GWA Group Limited - Case Study Example

Name University Course Date Analysis of the application of AASB Introduction Currently, investors have acknowledged the importance of intangible assets in their investments to ignore although investors usually consume much of their time and resources to manage tangible assets (Lev and Daum, 2004). Accountability of intangible assets has not been good since there have been no accounting standards that outline proper way of recording and valuation of intangible assets. Because intangible assets are highly valuable, potential investors are trying to understand the best way in which they can manage these assets but this kind of imbalance which finally get its solutions in the long run. Most companies usually account for intangible assets and the effect of this has been felt by investors when making decision. Lack of accountability of intangible assets by financial managers usually does not allow the investors to understand the real value of the firm which is essential in decision making. The decision made without consideration of intangible asset usually lead to a wrong decision. However, financial manager have the obligation to show intangible assets in their books of accounts. These can only be achieved when accounting policies and standards have been made in a manner that provides the treatment of intangible assets (Lev and Daum, 2004). The current Australian accounting standards has some accounting requirement which must be met by companies in Australia on how to treat intangible assets. These standards guide financial managers when accounting for intangible assets. The purpose for preparing this report is to outline and describe intangible assets that are recognized as intangible assets and those which the company has not recognized as intangible assets based on current accounting standards. The paper also seek to evaluate current accounting treatment of intangible assets by identifying current changes that need to be made o AASB and also consider other intangible assets that the company should recognize as part of intangible assets. Finally, recommendations that the CFO should address to the focus group of AASB. The background of GWA Group Limited GWA Group Limited was listed in ASX in 1993 and it is the main Australian supplier mainly focused on building fixtures and fittings. This company distributes and sells its products across Australia and it has the head office in New Zealand. It is one of the ASX200 index with other companies. GWA Group Limited operates in two divisions namely GWA Bathrooms & Kitchens and GWA Door & Access Systems. It has very many employees and generates high sale revenues to its shareholders. Description of Intangible assets recognized by the Company Intangible assets are those assets which cannot be identified physically and intangible assets according to IAS they are non-monetary assets that do not have physical substance but have the capacity to provide rights and economic benefits to the company. AASB classify assets on the basis on their description but all of these assets are recognized by the company. For the company in Australia to recognize intangible assets under current AASB, the asset must meet some important requirements. Australian company only recognizes intangible assets that have the correct definition of intangible assets according to the AASB, the same item recognized as intangible asset must also meet recognition criteria for which all intangible assets must meet in order for the Australian company to recognize it as intangible asset (Lev and Daum, 2004). All intangible assets that do meet these two recognition requirements are not accounted for under the Australian accounting standards. For the intangible asset to meet the definition requirement as intangible assets, it must have some elements which AASB recognizes. These assets must have features such as identifiability, must have future economic benefits and must have the capacity to control over a resource by the company. Intangible assets that cannot provide future economic benefit to the company cannot be recognized as intangible assets and therefore such assets are not recognized by the company according to AASB. The assets that have future economic benefits can control the company resources and such intangible assets includes goodwill and investments and therefore these assets are recognized by the company as intangible assets. Such assets must have the capacity to generate future economic benefits such as cost savings and revenue from the sale of a product. Intangible assets that cannot generate revenue from the disposal of a product or a service or which cannot save some cost for the company cannot be recognized as intangible assets in Australia because it neither meet the definition criteria as intangible asset nor does it meet measurement criteria. The economic benefits that the assets generates must also be able to flow into the company but when the benefits flow outside the company, then the intangible asset is not recognized as intangible assets and therefore all the assets whose future economic benefits flows into the company must be recognized as intangible assets. Finally recognition of intangible asset can also be met when acquisition cost of an asset can be measured reliably. The cost of acquiring as asset can be ascertained easily or if it is internally generated, the fair value of an asset can be recognized by the business entity. Intangible assets recognized by GWA Group Limited Research and development GWA Group Limited recognizes research and development as the most appropriate intangible assets. It is undertaken in view of gaining new scientific knowledge which can help the company gain future economic benefits. The result of research and development are used in planning or designing a product which improves sales