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The Accounting Standard AASB 138 intangible asset was created by the Corporations Act 2001 by the Australian Accounting Standard Board in the year 2004 on the 15th of July. The main aim of this standard was to set down accounting treatment for intangible assets that are not contained in other standards. The standards on accounting for intangibles are contained in ASSB 138 intangible asset. ASSB 138 intangible asset covers accounting for intangibles assets except those in paragraph 2 and 3 that are covered by other accounting standards. These include financial asset and mineral rights and expenditure on exploration for development and extraction of minerals, oil, natural gas and similar non regenerative resource (Picker et al. 2009).
Intangible asset is defined by Accounting Australian Standard Board in paragraph 8 of ASSB 138 as 'an identifiable non-monetary assets without physical substance'. (AASB 2007). Note intangible assets are non monetary assets i.e. assets as receivable and cash are not intangible assets. Monetary assets are defined 'money held and assets to be received in fixed or determinable amounts of money' (Elsayed 2010). The main two main characteristic of intangible assets are:
Can be indentified
Should not be physical substance.
Some examples of intangible assets include copyrights, trademarks , patents and etc.As mention in AASB 138 intangible asset was in progress to be used in financial statement beginning 1st of July of 2007. The main aim of this standard AASB 138 was accounting treatment for intangible assets that are not accounted in other standards by Australian Accounting Standard Board. There are other AASB standards that also accounts for intangible assets that are specific which include:
"Intangible assets held by an entity for sale in the ordinary course of business (AASB 102 inventories and AASB 111 construction).
Intangible assets arising from insurance contract with policy holders (AASB 4 insurance contract).
Deferred tax assets (AASB 112 income taxes).
Lease within the scope of ASSB 117 lease.
Assets arising from employees benefits (AASB 119 Employee Benefit).
Goodwill acquired in a business combination (AASB 3 Business Combination).
Noncurrent intangible assets held for sale (AASB 5 non-current assets held for sale and discontinued operation)". (Deagon 2007.)
Assets and recognition under AASB framework.
As mention in AASB framework, an asset is defined as 'a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity'. Assets are considered very essential to a business as it offer entities to reach their goals. The future economic benefits for an asset come in number of way to the business, it may come as
Assets that are used in production of goods or services e.g. machinery that can be sold for a price in the market.
Assets can be traded with other assets or used to purchase other assets.
Assets can be used to settle a liability between the entity and entity suppliers.
Many assets are considered to be physically present but it is not mostly the case, goodwill and other intangibles could be also assets as they create future economic benefits for the business. Recognition is the process of including items in the financial statement of entity i.e. balances sheet and income statement that meets the definition given by ASSB or it standards. For any assets to be recognized in financial statement, the following will need to be satisfied first:
The assets should provide future economic benefit to the entity.
The asset should have cost associated with it e.g. deprecation that could be measured in real terms.
Future economic benefit.
Future Economic Benefit is a concept of how potentially to contribute goods or services, in agreement with the entity's objectives and volumes and quality to be produced directly or indirectly to create cash flow to the entity. It is the concept of how the asset will contribute to the cash flowing activity of the business. The framework does not give any specific definition to these terms.
Real terms measurement.
This concepts deal with how cost associated with assets would be measured in real terms. The framework does not give any definition for this concept, but it says the cost associated with this can be measured through estimation.
As mentioned in AASB 138 intangible asset, intangible assets are written down in the financial statement only if they satisfy the definition of intangible asset i.e identifiable and without physical.
As mention in IAS 38 intangible asset is defined as idenfilibilty that distinguish other intangibles assets from goodwill. According to the paragraph 12 of the AASB 138, asset are identifiable if
Separable i.e. it can be separated from the entity and can be sold and transferred easily to the other party.
Arises from other legal rights that could be or not be transferable or separated from the rights and obligations.
No physical substance.
It is the main characteristic that distinguishes intangible assets from all other class of assets. It helps in differentiating fixed asset as plant, property and equipment from other intangible asset.
Initially, intangible assets are measured at cost as mention in ASSB 138 framework and be changed only if there is a market. In the recognition of asset, intangible assets provide economic benefit to the entity. The brand name can provide economic benefit to the entity as it provides cash flow. All customers purchase the item due to its brand name. Intangible assets have cost associated with them i.e. when the business has a good brand name, it needs to pay extra money to maintain the brand name e.g. extra marketing cost.
