ACC201: Financial Accounting - Accounting for Brands Under AASB 138/IAS 38 - Financial Accounting Assignment Help

Assignment Task:

Executive Summary

The report provides information on the treatment of certain events in the financial statements according to the accounting standards issued by the ASSB/IASB.  As per AASB 138, Recognition of Intangible assets like brands and goodwill are difficult to account for because they are based on the estimates of the future cash flows associated with them. These assets also require the use of management judgment on an estimation of future economic conditions and hence it is very difficult for the standard-setter to provide any definite formula for measuring their value. The report studies the situation when the goodwill can be written off and concludes that the significant write-off of goodwill is the reflection of poor investment strategy and overvaluation of the company shares.  The report also analyses ASSB 137 on provisions to be made for the future cost which are certain on the date of finalizing the financial statements.

1. Accounting for Brands under AASB 138/IAS 38

Brands are covered in the para 9 of AASB 138 under the trademarks. In order that the brand name can be considered as an intangible asset and accounted for separately than the goodwill, it is important that it is an identifiable asset. The brand should be capable of being separated from the entity and sold or transferred or should arise as the result of contractual or legal right to the entity.  The brand should be recognized only if the two conditions are fulfilled: Firstly, it is probable that there will be future economic benefits to the entity because of the brand name and secondly, the value of brand name can be measured reliably (AASB para 21). The problem here comes with the measurement of the value of the brand. The standard-setters faced a problem in setting formula for recognition of brands as it is based upon the expected future economic benefits using the reasonable assumptions based upon the management’s e best estimate of the future economic conditions. Since the entity has to use assumptions to determine the best estimate, it is not possible to give a formula for measurement of the value of the brand. Also, the future economic conditions are to be estimated and it depends upon the personal skill of the management staff.

2. Recognition and write-off of Goodwill (AASB 136)

Goodwill is acquired and recognized in the business combination. The amount of goodwill is the payment made by the acquirer in exchange for future benefits that are expected to accrue from the assets that cannot be identified and recognized separately. The important thing to note is that the goodwill cannot generate any cash flows independently and hence is allocated to the cash-generating units to which it contributes (AASB 136, para 81).

3. Restructuring under AASB 137

AASB 137 Provisions, Contingent Liabilities and contingent Assets require that the financial statements of an entity should ensure that there are proper recognition and disclosure for the future assets and liabilities that can arise in near future considering the situation as on the balance sheet date. Thus if the entity is planning to make any decision in near future that will affect the financial status or earning capacity of the entity than the nature of the transaction, its amount and timing must be disclosed in the financial statements of the entity. 
According to AASB 137 para 70, the provision for restructuring costs should be made if it is certain that there are some obligations which are the result of the past event. It is probable that the settlement of the obligation will require the outflow of resources on part of the entity and the amount of outflow can be estimated reliably (AASB 137, para 14).

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