QUESTION 1. JOURNAL ENTRIES
7/1 Cash and Receivables ,000
Furniture and Fixings 20,000
Land 95,000
Plant 125,000
Internally-generated Intangible Asset 25,000
Accounts Payable ,000
Current Tax Liabilities 8,000
Accrued Annual Leave 2,000
Investment Capital 265,000
To record the considerations paid to Darklite Ltd.
QUESTION 2. Explain and evaluate how internally-generated intangible assets are required to be accounted for.
One of the main points of AASB3 include that acquired intangible assets other than goodwill arise from contractual or other legal rights (regardless of whether those rights are transferable or separable from the acquired entity or from other rights and obligations); if an intangible asset does not arise from contractual or other legal rights, it is recognized as an asset apart from goodwill only if it is separable or capable of being separated and sold, transferred, licensed, rented or exchanged.
As with many accounting issues, accounting for intangible involves a trade-off between relevance and reliability. Information concerning intangible assets is relevant, but to meet the standard for recognition in the financial statements, the recorded amount for the intangible asset must also be reliable. The most important distinction in intangible assets for accounting purposes is between those intangible assets that are internally-generated and those that are externally-purchased.
This distinction is important because the transfer of externally-purchased intangible assets in an arm’s-length market transaction provides reliable evidence that the intangibles have probable future economic benefit. Such reliable evidence does not exist for most internally-generated intangibles. Accordingly, most costs associated with generating and maintaining internally-generated intangibles are expensed as incurred.
However, even though an intangible asset that is internally generated is not recorded in the company’s books, it is still valued by the stock market. Hence, if another company was to purchase the company with an internally-generated asset, an important part of recording the transaction would be allocating the total purchase price to the various economic assets acquired, including previously unrecorded intangible assets.
Accounting for intangibles focuses so much on the issue of capitalisation and therefore of valuating intangibles. But, besides this, there is another important issue, related to the disclosure of information on intangibles, whether they are capitalised or not. In the context of the knowledge economy, disclosure appears as an important issue among academics and practitioners as well as within the institutional context (normalisation bodies, funding organisations, professional accounting associations). Reinforcing disclosure practices is a way to bypass the recognition constraint. By disclosing information on intangibles managers can innovate in their external and internal information strategies.
From the criteria of recognition, it follows that all expenditure on research, start-up, training, and advertising must be registered as expenditures. The same treatment applies to internally generated intangibles like goodwill, brands, mastheads, publishing titles, customer lists and similar items in substance. However, some development expenditure, for instance on software, may be recognised as an asset.
Intangible assets that are internally-sourced are like plant and equipment assets in that they generate a total assets cost comprised of a value that incurs a capital charge and in most cases, an amortisation expense. Their value tends to become visible only in moments of ownership transfer, where the acquiring organisation tends to pay a negotiated amount over the book value of the acquired firm. In the conventional accounting taxonomy of intangible assets, the method of acquisition of intangible assets is one of two key criteria used. The first is the method of acquisition, and whether it is internally or externally developed. The other criterion is related to the specificability of the assets and whether it is both identifiable and separable.
An intangible asset acquired as part of a business should initially be recorded at fair value, but where the asset does not have a readily ascertainable market value, the fair value should be restricted to an amount that does not create or increase any negative goodwill arising on the acquisition. Fair value should be established based on replacement cost, which in most cases will be the estimated value market value of the asset. Also considered is the fair value in the context of unique intangible assets, such as brands, for which the replacement cost or market values may be difficult to determine. In some cases, techniques have been developed for estimating the value of such assets for the purpose of sale and purchase agreements; and the guidance in the standard notes that it may be appropriate to use these to establish fair value for accounts recognition purposes in the case of an acquisition.
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