The purpose of this paper is to emphasise the importance of intangible assets in the context of two of Australia's largest telecommunication companies, Telstra and NBN Co. (Optus). Disclosures for intangible assets are to be identified and critically evaluate for their consistency with the requirements of paragraph 118 -123 and paragraphs 126 - 128 of AASB 138 Intangible assets. Speculations for possible differences are to be explained as to why the two companies may have disclosed their intangible assets different.
Introduction (250)
Many products are sold based solely on their perceived value in society despite generic identical products in the market. They are sold on the value which could not be touched or perceived to have physical matter or substance which in many cases can become the main advocator for decision making.
Evidence suggests there is a faster growth in investment in intangible assets than in tangibles (OECD, 2011). Intangible assets have been continuously increasing in importance as business competition intensified and the development of new information technology. This rapid expansion in investment in intangible assets by companies will have significant impact on the productivity. Despite intangible assets making up a significant amount of the business, not all intangible assets are to be disclosed and recognised on the balance sheet.
This is not intended to provide a complete solution - rather to make a contribution to the process of improvement on specific disclosure requirements for intangible assets that ASIC's Financial Reporting Surveillance Program should focus on in their next review round.
Intangible assets (100)
Intangible assets make up more important value drivers in the new economy that are ignored on the balance sheet and could not recognised. A set of measures should and could be developed that would allow investors and creditors to better evaluate entities and compare them with one another.
Method for the disclosure of intangible assets (1000+)
(a) Disclosure (250)
(A) Telstra
In note 14 (Appendix C), Telstra discloses its intangible assets in table form cost to present the amount of intangible assets and the accumulated amortisation and impairment for the year 2011 into goodwill, internally generated intangible assets, acquired intangible assets and deferred expenditure. Comparative figures for the amounts for 2010 are provided to present a broad view of the performance.
Within the same note, a list of written down value has been included from the 1 July 2009 to 30 June 2011. This table explicitly presents the amount of intangible assets that has been written down in value broken down into additions, acquisition through business combination, disposals, disposals through sale of controlled entities, amounts written off, impairment losses, amortisation expense, net foreign currency exchange differences, transfer and others.
(B) NBN Co.
In note 11, (Appendix D), NBN Co. discloses its intangible assets in table form cost to present the amount of non-current intangible assets into columns divided between the intangible assets from software and licenses. The row segment begins with cost as at 1 July 2010 to progress onto the ending of the period at 30 June 2010. NBN Co. discloses its additions and amortisation to present a net value for the year that ended at 30 June 2010. NBN Co. discloses the figures for the following year which started 1 July 2011 to 30 June 2011. The figures are present to generate a comparative view of NBN Co.'s performance figures.
(b) Compliance with AASB 138
(A) Telstra
In compliance to the AASB 138, the entities must abide by the regulations set out in the standard when disclosing intangible assets in the financial statements. Telstra shall have to disclose its information in such a way which would be required.
In paragraph 118 (a) of AASB 138 Intangible assets
As outlined in paragraph 118 (a) of AASB 138, goodwill in Telstra's disclosure is to be categorised as having indefinite useful life where it is impossible to tell when exactly will the goodwill be deteriorated in the calculation of impairment. It could not be subjected to amortisation (paragraph 118 (b)) and could only be subjected to annual impairment test in accordance in with note 2.9 or when there is an indication of impairment. Therefore, Telstra is aligned with AASB 138 in its method for accounting of goodwill in their balance sheet.
In paragraph 118 (b) of AASB 138 Intangible assets
In paragraph 118 (c) of AASB 138 Intangible assets
Telstra discloses direct telecommunication costs in the note of expenses to indicate that the research and development cost for the year 2011. It can be demonstrated to have a technical feasibility to complete where it is integral in the production of its services as telecommunications companies where the entity has disclosed to further their technology in their proposed fibre network. To maintain a competitive edge over its competitor, ASIC can extrapolate that there is an intention to complete and will help in the generation of future economic benefit.
