CIMIC Group Limited - Intangible Assets - Example

CIMIC Group Limited: Intangible Assets Student Name: Institution Affiliation: Business Report CIMIC Group Limited was founded in 1949 as Leighton Holdings and changed to CIMIC Group in 2015. The company is ranked 50 among the public companies in Australia. The company is involved in engineering, building and construction, mining, environmental services, and telecommunications industries. The company’s most of the revenue is generated from the building and construction industry. CIMIC Group Limited generated revenues of approximately $ 11 billion in the financial year 2015/2016 (CIMIC Group Limited, 2016). CIMIC Group Limited is made up of several subsidiaries in contracting and project development. Major companies under CIMIC Group include CPB Contractors, Thiess, Leighton Asia, Leighton Properties and Macmahon Holdings Limited among others. Mr. Valderas Adolfo is the Chief Executive, and Marketing Director of CIMIC Group Limited and Mr. Verdes Fernandez is the Executive Chairman. The company mission is to provide sustainable and strong shareholder returns by ensuring that the foundation being built is solid. Intangible assets are assets not physical in nature (Cohen, 2013). Any profit-making business organization including CIMIC Group Limited has intangible assets. Intangible assets can be definite or indefinite (Cohen, 2013). These are the type of intangible assets underlying in CIMIC Group Limited: brand name, goodwill, IT systems, and customer contracts. Goodwill comes up due to business combinations. Goodwill is not amortized but tested for impairment annually and more often if it is likely to be impaired. Testing for goodwill impairment is achieved through allocation into cash generating units. In the example, the cash generating at the end of financial year is $370.4 million. It is as a result of Lessing the accumulated amortization and impairment of $12.3 million to cost fair value of $376.1in January and impairment cost at the end of the year 2015 of $2.7 million. At the end of the financial year 2016 due to construction, mining and mineral processing and services, it shoots up to $914 million also of $542.2 million on the acquisition. It is through a five-year cash flow projection and a business plan (CIMIC Group Limited, 2016). The company's brand name is as a result of the business combination, but it is recognized separately from goodwill. Where brand names are indefinite in their useful life are not amortized but are tested for impairments annually Brand names are valued and measures on their fair value at the inception date less amortization and impairment losses. In an example of CIMIC group limited a brand name of 14 million which is amortized at royalty relief method at a rate of 0.6%. However, at 31st December 2015, the brand name is $24 million on indefinite useful value. (CIMIC Group Limited, 2016). The IT systems are intangible assets due to the costs that are incurred in developing, acquiring, and licensing the systems. Costs put into IT systems at CIMIC group include direct external costs used in the material acquisition, service provision and payment of employees on these systems. It is measured by amortizing over their estimated useful life of 7 years. Therefore, it is Cost less amortization that accumulated over time. In the example, the CIMIC group limited to have a useful life of $127.4 million over the seven years, but as at 31st December 2015 on 4 useful life is $126.6 million, therefore, meaning that the IT systems will amortize for the next 3 years. (CIMIC Group Limited, 2016). Finally, customer contracts are as a result of combinations of business. They are measured at fair value at the acquisition date, and Lessing accumulated amortization and impairment losses. Where customer contract is indefinite, they are not amortized but tested annually for impairments, and vice versa is true. Therefore, regarding CIMIC group limited it amortized since there is a useful life that is of 2 to 5 years which at the end of the financial year 2015 is $4.3 million and 10 to 15 years is nil. (CIMIC Group Limited, 2016). The CFO should outline the following recommendation to the focus group of AASB. The customer contracts which is an intangible asset should not be reported as of no inflations and mispricing. According to capital market theory classifies all investors and customers as efficient investors. Also, the AASB should outline clear and expedited characteristics to report the portfolio contracts rather than the use of estimates in reporting. Obviously, the capital market theory state that the assets are definite and divisible. The Secondly, the AASB is to ensure those clear ways in measuring the trademark. It is because the cost incurred are considered not separable or indistinguishable from the expenditure of the company. Bearing in mind the brand name has been established in the year 1949. Thus, there should be no amortization or impairment test done on it. According to the institutional theory, it is critical for CIMIC Group to realign its structures especially those related to organizational culture. These realignments are essential for the growth and competitive advantage of company’s brand name. Media Release for CIMIC Group Limited’s Intangible Assets Intangible Assets are no physical assets that are a requirement for any profit-making business in not only Australia but also the whole world. CIMIC Group’s main intangible assets are goodwill, brand name, IT systems, and customer contracts (Trading Economics, 2016). Goodwill is a major intangible asset at CIMIC Group Limited. Goodwill arises from business combinations and is included in all equity investments of the company. Goodwill impairment is a critical aspect when it comes to this type of asset and CIMIC Group has not done enough when it comes to it. Goodwill has not appeared on the CIMIC Group financial statement position since the inception of the company. Goodwill has just appeared as others in the company's financial position. Further developments and recommendations are being considered by the company to start including it. However, it is difficult to calculate and determine goodwill as an asset because of its intangible nature. Goodwill does not have a major valuation effect on the company’s financial position even though it is not treated as an important accounting factor that it is. The IT systems at CIMIC Group Limited become intangible assets due to the costs that are incurred in developing, acquiring, and licensing the systems. The cost incurred in the IT systems are important since they ensure future returns on the costs regarding other assets. The IT system cost incorporated in CIMIC group include direct external costs used in the material acquisition, service provision and payment of employees on these systems. There is a useful life of $127.4 million over the 7 years. But as at 31st December 2015 on 4 useful life is $126.6 million, therefore, meaning that the IT systems will be amortized then for the next 3years. Costs invested in IT systems are easily visible in the company’s financial statements. Therefore, the costs cannot be neglected in determining the financial position of the company. All the current financial reports for the past decade and even more has incorporated IT Costs in accounting calculations, and therefore these costs play a critical function in the company's accounts. The CIMIC GROUP brand name is another important intangible asset. Established in 1949, CIMIC Group has grown its brand, and I believe that no assessment is needed in its useful life as it can easily be characterized as indefinite. The company's brand name makes the company a giant when it comes to building and construction. Of course, it is not easy to put the brand name into the company's financial documents, but it is an important determinant in the company's financial position. It is the CIMIC Group brand name that has determined the tangible assets possessed by the company. Besides, the brand name is also an important evaluation factor, and it is, therefore, essential for management to continue improving the brand name through marketing (Daum, 2003). Finally, the customer contracts arise because of the business that the company partakes with both its investors and customers. The useful life of customer contracts is indefinite since the business will always conduct businesses with its customers, as the brand name is indefinite. Customer contracts are essential in determining the financial position of the company even though is not stated in the accounting financial statements. In conclusion, it is important for CIMIC GROUP Limited to treat its intangible assets the same way it treats its tangible assets as they all play an equal role in determining the company’s financial position (Daum, 2003). CIMIC Group Limited has grown because of impressive market strategies, and the company will continue growing since these strategies continue improving in effectiveness. References CIMIC Group Limited. (2016). 2016 Annual Report. 1-200 Cohen, J. A. (2013). Intangible Assets: Valuation and Economic Benefit. Hoboken, N.J: Wiley. Daum, J. H. (2003). Intangible assets and value creation. Chi Chester, West Sussex, England: J. Wiley. Mitrione, L., Tanewski, G. & Birt., J. (2014). “The relevance to the firm valuation of research and development expenditure in the Australian health-care industry,” Australian Journal of Management, 39(3): 425–452. Trading Economics. (2016). CIMIC: Intangible Assets. Accessed May 8 from https://www.tradingeconomics.com/cim:au:intangible-assets. Attached Exhibits from CIMIC Group Limited. At the end of year 2015 and 2016 Exhibits Exhibit 1: Intangibles accounts All exhibits are from CIMIC Group Limited Exhibit 2: Consolidated Statement of Financial Position. All exhibits are from CIMIC Group Limited. Exhibit 3: Notes All exhibits are from CIMIC Group Limited Read More