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ACCTING 7023 Advanced Financial Accounting

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ACCTING 7023 Advanced Financial Accounting

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Course Code: ACCTING 7023
University: The University Of Adelaide

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Country: Australia

Questions:
(i)Provide a description of the Intangible Assets currently being recognised in Telstra financial statements based on the current requirements of AASB 138 Intangible Assets (you need to refer to the 2017 annual report for Telstra). In addition, based on your understanding of Telstra’s operations, describe the Intangible Assets that the company is prevented from recognising based on the current standard.
 
(ii)Critically evaluate the current accounting treatment of Intangible Assets under IFRS. Consider this in light of the objective of general purpose financial reporting, the primary users of general purpose financial statements, and the qualitative characteristics of useful financial information. Support your discussion with reference to theories covered in this unit, academic journal articles; and where relevant high quality professional articles and newspapers.
 
(iii)Provide a recommendation on the future direction the IASB and the AASB should take in regards to the reporting of Intangible Assets, which your CFO can take to the Board of Directors. Your position must also include a consideration regarding whether the IASB’s current work plan on Intangible Assets should be broadened. Support your recommendation with reference to theories covered in this unit and academic journal articles.
Answer:
Introduction
At the time of conducting the accounting operations of the companies, the financial managers and accountants have to consider some major aspects and one of them is Intangible Assets. An intangible asset is an asset that does not have any physical substance and is very complicated for evaluation (Edwards, 2013). In the presence of this nature of intangible assets, accountants and the financial managers face certain major difficulties at the time of their accounting treatment. In this scenario, it needs to be mentioned there are many controversies in the financial action of intangible assets for the companies all over the globe. The International Accounting Standard Board (IASB) plays a crucial part in the accounting treatment of intangible assets as it has provided the companies with all the guiding principles for the accounting treatment of intangible assets. In Australia, the presence of AASB 138 Intangible Assets can be seen that has provide the Australian business entities with all the principles and guidelines to recognize and measure their business intangible assets; and it is needed for the Australian companies to follow the principles of AASB 138 for the recognition and measurement of their business intangible assets (aasb.gov.au, 2018). This report sheds light in different aspects and dimensions of the accounting treatment of intangible assets by a leading Australian company, Telstra Corporation Limited (Telstra).    
Description of Intangible Assets
It can be seen from the 2017 Annual Report of Telstra that the company has provided all the information about the intangible assets of their business. According to the 2017 Annual Report of Telstra, the company has reported about five types of intangible assets; they are Goodwill, Software assets, Licences, Deferred Expenditures and Other Intangible Assets. The description of all these assets is provided below:
Goodwill: It needs to be mentioned that Goodwill is an important intangible asset in the business operation of Telstra and it arises when the business entity acquires another business. It can be observed from the 2017 Annual Report of Telstra that the goodwill of this company has indefinite useful life and they are not subject to amortization. The goodwill of Telstra is subject to amortization at least once in a year. However, the company can test for the goodwill impairment in case there is any indication of the impairment of goodwill (telstra.com.au, 2018).
As per the 2017 Annual Report of Telstra, the company does the measurement of their business goodwill at cost that represents the amount paid by the company for the business combinations over the fair value at the acquisition date. It needs to be mentioned that the goodwill from the joint venture acquisition is associated with a part of the cost of investment (telstra.com.au, 2018).
Deferred Expenditure: Deferred expenditures are considered as the next kind of intangible asset of Telstra and the company has used the standards of AASB 138 for the recognition as well as measurement of these intangible assets. According to the 2017 Annual Report of Telstra, the expected benefit of this intangible asset can be obtained for five years (telstra.com.au, 2018).
The major components of deferred expenditures are direct implemental costs for the establishment of customer contracts, incurred costs for basic access installation and the connection fees. The amortization of the deferred expenditure is done over the average period of the benefits; and they are needed to be documented in the income statement immediately. At the same time, the expenses of the amortizations are recognized in the operating expenses (telstra.com.au, 2018).
Other Intangible Assets: There are some other intangible assets in the business operation of Telstra and the company uses the standards of AASB 138 in order to measure and recognize them in the financial statements of their business (aasb.gov.au, 2018). As Telstra operates in the telecommunication industry of Australia, the company has to deal with different kinds of intangible assets other than goodwill, software and licences; and the duration of these other intangible assets is not long due to the nature of the telecommunication industry. For this reason, they are considered as other intangible assets (telstra.com.au, 2018).
