Change in Recognition of Intangible Assets after Adoption of IFRS Standards in Australia

Change in Recognition of Intangible Assets after Adoption of IFRS Standards in Australia

Table of Contents

1.         Change in Recognition after the Adoption of IFRS standard in Australia. 3

1.1.          Reason for Changes Regime. 4

1.2.          Identification of Intangible Assets. 5

1.3.          Pre and Post AIFRS Periods. 6

2.         Concluding Remarks. 8

3.         References. 8

List of Figure

Figure 1. Adoption of Accounting Standards Relating to Intangible Assets in Australia. 5

1.      Change in Asset Recognition after the Adoption of IFRS standard in Australia

Accounting regarding the intangible assets is always been a big puzzle because of the ambiguous value estimates. Although these assets has the significant role in development of firm value but with the complex underlying valuations, these intangibles fail to cope up with the criteria of asset recognition according to traditional accounting system (Kabir, 2008). Due to the difficulty in the measurement of the correct value of intangibles the value of these investments mostly expensed as they are incurred in most of the accounting standard. This practice reduce the transparency by understating the economic value of these intangibles which ultimately reduce the relevance of accounting information (Wyatt, 2001).

Australia became the first country to accept the implication of IFRS in local government entities in 2004, the full compliance of IFRS standard took place from 2005 fiscal year. At first there was a huge debate about the implementation of such standards and different interest groups considered that it will bring a lot of changes in the contemporary financial dynamics of the country and affect the account quality. The main reason behind the adoption of IFRS is to change several prevailed standards in Australian and recognition of internally generated intangibles is the superior one (Clarke & Dean, 2005; Deegan, 2005)

This essay different two distinct regimes i.e. Generally Accepted Accounting principles (GAAP) and International Financial Reporting Standards (IFRS) followed by Government of Australia regarding the capitalization of Goodwill and other intangibles before and after January 1, 2005. This essay elaborate that whether the relevancy of Australian financial reports before and after adoption of AIFRS regime.

1.1. Reason for Changes Regime

Commitment to International Harmonization policy, Australian Accounting Standard Board (AASB) considered the adoption of IFRS against the AGAAP from January 1, 2005. As the result the reporting under AIFRS accommodates the de-recognition of many internally generated identifiable intangibles.

AASB 1047 provided the information regarding the intangible assets which are expected by the investor in Australia. After the change in regime the gap between actual and expected value has been reduced and there is more transparency, which is communicated to investors (Chalmers & Godfrey, 2006a).

Before AIFRS there was no standard equality of AASB 138, which provides evidence regarding identifiable and non-monetary assets with no physical existence like mastheads, trademark, brand names and customer list. The introduction of AIFRS is for the de-regulation of the previously recorded intangible assets which are internally generated, secondly the previously revalued asset are recorded according to historical prices as asset can’t be revalued unless there is a developed secondary market so that with the valuation should be based on the market value before revaluing the asset (Ravlic, 2005).

  Many academicians, practitioners, consultants and financial experts argued that AASB 138 would have significant impact on the firm, who are forced to de-regulate the internally generated intangible assets, as these assets have significant contribution in the value of reporting companies (Picker & Hicks, 2003).

Before 2005 there was no single standard which would communicate the accounting treatment for the Australian intangibles. Rather there were standards concerns with intangible asset treatment, in which AASB 1013 represented the goodwill treatment, accounting treatment for research and development was represented by AASB 1011, Revaluation of noncurrent assets was treated by AASB 1041 and AASB 1021 was for Depreciation.

Figure 1. Adoption of Accounting Standards Relating to Intangible Assets in Australia

Source: (Jaafar, 2011)

1.2. Identification of Intangible Assets

In broad point of view intangible assets has some economic value to the firm although they don’t possess physical substance. There may be many intangible assets both from external and internal environment of the company. But according to AASB (2007) the intangible asset is the identifiable non-monetary asset which is without a physical substance. The identifiable criterion is referring to two categories; one is it is separable into entity and can be sold, rented, transferred and exchanged, individually and collectively. Second is it is come from some other legal rights. Some of the types of intangible assets are internally generated intangible assets which are not identifiable from the source of value but it is generated from inside of firm and inside goodwill, supplier and customer network, knowledge about market and technology, administrative structure and firms’ information system come into this horizon. Some intangible assets are acquired from other party such as patents, trademarks, and licenses. Third one is the investment in the R & D activities (Jaafar, 2011).

1.3. Pre and Post AIFRS Periods

Chalmers, Clinch, & Godfrey (2008) investigated the AIFRS w. r. t post and pre adoption. Using both AIFRS and AGAAP measure the association of intangibles i.e. R&D and goodwill with share prices and infer that AIFRS is considerably better in conveying the true picture for the valuation of intangibles. The information communicated by AIFRS is far more sophisticated than AGAAP. Information for investors regarding identifiable intangibles is more reliable under AIFRS regime than AGAAP regime.

