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GE Aviation is a company which engineers aircraft engines and supplies all around the world. It holds customers worldwide including British airways, emirates, Ryan air and others. I have looked at GE Aviations Ltd financial statement and its policies in accordance to the standards in order to cover the accounting topic, 'Intangible Assets'. I have got GE Aviation financial statements for year 2007.
International Accounting Standard 38
The IAS 38 prescribes the accounting treatment for intangible assets that are not dealt with specifically in another IFRS. The Standard requires the entity to identify an intangible asset if certain criteria are met. It also specifies how to calculate the amount of intangible assets and requires certain disclosures regarding intangible assets. [IAS 38.1] http://www.iasplus.com/standard/ias38.htm (accessed 15/11/10)
IAS 38 applies to all intangible assets other than: [IAS 38.2-3]
exploration and evaluation assets (extractive industries)
expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
intangible assets arising from insurance contracts issued by insurance companies
intangible assets covered by another IFRS, such as intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits, and goodwill. Goodwill is covered by IFRS 3. http://www.iasplus.com/standard/ias38.htm (accessed 15/11/10)
What is Intangible Asset?
Intangible is an asset that is not physical in nature, corporate intellectual property such as trademarks, patents, software, copyrights, and business methodologies. The most common intangibles at present is Goodwill, and brand recognition. For example a General Electric is a company brand name in which can be recognized from the aircraft engines, this is considered as an intangible because it is copyright. The Intangibles can be classified as two ways, either definite or indefinite on the specifics of the asset. If a company gets into a legal contract to operate under the company's patent, with no plans of extending the contract, it will then be classified as a definite asset because it would have a limited life. [IAS 38.88] http://www.investopedia.com/terms/i/intangibleasset.asp (accessed 25/11/10)
In the financial statement, intangible asset is presented different from tangible fixed assets. Some elements of fixed assets might be shown on the tangible or intangible assets but securities, financial instruments, bank deposits and liabilities are not either of them, although they are often current assets, the distinction may not need to be made anyway. The most common intangibles are deferred tax assets, patents and copyrights and capitalised research and development.
As for intangible the IAS 38 applies states that intangible should be identifiable, controlled by the company/entity and increase future profits. http://moneyterms.co.uk/intangible_assets/ (accessed 28/11/10)
GE's other intangible assets shows a figure of £12,915 million in year 2006 and £16,178 million in 2007. This shows their intangible assets have increased in value in one year. Referring to note 15 of the financial accounts, they have provided notes about their intangible assets.
Depreciation and Amortization
The cost General Electric plant and machinery equipment is depreciated on reducing balance method. Non U.S assets are depreciated on the straight line method. The cost of their equipment is leased out to others operating leases is amortized on a straight line basis to estimated residual value over the lease term or over the estimated economic life of the equipment. GE's intangible assets are amortized on a straight line basis over the assets estimated life except that individually significant customer-related intangible assets are amortized in relation to total related sales. The intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested annually for impairment and written down to fair value as required.
GE's current intangible assets are the following:
Patents, licenses and trademarks
Present value of future profits
These intangibles are owned by General Electric in which they have rights to. GE's financial accounts are prepared in conformity with U.S generally accepted accounting principles (GAAP).
GE's goodwill and other intangible assets stated that their intangibles amounted to $81.1 billion and $16.2 billion, at December 2007. GE saw an increase on their intangibles of $3.3 billion from year 2006 and Goodwill increased by $9.7 billion.
The companies Goodwill shows a period of two years accounts. There is an increase of Goodwill to $81,116 in 2007 from $71,399 in 2006. This shows profitability on their asset stating it has a future value to it.
