The Australian Accounting Standards Board - Example

ARGUMENT OF AASB 138 Name: Professor: Institution: Course: Date: The Australian Accounting Standards Board (AASB) The concept Regulation has always been a subject of debate throughout the years. In regard to the finance and business industry, there exist many regulators whose major purpose is usually to govern the operations, transactions and generally activities within the finance and business industry. Some of the commonly known regulators include the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investment Commission (ASIC), the Australian Accounting Standards Board (AASB) and Financial Reporting Council (FRC). This paper focuses on a discussion in line with the Australian accounting standards boards 138 (AASB 138). It addresses the concepts of intangible assets and how the AASB 138 operates in order to ensure that Australian industries are regulated accordance with the Australian accounting standards. Additionally some of the drawbacks in relation the AASB0138 have been discussed since its implementation. To begin with intangible asset may be defined as an asset that is of non monetary nature which lacks the element of being viewed as a physical substance (AASB 2004, p.13). There are quite a number of good examples of intangible assets which include patents, copyrights and trademarks nevertheless, to some degree trying to be more realistic there exist some intangible assets whose identification is quite complex since they are hardly seen but they have significant benefits to an organization. Some of such intangible assets include research and development, knowledge and skills of workers and a strong and well established customer base. The Australian accounting standards board as a regulator of the Australian business industry has stipulated sets of rules and regulations which govern corporations. Basically the AASB plays the role of creating and developing those standards that can be applied to the to Australian business and finance organizations. The issue of intangible assets regulations is a major part of the regulatory frameworks that are developed hence the existence of quite a number of considerations that the AASB is required to heed to in executing its role. They include the importance placed upon the preparation of reports as far as financial reporting is concerned, the future of organizations in regard to a chance of occurrence of an economic loss and lastly what the public expects from an organization (Matolcsy and Wyatt 2006, p.460). This issues shapes how the AASB carries on the process of creating and developing regulatory framework for enforcement. It is quite important to note that it is not the responsibility of the AASB to ensure that organizations and business entities adhere to the set regulations, this task is executed by the Australian securities investment commission (ASIC). In the year 2004 the AASB made an introduction of a framework that merged all accounting principles related to anything considered intangible into one standard of accounting identified as Australian accounting standard board 138 (AASB 138). This accounting standard may be equated to the international accounting standards 38 that constitute regulations in relation to assets that are intangible. The AASB 138 introduced focused on the provision of guidance through the processes of measuring and recognition of expenses that are incurred on intangible assets (Nzuve 2012, p.35). Before the AASB 138 could be implemented discretion of how finance and business entities accounted for their intangible assets was a necessity. In this case an evaluation was carried in line the previous accounting standard known as the Australian GAAP was used by the entities. The outcome of the evaluation presented quite crucial information regarding the operation of the Australian GAAP, for example it was discovered that under the standard AASB 1011 capitalization of R&D was overvalued beyond its reality from an economic perspective. (Dahmash et al 2009, p.130). As a result in the year 2005 following the implementation of the AASB 138 such a practice was brought under restrictions. As far as the management of intangible assets is concerned the AASB 138 brought a new record with it superseding six standards of accounting namely the AASB 1014 meant for the revaluation of fixed assets, the AAS 13 involved in the accounting of costs related to research and development, the AAS 10 meant for the recoverable amounts related to fixed assets, the AAS 4 meant for the accountings related to depression, the AAS 18 meant for accounts related to goodwill computations and lastly the AAS 21 which was meant for the acquisition of assets. Additionally some new changes were imposed in relation to intangible assets such as; 1. An impairment regime was introduced to facilitate accounting for goodwill replacing the previous one known as amortization regime 2. Capitalization of expenditure on research was forbidden with the new standard being expenditure on research be expensed the moment it is incurred 3. Some intangible assets that were generated internally ceased to be recognized 4. Only the cases when there is a liquid market in existence and which is active will identifiable intangible assets undergo revaluation. 5. The testing of the impairment of intangible assets became a requirement at least every year (Ritta and Wells 2006, p.45). An intangible asset undergoes recognition under AASB 138 when a probability exists that the economic benefits expected in the future which are directly attributed to the intangible asset will move to the organization and price of the asset can reliably be measured (AASB Standard 2010, p.77).From a general the AASB 138 of intangible assets provides coverage to three very essential themes. These themes posses a fundamental standpoint as far as accounting for intangible assets is concerned; Firstly, expenses that are incurred on intangibles that have been purchased must meet the actual definition used to identify intangible assets. It is stated in the AASB 138 accounting standard that an asset is identified to be an intangible asset if it; a) Is Separable, this means that the asset posses the characteristic of being separated or rather divided from an entity for the purpose of being sold, licensed, transferred, exchanged or rather rented, either with another contract that can