Identifying intangible assets ABACUS

It is difficult to find much goodwill in the debate over intangible assets.

Over the past few years the increased questioning from the corporate regulator on why companies accounted for intangibles such as broadcast licences, trademarks and similar assets has brought criticism of the regulator's activity from several pressure groups in the business community. The recent boost in activity on the part of the Australian Securities and Investments Commission has led to various bodies analysing the differences between the way some people were reading standards and examining ASIC's enforcement of the accounting rules. A submission, prepared by five business organisations, is the first indication of the likely heat a future debate on intangible assets will generate. Five bodies, including the AICD, signed the letter addressed to inaugural full-time chairman of the Australian Accounting Standards Board, Keith Alfredson, in an attempt to ensure the issue of intangible assets was kept a high priority. Initially proposed by the Group of 100, the letter is one element in a three-part submission that contains a short manifesto, the Statement of Principles, on the accounting for intangible assets, which begins on the premise that identifiable intangible assets do not deserve special treatment.

"The basis of the approach is that identifiable intangible assets should be treated in a way that is consistent with the treatment of other identifiable non-monetary assets," the Group of 100-inspired letter says. "We believe that this statement should be issued by the board, after due process, as the Accounting Interpretation of current accounting principles and requirements in respect of intangible assets." What is left unsaid on the latter point is more interesting than the call for the Statement of Principles to be adopted as the accounting interpretation on intangible assets. An existing accounting interpretation on intangible assets, which was the subject of corporate criticism during the past 12 months, would have to be overturned by the new AASB to put in place the model suggested in the co-signed document. It remains to be seen whether the new board considers itself to be in a position to overturn the previous promulgation so early in its life to appease some sectors of its broader constituency feeling the regulator's scalpel.

Many in the corporate sector were miffed by the issuance of the Accounting Interpretation, known as AI 1, in late June 1999. One of the reasons for the negative reaction was the issue of the document just days before the end of the financial year. Debate also raged over the interpretation's authority. Originally intended as an accounting bulletin, the document was upgraded to the status of an accounting interpretation of the AASB because members of the old board feared an accounting bulletin, which was deemed to have the same authority as a media release, be ignored in the same manner as two media releases of an earlier incarnation of the AASB issued in 1990 and 1992. Those media statements were released during a period when the board was deliberating on an exposure draft called ED 49 that was an attempt to grapple with the issues of accounting for intangible assets. Similar guidance was provided in an accounting guidance release in April 1988 dealing with depreciation of intangible assets. It demanded amortisation or a write off of intangibles over a period of time.

Of the three documents the accounting guidance release was the most explicit about amortisation requirements for intangible assets, expressing the concern of the AASB at the time that companies were not amortising intangibles. "The issue which concerns the boards relates to the suggestion that intangible assets, when identified for financial reporting purposes, do not require amortisation or depreciation," the then standard setting authority outlined. "[These] intangible assets are required to be written off by systematic charges to the profit and loss account over the period of time during which benefits are expected to arise." Costs incurred to maintain the intangible asset such as marketing or advertising, the 1988 pronouncement continues, do not justify non-compliance with amortisation requirements. By branding the 1999 document an "Accounting Interpretation" the previous incumbents on the AASB ensured the document would get attention from corporates and Big Five accounting firms. The document's release was also noticed because it came out in the middle of the ASIC enforcement over several hot spots in accounting including intangible assets.

Bryce Denison the president of the Group of 100, says in the covering letter co-signed by the AICD, Group of 100, Institute of Chartered Accountants, CPA Australia and the Business Council of Australia that there is some uncertainty about the application of the accounting rules because of enforcement activity. "Australian practice which had evolved over several years has recently been challenged by regulators with the result that reporting entities believing that they had complied with the requirements of Accounting Standards are now required to change their accounting policies," says the letter. "This has introduced some uncertainty as to what is an acceptable interpretation of the requirements". ASIC has less doubt about the situation. Chairman Alan Cameron told the recent Group of 100 conference intangibles must be amortised. "It is unlikely that we would ever accept a claim that the life of an intangible is unlimited. Companies must be able to substantiate the periods over which the assets are amortised as being reasonable estimates of the useful lives of the assets, taking into account factors such as technical and commercial obsolescence," Cameron told the audience of prominent accounting and finance specialists from the country's largest companies.

The power to demand further information from companies has been exercised by ASIC to get more detail on why a company decided an intangible should not be amortised. Another issue put to the new board by the G100 et al is the need, in their view, to wait for America to make a decision on intangible assets rather than move to embrace the pronouncement of the International Accounting Standards Committee that is seen by the Australian corporate sector as draconian because it does not permit the booking of some intangible assets, forces amortisation of others and prohibits revaluation where there is no observable market in a particular asset. "[It] would be inappropriate for the board to adopt an approach that harmonises with IAS38 "Intangible Assets" until the position in respect of US GAAP is known or IAS 38 is adopted for cross-border purposes," the letter urges. "As part of the debate it will also be necessary to consider the effect of institutional and environmental differences between international and Australian requirements such as the tax deductibility of amortisation charges and the effect of dividend distribution rules on the dividend distribution capacity of companies."

While the corporate community has already exercised its initiative and put forward a solution the user groups such as investment analysts and shareholders are yet to be heard. The new board will have a great challenge in balancing the wishes of corporates that are not wanting the ASIC to enforce aspects of accounting standards and also ensuring it bears the needs of annual report users in mind. It is an unenviable task. @smallhead: Papers online

Along with the new era in accounting standard setting comes the decision to publish agenda papers online so constituents can at least be aware of the substance of issues being discussed. The decision to publish online also means those attending the public meetings, which are required under the new Corporate Law Economic Reform Program Act, can follow proceedings more easily. It is a unique decision. Most other standard setters, including the US Financial Accounting Standards Board, tend not to publish detailed agenda documents.

Staying in the shadows

Australia's Financial Reporting Council, the body which oversees the new Australian Accounting Standards Board, was under attack during parliamentary hearings in the past month for still meeting behind closed doors. Stephen Conroy, shadow minister for financial services and regulation, called on the council to open its deliberations to the public after being told by Garry Potts, head of the markets group in Federal Treasury, that council members had decided not to hold meetings in the sunshine. "I thought the purpose of the FRC was to encourage transparency and discussion," said Senator Conroy, the man responsible for moving the motion to disallow a part of an accounting standard earlier this year. Garry Potts argued that transparency was important, but the real question was how to achieve it. "I cannot recall the details of it now, but that was the decision that was reached by the group as a whole," Potts said. The Senator said he though encouraging "transparency by secrecy" was a touch Orwellian and that the FRC should open up its deliberations.

"I can only ask you to encourage them to reconsider their position. I might like to come along and watch one day, just from the public gallery. I am sure I would enjoy that," Conroy said.

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