In 2005, Australian Accounting Standards Board adopted IFRS and all the existing accounting standards were replaced by the new IFRS compliant standards (Australian Accounting Standards Board, 2004). The adoption of new accounting standards had significant impacts on the reported financial position and financial performance of Australian Corporations. Under the new standard AASB 138 Intangible Assets, the accounting treatments of intangibles pertaining to recognition, measurement and disclosure of intangibles changed. Corporations are required to derecognise internally generated identifiable intangible assets which do not satisfy the recognition criteria (Australian Accounting Standards Board, 2004).
Also, the companies that have re-valued intangible assets are required to derecognise them if a suitable active market is not found for them. Previously Australian GAAP allowed the capitalization and revaluation of internally generated intangibles. Under new standards (AASB, 2009), only purchased intangible assets can be capitalized. Amortization is allowed for intangibles under GAAP or IFRS, but it will be avoided if the asset has an unlimited life span (AASB, 2009). The following accounting change seriously impacted the Research & Development assets of Australian corporations as they have to derecognise them. The capitalization instead of expense recognition has resulted in a negative impact on total assets while having a positive impact on the earnings.
Evaluation of the Write-down of Intangible Assets under AASB 138 against AASB Framework
The Australian Accounting Standards Board Framework lays out the basic guidelines in the preparation and presentation of financial statements for external users (AASB, 2009). According to the AASB Framework AASB (2009):
- “An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”
- The asset should generate material benefit for the firm in the form of cash or cash equivalents in future.
- Assets at an organization are used to produce goods and services for which clients/customers pay and hence generate cash flow for the organization.
- An asset can be used individually or with other assets to generate probable economic benefits for the organization. It also has the characteristic to get exchanged for other goods or assets and it can also be used to settle a liability or to distribute to the owners of the company
- An asset can be in a nonphysical form such as patents, copyrights etc. if future benefits are expected to flow to the company from such nonphysical assets
Also, the Framework AASB (2009) states
- An asset is not recorded in the balance sheet for which expenditure has been incurred and it is expected that the asset will not generate economic benefits for the entity beyond the current accounting period. The expenditure on such an asset will be recorded as an expense
The recognition of intangible assets under Standard 138 is consistent with the AASB Framework of Asset Recognition.
The Standard requires the intangible asset to result in expected benefits flowing toward entity and the cost of intangibles can be measured reliably, which is according to the AASB Framework.
The prohibition of the recognition of internally generated intangible assets such as brands, publishing titles, and intangibles from research is also in conformance with the framework because the value of such intangibles cannot be measured reliably. Same stands for internally generated goodwill as its value cannot be measured reliably in accordance with the framework.
Also, the de recognition of intangible assets occurs if no future benefits are expected from its use or disposal according to the AASB Framework. The framework also states that a physical form is not necessary for the existence of an asset and clearly states patents, copyrights as assets if future benefits are expected to flow from them towards the entity. Hence the write downs of intangible assets are in complete compliance with the framework.
Cheung et al. (2008) compared the projected and realised impacts of AASB 138 on all listed companies for the financial year 2005/06 using projected data available in 2004/2005 and found out that the actual reported results are different from the projected results for intangible assets, but both the projected and actual statistics are same for Return on Assets and Return on Equity ratios, which implies that the change in intangible assets was not that much significant as it was expected by some stakeholder. Cheung et al. (2008) Gives the reason that companies did not derecognise intangible assets as they were expected may be because of the poor communication to companies about the difference between internally generated intangible assets and purchased intangible assets which leads to the conclusion that the impact of AASB 138 on intangible assets was not as severe as expected. Rather a gradual change can be expected over the years as companies will become more aware of the full impact of this new standard on their intangible assets.
In the Exposure Draft ED 129, Disclosing the impact of Adopting AASB Equivalents to IASB Standards (AASB, 2004), Australian Accounting Standards Board proposed the adoption of IFRS from 2005 onwards to increase the overall quality of financial reporting system along with international convergence of accounting standards. Goodwin, et al. (2008) examined the effects of IFRS on the accounts of 1,065 Australian firms replying on retrospective reconciliations between AGAAP and AIFRS and found that under IFRS mean liabilities of firms increase while mean equity decreases. Reversal of Goodwill amortisation is one of the main reason of earning increase, and it was discovered that write down of intangibles reduced equity substantially, but those adjustments were not pervasive.
