Recognition and Measurement of Intangible Assets
Intangible assets can be described as assets that lack physical characteristics. Some of the most common intangible assets include trademarks, patents, copyrights, brand image and technical knowledge among others (Lukić & Vojteski-Kljenak, 2017). The Australian Accounting Standard Board (AASB), depicts the intangible assets as resources that frequently incur liability following their development, acquisition and maintenance (AASB, 2018). Organizations have continued to recognize the importance of intangible assets especially due to the growing technological advancements. The paper seeks to evaluate the current accounting treatment for the recognition and measurement of Telstra’s intangible assets under AASB standard, focusing on the organization’s 2019 annual report. The paper also provides a recommendation on the future direction the AASB should take in regards to the recognition and measurements of the identified assets.
Recognition and Measurement
Goodwill
Telstra measures the goodwill acquired following an acquisition or merger at cost. The organization considers the cost as the excess amount that is paid upon a business combination n; the additional amount that exceeds the fair value of the net identifiable assets of the acquired venture. Another consideration is that Telstra estimates the cost of goodwill at the date of the business combination. More so, the amount of the goodwill is recorded in the balance sheet under intangible assets. The organization does not amortize goodwill as the intangible asset is recognized as a resource with an indefinite period of life. Nonetheless, the annual report shows that the organization tests the goodwill for impairment annually or when a need arises.
Internally generated intangible assets
These intangible assets include information technology development costs that are incurred during the designing, building and testing of new IT systems and products. The organization also recognizes research costs as an expense. Telstra follows the tenets of the judgment of management to determine whether a development cost should be capitalized it not. In this case, the organization capitalizes a development cost when the new inception is found to be technically and commercially feasible (Telstra, 2019). This gives the firm the opportunity of selling as well as utilizing these intangible assets in completing the development activities.
Additionally, the firm capitalizes the direct costs associated with the development of software assets for meant for internal use. These direct costs include material costs, borrowing costs, and payroll expenditures among others. The firm reviews software assets constantly according to the stipulated specific period of life. In this case, Telstra software intangible assets are amortized. The firm applies management judgement to establish the amortisation period as well as assess the annual assets’ indefinite life. The annual report shows that in amortisation expense for the 2019 financial year was $130 million (Telstra, 2019).
Another consideration from the Telstra’s 2019 annual report is the acquired intangible assets. The firm acquires other intangible assets in various ways; either as one part of a business combination or an entirely separate acquisition. In this case, the firm records the intangible assets acquired during a combination at their fair value and recognize these intangible assets separately from goodwill. On the other hand, the firm records assets acquired through a separate entity acquisition at cost. Notably, management judgment is applied to establish the suitable fair value of each identifiable acquired intangible assets. The process involves conducting estimates of time as well as amounts of future cash flows that are derived from the utilization of these intangible assets and suitable discount rates that are to be applied in the firm’s projected cash flows. These estimates are conducted basing on financial reporting elements such as current forecasts, operating costs, growth rates as well as the expected period of life of these intangible assets. Telstra considers these acquired intangible assets to have a specific period of life, hence, amortization is done over the period of life (Telstra, 2019).
Figure 1: Amortisation (Telstra, 2019)
Recommendation
The AASB should consider the Telstra’s intangible assets as the firm complies with the tenets of the AASB 138. The recognized intangible assets’ future economic benefits will flow to the Telstra’s balance sheet. More so, the organization assesses its future economic benefits utilizing reasonable assumptions that represent the best estimates of the firm’s management. The AASB should espouse the firm’s process of measuring its intangible assets at cost. When the firm acquires an intangible asset in a business combination, Telstra records the cost of that specific asset as its fair value during the acquisition date. In this case, the fair value reflects the market expectations in relation to the expected economic benefits of the intangible assets.
References
AASB (2018). Australian Accounting Standards Board (AASB). https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
Lukić, R., & Vojteski-Kljenak, D. (2017). Analysis of intangible assets in retail trade. Strategic Management, 22(2), 18-26.
Telstra. (2019). Telstra Annual Report 2019. https://www.telstra.com.au/content/dam/tcom/aboutus/investors/pdf%20F/2019-Annual-Report.PDF