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ACC701 Key Analysis of Case Study of Technology Enterprises Ltd Assessment 2 Answer

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ACC701 Financial Accounting T119



Answer

AASB-138

Module Number-


Introduction

With the changes in the economic condition, every organization needs to comply with the accounting standards and laws to align the domestic reporting frameworks with the international reporting frameworks. This report divulges the key understanding on the provisions of AASB 138 and how it helps company to strengthen the transparency and revealing the true and fair view of its recorded assets and liabilities in the books of account. In this report, key analysis of the case study of the accounting for the internally generated intangible asset and its cost of Technology Enterprises Ltd has been taken into consideration. This reveal the key aspects of the AASB 138 and its legal compliance in the accounting and recording framework of Technology Enterprises Ltd. 

Answer to question no- 1

RECOGNITION AS INTANGIBLE ASSET OR NOT

  • To properly account for the intangible asset generated by Technology Enterprises Ltd. it is important to first understand whether the asset as claimed by organisation falls in the criteria of an intangible asset or not. The following provisions of AASB 138 (similar to the provisions set by IAS 38) are required to be checked to analyse the same:
Relevant paragraph of AASB 138Requirement set by the paragraph
  • Paragraph 9
The definition of intangible asset is set by this paragraph. Analysis of the definition includes the maintenance, acquisition, enhancement or development of scientific or technological knowledge in the category of items specifically considered as intangible asset.

  • Paragraph 18
This paragraph requires the asset to meet the recognition criteria in addition to be approved by definition of intangible assets to be able to be recognised in financial statements. 
  • Paragraph 21
The conditions necessary to be met by an asset to comply with recognition criteria are set by this paragraph as follows:
  1. The cost of intangible assets is able to be measured with reliability by organisation, and
  2. There exists certain probability of flow of “expected future economic benefits” because of the intangible asset towards the entity (Russell, 2017).
  • Paragraph 22
The probability of “expected future economic benefits” is judged by management by use of supportable and reasonable judgements. This is undertaken by considering best estimate of futuristic economic conditions.
  • Paragraph 23
Also, the degree of the above discussed probability is decided using management judgement giving prioritised weight to external evidence.


  • In the given case, Technology Enterprises Ltd has completed a project relating to method of recharging batteries in June 2018. The expectation in relation to derivation of economic benefits from the technology is for next 10 years. The organisation has also detailed information about the cost incurred in the technology (discussed in later section). The probability of ““expected future economic benefits” is based upon the best judgement of management.
  • As the project generated by organisation falls in the definition of intangible asset as per Paragraph 9 because it is a development dealing with scientific or technological knowledge. Also the asset fulfils the recognition criteria set by Paragraph 18 and 21, the asset falls in the category of “Internally generated intangible asset”. Hence, the asset can be recognised in the financials. 

ACCOUNTING FOR THE INTERNALLY GENERATED INTANGIBLE ASSET AND ITS COST


Relevant paragraph of AASB 138Requirement set by the paragraph
  • Paragraph 24
The initial recognition of the internally generated intangible asset is required to be done on cost.
  • Paragraph 52
For ascertainment of the cost, a distinction is required to be made between the research phase and development phase of the internally generated intangible asset.
  • Paragraph 53
In case the distinction of the development phase from research phase is not possible, then the entire expense incurred upon the intangible asset generation shall be expensed treating it as incurred in research phase.
  • Paragraph 54
The expense incurred in research phase can only be treated as revenue expenditure.
  • Paragraph 56
The expenditure incurred for making search for alternatives is considered as an example of research activity.
  • Paragraph 66
The cost of services and material deployed in generation of intangible assets is considered as a cost incurred in development of internally generated intangible asset.
  • Paragraph 67
Expense incurred to train staff to learn operation of asset is specifically excluded from the cost of any internally generated intangible assets.


  • As paragraph 24 specifically requires recognition on cost, the CEO’s contention to record asset at $400,000 stands wrong. The asset is required to be recognised only on the basis of cost of development (Auditing and Assurance Standards Board (2013).
  • The following table tells whether the expenditure reported by organisation can be capitalised or not (Auditing and Assurance Standards Board., 2013).
Particularsphase of expenseCapitalisation allowed (yes/no)Relevant paragraph of AASB 138Amount to be capitalised
Cost of time spent searching for evaluating material alternative : $10,000Research phaseNo560
Cost of design model and construction of prototype: $70,000Development phaseYes66$70,000
Cost of time spend on training for new design: $20,000N/ANo670
COST OF INTENALLY GENERATED INTANGIBLE ASSET$70,000


NOTE: the above accounting done for the internally generated intangible asset is for initial phase, i.e. first time recognition in books. The measurement of asset after once recognised shall be discussed in question 3 (Auditing and Assurance Standards Board., 2013)

Answer to question no-2

The rules and restrictions set by AASB 138 and IAS 38 are equivalent to each other. These rules are followed by company to strengthen the legal compliance and accounting frameworks. Both set guidelines which are mandatorily required to be overseen by entities while recognising, measuring and disclosing any sort of intangible asset in the books of accounts. The provisions set by AASB 138 have been updated to comply with the requirements set by IAS 38. This was done to bring convergence in the accounting treatment followed by every listed organisation in around 138 countries. The focus to bring the convergence was designed to maintain uniformity and raise comparability of the financial statements reported by listed entities. The policies of recognition of intangible assets, their initial measurement, inclusions and exclusions in cost, further re-measurement, revaluation, disclosures etc. have been set similar for every entity (Lin, Riccardi, Wang, Hopkins, & Kabureck, 2017).

