ACCT20071 | Accounting for Intangible Assets as per IFRS

On 1 January 2005, all the Australian companies had to adopt the principles and regulations of International Financial Reporting Standards (IFRS) at the time of the preparation and presentation of the financial statements. From then, it has been challenging for the companies in Australia in financial accounting due to the implementation of the principles of IFRS. There have been major changes in the accounting standards and financial reporting of the companies due to the adoption of IFRS. It was anticipated that there would be significant effects of the adoption of IFRS on various financial aspects; and one of such aspects is Intangible Assets (Bryce, Ali & Mather, 2015). After the adoption of the strategies of IFRS, there have been foremost changes in the intangible assets accounting by the companies. The main aim of this report is to evaluate different impacts of the adoption of IFRS on the intangible assets accounting for the companies. For this purpose, Wesfarmers Limited is taken into consideration for this report. Wesfarmers is one of the leading conglomerates in Australia. The company was established in the year of 1914 and it is headquartered at Perth, Western Australia, Australia (wesfarmers.com.au, 2018).

Economic Consequences of IFRS Adoption

The presence of certain objectives can be seen behind the introduction of the standards and principles of IFRS for the companies all over the world; and there is not any exception of this fact in case of the Australian companies. It can be observed that there are two major reasons behind the introduction of the standards and principles of IFRS (Daske et al., 2013). The first reason can be considered the belief that the adoption of IFRS would bring superior quality in the accounting works and they are more comprehensive while comparing with the national or domestic standards. It needs to be mentioned that high quality of financial reporting and effective financial disclosure has association with the value of the companies along with the market liquidity. In the presence of this fact, the introduction of IFRS should lead to the increased market liquidity along with the cost of capital reduction (Brüggemann, Hitz & Sellhorn, 2013). The second major objective behind the introduction of the standards of IFRS is to bring comparability in the financial statements so that it becomes less costly for the investors to compare the financial information of the companies across the countries. This aspect will lead to the cross-border investments and the incorporation of the capital market all over the world. It can be seen from the above discussion that the main aim of the introduction of IFRS standards was to improve the quality as well as accuracy of financial reporting across the countries (Horton, Serafeim & Serafeim, 2013).

Accounting for Intangible Assets as per IFRS

As per the earlier discussion, the Australian companies adopted the principles of IFRS on January 1, 2005. In the present situation, Australian Accounting Standard Board (AASB) has provided the companies with the required standards and regulations for the accounting treatment of intangible assets as per the standards of IFRS. For this reason, the Australian companies are required to comply with the standards and regulations of AASB 138 Intangible Assets at the time of the accounting treatments of intangible assets of their businesses (aasb.gov.au, 2018). This regulation is also applicable for Wesfarmers. According to AASB 138, the obligation on the companies for the recognition of intangible assets is when it is probable that there will be a flow of expected economic profit from the asset to the business organization and it is possible for the companies to measure the cost of the intangible assets on reliable basis. In this process, the business organizations have the author to make valid assumptions for gaining the future benefits from those assets. AASB 138 also states that the business organizations have the obligation for the measurement of the intangible assets at cost process (aasb.gov.au, 2018). In case a business organization does the acquisition of an intangible asset at no cost, the company is required to consider the present fair value of those asses as the cost price. Apart from these major regulations, the companies are needed to comply with different standards for the accounting of intangible assets (aasb.gov.au, 2018).

Impact of IFRS Adoption in Intangible Assets

After the adoption of the standards of IFRS, it was the most difficult task for the accounting regulators to regulate the accounting procedures for intangible assets. This is considered as the major issue due to the major growth in international mergers and acquisitions along with the rapid growth in the international financial market. In Australia, before the inception of IFRS, the presence of some accounting standards can be seen for the accounting of intangible assets; such as AASB 1011 Accounting for Research and Development Costs and AASB 1013 Accounting for Goodwill. The requirement for the companies was to capitalize and amortize the purchase of goodwill through earnings via straight-line method over a period of five to twenty years. The procedures for the accounting of intangible assets was much simpler that the post period of IFRS introduction (Ahmed, Chalmers & Khlif, 2013).

However, the adoption of the standards of IFRS has forced the accounting standard setters to adopt a more conservative approach for the intangible asset valuation. As per the current requirement in AASB 138 as per IFRS, only the externally purchased goodwill and other intangible assets like patents, licenses and others can be capitalized and subject to the impairment test (Bryce, Ali & Mather, 2015). It can be seen from the following table from the 2017 Annual Report of Wesfarmers:

(Source: wesfarmers.com.au, 2018)

Moreover, the costs of research are considered as the expense and the companies can only carry forwards the research costs. In this context, it needs to be mentioned that the Australian companies have to face difficulties in the process of the impairment of the intangible asset under the rules of IFRS. As per AASB 138, the Australian companies are needed to conduct impairment test of their intangible assets on regular basis. It implies that the accountants of the companies have to put more efforts on regular impairment testing (Ismail et al., 2013).

