This section of the report is aimed at discussing the treatment of intangible assets in Billabong International Limited. In particular, it is necessary to determine if this treatment complies with the existing Australian accounting standards. Overall, this enterprise recognizes three types of non-monetary and non-physical assets, namely goodwill, brands, and computer software (Billabong, 2011 p 66).
They are directly related to profit generation. However, one can single out some other intangible assets such as marketing rights, copyrights, patents, customer lists and so forth (Deegan, 2009). They are not quite applicable to this company, but they are of great importance to many modern businesses. On the whole, it is possible to say that the management of Billabong accurately identified each of its non-physical and non-monetary assets. In this respect, their financial reporting practices are quite appropriate.
The company treats these intangible assets in different ways. For instance, they do not amortize goodwill because it has an indefinite life. This means that one cannot determine when their commercial reputation, customer connections, or brand image will stop to bring revenues for the organization. Such practice is quite consistent with Australian as well as International Financial Reporting Standards.
This company allocates goodwill to cash-generating units in order to test impairment. It should be noted that they compare the fair value of a unit with its carrying or book value. Again, such methodology is compatible with the standards accounting adopted in Australia (Deegan, 2009).
Similarly, Billabong does not calculate the amortization of brands since their economic life can also be indefinite. It should be noted that this enterprise determines the recoverable amounts of cash-generation units or CGUs on the basis of value-in-use calculations (Billabong, 2011 p 78). Such calculations require the forecasts of the company’s future financial performance. This method of impairment testing fully conforms to Australian accounting standards (Australian Accounting Standard Board, 2009, p 76).
Yet, one needs to take into account that the company’s evaluation of intangible assets, especially brands, relies on sales forecasts. Thus, one has to determine the accuracy of these forecasts. According to their financial reports, they are based on previous experience, market trends, GDP growth or inflation (Billabong, 2011 p 90). Nevertheless, one requires more specific information to assess the feasibility of their forecasts.
The only intangible asset that Billabong does amortize is computer software; its amortization period ranges from 3 to 5 years depending on their contractual life. This practice is compatible with the requirements set by Accounting Standard Board (AASB, 2009 b, p 35). At this point, one has to note that there are two distinct terms such as contractual life and useful life.
The first notion can be defined as the period during which the company intends to utilize an asset whereas the second one can be explained as the period when an asset (computer software) is able to generate profit. Useful life can be much shorter than contractual life. Thus, these two notions are not interchangeable.
This is why AASB recommends the companies to calculate amortization of the basis of useful rather than contractual life of an asset (AASB, 2009, p 36). In this case, Billabong does not deviate from Australia accounting standards; more likely, they need to specify the duration of amortization period. The thing is that this slightly inaccurate formulation can be confusing to potential investors.
Another important issue to discuss is the recognition of expenses that are related to intangible assets. One can say that Billabong adopts different approaches to this task. For instance, the company capitalizes the costs related to the acquisition of software (Billabong, 2011 p 66).
This approach fully conforms to Australian and International Accounting Standards (IASB 2011, AASB, 2009). One should bear in mind that such method is appropriate only if the company purchases licensed software from third-party contractors. Provided that, the organization independently works on the development of software solutions, its expenditures must be expensed as they occur (IASB, 2011, unpaged).
Billabong capitalizes these expenses because such reduction minimizes their negative effect on profitability and overall financial performance of the enterprise. In turn, the costs that the organization occurs in order to develop or enhance their brands are expensed immediately. It should be noted that the costs of internally-developed brands can capitalized only if the company is able to demonstrate their economic feasibility (Benedict, 2001, p 209; IASB, 2011, unpaged).
In other words, the organization must demonstrate that the revenues generated by the intangible asset such as brand will fully cover the expenses. As a rule, it is impossible to do if the brand is unknown.
Overall, it is possible to say that financial reporting practices adopted by Billabong International Limited do not violate the existing Australian or international standards. This organization provides a complete and accurate representation of its intangible assets such as brands, goodwill, or computer software. It seems that they recognize each of their intangible assets and accurately describe their financial impacts. Their treatment of these assets appears to be quite satisfactory.
References
Australian Accounting Standard Board. (2009) “AASB 136: Impairment of Assets”. Web.
Australian Accounting Standard Board. (2009 b). “AASB 138: Intangible Assets”. Web.
Benedict A. 2001 Practical accounting. London: Pearson Education.
Billabong International Limited. (2011). Preliminary Financial Report. Web.
Deegan Craig. (2009). Australian Financial Accounting. Melbourne: McGraw-Hill Australia.
The International Accounting Standard Board. (2011) “IAS 38 INTANGIBLE ASSETS”. Web.