Following the direct telecommunication costs, Telstra also discloses employment costs, external service costs - systems and organisation costs and legal and negotiation support costs to be research and development cost. They also abide by the requirements set out.
Therefore the assessment of Telstra shows that the entity has abided by the policy set out by paragraph 118 (c) and is acting in compliance with the criteria set out.
In paragraph 118 (d) of AASB 138 Intangible assets
A) In paragraph 118 (e) Section I of AASB 138 Intangible assets
In note 14, Telstra has also disclosed its additions in compliance with paragraph 118 (e) section i which indicates that the increments of intangible assets has been the result of software assets developed, patents and trademarks and brand names been separately acquired. The column indicating the written down value for acquisition for goodwill, software assets, patents and trademarks, licenses, customer bases and brand name. AASB 138 does not allow other internally generated intangible assets to be recognised therefore value of mastheads are not to be recorded on the speculation that it has been derived from internal development.
B) In paragraph 118 (e) Section II of AASB 138 Intangible assets
Asset classified as held for sale and to be disposed are to be follow the disclosure of paragraph 118 (e) section ii where Telstra has disclosed its disposals in the areas of software assets developed and goodwill during the sale of controlled entities.
C) In paragraph 118 (e) Section III of AASB 138 Intangible assets
D) In paragraph 118 (e) Section IV of AASB 138 Intangible assets
Under paragraph 118 (e) sections iv and v, impairment losses accumulated are to be recognised when there is a impairment loss or if it has been reversed. Telstra, under these circumstances, have to record the impairment loss of goodwill and software assets.
E) In paragraph 118 (e) Section V of AASB 138 Intangible assets
F) In paragraph 118 (e) Section VI of AASB 138 Intangible assets
In paragraph 118 (e) Section VI of AASB 138 Intangible assets, NBN Co. are required to state its 'amortisation recognised during the period' in the form of expense. You need to check if it refers to the right classes of intangible assets, if it is consistent with what they say in the accounting policies, and with what they show in the statement of comprehensive income and so on. The amortisation periods of identifiable intangible assets are as follows in appendix B.
Paragraph 118 (e) section vi, there are impairment cost in regards to the software asset development, mastheads, patents and trademarks, licences and customer bases
G) In paragraph 118 (e) Section VII, VIII and VIIII of AASB 138 Intangible assets
In paragraph 119 of AASB 138 Intangible assets
Telstra has abided by the paragraph 119 in its note 14 where the entity has separated its acquired intangible assets into class with similar nature and use in operation. The intangible assets acquired as part of a business combination or through separate acquisition are divided up into mastheads, patents and trademarks, licences, customer bases, brand names which are to be recorded at fair value at the point of acquisition and amortised under straight line method.
In paragraph 123 of AASB 138 Intangible assets, Telstra has to disclose the factors that play a significant role in determining the useful life. As disclosure in the notes, Telstra has disclosed that software assets under development were not installed and ready for use, there is no amortisation being charged on the amounts which implied there has been no usage of the entity.
The disclosure of information regarding the Reach's international cable capacity shows that the asset will be under the direct control of the entity as a finance lease and will have a useful life of 5 to 22 years. The contract was recently written show that the asset will technically feasible.
Therefore, Telstra has abided by the paragraph 123 of AASB 138.
(B) NBN Co.
NBN Co. must abide by AASB138 where intangible assets must meet the requirements and prescribed recognition, measurement and disclosure applicable to intangible assets which are not dealt with specifically in another standard.
In paragraph 118 (a) of AASB 138 Intangible assets, the disclosure requires NBN Co. to distinguish its intangible asset with indefinite useful lives from the definite useful lives. In note 11, NBN Co. has disclosed its software assets and licenses as items with finite useful life. Having applied amortisation principles, ASIC can recognise that they are disclosed to be intangible assets with finite useful life. ASIC can state that software assets and licenses will result to zero once its useful life has been completed. Therefore NBN Co. has followed the compliance of this paragraph.