The original name of International Financial Reporting Standards (IFRA) was International Accounting Standard (IAS) that was adopted by International Accounting Standard Board (IASB) on April first 2001. The IASB was now respondable for setting international accounting standards. The IAS 38 intangible assets and AASB 138 intangible assets standards describes intangible asset definition exactly the same. According to IAS 38 intangible assets are those identifiable nonmonetary assets without physical substance (Ferrari & Montanari 2010). The main difference between ISA 38 intangible assets standard and ASSB 138 intangible assets are the characteristics that can be used to identify intangibles.
ASSB 138 had two characteristics while IAS 38 has three characteristics. IAS 38 intangible assets characteristics include
control (power to obtain benefits from the intangible asset)
Future economic benefits (such as revenues).
Writing down intangible asset.
There are no of issues related why some firms are trying to encourage of writing down of the intangibles. Using the international financial reporting standard (IFRS) firms are finding hard to draw up financial statements according to this standards while this standards is different from the ASSB standards. It is creating a great confusion among individual firms. The main reasons why international financial reporting standard (IFRS) are trying to write down of intangible assets:
Conflicts with the way accountant have classified assets. Accountants have classified intangibles as non- monetary i.e. Items like receivables, prepayment and deferred taxes are not considered to be intangible and items like leases, deferred cost, investment and etc are considered to be intangibles assets. It makes users who use these standards difficult whether to write as intangible assets or not.
It has created potential conflict with the framework. Based on the definition of assets should have future economic benefit, and then all assets are considered to intangible as collection and transfer of economic benefit. For example giving a motor vehicle for lease that means it a fixed assets but lease is considered to be intangible as it creates future economic benefit.
The problems associated with physical tangibility of asset. In the definition of assets, words like should be tangible and physical present has created problem in drawing up financial statement. For example making deposits in bank and trade debtors are not physical and are not tangible but are still classified as tangible assets.
Intangible assets may be extremely difficult to manage and operate rather than tangible asset. It is really hard to steal and break down building, machinery and etc and really easy to steal and break in to computers softwares and networks.
Intangible are really hard to transfer from one entity to other entities. Selling a building and machinery is easy as it can be calculated easily and very hard to sell computer softwares as different entities have different purpose of trading. The software could not be used by other entity.
The above are some of reasons why International Financial Reporting Standards (IFRS) are trying to write down intangibles as it held users of entity to produce financial statement easily and competitively.
Personal view on writing intangible asset.
Intangible are considered to be of great importance as it help determining the market to book ratio. If intangibles are removed from financial statement, this will create the price to book ratio will increase highly. I.e. Research shows how Apple trading price to book ratio has increased to 9.3 as compared to Microsoft 8.7. This indicates that these industries are leaders and if the intangible are written down, the price to book ratio will drastically drop down. It also indicates these companies rely heavily on intangible assets for their profit. The companies that have high price to book ratio are considered to be very successful in the near future. These companies are successful due to the brand name they offer in the market. The price to book ratio also encourage entity to make great decision on where to make investment. Intangible also increase the share price of the product. Example Dell computers are brought by many customers as they know the brand is of high quality as compared to 1990s where customers had no idea on dell computers. The Australian stock exchange says, that in 1997 the average share price was 2.1 to tangible assets and in late 2001 the ratio of price of intangibles asset was more than three times and doubling the gap between intangibles and tangible assets in four years.
The above reason shows us how intangibles have increased the overall market share of entities and how the share will fall if intangible is written down by Australian Accounting Standard Boards (AASB). It also shows how entity share price has increased due to intangibles.
In summary, intangibles assets are considered to be sufficiently different from other assets. AASB 138 intangibles asset is an important standard that help entities in making to achieve high markets share and price. This standard also help entity to draw financial statement more accurately and trustworthy to be used by entities users and its stakeholders. This standard also helps accountants to draw up accounts with any mistake and errors .i.e. easy and convenient. The standard also give clear ways of which are considered to be intangibles (what characteristic needs to be known) to be written down in financial statement.