Question:
Many of the largest international firms including Microsoft, Google, Coca Cola and Apple identify substantial intangible assets which may be quite different from the more traditional ‘bricks and mortar’ type organisations including BHP. Technological developments have resulted in intangible assets become an important part for many businesses of all sizes. An important accounting question for any business is whether they are able to recognise intangible assets in terms of AASB 138 and the basis of their measurement after initial recognition.
(a) You are required to electronically access the Annual Financial Report (AFR) of TWO ASX listed companies, one reporting substantial intangibles capitalised (e.g. most radio, television, electronic development and gambling companies) and the other reflecting small proportions of total assets as intangible assets (e.g. retail, mining and construction).
(b) Using the AFRs you have acquired, identify and compare the recognition of and subsequent measurement of ‘Intangibles’ in terms of the ‘AASB Framework for the preparation and presentation of Financial Statements’ and ‘AASB138 Intangible Assets’. (Hint most of this analysis and commentary will stem from the notes – including the note on Intangible assets and the note on Accounting Policies).
You are also required to calculate ratios, to be reported in tabular format, which reflect the ‘before and after position’ of the two firms for two comparative consecutive years (figures that will be available in the annual reports), to reflect the effect of the removal of intangible assets from the financial statements. (Note: the workings should be provided in an appendix.)
Financial statement help to provide a clear and precise idea about the tangible and intangible asset of the company which eventually help the company to provide a clear notion about the financial position of the company in the market and other key specific area related to business operation. The company needs to identify the acquired asset as the intangible asset on the basis of the identification guidelines mentioned in the AASB 138. According to the AASB 138 requirements, this particular asset can be recognised by the company as long as it represents the fair value which can be measured reliably. Also, the particular asset can be considered as a part of the business combination irrespective of it being an internally generated intangible asset.
Therefore, based on the fact, the asset can be recognised as intangible if, and only if:
After the initial recognition and it comes to the portion of measuring the value. In this process, the entire process of measurement can be pursued by the help of values and their measurement processes. In this case, the useful life of the goodwill is needed to be measured in order to see if it needs to amortise (Mackie, 2009). The judgement of the firm depends on the assessment of certainty attached with the flow that can deliver the future economic benefits to the firm by the use of the asset. It can be performed on the basis of the evidence gathered from the time of initial identification of the asset. Providing the greater weight to the external evidences is the part of the measurement and assessment process.
Considering this requirement, the selection of the company has been done and in this case, the company is selected as Echo Entertainment Group Ltd (EE9), as the company is one of the largest publicly listed gambling companies in the Australian market. After electronically assessing the Annual Financial Report (AFR), it is also acknowledged that the company is reporting the substantial intangibles capitalised. Analysis of the financial ratio is carried out with the help of the financial statement which the company produce at the end of each fiscal year. According to this context, it should be mentioned that the any expenses paid in the process of researching the existence of the intangible assets in the firm can be considered as a business expense (Moberly, 2014). Expenses incurred on an intangible asset that was previously recognised as business expenditure cannot be considered or identified as the part of capitalization cost of an intangible asset at a later date.
In this portion the computation of different types of ratios will be displayed on the basis of proper measuring formulas and the whole process will be done by considering two financial years of operation of Echo Entertainment Group Ltd. The purpose of this portion is to establish the fact of changes in financial performance by considering the results obtained from the ratios of “Before and After Position”.
The calculation of ratios will be done on the basis of Liquidity, Profitability, Solvency and Turnover areas of the company (Rodgers, 2008).
The results of the ratios on a tabular basis are shown in the appendix
According to the rules maintained in the AASB 138 related to the intangible assets, the fact can be clarified as the entities like Echo Entertainment Group Ltd can adopt them for the purpose of reporting their annual periods beginning on or after 1st January, 2005. All it requires is de-recognition of intangible assets that were generated internally. Prior to the inclusion of this particular guideline, it was observed that there are many listed companies were getting affected by the way of the substantial impacts on their reports. Therefore, on the basis of the annual reports available in between 2004 and 2005 for those companies, the expected outcomes of the AASB 138 reported on the intangible assets and key financial reports can be further explained. The essential measurement process is done on the basis of the reliable basis and it should need to be reported under both Australian GAAP and AIFRS (Vogel, 2007). Considering the resulting impact of AASB 138, the significant changes can be observed in the intangible assets and amount of debt equity as reported in the AIFRS. The measurement and the evaluation of the significant changes in the debt equity ratio by considering the expected change and actual change can help the different stakeholders who are using the report for taking their effective decisions. In this case, banking organizations can be worth to mention as they take their financial decision with the respect of the company’s financial position by considering the changes as reported. In the conclusion of the process, the useful implications can be considered regarding the transparency of the communication in the annual reports.
Intangible assets are considered as the non-physical assets that are important for the company and they have the effective life greater than one year. Some of the examples of intangible assets for the company are, patents, trademarks, copyrights, franchise, name of the company, licence, goodwill, etc. they used to provide the long-term benefits to the company (Moberly, 2014). Every company maintains accounts for the intangible assets and they are treated as the depreciable assets and natural resources. The life of these assets is never allowed to cross forty years and the cost of the intangible assets are allocated to the expense during the useful life or legal life of them, whichever is shorter. This particular process of allocating the cost to the expense is called as the amortization and it is known as the best practice that can be used by the management for managing and recording the intangibles.
It is assumed that the management of the company has the flexible power to manage and treat the intangible assets under the guidelines and standards of accounting principles. Based on the positive expectation, considering the straight-line method to amortize the intangible assets can be useful for the management of the company. In this case, the company of Echo Entertainment Group Ltd can use the straight-line amortization method to treat its goodwill in the financial year of 2014. If the goodwill is supposed to have a useful life of five years then the amount of amortization each year will be AUD (1442/5) = AUD288.4 m. Therefore, the company will debit AUD288.4 m as the amortization expenses and credit the same from the value of goodwill.
In this case, it is worth to mention, when the entity acquire another entity, the value of goodwill is considered as the basic difference (Vogel, 2007). The difference can be established by the way of the purchase price and the amount of price that are not associated with the assets or liabilities in the process of acquisition. According to the different accounting journals, goodwill has the capability to generate the independent cash flows.
According to the journal named Intangible Asset Accounting, the amortization should be done on the basis of the useful life of the intangible assets and the amount to be amortized should be considered as the cost to be recorded by the management after subtracting the residual value, if any. On the usual aspect, the full value of intangible assets needs to be amortized as the involvement of the residual value cannot be observed into those assets.
References:
Mackie, C. (2009). Intangible assets. Washington, D.C.: National Academies Press.
Moberly, M. (2014). Safeguarding intangible assets. Oxford: Butterworth-Heinemann.
Rodgers, P. (2008). Financial analysis. Oxford: CIMA.
Vogel, H. (2007). Entertainment industry economics. Cambridge: Cambridge University Press.
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