 (3), 254 HGB, there were certain stocks which are purchased in terms of foreign currency and are recorded at a cost lower than the original cost and there was the corresponding write down in the stock’s carrying value due to subsequent fall in the exchange rate, same as for UK GAAP, under section 280 HGB. Such exceptions are not allowed by German GAAP, where the stocks were being prohibited to be carried on such a value that exceeds the cost.

In case of the investments especially the long-term investments are recorded at a difference of the cost and the provision for any permanent value being diminished. Fixed assets investments (long-term investments) are the investments which are recorded at provision for any permanent diminution in value minus cost under section 253 (2) HGB. Such deduction in amount is charged to the profit and loss account, and such provisions should be no longer required to write back under section 280 (1) HGB.  

Current assets investments generally the investments which are purchased for the purpose of short term period are recorded at market value or cost whichever is less, where its market value is calculated on the basis of investment which is listed or publicly traded under section 253 (3) HGB) According to the German GAAP there is hardly any difference between the fixed assets and the assets purchased for the investment purposes. Following are the rules relating to the fixed assets (Saunders and Brynjolfsson, 2016). As per the Japan GAAP the assets like investment and the rental property are generally recorded at the cost with the subtraction of the depreciation. However, some of the value is also recorded at the after value (PWC, 2013).

The valuation of the stock is done on different basis such as

• Market value
• Replacement value
• Net realizable value or any another value permitted by tax rules whichever is lower as per section 253 (3), 254 HGB.

There were certain stocks which are purchased in terms of foreign currency and are recorded at a cost lower than the original cost and there was the corresponding write down in the stock’s carrying value due to subsequent fall in the exchange rate, same as for UK GAAP, under section 280 HGB. These kinds of exceptions are limited by German GAAP, where the stocks were being prohibited to be carried on such a value that is more than cost (Hope, Thomas, and Vyas, 2017). To check whether the direct costs are in any kind of alignment with the other prevailing standards, it is the duty of the entity to evaluate the direct costs from all possible areas. Otherwise in the vice versa cases the costs gets capitalised if the cost is relatable to the contract and the future performance in case of the rules as per the Japan GAAP.

Accounting Treatment of Concessions, Brands Patents, and Similar Intangible Assets

Cost includes both manufacturing cost and purchase cost. Manufacturing cost is a direct cost which includes the cost of raw material and production costs (including special production costs) which are directly included in the cost of production (Nastase, Calin, and Margina, 2016). As per section 255 (2) of HGB: Other costs such as an appropriate proportion of material overheads, depreciation on fixed assets of the tangible nature, overheads relating to the production and manufacturing of the material are also included. Such cost is recorded on the basis of the requirement of tax purposes as they are a part of the manufacturing process which is incurred at the time of production (Zhang and Zhang, 2017). The cost of general administration cost is inclusive of expenditure for voluntary staff benefits, social infrastructure and facilities and pensions after excluding the selling cost under section 255 (2) HGB The finance used in the production of an asset received in the form of loan, such interest on loan may be recorded during the period of production as per section 255 (3) HGB. The method of weighted average cost and LIFO as per section 256 HGB) are commonly accepted in the general practice and also accepted for tax purposes. FIFO method is not generally practiced or accepted for tax purposes until shows its ties with the actual pattern of consumption (Madhani, 2015). 

Creative Accounting

Innovative bookkeeping comprises of bookkeeping and accounting practices following the required laws and controls but usually diverts from what those standards intend to achieve. Creative accounting emphasizes loopholes and standards of accounting exploit a superior picture of the organization (Seetharaman, Helmi Bin Zaini Sooria, and Saravanan, 2012). Albeit creative accounting practices are legalized, and the areas they dig are often reframed to avoid such practices.

Governments can participate in “creative accounting” to hide the borrowings and sugar coat the spending balance and recommend utilizing “the contrast between spending deficiencies and the adjustment out in the public debt” to quantify creative accounting. Stock-stream modifications depict the distinction amongst shortages and the adjustment of the change in the debt (Stolowy and Jeny-Cazavan, 2013).

