Accounting Intangibles - Reporting Standards - Case Study Example

Insert Your Name Here Title: Accounting Case Study Subject: Accounting By: Michael Wacheke Date: 24th March 2009 Accounting Intangibles: Reporting Standards Case Study 1. Why does the author suggest that IFRS3/AASB 3 for business combinations fundamentally changes the way intangible assets are recognized measured and treated. Prior to the introduction of the IFRS3/AASB 3, the reporting of the intangible assets was neglected in most cases and only goodwill used to appear in balance sheets. Things like trade names and brand names were not reported in the balance sheets. While the auditors were doing their audits, they used to ignore them since they hardly ever changed the financial position of business. Auditors concentrated more on the liquid assets. There are speculations that these intangible assets might offset many balance sheets in many companies since most of the balance sheets will now have a richer debit side. To make sure that the balance sheets balance, the accountants and auditors will have to incorporate a figure to represent these tangible assets on the side of capital. Some of the companies may take advantage of these intangible assets to boost their weak asset figures and they may easily lure investors into investing in their companies promising great return on investment and since the IFRS3/AASB 3 continue to the effective after every other accounting period from when they were introduced, the investors might not realize that there is an inflation on the asset figure that was not there prior to the IFRS3/AASB 3. Intangible asset recognition, according to the author has always been done at the discretion of the company and it has not been revealed while announcing accounting results. In many cases, the intangible assets were even given value zero mostly because they have all along been part of the business and the acquisition of the same was done cheaply, long time ago. Appreciation of the intangible assets has all along been ignored and therefore even the valuation of the same becomes a hard task. Now that the new financial reporting standards are in place, places like United States have seen negative consequences after they have inflated the intangible assets while they were reported and thus they have given the investors a false position of the business. This has consequently turned against them since most of the investors have distanced from such companies and thus a contributor to the downfall of a number of companies that could have been saved by investors during the recession. In Australia, the companies are still cautious about the new reporting standards and the valuation. They want to be sure that these standards will not affect their business both in the short and the long run. 2. Explain the concept of identifiable intangible assets and ‘separability’. Identifiable intangible assets are the assets that the business has but they are not liquid so it is impossible for the business to sell them. They become identifiable when it is possible for the auditors to ascertain them a value that will appear on the balance sheet at the end of the financial statement. They are usually dormant assets and they only appear at the end of the financial period. They therefore do not affect any change of business strategy within the company though they are considered in case of a merger or when a business s being sold. This makes them identifiable and they are even used as consideration when discussing the capital of a business (IASB, 05). 3. Discuss in what circumstances these identifiable intangible assets would be separable or nonseparable: a) Trade name A trade name would only be nonseparable to a business when it is a contractual obligation that pertains to the business and therefore in the case of a merger or in the case of a sale of the business, the trade name becomes nonseparable. The trade name could be termed as separable if it was incorporated into the business later after establishment and it is registered separately from another trade name of the business though the management of both trade names is done in one business. It therefore does not count as part of another trade name. This however, just occurs in very few instances where a business was about top expand and had decided to open sub branches with different trade names (IASB, 05). b) Customer list A customer list is usually nonseparable when the customer register is maintained by the business as the sole source of wealth. This makes it difficult to distinguish between the customers that should be handed over to the buyer of the company rights and in many cases; the entire register is handed over. A customer list could be separable if the customers are not the only source of income and if the business that is selling its shares could lose a source of income on the hand that will be left untouched. This could stir negotiations on the ratio which could be used to share the customer list to avoid cases where one business goes bankrupt. c) Timber cutting rights Timber cutting rights are cases where the business remains the owner’s but the new party benefits from it. This will leave the business ownership untouched and therefore this is a separable right. It mainly happens in contractual mergers that have time limits. Timber cutting rights could become nonseparable depending on the level of ownership rights that a company is ready to offer as consideration (IASB, 05). 4. Why would a company identify an intangible asset such as a trade name or brand name as having an indefinite useful life? Explain what is meant by ‘benefit consumption amortization’. Instances where a company identifies an intangible asset as having an indefinite useful life are when the intangibles are the backbone of the business and the business owes all its transaction to the fame of the trade name and brand names. Such cases are results of great market controls using the brand names and this capitalization serves as assurance that the business has continuity even after a sale or merger of the company. Benefit consumption amortization is the distribution of the entire sum of benefit over the period considered to be the business life. In many cases, a ratio is generated that is used to generate the benefit consumption per period. This is because the benefits of a company are not fixed and they vary constantly depending on the turnover of customers as well as the sales figure. 5. What valuation methods are recommended by browning? Why does he recommend several? Browning recommends the valuation where customer relationships are not valued since they are inseparable from all the other assets. This valuation method is the traditional one that usually ignored most of the intangibles. It assumed that the sale of a business did not necessitate the valuation of most intangibles and more so the customer relationships that were minor considerations in negotiations for mergers and such other business sale transactions. He sees customer relationships to be noncontractual and therefore the prior owners of the business could withhold the customers at will. Browning recommends this type of valuation because it does not play part in the fate of business after sale or after merger. This method of valuation mainly looks like a shortchange since once the merger is through, the business starts building new customer relationships again which is not supposed to be the case. Instead, the business and the customers should be one and the same and therefore the customer relationships should always be considered. This is now according to the new accounting standards. Works Cited 1) International Accounting Standards Board (IASB). International Financial Reporting Standards Arizona: Kluwer, 2005 Read More