Accounting Standard AASB138 Intangible Assets - Essay Example

?Part I Accounting Standard AASB138 Intangible Assets Required Briefly describe how AASB138 requires research and development expenditures to be accounted for. The first stipulation given by the AASB138 in reference to accounting for research and development is for amount involved in the said research and development program to be disclosed in an aggregate. This means that as much as possible, no pieces and bits of expenses are to be left out. The collection of every amount that went into spending is supposed to be captured as part of the expenditure development (Deegan, 2012). This also entails a mandate whereby accounting for research and development expenses will not be done in isolation. Rather, it is expected that the expenses making up for the two will be integrated as one so as to have a total aggregate of the expenditure. What is more, the AASB138 requires specific items that cover cost of all internally generated intangible assets to be accounted for (66). These would include costs of materials and services, cost of employee benefits, fees to register a legal right and amortisation of patents and licenses (66, a, b, c). There however exist some freebies as far as items to be covered are concerned as there are entities that are encouraged but not necessarily required. These include amortised intangible assets that are still in use and intangible assets that did not match up the recognition criteria in the Standard (128). 2 Explain the rationale behind the different accounting treatments for research and development expenditures. A critical review of the AASB138 shows that there are different accounting treatments given to varying research and development expenditures. Such differences exist for varying reasons. First of all, items or assets that are captured in the expenditure are seen to possess different impacts as far as the creation of net cash inflows is concerned. For this reason, it cannot be pretended that all items and assets that come as expenditure would be equally viable and so should all have the same accounting treatments. In cases where there cannot be a guaranteed limit to the period over which any given asset would generate net cash inflow, there are softer regulations that normally encourage inclusion in expenditure but do not enforce inclusion (88). Secondly, the tangible impact that different research and development expenditure creates is always different and subject to quantitative grading (Accounting Scholar, 2012). For this reason, there exists different accounting treatment for research and development expenditures so that accountants would have the opportunity of undertaking their own assessments of the impacts of expenses so as to undertake effective quantitative grading. In the opinion of Deegan (2012), having the same accounting treatments for all research and development expenditures would only be a way of saying that when quantitative grading is done, all entities will be on the same scale (p. 231) 3 Before the introduction of Accounting Standard AASB 138 Intangible Assets in 2005, Australian companies were allowed to treat research expenditure as an asset and spread the charge against profits over several years. a Examine possible impacts of the introduction of new accounting standards regarding research expenditures to the key elements of companies’ financial statements such as assets, liabilities, equity, income and expenses. With the coming into force of the new accounting standards on research expenditure, one of the key impacts that is expected in terms of financial statements of companies is that there will be an overall change in the technical structure and setup of their financial statements (Deegan, 2012). For example as the new accounting standards brings into force new definitions and categorisations of key entities like assets and expenditure, it is expected that the overall structure of financial standards will change drastically. In terms of assets, it is expected that companies are going to record comparatively reduced volumes of assets than they did before as key areas such as research expenditure that were out rightly considered as assets are going to be shrouded only specific components that come under the definition of intangible assets remaining. As internally generated brands, mastheads, publishing titles and customer lists are prohibited from being recognised as intangible assets (AASB, p. 7), it is expected that these will be forwarded as liabilities and so unlike before, there is going to be an expanded scope of liabilities. In essence, income will be affected because in any instance where there is an expanded liability scope against assets scope, the resulting phenomenon is that income margin will be closed (Gabrielle, 2009). b Discuss whether a manager of the following companies prefers to recognise research expenditure as an asset or an expense according to the three major components of Positive Accounting Theory. (Total 45 marks). Note: You only need to refer to the relevant components of Positive Accounting Theory for each case. In other words, you are not required to analyse all of the three components unless necessary. 1 A departing manager whose retirement bonus is determined by the level of earnings in his final year. Generally, a departing manager would be in the final year and so would not want earnings to be shifted into the future but the present period. In this regard and considering the bonus plan hypothesis of the positive accounting theory, it is likely the departing manager would want to implement a bonus plan hypothesis so as to amass enough earning for the year in question so that his retirement level will be higher. With regards to expenses and asset also, the manager if he chooses to recognise research expenditure as an expense would mean that he would have to wait till long before expecting earnings from the research expenditure (Accounting Scholar, 2012). Therefore, the departing manager would want to see research expenditure as asset so that when added to the overall earning for the year, the overall earning for the year and in essence the level of earning for the manager will be increased. 2 A company which fails to maintain a certain level of leverage required by its debt covenants. In the event of failure to maintain level of leverage required by debt covenants, there is the tendency that there will be restrictions that specify “a certain level of sales or profits be generated” as a refusal to do this “might limit the company’s ability to take on other debt” (Your Dictionary, 2012). For a manager in a company that needs to raise good balance books to justify the reception of more loans, records of more expense would be a disadvantage as compared to records of assets (Gabrielle, 2009). It would be noted that assets, whether tangible or intangible are considered as sources of value for companies whiles expenses are considered as unguaranteed investment that only takes time to determine whether or not they will be profitable. In line with this therefore, such a manager would opt for debt covenant hypothesis and wish that research expenditure be considered as an asset so that the overall turnover would be higher. 3 A company expected to realise a huge profit increase in this financial year. Once companies are having expenses, the implication is that they are investing for future returns. Though expenses are not guaranteed revenues, they symbolise projected revenues if they are well monitored and closely evaluated. In this instance, the advantage that expenses bring on board for profit increase is that they are ideal for projected inputs. For a manager who expects a huge profit increase in a given financial year therefore, such a manager would want to have more and more projected assurance. For this reason, the manager would want to see research expenditure as an expense rather than an asset. As noted with the political cost hypothesis, managers would choose “accounting procedures that defer reported earnings from current to future periods” (Accounting Scholar, 2012). Without any doubt, it is expense rather than asset that can well give such deferred earnings such as the ones that are to be covered at the end of an entire financial year. CITED WORKS AASB, 2004. Intangible Assets. Commonwealth of Australia. ISSN 1036-4803 Accounting Scholar. Positive Accounting Theory (PAT). 2012. Web. August 22, 2012. Deegan, Cahill. Australian Financial Accounting. McGraw-Hill: Melbourne. 2012. Print. Gabrielle, Frank. Accounting Standards for a Conventional World. PrintMark Publication: London. 2009. Print. Your Dictionary, 2012. debt covenants investment & finance definition. http://invest.yourdictionary.com/debt-covenants Read More