Accounting

 AASB 138/IAS 38 ‘Intangible Assets’

AASB 138 is prescribed under section 134 of Corporation Act 2001. This accounting standard deals with the treatment of Intangible Assets. Provisions related to recognition, measurement and disclosures have been covered under AASB 138. 

AASB incorporates International Accounting Standard 38 that is issued and amended by IASB for Intangible Assets. All the profit making entities in Australia that are in compliance with AASB 138 has responsibility to comply with IAS 38 as well. Non profit entities may comply with the specific ‘Aus’ paragraph prescribed for providing the guidance to such entities to suffice the compliance requirement of IAS 38. The organisation that are complying with general purpose accounting standard are not considered to be in compliance with International Financial Reporting Standards.

Intangible Assets

An asset may be referred to as a resource from which future economic benefits towards entity may be expected and this resource is in control of entity as result of the past events. Considering the definition of asset, Intangible Asset may be defined as a non monetary identifiable asset that does not have physical existence. Patents, licenses, copyrights, computer software are some of the examples for Intangible assets (Francis, 2019).

Recognition and Measurement

As stated by 21 IAS 138, all the considered intangible assets would be recognised only if it is expected that coming benefits will flow towards entity from the asset, and its cost may be measured reliably. Entity has responsibility to make reasonable estimates for the economic benefits that expected in future (Francis, 2019).

As per paragraph 24 of AASB 138, intangible assets shall initially be measured at cost. However, Paragraph Aus 24.1 states that if asset is acquitted at nominal cost or with no cost, the fair value on acquisition date shall be the cost of such assets. This exception is only applicable in case of non profit entities. Also, this exception is not in line with the provisions in IAS 38 (Francis, 2019).

As per paragraph 71 of AASB 138, any expenditure that has initially been recognised from the income statement and subsequently charged from the carrying units.

As per paragraph 72 of AASB 138, there are 2 methods that may be used to measure after recognised. First of them is cost model. As per cost model, the intangible asset shall be recorded at cost less accumulated amortisation and impairment loss, if any. The second method of measurement is revaluation model. As per revaluation model, the intangible asset shall be carried at revalued amount that is the fair value of asset on revaluation date less accumulated amortisation and impairment loss, if any. The fair value of intangible asset shall be measured by taking the market factors into account. Revaluation shall take place at the end of each reporting year to determine that correct carrying amount of the intangible assets (Francis, 2019).

Amortisation method and period

To select the amortisation period and amortisation method, entity shall first decide and examine the assets given useful life that is the period up to which the asset is going to bring the economic benefits towards company. As per paragraph 88, an entity shall assess the useful life of the Intangible assets. If the life is finite then entity shall assess the length of life and the benefit that may be derived from such asset. Also, entity shall analyse relevant factors and treat the useful life of asset as infinite if there is no foreseeable period limit over which the assets will bring the economic benefits (Devalle, Rizzato., & Pisoni, 2017).

For the Amortisation purposes, paragraph 97 of AASB states that the amortisation amount shall be allocated systematically on the basis if useful life of asset. Amortisation on asset shall start from the date when it is ready to use and shall end on the date. The method of amortisation shall show a pattern of future economic benefits from the assets that are expected to be consumed by the entity. If such pattern could not be reliably determined then entity shall use straight line method for amortisation. The amortised amount shall be charged to statement of profit or loss each year. There may be variety of methods that may be used for systematic allocation of depreciable amount of intangible asset over the useful life of such assets. The selection of amortisation method shall be done on the basis of excepted outcomes (Fjellvind, & Eriksson, 2016).

The amortisation method and period shall be reviewed at the end of each reporting year for the intangible assets that have finite useful life. If expected useful life is not same as per last year(s) estimates then the amortisation period shall be modified or changed accordingly. The useful life of intangible assets with indefinite life shall be recorded at the end year to support the assessment of infinite useful life of the asset. Company shall disclose information related to determination of useful life and selection of amortisation method in its financial reports.

Case Study

In the provide scenario of Mags Limited, the management and investors believe that the marketing flair and expertise are the factors for the success of the company and not the competing on price. Also, investors have doubt on adoption of the accounting policies and costs related to them (Wang, 2019).