As per the 2017 Annual Report of Telstra, the other intangible assets acquired from the business combination are recognized as well as recorded on fair value basis at the acquisition date; and the company separately recognizes them from goodwill. Telstra records the other intangible assets at cost in case they are acquired through a specific acquisition. This amortization is done on straight line basis (telstra.com.au, 2018).  
It needs to be mentioned that there are two other types of intangible assets in the business operations of Telstra apart from the above and the company does not do the recognition and measurement of the as per the standards and regulations of AASB 138 due to their nature (aasb.gov.au, 2018). These two intangible assets are Software Assets and Licences; and they are described below:
Software Assets: It needs to be mentioned that the software assets of the company have shorter life. It can be seen from the 2017 Annual Report of Telstra that the company had a software asset under development worth $456 million. In addition, the company has not charged any kind of amortization of this asset as these assets were not installed and ready. It can also be observed from the 2017 Annual Report of Telstra that the software assets include capitalized borrowings worth $27 million that is directly attributed towards the qualifying assets (telstra.com.au, 2018).
Licences: Licences are regarded as another type of intangible assets in Telstra and the company has not recognized as well as measured as per the regulations and standards of AASB 138 (aasb.gov.au, 2018). As per the 2017 Annual Report, the benefit from the licences can be obtained for fourteen years. It needs to be mentioned that the government of Australia grants Telstra licences for the dedicated use of the portions of spectrums. In the current financial 2017, Telstra has acquired licences for 1800 MHz and 2.5 GHz spectrum for their telecommunication business (telstra.com.au, 2018).
Current Accounting Treatment of Intangible Assets
International Financial Reporting Standards (IFRS) has given the business entities with the needed principles for the financial treatments of intangible assets through IAS 38 Intangible Assets. The following discussion shows the accounting treatment of intangible assets under IAS 38.
Objective: The main objective of IAS 38 is the prescription of the accounting actions for the intangible assets that another IAS standard does not deal. As per the requirement of this standard, companies are needed to recognize the intangible assets after meeting the criteria. It provides the companies with the guidelines for the accounting treatment of intangible assets (iasplus.com, 2018).
Scope: IAS 38 can be applied in all the intangible assets except financial assets, rights of minerals, exploration and development costs, intangible assets from insurance contracts and others (Vetoshkina & Tukhvatullin, 2014).
Definition: IAS 38 describes intangible assets as particular monetary asset without having any physical matter. It states that an intangible asset needs to have three specific critical attributes; and they are identifiability, control and future economic benefits. An intangible asset will be considered as identifiable in case it is separable and arises from legal or contractual rights (ifrs.org, 2018).
Recognition Criteria: As per the requirements of IAS 38, a business entity is needed for the recognition of an intangible asset when it is possible that the future economic benefits related to the intangible asset will flow towards the entity; and when the entity can measure the cost of the asset (Demartini & Paoloni, 2013). The companies can apply this requirement when there is the acquisition of intangible assets from externally or generated internally. Some additional recognition criteria can be seen from IAS 38 to recognize internally generated intangible assets. It needs to be mentioned that the probability of the future economic benefits needs to be based on the assumptions that are reasonable as well as supportable about the condition over the life span of the asset.
Measurement: According to IAS 38, companies are needed to do the initial measurement of intangible assets at cost value. After this, it is needed for the organizations to select between cost model and the revaluation process for the valuation of the intangible assets. In the cost model, after the process of initial recognition, companies should carry the intangible assets at cost less any impairment losses and amortization. Under the revaluation model, the companies are needed to carry the intangible assets at revalued amount less any subsequent amortization and impairment losses where the fair value can be determined in the active market (Dinh et al., 2015).
Objectives, Users and Qualitative Characteristics of General Purpose Financial Reporting: As per IASB and IFRS, the main objective of general purpose financial reporting (GPFR) is to give the investors, lenders and other creditors with the required financial information in order to make decisions about the entity’s resources. From this perspective, the success of IAS 38 can be seen in the companies as this standard helps the companies in disclosing the required information about their intangible assets so that the users like investors, creditors and lenders can use them for judging the financial standing of the company (Dinh et al., 2015). Relevance and faithful representation are the two fundamental qualitative characteristics of financial information. It needs to be mentioned that the compliance with IAS 38 makes the intangible asset related information of the companies relevant as it provides the recent information; moreover, compliance with this standard ensures that the information is faithfully represented to the primary users of the financial statements. Moreover, the regulations of IAS 38 ensure that the financial information related to intangible assets includes the enhancing qualitative characteristics like comparability, timeliness, verifiability and understandability (ey.com, 2018). The presence of these characteristics helps in enhancing the quality of the financial information.       
Recommendation
Based on the above discussion, the necessary recommendations are provide below:

