ADVANCED ACCOUNTING PRINCIPLES AND PRACTICE Assignment Task: “ In concluding the chapter on accounting for intangibles, to many observers it does appear that for the sake of enhancing international...

ADVANCED ACCOUNTING PRINCIPLES AND PRACTICE


Assignment Task:


“
In concluding the chapter on accounting for intangibles, to many observers it does appear that for the sake of enhancing international comparability Australia has embraced a less than ideal accounting standard”
(Deegan 2012, p.383).

You are required to:

• Discuss and analyse the above statement relating it back to the qualitative characteristics in the IASB Conceptual Framework such as relevance, reliability, comparability, verifiability, timeliness and understandability whilst relying on a theoretical framework.

• Your discussion should address intangible assets (AASB 138) and examine the immediate expensing of all expenditure of the research component of R&D and explain how capitalisation of development expenditure is met.

Additional Information:

You are required to, and must, read and incorporate
academic journal articles
and other relevant materials into your assignment. The length of the assignment is
4,000 words. The
actual word count must
be
stated
on the heading page of the assignment.

Writing a Research Essay/Assignment:

• 
  Before commencing your assignment
  you should read:

• 
  
  Writing a Research Essay
  
  by Professor B Cooper


• 
  
  Summarising, paraphrasing and quoting
  
  


• 
  
  Avoiding plagiarism and collusion
  
  


• 
  
  How to read a Turnitin Report
  
  

Mark Allocation Evaluation Criteria:

You
MUST
prepare your assignment in
STRICT
accordance with the

Mark Allocation


Evaluation Criteria

as set out below.

Mark Allocation Evaluation Criteria

Steps	Evaluation Criteria	Allocated Marks
1	Structure of the assignment: A clear structure must be readily evident. That is, the assignment must have a clearly stated introduction, followed by separate literature review, analysis, conclusion and bibliography sections. Headings and other ‘extra’ evidence of structure will be rewarded.	5
2	Introduction: This should be a clear, concise statement setting out the assignment’s objective. It should identify the order in which the assignment’s sections will be presented. It should state, in the briefest terms, how the objective is to be reached and briefly state the conclusion reached. This should be no more than one or two brief paragraphs.	7.5
3	Literature review (based on at least 6 academic refereed articles published in accounting, corporate governance, business ethics journals and/or similar journals). The articles must be clearly identified as to author, date and source. This section must set out in relatively brief terms the nature, content and conclusions of each article. There should be evidence that you have carefully examined the literature, understand it, and have been able to summarise its essential content. There should be evidence of an intention to integrate these articles into your own argument and perspective. You should not quote whole sections from these articles – for example, from the summary, introduction or conclusion sections. Reference to these articles and other sources should be evident in a properly constructed bibliography.	25
4	Analysis (critical analysis is expected). You must be investigative. You need to collect relevant information, cases, and other material via an internet search and via national and international news media. These sources should be linked with the literature review. In light of the materials reviewed, you must present and support your viewpoint in a logical, consistent and coherent manner. Arguments must not simply be regurgitations of pro and con material taken from your text book. You should be able to show that you can integrate various viewpoints and arguments in a way that demonstrates understanding and the desire and ability to reach a conclusion of your own. Lists of arguments or perspectives will get low marks. Students will differ in their selection, focus, opinion and emphasis of different perspectives. That is, there is no right answer as such. We are looking for evidence that you have understood the issues and have thought carefully about them. ‘Broad brush’ arguments or statements that lead in no particular direction will be given low marks. In the absence of clear evidence that you have put something of yourself into your arguments, the mark for this section will be no more than moderate.	40
5	There must be a concise and well formulated conclusion. This should be specific and be consistent with and based on your analysis. If it suddenly appears magically as if from nowhere, as would be the case if your analysis leads in any particular direction throughout, relatively low marks will be awarded.	10
6	Format, spelling, grammar, presentation and referencing. Full marks for this section require excellence in all areas of assignment presentation - including formatting, spelling, grammar, presentation and referencing. Marks will be deducted for any aspect of assignment presentation that falls short of excellence.	12.5
Total Marks	100

International Accounting Standards Board (IASB) Conceptual Framework (CF) was developed to help the ‘Board in promoting harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements’. (Conceptual Framework, 2012). It supports developing national standards for all so there are rules and regulation outline of what can and cannot be done. It also assists users of the financial statement to interpret the information contained. According to the IFRS: Conceptual Framework (2012), CF has 8 objectives.

