In this paper, the author works for the Brisbane office of a firm of public accountants whose clients have made immense investment in their brand developments.
Following this hefty investment, the clients encounter large amounts of expenditure to market and build their brands.
Consequently, they are seeking the necessary information on whether they ought to capitalise as opposed to expensing their outlays.
To aid them in making this vital decision, this paper presents a report on a concise history of Australia’s policy for accounting for intangible assets before the adoption of IFRS.
It presents the approach taken by the Australian IFRS on the question of expensing or capitalising internally generated intangible assets such as brands, and the reasoning behind this approach.
It also considers any future global developments relating to changing the IASB’s current accounting standard for intangible assets showing how they might affect Australian reporting entities.
International financial reporting standards (IFRSs) were embraced by many nations including Australia in 2005.
In this context, Kanodia et al. (2004) reckons that Australia entangles one of the fascinating setting for conducting a study on the impacts of IFTRSs on the values of a firm due to the differences that the standards have on intangibles accounting standards that existed before 2005 (p.89).
Arguably, IFRSs encompasses a variety of regulations on accounting practices to meet the global code of practice.
However, in Australia, the issue of regulation of accounting standards especially on intangibles has attracted a lot of controversy (Wyatt, Zoltan & Stokes 2001, p.23: Ritter & Wells 2006, p.843: Daske 2008, p.1085).
This is because there has not been a nationally acceptable rule governing the type of intangibles that need to be recognised coupled with the manner in which such intangibles need to be measured on a common parameter so that it can be reported in financial statements similarly in all firms across Australia (Bugeja & Gallery 2006, p. 524).
Nevertheless, prior to the adoption of IFRSs, in Australia, there were certain standards of accounting that sought to regulate various types of intangibles in the Australian firms (Jeanjean & Stolowy 2008, p.48: Goodwin & Ahmed 2006, p.73).
Some of these standards include AASB 1011, AASB 1013, and AASB 1012 amongst others. AASB 1011 entangles accounting standards for research and development costs while AASB 1012 entangles accounting standards for extractive industries (Oswald & Zarowin 2007, p.703).
On the other hand, AASB 1013 was deployed as goodwill accounting standard. Apart from this publication, other publications also existed that were attributed to intangibles. Such publications include IASB and AASB.
However, as Francis and Schipper (2009) posit, in Australia, following the adoption of IFRSs, requirements for accounting reporting in relation to intangibles were integrated in AASB 3 and AASB 138 or IAS 38 (p.319).
In this context, although not harmonised consistently with the accounting standards practiced by other nations across the globe before the adoption of IFRSs, Australia had her own standards for financial reporting of intangibles.
Australia has adopted various approaches towards accounting for internally generated intangibles consistent with the requirements of IFRSs. In this regard, some varieties of intangibles that are generated internally are not capitalisable (Barth, Landsman & Lang 2008, p.468).
Wyatt (2005) builds on this idea by asserting that, according to IFRSs, brands, publishing titles, and mastheads without negating customer lists and other related items are internally generated within a firm (p.973).
The reasoning behind non-capitalisation of these intangibles is that they are not essentially classifiable as assets. Additionally, some costs are also not capitalised concerning IFRSs, which are adopted in Australia.
These costs include pre-operating costs, costs incurred at start-up, and pre-opening costs (Goodwin & Ahmed 2006, p.463). Others include advertising costs, costs of training, and costs of relocation.
The main reasoning behind non-capitalisation of these costs is that measuring these costs is difficult (Brown, Lo & Lys 1999, p.83).
Stemming from this discussion, for capitalisation of either intangible assets or cost, measurability of costs, and the capacity of an asset to be clarified as an asset are critical factors in determining whether intangibles need to be capitalised or expensed under the Australian accounting practices inspired by IFRSs (Alford 2005, p.187).
Considering the case in question in this report, it important that the clients consider expensing their brands since, according to IFRSs, brand and the costs incurred in building the brands are taken as not capitalisable.
The global trend in accounting for intangibles concerning IASB’s current accounting standards is towards enhancing transparency by steadily altering financial reporting to assume a manner that is of fair value based on the market.
In this context, Barth (2008) posits that, as a constituent of this drastic move, there has been a noble change in the approaches of ‘accounting for business combinations’ particularly on the sector of intangibles (p.1159).
What this means to the Australian accounting reporting entities is that they have to refocus their attention to enhancing transparency on intangibles that do not fit in balance sheets since they are non-capitalisable and or the costs that cannot be expensed especially during acquisitions (Haswell, & McKinnon 2009, p.8).
In conclusion, this paper considers the question on whether clients who have spend a lot of money on development and building their brand name through marketing need to capitalise, expense the costs incurred, or capitalise the intangibles asset.
As a recommendation, it is evident under the IFRSs, adopted, and used currently in Australia: brands cannot be capitalised and hence the paper recommends that the clients need to expense them.
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