AASB 138 for intangible assets report de-recognition of intangible assets which were internally generated. Cheung, Evans, & Wright (2008) investigated the impact of AASB 138 on key financial measures and also on the reported intangible assets of Australian annual reports. They compared both GAAP and IFRS measure in 2005/06 reports. They draw implications regarding transparency of communication and reported the change in debt to equity ratio after adoption of AIFRS.

The standard work for purchased goodwill before the AIFRS period was Acquisition of goodwill (AASB 1013) and acquisition of assets (AASB 1015) in that period amortization of these assets was permitted and it was done on straight line method with period within 20 years. Revaluation was allowed but the upward revaluation was prohibited. On the other hand the post AIFRS period the accounting standards for purchased goodwill were business communication (AASB 3) and AASB 138 for intangible assets. The recognition is done at cost on the basis of historical values and market liquidity is taken as the important factor in recognizing the intangible assets (Chalmers & Godfrey, 2006b), at the end the revaluation is not allowed in post IFRS standard but the annual impairment is considered as the important factor to correctly specify the effect of goodwill on the firm value. For internally generated goodwill AASB 1013 standard was used and recognition was prohibited and after implementation of AIFRS, AASB 138 for intangible asset standard prohibits the recognition the asset (Alfredson, 2001).

Research and development is the internally identifiable intangible asset which can have future economic value for the firm. Pre AIFRS standards were accounting regarding research and development cost (AASB 1011) and amount receivable of non-current assets (AASB 1010). The recoverable amount test is recommended by the standards before recognition then Recognition is incurred unless the receivable expectations beyond doubt about future economic benefits. Amortization is done on the basis of future research and development. Now the post AIFRS period AASB 138 intangible assets and business communication AASB 3. The revaluation model is based on the internal generation and occurrence of expanses. The recognition is done at cost and expenditures are classified into two phases, at research phase expenses are recorded as incurred, and at development phase recognition is done on the basis of satisfaction of certain conditions. Most important amendment which differentiates the pre and post AIFRS era of Australian accounting standards is prohibition of the recognition of specific internally generated intangibles i.e. publishing titles, brands, mastheads, and customer list. Intangible assets in post AIFRS period have indefinite or infinite life. If it has indefinite useful life then impairment analysis is done at least annually. And if it has infinite useful life then amortization is done over the intangible asset useful life on systematic basis (Jaafar, 2011). 

2.      Concluding Remarks

It has been observed that there are many complications in accounting for intangibles that become the center of attention for many academics and standard setters. With the brief discussion it has been observed that intangible assets serve as the key factor for the survival, success and development of the firms. As it has been discussed that prior to adoption of AIFRS, lack of identifiable intangible assets assert the management in discretion. With the implementation of the IFRS in Australia the most of the discretions were restricted. Proper recognition is mandatory for the true picture of financial statement. The accounting standards which were pre AIFRS period created complexities in accounting for these internally generated intangible assets and further under-recognize the intangibles in financial statements. Post AIFRS standards are the effort to reduce the complexities and provide proper recognition and valuation of these intangibles.

References

AASB. (2007). Australian Accounting Standards Board Intangible Assets. Victoria.

Alfredson, K. (2001). Accounting for Identifiable Intangibles - An Unfinished Standard-Setting Task. Australian Accounting Review, 11, 12–21.

Chalmers, K., Clinch, G., & Godfrey, J. M. (2008). Adoption of International Financial Reporting Standards: Impact on the Value Relevance of Intangible Assets. Australian Accounting Review, 18(3), 237–247. doi:10.1111/j.1835-2561.2008.0028.x

Chalmers, K., & Godfrey, J. (2006a). Intangivle Assets: Diversity Impact, 16(3).

Chalmers, K., & Godfrey, J. (2006b). Intangible Assets : Diversity Impacts, 16(3).

Cheung, E., Evans, E., Wright, S., Esther, C., Elaine, E., & Wright, S. (2008). The Adoption of IFRS in Australia : the case of AASB 138 (IAS 38) Intangible Assets. Wiley-Blackwell Publishing Asia, 18(3), 248–256. doi:10.1111/j.1835-2561.2008.0029.x

Clarke, F., & Dean, G. (2005). Double standards: a different take on true and fair view. Australian Financial Review, 83.

Deegan, C. (2005). Australian Financial Accounting. Sydney: McGraw Hill.

Jaafar, H. (2011). Accounting for Intangible Assets, Firm Life Cycle and the Value Relevance of Intangible Assets.

Kabir, M. H. (2008). Accounting for Intangibles. Chartered Accountants Journal of New Zealand, (87), 63–66.

Picker, R., & Hicks, K. (2003). Derecognition looms for corporate intangibles. Australian CPA, 78–9.

Ravlic, T. (2005). Readings in Financial Reporting , Wiley, Queensland.

Wyatt, A. (2001). Accounting for Intangibles: The Great Divide between Obscurity in Innovation Activities and the Balance Sheet. The Singapore Economic Review, (46), 83–117.