1. Objective and qualitative characteristic


2. Definitions of elements, recognition and recognition


3. Measurement


4. Reporting entity concept


5. Boundaries of financial reporting, and presentation and disclosure


6. Purpose and status of the framework


7. Application of the framework to not for profit entities


8. Remaining issues, if any.

It is understood that there will always be challenges, changes and room for development for the accounting standards. There are things that influence the development of the accounting regulation such as ‘cultural factors, legal/political factors, economic factors, educational factors, and capital market factors’. (The Changing Accounting Environment n.d) These factors can work well or challenge the international accounting standards. Legal and political factors have a big influence. Australia follows common law so what they follow and how things are different is different to other countries. There are legal differences and every country has different standards so Australia cannot always comply with the rest of the world. However with the IASB, it regulates the accounting standards so it is equal and fair. It is said that ‘all securities regulators should work together diligently to create sound international regulatory frameworks that will enhance the vitality of capital markets’ (The Changing Accounting Environment n.d)
According to the changing accounting environment journal, having the same standards will lead to a decrease cost of capital as the international standards will expand the global funding as well as more agreement between the accounting and economic measures. The structures in the Australia government at the Federal level determine the standards for the auditing and financial reporting for the public. These regulations are adopted throughout Australia.
International Financial Reporting Standards (IFRS) overlooks the work of IASB, it reviews over the structure and strategy that it presents as IASB is organised under IRFS. This is a non for profit organisation and the conceptual framework ‘aims to update and refine the existing concepts to reflect the changes in markets, business practices and the economic environment that have occurred.’ (The Conceptual Framework for Financial Reporting, 2010)
The IASB is very successful at an international standard of financial reporting however it faces problems when it comes to national and regional levels. These problems come from things such as different ‘national accounting cultures, which are embedded in the market structures and institutional and legal frameworks within which business entities operate’. (Whittington, 2008). Australia sometimes does not following International standards because the Australian Government may not see the need for certain things such as accrual reporting as cash based reporting is enough whereas other countries do. It is discussed that the lack of consistency of international CF has ‘seriously impeded progress towards the convergence of national accounting standards. ‘ (Bence D & Nadine, F. 2012)
Conceptual framework assist IASB ‘In promoting the harmonization of regulations, accounting standards and procedures relating presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by international standards.’ (The IASB Conceptual Framework, 2012) Conceptual framework also helps out set financial statement preparation for external users. Some users of the CF are investors, suppliers, employees, lenders and government agencies.
IASB CF portrays enhancing qualitative characteristics such as relevance, reliability, comparability verifiability, timeliness and understandability. These characteristics magnify how useful and relevant the information may be to financial users. They help determine if the information is both relevant and also faithfully represented.
Comparability allows for a decision between another option and another alternative to see which is best relevant to the purpose, such as holding an investment. For it to be useful, while comparing it should be compared between things that are somewhat similar.
‘Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent.’ (Conceptual Framework for Financial Reporting, 2010). This is to ensure that the information that is depicted is accurate and not made up. This can be done directly or indirectly. Direct referring to another source or other representation through a direct observation such as counting money. Indirect verifications is ‘checking the inputs to a model, formula or other technique and recalculating the outputs using the same methodology’. (Conceptual Framework for Financial Reporting, 2010). Sometimes it is not possible to verify all explanations but it helps users to figure out if they want to use the information or not, it is thought to enclose an assumption, compiling information and other circumstances to support the information.
Timeliness refers to having information accessible in time to be able to make the decision. The more up to date the information is the better as older information can be out of date. For financial users, it is important to have the information required at an easy access and able to efficiently get to what is needed.
Understandability allows for clarifying and classifying the information making sure that clear and concise. There are times when reports are hard to understand and complex to comprehend which can be misleading. Generally the financial reports are for the intelligent users and with the knowledge to understand it all.

References:
Accounting Web 2005, The IASB Conceptual Framework - An Introduction, viewed1^st
of December, 2012. http://www.accountingweb.co.uk/topic/financial-reporting/iasb-conceptual-framework-introduction> Bence, D & Nadine, F. (2004) The International Accounting Standards Board’s Search for a General Purpose Accounting Model http://business.curtin.edu.au/files/bence-fry.pdf>
IFRS 2010, The Conceptual Framework for Financial Reporting, viewed 2 December, http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Pages/Conceptual-Framework.aspx>
Journal of Finance and Accountancy n.d, The Changing Accounting Environment: International Accounting Standards and US Implementation
http://www.aabri.com/manuscripts/09206.pdf?
Whittington, G. (2008)
Harmonisation or discord? The critical role of the IASB conceptual framework review.

Journal of Accounting and Public Policy
.
volume 27, Issue 6, November–December 2008
International Accounting Standards Board 2010, Conceptual Framework for Financial Reporting
http://www.aasb.gov.au/admin/file/content102/c3/Oct_2010_AP_9.3_Conceptual_Framework_Financial_Reporting_2010.pdf
>