It needs to be mentioned that there is a chance of the increase in the amount of the intangible assets in the statement of financial position of the business entities in case the purchase of mote intangible assets; like trademarks and others. For this reason, it is not possible for IAS 38to do the valuation of these intangible assets. This can lead to inconsistencies. In order to avoid this situation, it is needed for IAS 38 to allow the revaluation of these intangible assets to include the value of the additional intangible assets in the required financial statements (Carvalho, Rodrigues & Ferreira, 2016).
It is recommended to IASB and Australian Accounting Standard Board (AASB) to allow some intangible assets with identifiable useful life to be included in the goodwill. More specifically, it is recommended to IASB and AASB to allow the intangible assets having identifiable useful life to be included with the goodwill, in case those assets are not generating from the use of continuing independent cash flow. There is also scope for IASB and AASB for requiring the qualitative disclosures for any identifiable intangible asset having indefinite useful life within the goodwill (Yallwe & Buscemi, 2014).  

Conclusion
The report involves in the analysis and evaluation of the accounting of intangible assets of Telstra. The discussion shows that Telstra does the accounting treatment of some of their intangible asset as per the standard of AASB 138 Intangible Assets like goodwill, other intangible assets and others; while the company carries the accounting treatment of some of their intangible asset by not complying with the standards of AASB 138 Intangible Assets like software assets and licenses. The above discussion also sheds light in the present accounting treatment of intangible assets by IFRS with the help of the standard of IAS 38 Intangible Assets. Under this regulation, the business entities are needed to recognize as well as measure the intangible assets as per the regulations of ASA 38 Intangible Assets. The critical evaluation part shows that this new regulation of IFRS complies with the objective of GPFR and contains the qualitative characteristics of financial information. At the same time, this new regulation helps in providing the primary users of financial information with all the necessary information related to the intangible assets of the business entities.
References
Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting). Routledge.

(2018). Conceptual Framework: Objectives and qualitative characteristics. Retrieved 29 August 2018, from https://www.ey.com/Publication/vwLUAssets/Supplement_86_GL_IFRS/$FILE/Supplement_86_GL_IFRS.pdf

IFRS. (2018). Goodwill and Impairment research project. Retrieved 29 August 2018, from https://www.ifrs.org/-/media/feature/meetings/2018/june/iasb/ap18d-gi.pdf
Telstra. (2018). Telstra – Annual reports – Investors. Retrieved 29 August 2018, from https://www.telstra.com.au/aboutus/investors/financial-information/reports
Vetoshkina, E. Y., & Tukhvatullin, R. S. (2014). The problem of accounting for the costs incurred after the initial recognition of an intangible asset. Mediterranean Journal of Social Sciences, 5(24), 52.
Demartini, P., & Paoloni, P. (2013). Implementing an intellectual capital framework in practice. Journal of Intellectual Capital, 14(1), 69-83.
Dinh, T., Eierle, B., Schultze, W., & Steeger, L. (2015). Research and development, uncertainty, and analysts’ forecasts: The case of IAS 38. Journal of International Financial Management & Accounting, 26(3), 257-293.
Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), 734-775.
Carvalho, C., Rodrigues, A. M., & Ferreira, C. (2016). The Recognition of Goodwill and Other Intangible Assets in Business Combinations–The Portuguese Case. Australian Accounting Review, 26(1), 4-20.
Yallwe, A. H., & Buscemi, A. (2014). An era of intangible assets. Journal of Applied Finance and Banking, 4(5), 17.    
AASB 138. (2018). Intangible Assets. Retrieved 29 August 2018, from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
Deloitte. (2018). IAS 38 — Intangible Assets. Retrieved 29 August 2018, from https://www.iasplus.com/en/standards/ias/i

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