Case Study on Financial Accounting AASB 138 Intangible Assets

Question: Discuss about the Financial Accounting for AASB 138 Intangible Assets. Answer: Intangible asset is the asset that is not physical in nature. The AASB 138 intangible assets explain how the intangible asset are recognized, estimated and disclosed within the financial statements. It outlines the treatment of both non identifiable and identifiable intangible assets (Berk and DeMarzo, 2007). Companies frequently incur liabilities or expend resources on the enhancement, maintenance, development, acquisition, of intangible resources such as scientific or technical knowledge, design and implementation of processes or new systems, intellectual property, trademark, market knowledge and licenses (Hillier, 2010). The disclosures of intangible assets are very much important for a company as it shows the asset value during a period of time. The intangible assets of AGL energy has been disclosed in the balance sheet of the financial statement of the organization. The balance sheet shows the assets and liabilities of a company during a period of time. The balance sheet shows property, plant and equipment of amount $6,482 million disclosed in the Note 18 and the intangible assets is around $3232 million that includes goodwill of amount $2791 disclosed in the Note 19 representing significant recorded balances in the consolidated financial position statement (Holton, 2012). The evaluation and analysis of the recoverable amount of the assets requires judgment to determine the assumptions to support the expected flow of cash and utilization of relevant assets. The valuation of the assets is also very much important for the company and the finance department plays a significant role in evaluating the value of the assets. The key areas that the AGL energy focuses are as follows: Acquiring the understanding of key control management that has placed in order to measure the unbilled cost accrual Challenging and understanding the assumption of the management relating to tariffs and volume used to determine the costs accrual by: sample basis including calculation of volumes in to sales, purchases and other systems as well as testing the control system within the departments (Moles, 2011). Prices are compared applied by the distributors with the current tariff tables Critically evaluating the methodologies of management and their key assumptions are utilized in the valuation model that are described in the Note 19 The identification of the cash generating unit includes allocation of property, plant and equipment and associated allocation and identification of the cash flow for the purpose to assess the recoverable amount of cash generating units (Paramasivan and Subramanian, 2009). The assumption for the long term growth rate in forecasting the flow of cash by comparing them to the historical results, industry and economic forecasts The applied discount rate The appropriateness of the unbilled cost accrual s based on the calculation of the expected accrual to utilize the supplied information. The finance department evaluates the models of cash flows and forecasting the flow of cash as well as assessing the historical accuracy (Spiceland, Sepe and Nelson, 2011). The sensitive analysis helps to determine and evaluate the key drivers of the growth rates uses in discount rate and cash flow forecast. The sensitive analysis includes key assumptions that either collectively or individually required for the assets to be impaired and likelihood of movement in the arising key assumptions (Stittle and Wearing, 2008). The annual report of the company shows the intangible assets in the balance sheet at the end of the financial reporting period. The financial reports is prepared as per the AASB standard. The intangible assets of Medibank is also shown in the balance sheet of the company. The disclosure of intangible assets includes: Goodwill Goodwill is estimated as described in the Note 3(f)(x) of the annual report. The intangible asset includes goodwill on the acquisition of the subsidiaries. It is not amortized but it is evaluated for impairment and it is carried at the cost less the impairment losses (Wolf, 2008). Losses and gains on the disposal of an organization includes carrying amount of the goodwill related to the company sold. The goodwill is allocated to the CGUs for the objective of the of the impairment testing. Software The costs incurred in obtaining licenses and software will contribute to the financial benefits in future period through cost reduction and revenue generation are capitalized to the software intangibles. The capitalized costs include direct costs of service and material and payroll related costs and direct payroll of the employees (Berk and DeMarzo, 2007). The software intangibles are commonly carried at the cost less impairment losses and accumulated amortization. Customer relationships and contracts Customer relationship and contracts acquired as the part of the business are separately recognized from goodwill. The customer contracts and relationship are carried at the fair value acquisition dateless impairment losses and accumulated amortization (Hillier, 2010). The amortization of the customer relationships and contracts is estimated on the basis of the straight line method over expected useful life that for the assets owned currently by the group is around 10 to 12 years and is determined in amortization and depreciation expense in income statement. Impairment of assets Intangible assets and goodwill have useful life and are not subjected to the amortization and annually tested for the impairment. Other assets of the company are tested for the impairment whenever changes in situations or events show that carrying amount cannot be recoverable. The impairment losses are determined for the amount at which the carrying amount of the assets exceeds the recoverable amounts (Holton, 2012). Therefore, the recoverable amounts are higher of the fair value of the asset less disposal cost and value in use. The estimated flow of cash are discounted to the present value of the assets using the discount rate which reflects the assessment of current markets time value of money and specific risk to the asset. The main purpose of assessing the impairment is that the assets are appropriately grouped at low level for which there are inflow of cash that are independently largely of the inflow of cash from other group of assets. Provisions Provisions are determined and recognized when a company has a constructive and legal obligations as a result of the past event and it is important that the outflow of the resources would be required to reconcile the obligations and amounts has been estimated reliably. The provisions are not determined for the future operating losses. Thus, there are number of obligations for the company and the outflow of resources would be required to be settled by considering the obligation class a whole (Paramasivan and Subramanian, 2009). The provisions are estimated at the net present value of the estimates of the management of expenditure that is required to settle the obligations at the end of the financial reporting period. The expected payments in future are discounted using the market yield at the end of the financial reporting period using the corporate bonds with the maturity terms that matches the estimated future outflows of cash (Stittle and Wearing, 2008). The increase in provision du e to the time passage is recognized as the interest expense. The annual report of the company shows the intangible assets in the balance sheet at the end of the financial reporting period. References Berk, J. and DeMarzo, P. (2007).Corporate finance. Boston: Pearson Addison Wesley. Hillier, D. (2010).Corporate finance. London: McGraw-Hill Higher Education. Holton, R. (2012).Global finance. Abingdon, Oxon: Routledge. Moles, P. (2011).Corporate finance. Hoboken, N.J.: Wiley. Paramasivan, C. and Subramanian, T. (2009).Financial management. New Delhi: New Age International (P) Ltd., Publishers. Spiceland, J., Sepe, J. and Nelson, M. (2011).Intermediate accounting. New York: McGraw-Hill Irwin. Stittle, J. and Wearing, B. (2008).Financial accounting. Los Angeles: SAGE Publications. Wolf, M. (2008).Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.