Financial Accounting Business Report (Research Paper Sample)

2102AFE Financial Accounting Business Report
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Executive Summary
The objective of this analysis is to offer an opinion on the treatment of internal intangible assets by West ltd. The discourse examines the treatment of such intangibles prior to and after the adoption of the Australian Accounting Standards Board 138 resolve that indicated that all intangible assets must be derecognized from the financial reports. The Australian International Financial Reporting Standards (AIFRS) provides for the exclusion of all the intangible assets. It is important to examine the relevance and reliability of the intangible assets before a valid opinion can be given as to whether adoption of capitalization as a strategy of business is allowable in principle and the effects of not including the intangible assets in financial reporting.
Report
An intangible asset can be defined as an asset that lacks substance and in most instances is hard to evaluate. This includes assets like copyrights, patents, goodwill, trade names and trademarks. It is an asset lacking in physicality but having great useful life that extends to more than a year (Kaplan & Norton, 2004). An intangible asset having a useful life attracts book value amortized over the years the asset has a useful life. There are instances where the value and relevance of the intangible asset is considered to be declining in value and at such a time the decline in value is treated as depreciation in the existing period. This in essence means that the depreciation is not apportioned over many periods but it is one time.
The intangible Assets were adopted the Australian reporting entities for the reporting period beginning 2005 January 1st. The Australian Accounting Standard Board (AASB) asserted that all the intangible assets generated internally be derecognized. Before the adoption of the AASB 138 the accounting standards required the inclusion of intangible assets in the reporting of all the entities that are listed as public entities.
The effects caused by the AASB 138 resolutions to disallow the inclusion of intangible assets in reporting are evidenced on the assets reported and on other financial reporting measures. It was expected that the intangible assets reported and the ration between debt and equity would be affected considerably following the revised treatment of the assets. Contrary to expectation the Australian equivalents to international financial reporting standards (AIFRS) only showed a significant change on the debt to equity ratio but no significant change on the intangible assets (Tudor & Dragu, 2010).
It is important to evaluate the reasons as to why the adoption of the new changes did not yield the expected results. The landmark decision by AASB disallowing the inclusion of intangible assets in reporting raises important questions as to why the internally generated assets are no longer considered as core assets in the business community and whether the dependability of intangibles reported raises any patient analysis concerns. The main issue that needs to be canvased with finality is the degree to which intangible assets are relevant and reliable and the value relevance the assets claim. The value relevance materials attempting to demystify the issue are limited (Collett, Godfrey, & Hrasky, 2001).
Dahmash, Durand and Watson in the year 2009 attempted to scrutinize the reliability and value relevance of intangible assets and goodwill under the Australian generally accepted accounting principles (AGAAP). The method used to examine the reliability and value of the intangibles is the reported coefficients of goodwill and assets that are identifiable. The argument by the scholars is that the coefficients for both the identifiable intangible assets, like brand names and master headings, and unidentifiable intangible assets (goodwill) only become value relevant when the coefficient is not zero.
The relevance of the coefficients is realized when they are approaching 1. The finding from their study was that the information relating to identifiable assets and goodwill was indeed relevant in value but were not reliable. The reporting of goodwill is conservative and that of identifiable intangibles is aggressive. The investigation by Kallapur and Kwan in 2004 on the reliability and the relevance of brand assets found that brand assets are relevant in value. It was however noted that the rates of market capitalization for brands with high reliability were higher than those rates of firms with low reliability.
This means that there are notable differences between the value relevance of brands with different measures of reliability. There is therefore a balanced relationship between value reliability and relevance of the intangible asset information. The information on intangibles is value reliable while the value of the intangibles is value relevant.
The diagram below is a summarized explanation of the significance of principles of accounting for the intangible assets.


The relevance of adoption of the AASB138 (Australian Accounting Standard Board) derecognizing intangible assets can be summarized by the following journal entries for the purpose of cancelling out the previously accepted standards.
Dr. Asset Revaluation Reserve
Cr Intangible Assets
The objective for the entries is to cancel out the originally recognized internal intangible assets
Dr. Accumulated Amortization
Cr Retained Earnings
The effect is the reversion of the expenses on amortization during the life of the intangible assets.
Coming from the background of this understanding we may draw useful information necessary to make a decision as to whether West ltd should capitalize its internally generated intangible assets. While it was initially possible to recognize the internally generated intangible assets prior to the adoption of the Australian Accounting standard board (AASB) 138 resolve it is currently not correct as a matter of principle to recognize the intangibles borrowing from the Australian international financial reporting standards (AIFRS).
While West ltd has a good brand name that could yield relevance the potential for manipulation and signaling are higher and as such professionalism is required. The company seems to be incurring heavy costs in terms of market costs for building the brand name to the tune of $500,000. Prior to the adoption of the reforms in accounting it would have been advisable to capitalize the brand in light of the growing relevance it is developing among the community. In the new dispensation however it is not possible by principle to include such assets in reporting. Research conducted here in seems to suggest that there was indeed no significant change in reporting as a result of the changes in accounting.
The changes in reporting indi...