However, the rules and restrictions set by AASB 138/IAS 38 turn flexible at certain areas. The use of best estimates based upon management judgement and external evidence is purported at several places by the accounting standard. E.g. for considering the probability of “expected future economic benefits” Paragraph 22 allows management to use their best judgement. This brings flexibility and loosens the chances of estimates being uniform. The estimates accepted by the management of listed entities around the world are bound to differ. This brings a certain question upon the comparable characteristic of financial statements (Auditing and Assurance Standards Board (2015b). 

If this aspect is accepted, rest other rules and restrictions set by AASB138/IAS 38 have only raised the comparability of financial statements, not only between Australian entities, but at the international corporate platform. Also, the quality of entity’s own performance comparison over years has become more transparent and relevant (Akgün, 2016). 

Answer to question no- 3

Response to CEO in relation to market hypothesis set by AASB 138

The below given relevant program of the AASB 138 reveals the initial measurement and compliance required by Technology Enterprises Ltd for recording of the true and fair view of the intangible assets. 

Relevant paragraph of AASB 138Requirement set by the paragraph
  • Paragraph 71
After initial measurement organisation can opt to either value the intangible asset using the cost model or revaluation model.
  • Paragraph 74
Measurement of intangible asset using the cost model shall reflect the actual recognised cost of intangible asset after deducting the accumulated amortisation expense till date and any impairment loss (if the asset had been tested for impairment and impairment loss is there).
  • Paragraph 75
For organisations opting for revaluation model, the measurement of intangible asset shall be equal to fair value of asset as available for the date when revaluation is done. This fair value shall be deducted by any subsequent impairment loss or accumulated depreciation (Bond, Govendir, & Wells, 2016).
However, the revaluation model can only be opted by the organisation, if the fair value is available in “reference to an active market” (Auditing and Assurance Standards Board., 2015).
  • Paragraph 81
In case no active market is available, the valuation model can only be the cost model and the requirements set by Paragraph 74 shall follow.


  • Active market as defined by AASB 138 as availability of homogenous items in a market where both buyers and sellers are willing to trade and the public is informed of the trade price of the intangible asset.
  • In the current case, there is no available active market for the internally generated intangible asset. There are no homogenous items traded as developed by the organisation. also there is availability of a single buyer who also demands customisation. Plus the price of intangible asset is not available to public. Hence, the contention that asset must be valued at $400,000 being the present value of asset is wrong considering the provisions of Paragraph 75 and 81 of AASB 138. Also the asset has to be measured using cost model only as per Paragraph 74 (Mrša, 2018).
  • The amortisation expense is calculated as follows:

Life of asset: 10 years

Cost of asset: $70,000

Amortisation expense per year: 70,000/10

                            : $7,000

Therefore, it could be inferred that amortisation expenses which would be charged on the books of account of the company recorded for the intangible assets would be $7,000

Recommendations to meet the concerns about investor interpretation

  • Proper disclosures must be attached to the foot of financial statements. The detailed computation of the cost of intangible assets against the provisions set by AASB 138 must be shown. Comments must be added about why the cost model is only followed and why the present value is ignored. 
  • The estimates used by management in relation to “expected future economic benefits” should also be disclosed. This shall enable the investors to understand the economic benefits attached to the development of asset, which however shall be reaped in sometime and in parts.
  • The benefit to organisations performance must also be added in financials to help investors understand the upcoming economic and brand image additions flowing to their investment organisation (Denicolai, Cotta Ramusino, & Sotti, 2015).
  • It will strengthen the disclosure compliance and helps stakeholders to identify the key details recorded and accounted in the books of account for the intangible assets of company. 
  • It will also be helpful for the investors to assess the economic benefits and return on capital employed offered by company to them. The return on total assets would be clear to the stakeholders as it will be based on the genuine recording of the value of the intangible assets of Technology Enterprises Ltd (Auditing and Assurance Standards Board., 2013).

Conclusion 

After assessing the recording and assessment of the intangible assets of Technology Enterprises Ltd as per the AASB 138, it is found that company has strengthen its business assets transparency to its stakeholders. It has kept the true and fair view of its assets recorded in the books of account. Technology Enterprises Ltd has kept the proper notes to account and other supporting details in its financial statements which would help the stakeholders of the Technology Enterprises Ltd to interpret the financial results in easy manner. Now in the end, it could be inferred that every listed company should comply with the provisions and laws of the AASB 138 to strengthen the true and fair view of its recorded intangible assets. The value of the intangible should be based on the cost model and comparison of the recorded assets should be made on the periodical basis. 

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