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Bryce Denison
National President
Group of 100
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Ian Dunlop
Executive Director
Australian Institute of Company Directors
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David Buckingham
Executive Director
Business Council of Australia
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Stephen Harrison
Chief Executive Officer
The Institute of Chartered Accountants in Australia
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David Edwards
Chief Executive Officer
CPA Australia

Reasons for not Harmonising Directly with IAS 38

The G100 principles, which incorporate current Australian requirements, differ in significant respects from IAS 38 "Intangible Assets" ("IAS 38"), Financial Reporting Standard 10 "Goodwill and Intangible Assets" ("FRS 10") in the United Kingdom, the proposals in "Exposure Draft Business Combinations and Intangible Assets" ("FASB ED"), and existing requirements in the USA ("US GAAP"). This is because the Australian environment and practices are markedly different from those adopted internationally in respect of:

• asset valuations;
• recoverable amount test; and
• strict historic cost framework.

It is premature to issue an exposure draft in Australia based on IAS 38 particularly as the US proposals to amend US GAAP are still under consideration. As such, because the requirements in IAS 38 are not consistent with requirements in Australia or US GAAP a reconciliation would be required for cross-border filing if IAS 38 were adopted. A further reason for delay is that under the CLERP amendments made in the Senate during December 1999 the focus for international harmonisation is required to be on those accounting standards representing international best practice. This would involve a consideration of best practice accounting standards in the world’s major capital markets, such as the United Kingdom and, more particularly, the United States.

The IAS 38 rules for recognition are inconsistent because identifiable intangible assets are treated differently from other non-monetary assets. This is the case for internally generated intangibles such as brands, mastheads, publishing titles, etc. Although these types of intangibles may satisfy the definition of an "asset" IAS 38 does not permit them to be recognised as separate assets.

IAS 38 imposes a mandatory amortisation requirement and, in all practical respects, the residual value of intangible assets, is assumed to be zero.

The G100 believes that identifiable intangible assets that have indefinite lives should not be subject to mandatory amortisation, but that an annual impairment test should be applied to ensure the carrying amount of the asset is recoverable. The assumption of a zero residual value is inconsistent with both IAS 16 "Property, Plant and Equipment" and AASB 1021 "Depreciation" and is unrealistic, because the primary motivation of directors is to maintain and enhance the value of the assets of the entity.

Amortisation of goodwill and identifiable intangible assets is tax deductible in the US and in many European countries. Such amortisation is not tax deductible in Australia. While not a financial reporting issue this does bear upon the effects of amortisation on distributable profits and the competitive ability of Australian companies to participate in acquisitions. These economic impacts are a serious concern of directors.

The alternative revaluation approach contained in IAS 38 is severely and unreasonably restricted by the detailed rules. These are considered inappropriate because:

• a reliably measured cost is necessary for initial recognition of assets which, as a consequence, tends to mitigate against the recognition of internally developed identifiable intangible assets. However, cost is not always an adequate measure of the value of internally developed identifiable intangible assets;
• an active market for the assets must exist, that is, an asset must be separately traded in an open market, for market values to be ascertainable. This requirement imposes a significant impediment to the revaluation of identifiable intangible assets such as, broadcast and television licences, because few revaluations will qualify under IAS 38;
• an appraisal value by a qualified valuer should be an appropriate basis for revaluations. In Australia appraisal methodologies are widespread and accepted;
• obligations under recoverable amount/impairment tests in Australia should ensure that valuations do not cause assets to be overstated;
• IAS 38 requires intangibles obtained in a business acquisition to be measured using appraisal valuation techniques (regardless as to whether or not an active market exists). IAS 38 requires that fair value determinations (for other assets obtained but not in a business acquisition) must be based on an active market. It is therefore illogical for IAS 38 to require that individual assets to be assigned fair values in the context of acquisition accounting but not in any other context.

Group of 100
Statement of Principles - Intangible Assets

This Statement of Principles is prepared in the context of the Group of 100 policy on international harmonisation and current accounting practice in Australia. The policy provides that:

• Endorsement of IASC standards by IOSCO and the US SEC for cross-border listing and capital raising is a pre-requisite for final acceptance of IASC standards by Australia.
• The policy should be implemented by:

a. harmonising with IASC standards where the requirements are consistent with United States Generally Accepted Accounting Principles (US GAAP);

b. deferring harmonisation with IASC standards where these standards are different from both Australian standards and practice and US GAAP until the IASC standards have been endorsed by IOSCO and the SEC.

The outcome of this process should be that compliance with Australian accounting standards should result in automatic compliance with international accounting standards being those issued by the International Accounting Standards Committee (IASC) which are widely accepted in international capital markets.