Mags Limited has practice of capitalising cost of its direct mail to customer. Company capitalised $4.2 million at June 2018 for account of direct mailing cost. Mags Limited amortises this asset by using straight line method. As per paragraph 8 of the standard, an asset may be referred to as a resource from which future economic benefits towards entity may be expected and this resource is in control of entity as result of the past events. Considering the definition of asset, Intangible Asset may be defined as a non monetary identifiable asset that does not have physical existence (Bond, Govendir, & Wells, 2016). Also, Intangible asset shall be recognised only if it is expected that future economic benefits will flow towards entity from the asset, and its cost may be measured reliably. Entity has responsibility to make reasonable estimates for the total economic outcomes to organization and society from the asset in future. Capitalising the cost of direct mailing will bring future economic benefits towards company and such cost may be reliably measured that is $4.2 million. Hence, company may record it as an Intangible Asset. As per paragraph 97 of AASB the amortisation amount shall be allocated systematically on the basis if useful life of asset. The amortised method shall show a pattern of future economic benefits from the assets consumed. If such pattern could not be reliably determined then entity shall use straight line method for amortisation. Mags Limited shall make reasonable estimates about pattern of the future benefits of intangible assets and if such pattern could not be reliably measured then the company may use amortisation method. Hence, the treatment of amortisation is in accordance with AASB 138 (Cheung, & Lau, 2016).

Mags Limited has purchased client details in $800,000 in year 2019. Company has recognised non-current assets as it is expecting that the asset will generate sales for at least another 2 to 3 years. The contention of company is correct in this case to record the cost of purchasing the list as Intangible assets because as per IAS 138, an Intangible asset shall be recognised only if it is expected that future economic benefits will flow towards entity from the asset, and its cost may be measured reliably. Entity has responsibility to make reasonable estimates for the future benefits. Capitalising the cost of purchasing the lists will bring future economic benefits towards company and such cost may be reliably measured that is $8 million (Peach, & West, 2017).

The financial statements of Mags Limited for year ended 2018 reports $7.5 million cost for marketing. Also, if company has charged this marketing cost instead of capitalising the cost, the net income for the year 2018  have been 10 million instead of syste$ 12 million. The company amortises the marketing cost at an accelerated rate that are 55% in year 1, 29% in year 2 and 16% in year 3 (Corporations, 2017). The selection of amortisation method has been done on the basis of 25 years of experience. As per paragraph 8 of the standard, an asset may be referred to as a resource from which future economic benefits towards entity may be expected and this resource is in control of entity as result of the past events. Considering the definition of asset, Intangible Asset may be defined as a non monetary identifiable asset that does not have physical existence. Also, AASB 138, determined intangible assets be recognised only if it is expected that future economic benefits will flow towards entity from the asset, and its cost may be measured reliably. Considering the provisions in the standard, it may be concluded that the contention of the company to recognise the marketing cost as Intangible is correct as it is proven by the information provided that the marketing is the key of success for the benefit so incurrence of these cost is surely going to bring the economic benefits towards Mags Limited and the marketing cost is reliably measured that is $ 7.5 million (Lowe, & Middleton-Jones, 2018).

In consideration of amortisation method used by the company, it may be observed that they are using an accelerate method. Looking the rate pattern, it may be observed that the useful life for intangible asset will be 3 years. As per paragraph 97 of AASB, the amortisation amount shall be allocated systematically on the basis if useful life of asset. Amortisation on asset shall start from the date when it is ready to use and shall end on the date it is hold for sale  (Kabir, & Rahman, 2016).  If such pattern could not be reliably determined then entity shall use straight line method for amortisation. The amortised amount shall be charged to statement of profit or loss each year. There may be variety of methods that may be used for systematic allocation of depreciation given of intangible asset over the useful life of such assets. The selection of amortisation method shall be done on the basis of future outcomes. If these accelerated will provide the amortised amounts in the future benefits. Hence, it may be concluded that Mags Limited is using appropriate amortisation method. Also, the selection of the amortisation method has been done on the basis of 25 years of experience. This represents that company has made reasonable estimates in determining future outcomes (Lam, 2018).

The investors is concerned about capitalisation of marketing cost because if  company has charged this marketing cost instead of capitalising the cost, the net income for the year 2018 would be $ 10 million in place of 12 million. However, capitalising the asset has provided them higher returns in respect to their investments. Also, if the compliance requirements are taken into account then also the company is not making any breach and the following years profit will be reduced with the amortised amount of the marketing cost. So ultimately the marketing cost is going to reduce the profits anyhow. It is just matter of time (Miah, 2017).

Conclusion

Mags limited have not made any breach in compliance of AASB 138 or IAS 38. Company has capitalised those cost which should be capitalised as per the rules mentioned in the relevant Accounting standards. The company is performing really well in terms of generating sales and profits. Marketing strategy of the company is playing a vital role in the success of the company. The provided information tells that company has capitalised 3 of its cost as Intangible assets that are mailing costs, purchasing cost of list and marketing costs. All of these costs are reliably measured and expected to bring economic benefits towards company in future. So they fit in the category of Intangible assets and Mags Limited has recognised them correctly. The selection of amortisation method has been done in accordance with the provision of accounting standard(s). For mailing cost, company is using straight line method because a pattern for expected future economic benefits could be determined. For marketing cost, company is following accelerated method that is based on the pattern of future economic benefits. At last, it may be suggested to the investors that company is complying with the provisions of AASB 138/IAS 38 so there is no need to be worried.