Intangible Assets †Woolworths limited Essay

Intangible Assets: An intangible asset, despite not having a physical form to it, has great value to a company and is to be disclosed in the financial reports. Some companies only disclose the brand and goodwill as their only intangible assets, while others include more such as software and the company trademarks (Loftus et al. 2012). The Accounting Standard AASB 138 advises businesses on the accounting treatment of these intangible assets, but only if the specific criteria have been met for an asset to be recognized as intangible. An intangible asset must encompass three characteristics: Identifiable: An asset has to meet one of the following in order to be considered identifiable. It has to be separable, so that it is recognizable to be different than goodwill. This means it is capable of being sold, licensed, rented, transferred or exchanged, resulting with separation from the business. Or it has to arise from contractual or other legal rights, whether it is separable or not (AASB 2010). Non-monetary in nature: The asset has to be non-monetary. This characteristic is required so that receivables are not considered as an intangible asset by businesses just because the money has been recognized but not received yet (Loftus et al. 2012). Lack of physical substance: This is required so that tangible assets of property, plant and equipment are not being recognized as an intangible asset (Loftus et al. 2012). Also, an asset is strictly only recognized as intangible if it meets both of the following in the recognition criteria: (a) It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and (b) The cost of the asset can be measured reliably (AASB 2010) Classes of intangible assets: A class is a group of intangible assets that are of similar nature. Some examples of classes include Brand names, Computer software or Licenses and Franchises, just to name a few. Compliance with Accounting Standards: There is a set of disclosing rules that has been set out for Woolworths to apply to their reporting of intangible assets. It is stated in AASB 138 that for each class of intangible assets, the following shall be disclosed by a business: If the useful lives of the asset is either indefinite or finite and the useful lives or amortization rates if it is finite; Woolworths have clearly stated in their annual report a description on whether the useful life of each class is indefinite or finite. 4 out of 5 classes (excluding goodwill as it was reported separately from the other intangibles) were stated as assets with an indefinite useful life, so no amortization was charged (Woolworths Limited 2012). The method used for amortization on intangible assets with finite useful lives; The research and development class of intangible assets for Woolworths had stated that any spending on development activities where their research results are applied to a development for a new or improved product is to be capitalized if the plan is deemed to be commercially possible, and the business has sufficient resources to complete it. It is explained that this capitalized expenditure is expressed as cost less accumulated amortization and impairment losses (Woolworths Limited 2012), however no specific amortization rates were defined. The gross carrying amount and any accumulated amortization and impairment losses at the beginning and end of the period; The line item(s) of the statement of comprehensive income in which any amortization of intangible assets is included; A reconciliation of the carrying amount at the beginning  and end of the period (AASB 138); Woolworths Limited provided a reconciliation of movements in Intangibles (Appendix 1) from 2011 to 2012 in their 2012 financial report to shareholders (Woolworths Limited 2012). The report was presented with each class of intangible asset separated into their own headings with their own amounts written under it before the total amount of intangibles. This made the amounts of amortization and impairment more recognizable from where it had arisen. This reconciliation provided a carrying amount at the beginning and end of the period as requested by the Standards. Also included were the additions arising from acquisition of businesses, other acquisitions and disposals that were required to be shown in the reconciliation. 2011 ($M) 2012 ($M) Carrying amount at end of period $5236.6 $5282.0 (Woolworths Limited 2012) Woolworths had applied the relevant Accounting Standards, AASB 138, towards the treatment of their intangible assets and disclosure of them very well. Their intangible assets presented in the reports were separable, non monetary in nature and didn’t have physical substance. Woolworths could have explained the amortization rates used for their intangible assets, but that was the only limited information provided by Woolworths limited. The disclosure rules were applied into their financial reports, showing that Woolworths Limited’s treatment on their intangible assets conformed to the relevant accounting standards. Recommendations: The guidelines in the AASB 138 seem to already make companies scrutinize their intangible assets intensely and reveal every bit of it in their financial reports. An improvement could be to state in the guidelines which type of report and where in the report that this information should be  disclosed so users can have access to all the information in one go without having to search through many files to find certain information about a company’s intangible assets. AASB 2010, AASB 138 – Intangible Assets, Available on: http://www.aasb.gov.au/admin/file/content102/c3/AASB138_07-04_ERDRjun10_07-09.pdf [25 September 2013] Loftus, J, Leo, K, Picker, R, Wise, V, Clark, K 2012, Understanding Australian Accounting Standards, Wiley, QLD Woolworths Limited 2012, 2012 Financial Report for Shareholders http://www.woolworthslimited.com.au/annualreport/2012/pdf/WW_AR12_FinReport.pdf Appendices Appendix 1: