Accounting Treatments for Identifiable Intangible Assets.

Authors Avatar

Accounting Treatments for Identifiable Intangible Assets  

 Currently in Australia, there is no single accounting standard specifically handling the issue of accounting for identifiable intangible assets other than research and development costs. In 1989, the Australian Accounting Research Foundation (AARF) issued an exposure draft ED 49 Accounting for Identifiable Intangible Asset, covering a vast range of identifiable intangibles, which included, but was not restricted to, brand names, franchises, licence agreements, copyrights, intellectual property, mastheads, trademarks and patents. However, it was withdrawn in 1992 due to a lack of consensus (Belkaoui & Jones, 1996, p.484). Because of the absence of special standards, accounting treatments for these identifiable intangible assets could be selective and thus creative. It may be necessary to take further action to develop an accounting standard on this issue in Australia.

Although intangible assets are often referred to in the literature and in the financial reports of many entities, there seems to be not a unanimous definition for such assets. According to Henderson & Peirson, intangible assets can be defined as rights rather than objects (2002, p.370). However, International Accounting Standard (IAS) defines an intangible asset as an identifiable non-monetary asset without physical substance (IASB, 2002, online). The elusive definitions of identifiable intangible assets contribute to the inconsistency of accounting treatments for such assets. This essay sets out to discuss some arguments about the accounting treatments for identifiable intangible assets based on the analyses of three Australian publicly listed company cases, and analyse some possible recommendations for the new standard.

Case studies of three Australian publicly listed companies

As per IAS 38 Intangible Assets, examples of possible intangible assets include:

–     computer software

–     patents

–     copyrights

–     motion picture films

–     customer lists

–     mortgage servicing rights

–     licences

–     import quotas

–     franchises

–     customer and supplier relationships

–     marketing rights (IASB, 2002, online).

As there is no separate standard for identifiable intangible assets apart from research and development costs, the accounting treatments for such assets should be subject to other related standards including AASB 1010 Recoverable Amount of Non-current Assets, AASB 1015 Acquisitions of Assets, AASB 1021 Depreciation and AASB 1041 Revaluation of Non-current Assets. AASB 1010 states that a non-current asset measured on cost basis should be written down to its recoverable amount which is less than its carrying amount (Knapp & Kemp, 2003, p.227). AASB 1015 requires assets be recorded at the cost of acquisition (Knapp & Kemp, 2003, p.305). As per AASB 1021, non-current assets with limited useful lives should be depreciated over those useful lives (Knapp & Kemp, 2003, p.507). In AASB 1041, non-current assets are required to be measured at either cost or fair value (Knapp & Kemp, 2003, p.969).

The cases to be analysed below are Telstra Corporation Limited (TLS), Lend Lease Corporation (LLC) and Amalgamated Holdings Ltd (AHD), all of which are Australian publicly listed companies. For the purposes of this essay, the accounting treatments for identifiable intangible assets should involve the amortisation method, the useful lives of the assets and the treatment for their recoverable amounts. The following paragraphs will describe their accounting treatments for identifiable intangible assets, discuss the possible reasons for the treatments adopted by each of them and identify similarities and differences in the treatments across the three companies.

First of all, it can be seen from the financial report of Telstra that the dollar value of intangible assets was A$3,012 million at 30 June 2001. Excluding the goodwill of A$1,548 million, the identifiable intangible assets were A$1,464 million, which included patents, trademarks, licences, brand names, and customer bases (Appendix 1). According to note 1.20(b) to the financial statements, the costs of such assets were amortised using the straight-line method over their useful lives, which averaged 12 years for financial year 2001. The recoverable amounts were reviewed annually and the carrying amount was adjusted down and charged to the statement of financial performance when necessary. However, the research and development costs and the software assets developed for internal use were put under the item of other assets instead of intangible assets (note 1.21). On the other hand, note 1.1 states that its financial report was prepared in costs.

Join now!

According to AASB 1021, the depreciation or amortisation method should be able to reflect the pattern where the entity consumes the future economic benefits of its assets (Knapp & Kemp, 2003, p.509). It may be because of the difficulty of estimating the pattern of consumption of economic benefits from aforenamed assets, which includes patents, trademarks, licences, brand names, customer bases, research and development costs and software, that they were amortised using the straight-line method in Telstra’s practice. Furthermore, the useful life of an asset should be estimated considering the factors of expected physical wear, obsolescence and legal or other ...

This is a preview of the whole essay