An essential advantage of public accounting statements is that they enable investors to analyze the financial health of contending organizations. In any case, when firms enter into creative accounting methods the value of the information gets distorted and the financials so provided are not reliable in nature. Innovative bookkeeping also is known as the creative accounting can be utilized to keep the debt securities out of the balance sheet and to keep a track of the earnings. For instance, Pressure to complete the term expectations of the Wall Street of the financial targets due at the end of each year can be due to the creative accounting activities. The CFO of a company belonging to the software industry can keep a portion of the revenue and record it as the liability on the balance sheet and recognize the same as current period earnings to achieve a certain goal.

Accounting for Tangible Assets

The CFO of a product organization may take a part of incomes that ought to be recorded as an obligation on the asset report and remember it as earned in the present time frame to achieve a specific income objective. A CFO of an assembling organization could defer the account of current period costs to an ensuing period to improve current period profit look. On the off chance that a hazy area of bookkeeping is discovered, it might be misused (German climate Finance, 2017).

The government of Germany intends to guarantee €4 billion of every 2020 not exclusively by means of the financial plan, but rather additionally by counting the low-intrigue KfW advances. In any case, just spending stores were considered to build up the 2014 benchmark. Consequently, the expansion is certifiably not a genuine multiplying. A legitimate use of the promise would require the €4 billion to be raised completely by means of the financial plan in 2020 and apart from this anything would qualify for the creative accounting (Hill, 2017).

One of the major incidents that happened in Germany had two phases, first was when the banks and the stockbrokers bought and sold shares for the investors of the foreign countries in such a way that they went to claim a tax refund for which they were not eligible. The second was when the banks and the investors purchased and sold the shares just before and after the dividend was distributed BBC, (2018).  This practice was outlawed in the financial year 2012and the Panama papers were in the major highlight when the systematic tax dodging at the offshores were revealed unintentionally. The total number of banks that were involved in the practice of the creative accounting was around 40. Literature provides evidence that creative accounting exists and is still practiced. Organizations search for the best graduates and experts who know the law and bookkeeping direction by heart and still discover approaches to influence the association to look great and alluring for speculation. While opinions on the acceptability of accounting manipulation, control change, usually saw as ethically unpardonable since it includes out of line exercise of intensity, injustice to clients and also involves in the unfair practices that weaken the authority of the regulations and the accounting theories. The below table depicts the usage of the creative accounting methodology ad for what purposes.

Managers	To reduce the cost of the capital and manage the total available remuneration. To gain the tax advantages and to avoid the political costs and also to minimize the income tax.
Stakeholders	To increase the market value of the shares and bonds and to control the claims from the employees.
Suppliers	The major reason for using the creative accounting it to keep a client that can be beneficial in the long term.
Clients	To provide the continuous services and to avail the short-term benefits the clients also use the policy of the creative accounting.
Government	To collect the taxes and to increase the opportunities for the purpose of the job for the population.
Bankers	The major reason is to repay the loans.

Conclusion

The nature of the tangible assets, as well as the intangible assets, is often generated internally and therefore there is a difficulty in the retrieving and measuring the problems. Moreover, there is a complex accounting for the assets and at times it becomes highly subjective.

From the above analysis, it can be concluded that the accounting treatment for the intangible assets and the tangible assets are done differently using different accounting standards such as IFRS and GAAP. Under the area of accounting for intangible assets as well as the tangible assets, there is a debate and disagreement between the standards and the rules as per the individual requirements and the convenience. On the other hand, the practice of the creative accounting shall not be used for the person or the professional means. 

References

Accounting Standards Committee of Germany, (2017) Tangible Assets [online] Available from https://alt.drsc.de/service/drs/standards/index_en.php?ixstds_do=show_details&entry_id=96 [Accessed on 29th July 2018]

Adeyemo, K.A., Ajibolade, S.O., Uwuigbe, U. and Uwuigbe, O.R., (2017) Mandatory Adoption of International Financial Reporting Standards (IFRS) by Nigerian Listed Banks: Any Implication for Value Relevance?. International Journal of Accounting Research, 42(90), pp.1-13.

