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Key Topics
- Requirement
- Solution
- Introduction:
- Answer to Q 1:
- B) The way in which the internally generated intangible assets of the company are supposed to be accounted for and the way in which the intangible assets of the company are going to be impaired:
- Answer to Q 2:
- A) Accounting for Internally generated intangible assets and implementation of intangible assets with reference to AASB 138/IAS 38/IAS 36 respectively.
- B) The various points of differences between the intangible assets that are generated internally by the entity and the intangible asset that has been acquired by the entity:
- C) The various reasons for the managers to be reluctant towards enforcing changes in AASB 138 that will require recognition of more costs pertaining to internally generated intangible assets:
- Conclusion:
- Reference:
Requirement
1- Write a report on Financial Accounting and Reporting with reference to T119.
Solution
Introduction:
A detailed study of the various accounting treatments and policies adopted by the management of various corporates that are currently operating in the market which are considered as critical and significant in nature. These important components of the financial statement of the entity have a significant bearing on the overall decision making process of the entity. Specific discussion will be presented in this report pertaining to the matters of internally generated goodwill, goodwill that has been acquired by the entity and all the relevant provisions and guidelines relating to the disclosure and other treatment of the contingent liabilities of the entity.
Answer to Q 1:
A) Provisions stated out in AASB 137 for the purpose of accounting related to contingent liabilities:
All the relevant guidelines pertaining to the contingent liabilities of an entity has been given out in details from paragraph 27-30 of the AASB 137. Some of the most important points stated out in the AASB are as follows:
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a) There shall not be any recognition of any amount pertaining to contingent liability in the books of any entity.
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b) It has been stated out that most of the times the circumstances that lead to the generation of a contingent liability ismuch unexpected in nature. Due to this the management of the company is expected to continuously observe the changes in the circumstances pertaining to the entity. The reason behind this is that it must be able to ascertain any specific change that can lead to the generation of a contingent liability for the entity during the relevant period of time (Standard 2015). If there is a possibility that the entity will have to face an outflow of resources embodying economic benefits then it is required on the part of the entity to create a provision for the same.
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c) Though, no amount of contingent liability is supposed to be recognised in the financial statement of the entity appropriate disclosure is a mandate on the part of the management of the company (Standard 2015).
Delta Ltd. should not record any contingent liability in its financial statement. the main reason for the same is that the possibility of an outflow embodying economic benefits is very remote. If the entity feels that there is a chance that a payment might have to be made then a provision related to the same must be created by the entity in this respect.
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B) The way in which the internally generated intangible assets of the company are supposed to be accounted for and the way in which the intangible assets of the company are going to be impaired:
For the purpose of recognising the internally generated goodwill within the books of the entity there is imminent requirement on the part of the entity to address certain issues faced by it. The most important of such issues are as follows:
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a) The internally generated intangible assets of the entity are capable of providing long term inflows of economic benefits to the entity.
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b) It is possible to reliably measure the costs that have been incurred by the entity for the purpose of generation of such goodwill (Mrša 2018).
In addition to this the management of the entity is required to divide cost incurred for the purpose of development FO the internally generated goodwill into two parts. One part is called the research phase and the other part is called the development phase.
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Place Your OrderAnswer to Q 2:
A) Accounting for Internally generated intangible assets and implementation of intangible assets with reference to AASB 138/IAS 38/IAS 36 respectively.
The cost that is going to be recognised in respect of the internally generated intangible assets asset forms one of the most significant aspect related to it. For the purpose of mitigating the issues relating to the recognition of the cost in respect if such assets detailed guidelines for the same has been given out in the paragraph 66 of AASB 138 (Mrša 2018). The elements that are needed to be present for the purpose of recognising any cost in respect of the asset include the ones that are directly incurred by the entity in respect of the preparing producing creating the asset. Some of the most important cost that is most often recognised in respect of the asset is as follows:
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a) The amount that is paid by the entity as fees for the purpose of obtaining rights over the asset created by the entity.
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b) The amount that is paid by the entity to the employees of the entity who were engaged in the provision of economic benefits to the entity.
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c) All the materials and the services that are consumed during the period of generation of the intangible asset by the entity.
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d) The amount that is expended by the entity for the purpose of amortising the patents and the licenses used during the process of generation of intangible asset by the entity (Mrša 2018).
B) The various points of differences between the intangible assets that are generated internally by the entity and the intangible asset that has been acquired by the entity:
The level of simplicity that is involved in the process of recognising the assets that are generated internally and the one that is acquired by the entity is the most significant difference between the two. The acquired intangible asset of the company is easier to record or recognise within the books of the entity compared to the one that is being generated internally by the management of the entity (Teece 2015). The primary reason for the same is that the valuation of the acquired intangible asset of the company is done based on fair value method. Several costs involved in the process of recognition of acquired intangible asset include the purchase price, the duty paid on imports of the company, the taxes that are of refundable nature. There are several costs that are incurred by the entity for the purpose of preparing the asset for its intended use. The same will also have to be recognised by the entity.
C) The various reasons for the managers to be reluctant towards enforcing changes in AASB 138 that will require recognition of more costs pertaining to internally generated intangible assets:
There are several reasons for not reluctance on the part of the management in this matter. Some of the most important ones are as follows:
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a) One write-off phenomenon is more supported by the investors. Due to this very less attention is attracted from them corresponding to the process of valuation.
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b) There is a tendency among the managers of the entity to inflate the profits that is earned by the company during the relevant period of time (Bond, Govendir and Wells 2016).
Conclusion:
With the help of the above report it has become possible to ascertain several costs that are to be incurred by the entity for the purpose of the generation and recognition of intangible assets in the financial statement of the entity. All the relevant provisions related to the recognition and disclosure of contingent liability has also been sated out in details.
Reference:
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Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136. https://www.uts.edu.au/sites/default/files/ACCDG_Aut15Sem_D.Bond_.pdf
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Teece, D.J., 2015. Intangible assets and a theory of heterogeneous firms. In Intangibles, market failure and innovation performance (pp. 217-239). Springer, Cham. https://link.springer.com/chapter/10.1007/978-3-319-07533-4_9
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Mrša, J., 2018. Valuation of Internally Generated Intangible Assets in Accounting. ActaEconomicaEtTuristica, 4(2), pp.181-195. https://www.degruyter.com/downloadpdf/j/aet.2018.4.issue-2/aet-2018-0012/aet-2018-0012.xml
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Standard, I.A., 2015. Presentation of Financial Statements. Balance Sheet, 54, p.80A. https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf
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