Changes in Goodwill
General Electric saw an increase in balance of $9,028 million of Goodwill in 2007. The reason why they saw an increase is because of new acquisitions which they bought Vetco Gray for $1,379 million, Auto service leasing GmbH, the leasing of allgemeine leasing and GmbH and CO. ($694 million) by commercial finance; they also bought Smith Aerospace Group Ltd for (3,877 million). These were adjusted in the accounts and it increased the value of other intangible assets such as, customer related. The goodwill balance declined by $269 million related to purchase accounting adjustments to prior-year acquisitions during 2007. http://www.ge.com/ar2007/note_15.jsp (accessed 28/11/10)
The intangibles assets are subject to amortize of $4,286 million. The IAS 38 requires the entity or company that 'Subsequent expenditure on an intangible asset after its purchase or completion should be recognized as an expense when it's incurred, unless it is probable that this expenditure will enable the asset to generate future economic benefits in excess of its originally assessed standard of performance and the expenditure can be measured and attributed to the asset reliably' (IAS 38.60). It should be disclosed on the income statement. http://www.iasplus.com/standard/ias38.htm (accessed 28/11/10)
GE' acquired the components of finite-lived intangible assets during 2007 and their weighted average useful lives are as follows:
Customer related - $2.277 million - (17.5 years)
Patents, licenses and trademarks - $299 million - (20.2 years)
Capitalized software - $590 million - (4.2 years)
Lease valuations - $992 million - (7.6 years)
All other - $128 million (9.9 years)
According to the standard overview the cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS 38.97] http://www.iasplus.com/standard/ias38.htm (accessed 28/11/10)
The amortisation method should make changes to the benefits of intangibles.
If the pattern cannot be determined reliably, amortise by the straight line method.
The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of another asset.
The amortisation period should be reviewed at least annually. [IAS 38.104]
Goodwill is prohibited for amortization; therefore it can be impaired annually.
The intangibles should be assessed for any impairment in relation to the standard overview IAS 36. (IAS 38.111)
GE amortizes the cost of their intangibles over the estimated useful lives unless such lives are deemed as indefinite. Because the overview IAS 38 defines that 'Any intangible asset which has an indefinite useful life is prohibited to be amortised'. [IAS 38.107] customer-related intangible assets are amortized in relation to the sales revenue. The ones that are amortized are tested for any impairment based on undiscounted cash flow. If it's impaired then it's written down to the fair value based on the appraised values. Intangibles that are infinite are tested for impairment and written down to the fair value as required only annually.
Objective of Financial Reporting
The objective of financial reporting presenting useful data to the financial statements such as Balance sheet, Income statement, changes in equity, for users so that decisions can be made in regards to the company's financial reporting. The data should be accurate so that a clear understanding of the entity's activities is possible. Financial reporting is also useful to investors because it shows transparency of the company's strength and weaknesses. Also it is useful for managers and directors so it can be used for decision making. An advantage for the financial reporting is to get more finance for example, long term loan from a bank. http://www.answers.com/topic/objectives-of-financial-reporting (accessed 26/11/10)
Financial Accounting includes various aspects of information in regards to the businesses. It not only includes financial statements but it includes other means of communicating financial information to its users. The statements provide the businesses resources, for example assets, liabilities and capital. These are useful in investment and credit decisions.
Financial reporting also provides notes in regards to the statements showing the figures. These notes are available on the company's accounts. They are there for disclosures such as changing prices, management discussions and analysis. Those who make economic decisions about the business enterprises, financial reporting will be a useful way. http://www.referenceforbusiness.com/small/Eq-Inc/Financial-Statements.html (accessed 27/11/10)
The Financial Accounting Standards Board (FASB) has defined the following elements of financial reporting of a business:
Assets - an asset where a company owns the goods or building where they have rights to it
Liabilities - this is where you owe your creditor money for either goods bought on credit, short term loan, overdraft or interest.
Equity - this is important of the balance sheet because it has information about its equity, these can be retained profit, ordinary shares, preference shares, capital
Revenues - this is a major part of the incomes statement. Revenues are inflows, money coming in to the business enabling the business to pay its costs and liabilities in order to break even and see a return.
Expenses - these are incurred at the time of sale, administration and distribution expenses.
Gains - this is where a shareholder will see their return on their investment, this is known as return on capital employed.
Losses - are decreases in equity, this can be due to incidental transactions of an entity or circumstances affecting the profit margin which results in a loss.
Investment by owners - there are many ways of investing to be able to increase the net assets. This can be by transfer in general reserve, of investing in intangible assets.
Distributions to owners - this is where the net assets are decreasing of a particular enterprise resulting from transferring assets or incurring liabilities to owners. This will lead to ownership interest or may decrease equity of an enterprise.