In paragraph 118 (b) of AASB 138 Intangible assets, the disclosure requires NBN Co. to distinguish its method of which their intangible assets are to be amortised. In note 2, the summary discloses that all intangible assets where it discloses the amortisation periods of identifiable intangible assets in appendix B. The service lives of software assets and licences are to be reviewed each year where any reassessment of service lives in a particular year will affect the amortisation expense.
In paragraph 118 (c) of AASB 138 Intangible assets, the disclosure of NBN Co's accounting policies in note 1 states that research and development costs are to be expensed in the statement of comprehensive income and notes of expenses (Note 4) .
NBN Co. discloses direct telecommunication costs in the note of expenses to indicate that the research and development cost for the year 2011. It can be demonstrated to have a technical feasibility to complete where it is integral in the production of its services as telecommunications companies where the entity has disclosed to further their technology in their proposed fibre network. To maintain a competitive edge over its competitor, ASIC can extrapolate that there is an intention to complete and will help in the generation of future economic benefit.
Following the direct telecommunication costs, NBN Co. also discloses employment costs, external service costs - systems and organisation costs and legal and negotiation support costs to be research and development cost. They also abide by the requirements set out.
Therefore the assessment of NBN Co. shows that the entity has abided by the policy set out by paragraph 118 (c) and is acting in compliance with the criteria set out.
In paragraph 118 (d) of AASB 138 Intangible assets, NBN Co. must satisfy the requirements to show line items in the statement of comprehensive income where intangible assets and amortisation is to be disclosed. As required in the disclosure of AASB 138, NBN Co. has disclosed its depreciation and amortisation
A) In accordance to paragraph 118 (e) Section I of AASB 138 Intangible assets, NBN Co. has disclosed its additions of software and licenses in the notes of non-current assets - intangible assets. As intangible assets that has been the result of acquisition or business combination, the disclosure of additions will have to be disclosed.
Therefore NBN Co. has met the requirements of paragraph 118 (e) section 1 of AASB 138 Intangible assets.
B) In paragraph 118 (e) Section II of AASB 138 Intangible assets, NBN Co. must classify its disposal intangible assets. There are no disposed assets for NBN Co. mentioned in the notes and financial statements. If there are no disposed assets, NBN Co. will be exempted from this disclosure.
C) In paragraph 118 (e) Section III of AASB 138 Intangible assets, NBN Co. has disclosed in note 11, changes in acquired intangible assets from additions and amortisation are recorded. NBN Co. has only applied this to acquired intangibles which
D) In paragraph 118 (e) Section IV of AASB 138 Intangible assets, NBN Co. will have to disclose its impairment losses in note 12 where it has recorded to have no impairment loss identified. It can be concluded that For assets that do not generate largely independent cash inflows, the recoverable amount is
determined for the cash generating unit (CGU) to which that asset belongs
E) In paragraph 118 (e) Section V of AASB 138 Intangible assets
F) In paragraph 118 (e) Section VI of AASB 138 Intangible assets, NBN Co. are required to state its 'amortisation recognised during the period' in the form of expense. You need to check if it refers to the right classes of intangible assets, if it is consistent with what they say in the accounting policies, and with what they show in the statement of comprehensive income and so on. The amortisation periods of identifiable intangible assets are as follows in appendix B.
In paragraph 119 of AASB 138 Intangible assets
NBN Co. has abided by the paragraph 119 in its note 4 where the entity has separated its acquired intangible assets into class with similar nature and use in operation. The intangible assets acquired as part of a business combination or through separate acquisition are divided up into licences and software which are to be recorded at fair value at the point of acquisition and amortised under straight line method.