The major requirement under the standards of IFRS for the companies is that they are needed to recognize and record more intangible assets in their financial statements. One major reason why regulating intangible assets is a controversial as well as difficult job because the standard setters as well as companies have to face two major dilemmas at the time of considering the economic consequences of the decisions related to intangible asset valuation (Cascino & Gassen, 2015). The tradeoff between the possibilities of manipulation vs. the possibilities to signal at the time of the selection of accounting treatments for intangible assets. Two theories can be mentioned at this point; they are opportunistic theory and efficient contracting theory. As per the opportunistic theory, the managers select the accounting policies for the maximization of their own interests instead of providing valuable information to the investors and the financial statements users. Thus, under IFRS, the managers of the companies get the chance to do manipulation with the financial information as they are given discretionary power. As per, efficient contracting theory, the mangers have the option to provide more true financial position of the companies with the help of discretionary power (Su & Wells, 2015).

Another major area of impact on the adoption of IFRS standards can be seen in the form of the de-recognition of the intangible assets of the businesses. Under the standard of AASB 138, the companies are needed to recognize the intangible assets that have been purchased at cost value. Thus, the companies are needed to de-recognize the internally generated assets of their business. This aspect has created difficulties for the accountants of the companies as they have to go through complex accounting procedures for the recognition as well as de-recognition of the intangible assets (Christensen & Nikolaev, 2013).

(Source: wesfarmers.com.au, 2018)

However, exception of this regulation can be seen in case of goodwill as the companies can recognize the goodwill at the time of acquisition as a part of the business combination and they can be measured as per the regulation of AASB 3 Business Combination. It needs to be mentioned that the companies had to de-recognize all their intangible assets after the introduction of IFRS and this aspect created many difficulties for the companies to carry on their valuation process of intangible assets. Apart from this, it can also be seen that there has been decrease in the net assets of the companies along with an increase in the debt-to-equity ratio of the companies (Karampinis and Hevas, 2013).

(Source: wesfarmers.com.au, 2018)

Along with the above, there are many instances where the companies have to face immense difficulties in meeting their excising debt agreements in the presence of the ne IFRS standards. It needs to be mentioned that in the year 2004, large number of firms were not fundamentally prepared to adopt the IFRS principles and this aspect create difficulties for them (Christensen & Nikolaev, 2013).

It can be observed that many Australian companies requested AASB for exempt themselves from compiling with the regulations of IFRS related to the intangible asset valuation. In this context, the aim of IFRS needs to be mentioned that is to implement a uniform accounting system for the countries all over the world. For this reason, the International Accounting Standard Board (IASB) overrode the demand of these companies (Ahmed, Chalmers & Khlif, 2013).

Conclusion

From the above discussion, it can be seen that the main aim of the introduction of new standards of IFRS was the establishment of a uniform accounting standards and the accounting for intangible assets was one of them. The above discussion shows the fact that the Australian companies have to face some major difficulties from the adoption of the standards of IFRS related to intangible assets. Most of the companies had to de-recognize their intangible assets as they are needed to consider the cost value of the intangible assets. It can also be observed that the IASB has not materialized the request of the Australian companies to exempt them from the IFRS regulations of the intangible assets.

References

2017 Annual Report. (2018). Retrieved from https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4

Adibah Wan Ismail, W., Anuar Kamarudin, K., van Zijl, T., & Dunstan, K. (2013). Earnings quality and the adoption of IFRS-based accounting standards: Evidence from an emerging market. Asian Review of Accounting, 21(1), 53-73.

Ahmed, K., Chalmers, K., & Khlif, H. (2013). A meta-analysis of IFRS adoption effects. The International Journal of Accounting, 48(2), 173-217.

Brüggemann, U., Hitz, J. M., & Sellhorn, T. (2013). Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), 1-37.

Bryce, M., Ali, M. J., & Mather, P. R. (2015). Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific-Basin Finance Journal, 35, 163-181.

Cascino, S., & Gassen, J. (2015). What drives the comparability effect of mandatory IFRS adoption?. Review of Accounting Studies, 20(1), 242-282.

Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), 734-775.

Daske, H., Hail, L., Leuz, C., & Verdi, R. (2013). Adopting a label: Heterogeneity in the economic consequences around IAS/IFRS adoptions. Journal of Accounting Research, 51(3), 495-547.

Group, D. (2018). Who we are . Wesfarmers.com.au. Retrieved 7 August 2018, from https://www.wesfarmers.com.au/who-we-are/who-we-are

Horton, J., Serafeim, G., & Serafeim, I. (2013). Does mandatory IFRS adoption improve the information environment?. Contemporary accounting research, 30(1), 388-423.

Impairment of Assets. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf

Intangible Assets. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf

Karampinis, N.I. and Hevas, D.L., 2013. Effects of IFRS adoption on tax-induced incentives for financial earnings management: evidence from Greece. The International Journal of Accounting, 48(2), pp.218-247.

Su, W. H., & Wells, P. (2015). The association of identifiable intangible assets acquired and recognised in business acquisitions with postacquisition firm performance. Accounting & Finance, 55(4), 1171-1199.