In reply to the proposed AASB’s International Convergence and Harmonisation Policy Exposure Draft ED 102 (Group 100, 2001) the group of 100 which consist of senior finance executives from Australian Corporations advocated the internationalisation of accounting standards. Jones and Higgins (2006) found out that IFRS is expected to have the greatest impact on existing financial reporting practices in an area which lack current reporting standards such as intangible assets. It was also found out that business believed IFRS transition was a major business priority which will involve significant involvement of human resources along with senior management and board. A strong positive correlation was found by Jones and Higgins (2006) between firm size, and expected involvement in transition to IFRS reporting. Also, Jones and Higgins (2006) concluded that it was a widely believed notion among Australian business corporate that the costs far outweigh the benefits gained from IFRS transition from AGAAP and is unlikely to result in any considerable benefits to Australian Corporations.
Jenkins and Upton (2001) supported the need for updated accounting standards for intangibles in order to cater the needs of today’s economy. According to them traditional financial statements do not capture the value drivers that dominate the new economy. The identified the potential problems that were inherent in the accounting standards dealing with intangibles before 2005. Jenkins and Upton (2001) stated that the valuation of internally generated intangibles is not a reliable measure of the underlying value. Alfredson (2001) identified the unavailability of any accounting standard dealing specifically with identifiable intangible assets. Alfredson (2001) found out that flexible accounting practices had become well established in Australia and any proposed restrictions to these practices will give rise to controversy. Additionally, Alfredson (2001) also identified the controversy surrounding the indefinite lives of intangible assets and the revaluation of intangibles. Alfredson (2001) concluded AASB should deal with the recognition of intangible assets in today’s modern day economy where the growth in intangibles is fast.
Carlin and Finch (2010) researched the level of compliance in Goodwill reporting and disclosure requirements of 135 Australian companies and found high levels of noncompliance with the IFRS Goodwill accounting standard which weakens the assumptions of consistency and comparability under IFRS by Australian Corporations. Goodwin et al. (2008) examined the level of preparation of Australian firms and managers to adopt IFRS effective from 2005 and found out that most of the firms or auditors were not prepared to shift from AGAAP to IFRS because of changes in explanations from AGAAP to AIFRS.
Wyatt et al. (2001) identified that AASB accounting concepts are too abstract to understand by managers, leaving managers to act in self-discretion. Also, there is a wide diversity in capitalization practices among different corporations and classes of intangible assets which have helped in identifying significant accounting regulatory distortions. Godfrey and Koh (2001) found out that the capitalisation of intangible assets provides more information on firm valuation than other balance sheet items such as total intangible assets. Godfrey and Koh (2001) also discovered that goodwill and identifiable intangible assets affect firm valuation more than capitalised R&D costs.
In my opinion, the shift to International Financial Reporting Standards from Australian GAAP was a logical move. Globalisation is taking over the world and firms are going multinational to sustain growth and exploit less explored markets for better profit margins. In such a scenario, a global marketplace has been created for firms that are competing with firms from other countries instead of competing with local firms. Hence, a uniform financial reporting standard needs to be developed for better financial comparison of global firms with each other. Different reporting systems give rise to different financial results and hence give rise to conflicting comparisons. A uniform reporting system will enhance the transparency of comparison among firms.
Adoption of IFRS in Australia will also fix the loopholes which were previously left unaddressed in Australian GAAP, for example the treatment of internally generated intangibles. In this way, reporting will be more transparent and accurate in Australia. Internally generated asset accounting creates ambiguity and eradication of such practice will result in more accurate valuation of Australian firms.
Transparency and Accuracy will also increase as a result of the prohibition of revaluation of internally generated intangibles assets under IFRS for whom an active secondary market does not exist. Such practices in past have resulted in ambiguous valuations. The removal of internally generated intangibles from the balance sheet will also reduce the overall risk of the firm. Managers of the firms will be required to make less judgemental decisions on the valuation of internally generated assets.
The adoption of IFRS accounting standards in place of Australian GAAP was a major shift in Australia Accounting Standards board reporting policies. The following change in shift brought a new standard for the treatment of intangible assets which was previously nonexistent. Previously, companies were free to record internally generated assets under old accounting standards, but the recent adoption of IFRS has brought major shifts in the measurement and recognition of financial statement elements. The adoption of IFRS has significantly impacted the financial position and financial performance of firms. IFRS may have restricted some accounting reporting for companies but it sure has brought more transparency in financial statement reporting.
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