be related to the asset or individually, or with another identifiable asset b) Arise as a result of entry into a contractual agreement or other legalities in spite of whether those legalities can be transferred or separated from the entity or from other obligations and legal rights (AASB Standard 2010, p.25). Secondly, all the other expenses in relation to intangible assets fall under the category of provision for those intangible assets that are internally generated. Their classification is either (R&D) research or development. Thirdly, in relation to the expenses incurred on research and development, the expenses on development that the definition of intangible asset that are recognized by the AASB 138 accounting standard of intangible asset whereby it is stated that an asset that is intangible and which arises from development shall undergo recognition if and only if an entity is able to show the following; a) Intention for completion of the intangible asset for either usage or for being sold b) Ability for usage of the intangible asset or selling c) Technical feasibility for completion of the intangible asset to ensure its availability for either use or for sale d) How economic benefits in the future may be generated by the intangible asset additionally the entity can serve as an indication of the existence of a market for the intangible asset’s output or rather for the asset itself. e) Ability to reliably measure the expenses that can be attributed to the intangible asset in the development process. f) Availability of adequate financial, technical and other resources required for the completion of the development process (AASB 2010, p.48). From the requirements presented under the AASB 138 accounting standards if an item is not able to meet the requirements for recognition due to inadequate funds but later on funding is secured then there can be no capitalization on the previously expensed expenditure for development. In addition, expenses on research relating to the intangible assets that are internally generated cannot be capitalized upon thus diminishing the significance of intangible assets previously under recognition under the standard AASB 138 (Chalmers and Godfrey 2006, p.65). The AASB 138 accounting standard of intangible assets has been debated upon since it was introduced in the year 2005. Some of the issues pushing forth for its assessment in the debates include the negative effect that is attributed to the standard in regard to the ability of organizations to make profits. Discussions and debates concerning the AASB 138 have been most beneficial to corporations within the business environment that mostly deal with intangible assets such as Google and Microsoft among others. These entities largely focus on issues regarding knowledge and human capital based intangible assets since these are the areas where they are able to make greater enhancements in their operations (Clikeman 2002, p.415). The accounting standard AASB 138 of Intangible assets therefore forms quite an integral part in the global market of business. What has been discussed about the principles of AASB 138 accounting standards involves simply the assessment of intangible assets. As already mentioned an intangible asset that is internally generated can either undergo recognition or not. The process of generation of the asset is classified into two processes that is research and development process (Cheung, Evans and Wright 2008, p.250). Those intangible assets emanating from the process of research are not recognized with its expenses not being expensed as they are incurred. Basically the reason behind such accounting treatment is simply that in the process of research an entity lacks the capacity of demonstrating that an asset that is intangible shall in the future generate some economic benefits (Ritter and Wells 2006, p.860) This is just an example of how the AASB 138 accounting facilitates the assessment of intangible assets what should be expensed and what should not be expensed. In conclusion intangible assets demonstrated by their characteristics are considered to be completely different from any other types of assets. From this discussion the Australian accounting standard board (AASB 138) of intangible assets is an essential accounting standard that aids finance and business organizations obtain a larger share of the market. This accounting is standard increases its importance to business organizations in that it offers assistance in the process of drawing financial statements in an accurate manner. This is an essential function due to the fact that it is the financial statements that enables businesses to make crucial decisions regarding their future as well as how to develop some strategies that they should apply as far as the coming up with alternative means of doing business is concerned if they are making losses. The AASB 138 standard aids accountants in their day to day accounting activities. Most importantly the standard gives a clear view of what assets are considered intangibles and the features that define them. References Australia Accounting Standard Board 2004, AASB 138 Intangible Asset, Compiled AASB Standard Chalmers, K & Godfrey, J 2006, Intangible Assets: Diversity of Practices and Potential Impacts from AIFRS Adoption, Australian Accounting Review, 16, p. 60-71. Cheung, E., Evans, E & Wright, S 2008, The adoption of IFRS in Australia: the case of AASB 138 (IAS 38) intangible assets, Australian Accounting Review, Sep, Vol. 18, no. 3 p. 248-256. Clikeman, P 2002, The Quality of Earnings in the Information Age, Issues in Accounting Education, 17, p. 411-417. Dahmash, F., Durand, R & Watson, J 2009, The value relevance and reliability of reported goodwill and identifiable intangible assets, The British Accounting Review, 41(2), 120-137. Matolcsy, Z and Wyatt, A 2006, Capitalized Intangibles and Financial Analysts, Accounting and Finance, 46, p. 457-479. Nzuve, S 2012, Some Thoughts of How to Allocate Indirect Costs in a Corporate Environment, Social Science Research network, School of Business, University of Nairobi. Ritter, A and Wells, P 2006, Identifiable Intangible Asset Disclosures, Stock Prices and Future Earning, Accounting and Finance, 46, p. 843-863. Thompson, J 2009, Big Australian Companies boost R&D Spending, Sydney. The Treasury 2012, “Office of the Australian Accounting Standards Board" Read More