Examine and explain AASB 138

Intangible asset is defined as a non monetary asset without a physical substance
(AASB, 2004).
For instance, copyrights, patents, trademarks; however, in reality there are some other intangible assets that are complex to identify due to the fact that they are rarely seen, but have an enormous economical benefit to an entity, for example, the skills and knowledge of a workforce, strong customer base and Research and Development. Furthermore, in the 21^st
century business environment, big corporations such as Microsoft, Google and other multinational entities relies heavily on intangible assets, in particularly, human capital and knowledge based assets to enhance their operations
(Clikeman, 2002). A study by Booz & Company (Consulting firm) revealed that in spite of the downturn of the economy in 2008; six Australian biggest firms increased R&D spending by 37.9%,
(Thompson, 2009).
Therefore, this reflects the importance of intangible assets in the current business climate.
In 2004, The Australia Accounting Standard Board (AASB) introduced the amalgamation of all intangible related accounting principle into one accounting Standard known as the AASB138, largely equivalent to the International Accounting Standard IAS 38 Intangible Assets. The two standards provide guidance on recognition and measurement of expenditure on the intangibles
(Nzuve, 2012).
Prior to the implementation of the AASB138, wide discretion was given to firms in accounting for intangible assets under the Australian GAAP, as a result, for instance, the capitalization of R&D under AASB 1011 was valued ‘far beyond its economic reality’
(Dahmash et al, 2009). Consequently, this practice was restricted when the AASB138 standard was implemented in 2005. AASB138 superseded six accounting standards including AASB 1041
Revaluation of Non-Current Assets, AAS 4
Depreciation, AAS 10
Recoverable Amount of Non- Current Assets, AAS 21
Acquisitions of Assets,
AAS 13
Accounting for Research and Development Costs
and AAS 18
Accounting for Goodwill
and furthermore imposed new changes such as:

1. Accounting for goodwill shifted from an amortization regime to an impairment regime

1. Capitalization of research expenditure is prohibited and must be expensed as incurred

1. Certain internally generated intangible assets can no longer be capitalized and must be derecognized

1. Revaluations of identifiable intangible assets are permitted only if an active and liquid market exists; and

1. Impairment testing is required for intangible assets at least annually.

(Ritta & Wells, 2006)

Under AASB 138, an intangible asset is recognized when it is probable that the
expected future economic benefits that are attributable to the asset will flow to the
agency and the cost of the asset can be measured reliably
(AASB Standard, 2010).
Generally, AASB 138 Intangible Assets covers three fundamental themes: Firstly, expenditure on purchased intangibles must meet the identifiability definition of an intangible asset. Paragraph 12 of the AASB138 standard states that an asset is identifiable if it’s either:
(a) is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability
(b) Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

(AASB Standard, 2010)

Secondly, all other expenditure on intangibles come under the internally generated intangible asset provisions and is classifiable only as either research or development (R&D). Thirdly, of the R&D expenditure, only the development expenditure that meet the intangible asset definition and recognition of AASB 138 Intangible Assets paragraph 57 which states that an intangible asset arising from development (or from the development phase of an internal project) shall be recognized if an entity can demonstrate all of the following:

1. The technical feasibility of completing the intangible asset so that it will be available for use or sale;

1. its intention to complete the intangible asset and use or sell it;


2. its ability to use or sell the intangible asset;


3. How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

1. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

1. Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

(AASB, 2010)

Therefore, if an item fails the recognition criteria on the grounds of having inadequate funding, but subsequently manages to secure funding, previously expensed development expenditure cannot be capitalized. Furthermore, research expenditure related to internally generate intangible assets could not be capitalized and hence diminishes the relevance of intangible assets that was recognized prior to the pronouncement of the AASB138 standard
(Chalmers and Godfrey, 2006).
Matolcsy and Wyatt noted that firms previously chose to capitalise their intangible assets have higher value-relevance of intangible assets prior the AASB138 period compared to the period after the adoption of the standard
(Matolcy & Wyatt, 2006)
.

REFERENCES

• Australia Accounting Standard Board, 2004. AASB 138 Intangible Asset, Compiled AASB Standard – RDR Early Application Only, 2010

• Chalmers, K., & Godfrey, J. 2006. Intangible Assets: Diversity of Practices and Potential Impacts from AIFRS Adoption. Australian Accounting Review 16, 60-71.

• Clikeman, P.M. 2002.
  The Quality of Earnings in the Information Age.
  Issues in Accounting Education 17, 411-417.

• Dahmash, F. N., Durand, R.B., Watson, J. (2009). The value relevance and reliability of reported goodwill and identifiable intangible assets. The British Accounting Review 41(2): 120-137.

• Matolcsy, Z., & Wyatt, A. 2006. Capitalized Intangibles and Financial Analysts. Accounting and Finance 46, 457-479.

• 
  Nzuve. S,
  
  Some Thoughts of How to Allocate Indirect Costs in a Corporate Environment
  , Social Science Research network, School of Business, University of Nairobi,
  
  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2141692
  

• Ritter, A., & Wells, P. 2006.
  
  Identifiable Intangible Asset Disclosures, Stock Prices and Future Earnings.
  
  Accounting and Finance 46, 843-863.

• Thompson J,
  Big Australian Companies boost R&D Spending, November 2009, http://www.smartcompany.com.au/strategy/20091117-big-australian-companies-boost-r-d-spending.html, cited 12/12