Ball, R., (2006) International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), pp.5-27.

BBC, (2018) Germany fears huge losses in massive tax scandal [Online] Available from https://www.bbc.com/news/world-europe-40199259 [Accessed on 29th July 2018]

Bianchi, P., (2017) The economic importance of intangible assets. California: Routledge.

Bryan, D., Rafferty, M., and Wigan, D., (2017) Capital unchained: finance, intangible assets and the double life of capital in the offshore world. Review of International Political Economy, 24(1), pp.56-86.

Chandra, S., Erlina, E., Maksum, A. and Supriana, T., (2018) Effect of corporate governance on the cost of equity before and after international financial reporting standard implementation, United States: John Wiley.

The contractor, F., Yang, Y. and Gaur, A.S., (2016) Firm-specific intangible assets and subsidiary profitability: The moderating role of distance, ownership strategy and subsidiary experience. Journal of World Business, 51(6), pp.950-964.

German climate finance, (2017) Climate finance in Germany’s 2017 federal budget: more creative accounting than a true doubling [online] Available from https://www.germanclimatefinance.de/2017/02/03/climate-finance-germanys-2017-federal-budget-creative-accounting-true-doubling/ [Accessed on 29th July 2018]

Heng Wang, (2016) Intangible Assets [online] Available from https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.688.3279&rep=rep1&type=pdf [Accessed on 29th July 2018]

Hope, O.K., Thomas, W.B. and Vyas, D., (2017) Stakeholder demand for accounting quality and economic usefulness of accounting in US private firms. Journal of Accounting and Public Policy, 36(1), pp.1-13.

Hung, M. and Subramanyam, K.R., (2017) Financial statement effects of adopting international accounting standards: the case of Germany. Review of accounting studies, 12(4), pp.623-657.

Kim, J.B., Shi, H. and Zhou, J., (2014) International Financial Reporting Standards, institutional infrastructures, and implied cost of equity capital around the world. Review of Quantitative Finance and Accounting, 42(3), pp.469-507.

Madhani, P.M., (2015) A Study on the Corporate Governance and Disclosure Practices of Tangible Assets and Intangible Assets-Dominated Firms and Their Relationship.

Nastase, G., Calin, A.M. and Margina, O., (2016) International accounting standard no. 16 tangible assets and its practical implementation. Quality-Access to Success, 17.

Nobes, C., (2014) International classification of financial reporting. California: Routledge.

Osinski, M., Selig, P.M., Matos, F., and Roman, D.J., (2017) Methods of evaluation of intangible assets and intellectual capital. Journal of Intellectual Capital, 18(3), pp.470-485.

PWC, (2013) Similarities and differences [online] Available from https://www.pwc.dk/da/nyt/finance/regnskab/assets/similarities-nov-2013.pdf [Accessed on 3oth July 2018]

Saunders, A. and Brynjolfsson, E., (2016) Valuing Information Technology Related Intangible Assets. Mis Quarterly, 40(1).

Seetharaman, A., Helmi Bin Zaini Sooria, H. and Saravanan, A.S., (2012) Intellectual capital accounting and reporting in the knowledge. New York: Springer.

Stolowy, H. and Jeny-Cazavan, A., (2013) International accounting disharmony: the case of intangibles. Accounting, Auditing & Accountability Journal, 14(4), pp.477-497.

Vetoshkina, E.Y. and Tukhvatullin, R.S., (2015) Economic efficiency estimation of intangible assets use. Mediterranean Journal of Social Sciences, 6(1 S3), p.440.

Zhang, I.X. and Zhang, Y., (2017) Accounting discretion and purchase price allocation after acquisitions. Journal of Accounting, Auditing & Finance, 32(2), pp.241-270.