revenues. Brand names Brand name is also a very important intangible asset that GWA Group Limited recognizes. It helps in improving customer loyalty and attracting new customers to buy its products. The improvement of brand name of this company is recognized as profit because the increase is capable of increasing sales margins. It is therefore a very important asset that the company should recognize as an asset. It is not amortized because it has indefinite useful life although its carrying value is evaluated annually to eliminate impairment. Goodwill Goodwill is also recognized by this company. It is measured at cost minus accumulated impairment losses. It is recognized by this company as excess of the cost of the acquisition above the company interest in the net fair value of the identifiable asset, liability of the acquired business entity. Subsequent expenditure GWA Group Limited also recognizes subsequent expenditure as part of its intangible assets. This company capitalizes it when it has the potential to increase future economic benefit. Other expenditures are treated as expenses by this company. Amortisation GWA Group Limited recognizes amortisation in the income statement account on straight line basis within its useful life. Only intangible assets which have indefinite useful life are not amortized but usually evaluated for impairment at the end of every accounting period. Other intangible assets for this company are amortised when purchased and ready for use. Software This company also recognizes software as part of intangible assets. Only those that are able to provide future economic benefits to the company are recognized because they can provide value to the company. Software is valued at cost in the year of purchase and its value is reported annually at the end of every financial year. The balance is carried forward to the next financial year. The purpose of this is to ensure that the company reflects its net worth at the end of every financial year. Intellectual properties It also recognizes intellectual properties as intangible assets. Assets such as patents, trade names and even trademark for this company are also recognized as part of intangible assets. They also increase the value of the company (Bureau of Economic Analysis, 2013). Not all are included by only those that meet the definition criteria and can generate adequate future economic benefits. All these assets are treated in the same manner from the date of acquisition. Evaluation of current accounting treatment of Intangible assets GWA Group Limited usually accounts for its intangible assets effectively but there are some incidences where intangible assets are treated poorly according to my opinion. GWA Group Limited treats research and development as an item of income statement but according to my knowledge, it should be used as an item of balance sheet. Although research and development can provide future economic benefits, it should be used as an asset to increase the value of the company. When it uses as an item of income statement it only uses company profitability but it does not increase the net worth of the company. Changes that should be made are to ensure that all intangible assets are treated as asset. GWA Group Limited also treated brand awareness as an item of profit and loss account but in my opinion, the possible changes that AASB should make is to start treating intangible assets as a balance sheet item (Webster, Elisabeth, 2006). All intangible assets should be recognized as an asset in the balance sheet and it should be evaluated at the end of every financial year. When there is gain in the brand awareness, it should be used to increase the net worth of the company but not profitability. GWA Group Limited wrongly treats brand awareness because it should be used as an asset but not an expense of income as outlined in AASB. It is only correct to recognize assets which have future economic benefits to the company as intangible assets (Lev and Daum, 2004). This is very important to the company because intangible assets without future economic benefits are worthless and cannot increase the net worth of the company. I also concur with the AASB that all intangible assets that are recognized should meet the definition criteria of the standard. This is correct because intangible assets should not have physical substance and any intangible assets with physical substance are treated as fixed assets but not intangible asset. Recommendations I recommend that all intangible assets should be recognized as an item of balance sheet not an item of profit and loss account because when intangible assets should be able to increase the net-worth of the company. When it is used as an item of income statement, it only increases profitability which the investors can use to make investment decision. I also recommend that intangible assets should be recognized every financial year in order to report the correct net worth of the business at the end of every financial year. Work Cited Lev, Baruch; Daum, Juergen (2004). "The dominance of intangible assets: consequences for enterprise management and corporate reporting". Measuring Business Excellence. 8 (1): 6– 17 http://www.aasb.gov.au/admin/file/content105/c9/ACCDP_IGIA_10-08.pdf Webster, Elisabeth; Jensen, Paul H. (2006). Investment in Intangible Capital: An Enterprise Perspective. The Economic Record, Vol. 82, No. 256, March, 82-96 http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168357653&acceptedDiscl aimer=true Bureau of Economic Analysis (2013). Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts. https://www.iasplus.com/en/projects/research/long-term/intangible-assets https://www.wsj.com/articles/accountings-21st-century-challenge-how-to-value-intangible-assets- 1458605126 http://businessjournalism.org/2016/07/intangible-asset-accounting/ Read More