In paragraph 120 of AASB 138 Intangible assets
In paragraph 121 (a) of AASB 138 Intangible assets
In paragraph 121 (b) of AASB 138 Intangible assets
In paragraph 121 (c) of AASB 138 Intangible assets
In paragraph 122 (a) of AASB 138 Intangible assets
In paragraph 122 (b) of AASB 138 Intangible assets
A) In paragraph 122 (c) Section I, II, III of AASB 138 Intangible assets
In paragraph 122 (d) of AASB 138 Intangible assets
In paragraph 122 (e) of AASB 138 Intangible assets
In paragraph 126 of AASB 138 Intangible assets
In paragraph 127 of AASB 138 Intangible assets
A) In paragraph 128 (a) of AASB 138 Intangible assets
B) In paragraph 128 (b) of AASB 138 Intangible assets
Problems with current disclosures give rise to speculations for the differences in disclosures
As raised by Lev (2001), the current problem regarding the disclosure of intangible assets is that they are inherently difficult to trade, legal property rights are not concrete, The reason for this is that they are different will be differences between the accounting standards for the recognition and measurement of non physical assets as compared to tangible assets.
Explained in FASB "Disclosure of information about intangible assets not recognised in financial statements", intangible assets are difficult to compare the financial statements of an entity that has built up a substantial amount of intangible assets internally with those of another entity that has acquired their intangible assets. Generally intangibles are recognised in financial statements if they are acquired as acquisition or through business combination. Otherwise identical intangible assets are not to be recognised if internally developed.
This issue gives rise comparison issues between NBN Co. and Telstra where the entities have already been well established in the telecommunication sector. Not all companies will choose to develop internally or acquire externally all the same functions in the business. NBN Co. chooses not to acquire intangible assets in the acquisition whereas Telstra shows evidence that acquisition in the disclosure of goodwill and other acquisitions which would otherwise be not disclosed in the notes.
Only quantitative disclosures are only required for recognised intangibles. Since not all intangible assets are disclosed in the financial statements, comparison between the entities can be a difficult task. Therefore this gives rise to multiple issues in regards to the actual comparability of the two companies' profitability.
Recommendation for specific disclosure requirements
As outlined in difference in the disclosure of the Telstra and NBN Co., there is a problem in the comparison aspect. Intangible assets are generally recognised in financial statements if they are acquired, either by themselves or as part of a business combination. However, they will not be recognised despite being similar if they were internally generated.
Intangible assets that are not recognised will have to be recognised regardless acquisition, in process R&D assets written off.
This idea has been inspired by FASB new disclosure project where regardless of their nature; all intangible assets are to be recorded thus making the similar companies more comparable.
The removal of fair value as the measure of intangible asset.
In the failure of the adoption of IASB in the EU, fair value was the prime reason as individuals argued that it is not an accurate measure for assets. Fair value is the value which an individual places on an asset which they deem visible for the purchase of the asset if sold.
Firstly, the asset will never truly have an accurate value in terms of fair value as individuals will have different perceptions of value in depending on their culture, social status and personal characteristics. Secondly, the assets will only truly be able to determine the value of the asset if it was sold and not as a calculation of the value. Thirdly, Upton 2010 has discussed that it is rare for active markets to exist for intangible assets where there are active buyers and sellers.
Fair value should not be used in the calculation of intangible assets. AASB should work on a new measure for the calculation of value that is more suitable for the disclosure of intangibles.
Conclusion
AASB has to take into consideration the possible changes in AASB 138 but have proven to be a struggle to accomplish to produce an effective change. Proposals for changes in disclosures are plentiful, yet difficult to integrate in practice. They are also subject to change, as indicated by Lev 2001 that they are still growing at a considerable rate.
Research data collected on Telstra and NBN Co.'s Optus provide important information about the comparability and disclosure issues. There are considerable benefits in the discussion of producing a more effective disclosure for intangibles.
With the introduction of Intangible assets that are not recognised will have to be recognised regardless acquisition, in process R&D assets written off.
Better information could be disclosed on the corporate level which will assist regulators' understanding of the corporate sector's financial position and attitude to risk.
Another area worth exploring is the exclusion of fair value in the calculation of intangible assets and the development of a measuring protocol which will be able to accommodate to the changes in worth. Companies would be required to report or disclose an assessment of intangibles regardless whether it is internally generated, separately acquired or acquired in a business combination.
The preliminary research done on the analysis of intangible assets in the telecommunication sector has provided evidence that actions will need to be conducted to improve on the current problems associated with the disclosure of intangibles and their recognition in the financial statements. Before this problem
