ACC201 Financial accounting T119

Executive Summary

The main purpose of this study is to develop an understanding about accounting standards both AABS and IAS. In concern to this, there are two cases are analyzed and evaluated related to the accounting standard. The accounting for contingent liabilities is explained in reference to AABS 137.

As well, internally generated intangible assets and acquired intangible assets are explained or discussed with reference to AABS 138/ IAS 38 and AABS 136/ IAS 36 based on the case studies.

Question 1

Accounting for contingent liabilities with reference of AABS 137

According to AABS 137, a contingent liability is considered as a possible obligation, which arises from earlier events and the existence of these events will be confirmed only at the time of occurrence or non-occurrence of these uncertain future events not fully within the entity control.

On the other hand, these present obligations are not recognized because it is not possible that the outflows of resource provide economic benefits to settle the obligations, as well as the obligation amount, cannot be measured with sufficient reliability.

With reference to AABS 137, the accounting for contingent liabilities is not included in the statement of financial position of the company (Barbu et al., 2014).

Due to this, a contingent liability is disclosed in the notes given in the financial part of the annual report. In this part, the possibility of any outflow of the economic resource is given to understand the number of contingent liabilities. In concern to Delta Ltd annual report, the company will consider $500,000 as costs and damages in the contingent liabilities.

Disclosure of accounting implications under AABS 137

In December 2018, a customer filed a lawsuit against Delta Ltd for costs and damages allegedly incurred due to failure of Delta Ltd’s one electrical product. The lawyers of Delta Ltd are confident for successfully defend the case.

As a result, Delta Ltd’s lawyers have advised for expected costs and damages would be approx. $500,000 but the customer was claimed for $3 million. However, the company is unsuccessful in defending the case.

As per the paragraph 86 of AASB 137, a company should require disclosure of each class of contingent liability whereas there is a possibility of an outflow or not in a settlement that is not identified in this case here.

However, it can be said that paragraph 86 also requires an estimate of the financial effect that should be measured under the 36–52 paragraphs. In these paragraphs, the best estimate is the amount of required expenditure to settle the obligation more willingly than the customer claimed for the amount (Sinclair and Keller, 2014).

Question 2

Internally generated intangible assets with reference to AABS 138/ IAS 38 and AABS 136/ IAS 36

Initially, the intangible assets are measured at cost because of this there is no related expenditure on the existence of internally generated assets so that under AASB 138:24 it cannot be recognized. Expenditure may be capitalized for the development of internally generated intangibles that are dependent on the expenditures that are classified in the research.

As per AASB 138:56 /IAS 38:56, research has planned an investigation and original as new knowledge. In addition, AASB 136/IAS 36 Para 59 explain the development is the application of research findings and paragraph 54 explains research expenditures are expensed as incurred (Rossen, 2011).

However, it is recognized that at the beginning of the quoted article, the customer relationships are maintained that should never be recognized because it is an intangible asset. In addition, it can face difficulty to meet the definition of an asset as well as it can be said that the company does not have control over that asset.

An asset was regarded by it that cannot meet an identifiable criterion because it cannot be exchanged sold in the definition of an intangible asset. On the other hand, if it is recognized then they have indefinite lives because internally generated intangibles must be amortized.

Difference between accounting for internally generated intangible assets and acquired intangible assets in AASB 138

Difference between accounting for internally generated intangible assets and acquired intangible assets in AASB 138/IAS 38

In AASB 138/IAS 38, there is a smaller difference between accounting for internally generated intangible assets and acquired intangible assets. In order to ‘acquired intangible assets’, there is a market transaction and the acquired assets can be measured at cost or at fair value for business combinations.

On the other hand, it is something difficult to identify an internally generated intangible asset because it is identified on the basis of expected future economic benefits (Hunter et al., 2012). As well, it is also difficult to determine the cost of the asset reliably.

As a result, it is seen that the cost of generating intangible assets internally are not different from the cost of enhancing or maintaining the internally generated goodwill of entity or day-to-day running operations.

The reason behind reluctant of companies to press changes in AABS 138/ IAS 38

As per section 11.2.7 in AABS 138/ IAS 38, inflate future profits are preferred by the managers due to this, companies may be reluctant to press for changes. In concern of this, most of the investments are written off in research and development. In addition, the managers know that future revenues and earnings are derived from acquisitions (Halim and Jaafar, 2012).

The major expense items will report as unencumbered such as amortization of the intangible asset. As well, it creates a positive effect on the ratios like rates of return on assets, equity, etc.

Conclusion

From the above study, it can be concluded that AABS & IAS are important accounting standards that are followed by the Australian organization to systematically provide accounting solutions. In addition, different accounting standards are provided in AABS & IAS to reduce the complexity of the accounting terms.

References

Barbu, E.M., Dumontier, P., Feleaga, N. and Feleaga, L., 2014. A proposal of an international environmental reporting grid: What interest for policymakers, regulatory bodies, companies, and researchers?: Reply to discussion of “mandatory environmental disclosures by companies complying with IAS/IFRS: The Case of France, Germany and the UK”. The International Journal of Accounting, 49(2), pp.253-262.

Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), pp.286-302.

Rossen, P.E.T., 2011. Initial identification of internally generated intangible assets in the context of the definitions of an asset and an intangible asset.

Hunter, L., Webster, E. and Wyatt, A., 2012. Accounting for expenditure on intangibles. Abacus, 48(1), pp.104-145.

Halim, H.A. and Jaafar, H., 2012. INTANGIBLES DISCLOSURE AND CAPITAL-RAISING IN AUSTRALIA: AN ANALYSIS OF INFORMATION INTENSITY. Asian Academy of Management Journal of Accounting & Finance, 8(2).