The emphasis in this statement is on accounting for identifiable intangible assets. The view taken is that in respect of unidentifiable intangible assets (goodwill) AASB 1013 and AAS 18 "Accounting for Goodwill" set down the current requirements operative in Australia. Consistent with these requirements:

• Goodwill - defined as unidentifiable intangible assets - should only be recognised on acquisition.
• Internally generated goodwill should not be recognised as an asset.
• Recognition of goodwill, which can only be measured reliably on purchase, must be supported by future economic benefits that will flow to the enterprise.
• Initial measurement will be based upon cost that will reflect the difference between the purchase consideration and the fair value of net assets acquired.
• The carrying amount must be reviewed regularly (at least on an annual basis) to determine that the recoverable amount based on future cash flows has not declined below the carrying amount. When any such decline has occurred the carrying amount must be written down to recoverable amount. Any reduction should be recognised and a charge made to profit and loss account as an operating item.
• Subsequent to initial recognition goodwill must not be revalued except in the event of impairment of the carrying amount.
• Goodwill should be amortised over its useful life.

The following principles reflect the views of the Group of 100. We consider that:

• There should be a consistent accounting treatment for identifiable intangible assets. As a general principle we believe all identifiable non-monetary assets (both tangible and intangible) should be treated the same way, that is :

~ recognise an asset if asset definition and recognition criteria are satisfied; and
~ amortisation of the asset over its useful life unless indefinite.

• The significance of this approach is that identifiable intangible assets are not regarded as having fundamentally different characteristics from those of other identifiable non-monetary assets and that it is consistent with the requirements of Accounting Standards and Statements of Concepts. As such, identifiable intangible assets are not regarded as unique except in the sense that other classes of non-monetary assets also have distinguishing characteristics. However, there may be significant practical difficulties in measuring certain identifiable intangible assets and in separating identifiable intangible assets from goodwill.

Initial recognition

• Where expenditures made satisfy the definition of an asset and meet the criteria for recognition an asset must be recognised.

[We note that SAC 4:

• defines assets as future economic benefits controlled by the entity as a result of past transactions or other past events; and
• provides that an asset must be recognised when and only when it is probable that the future economic benefits embodied in the asset will eventuate and the asset possesses a cost or other value that can be measured reliably].

• Identifiable intangible assets must only be recognised when it is probable that future economic benefits associated with the assets will flow to the enterprise and they can be measured reliably. To satisfy this criteria it is necessary that :

~ the role performed by the intangible asset will enhance the economic benefits which will flow to the enterprise in the future; and
~ the enterprise will be in a position to enjoy those benefits or control the consumption of those benefits.

• Identifiable intangible assets must be initially recognised at cost of acquisition (by individual purchase or by way of business combination/acquisition or by internal development) or at valuation.

Revaluation

• AASB 1041 "Revaluation of Non-Current Assets" provides that subsequent to initial recognition each class of non-current assets must be measured on either the cost basis or the fair value basis.
• In accordance with the general principle that all non-monetary assets should be treated in a consistent way, all non-monetary assets should be able to be revalued to fair value, provided the fair value can be measured reliably.
• For identifiable intangible assets fair value can be determined by reference to an active secondary market in that type of identifiable intangible asset or by a method that is robust, verifiable, transparent and gives the best estimate of fair value on a reliable basis.
• When an identifiable intangible asset is revalued the normal rules for revaluation should apply, namely :

a. an entire class of assets should be revalued;
b. revaluations should be carried out on a regular and frequent basis to ensure that carrying amounts do not differ materially from fair values;
c. a valuation increment should be credited directly to equity (subject to any extent that it reverses a revaluation decrement which has been previously recognised as an expense or offsets a revaluation decrement in the same class of assets); and
d. a valuation decrement should be recognised as an expense (subject to any extent that it reverses a revaluation increment which has been previously credited to equity or offsets a revaluation increment in the same class of assets).

Consistent with the principle that all non-monetary assets should be treated in a consistent manner and the requirements of Australian Standards:

• Identifiable intangible assets should be amortised over their useful lives.

• Where the identifiable intangible asset is evidenced by substantive contractual terms or other agreement amortisation is to be made over that period. However, some identifiable intangible assets such as broadcast licences, microwave spectrums and transmission licences may have indefinite lives and, in these circumstances should be subject to annual tests for impairment to determine whether a periodic change is necessary.

• The residual value of an identifiable intangible asset at the end of its useful life should be subject to the same conditions regarding its estimation as other non-monetary assets that are required to be depreciated. As such, there is no presumption that the residual value of an identifiable intangible asset is zero. [The interdependency of the estimates of useful life and residual value in determining the amount of the periodic amortisation charge is noted.]

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