Treatment Of Intangible Assets In Financial Statements Of Harvey Norman And Telstra

Comparison between the Treatment of Intangible Asset in Telstra and Harvey Norman

Using the AFRs identify and compare the recognition of and subsequent measurement of 'Intangibles' in terms of the 'AASB' framework for the preparation and presentation of financial statements' and 'AASB138 intangibles asetes'.

Intangible assets refer to the assets which are not physical in nature. Common intangible assets are intellectual property such as copyright, patent, trademark etc, and brand image, goodwill, technical knowledge etc. According to Australian Accounting Standard Board 138, intangible assets can be described as the resources which are frequently spent or incur liability upon acquisition, maintenance and development of those (www.aasb.gov.au, 2015). Various large international firms have identified the significance of intangible assets which is distinct from the traditional organizations. It has been observed that technological developments have contributed in the increasing importance of intangible asset for various businesses (Atrill, 2006). Presently the business organizations have been encountering major challenge regarding the recognition of intangible assets in terms of Australian Accounting Standard Board 138 and its basis of estimation. This paper will focus on accessing the Annual Financial Report of two Australian Security Exchange listed companies. In this paper, to listed companies Telstra and Harvey Norman will be considered. In these two companies identification and measurement of the intangible assets will be estimated.  Additionally, ratios will be calculated in order to demonstrate the impact of intangible asset on the financial performance of the company (Epstein & Lee, 2011).

In the annual report of Telstra it intangible asset has been defined as the assets which has some value but do not have physical existence. Hence, intangible assets cannot be indentified physically unlike the tangible assets such as plant, machines etc. In the annual report of Telstra, notes to the financial statement have indicated that for recognizing the intangible asset, the asset must be separable or it needs to be raised from some legal rights or contracts (Brigham & Houston, 2004).

According to the annual financial report of Harvey Norman, intangible assets of the company are consisted of the software assets and license properties. The intangible assets in Harvey Norman are tested for impairment (Marsh, 2012).

Treatment of goodwill in Telstra

In case of associated entity, joint venture or controlled entity, when investment is acquired, if the company pays the amount which is more than the fair value of the net identifiable asset of the entity, the additional amount is considered as goodwill. Telstra estimates the amount of goodwill on the date of purchasing the ownership interest in the entity. While, Telstra buys an entity which will be controlled by the company, the amount of the estimated goodwill is recorded under the head of intangible asset in balance sheet. On the other hand, when the acquisition of investment takes place in case of the associated entity or joint venture, goodwill will be considered as part of the cost of investment (Paramasivan & Subramanian, 2009).  Goodwill is not amortized as the intangible assets having indefinite period of life is not eligible for amortization. However, goodwill is tested for impairment annually or the indication of impairment is considered for estimating the value. 

Treatment of goodwill in Telstra

Treatment of goodwill in Harvey Norman

According to the annual financial report of Harvey Norman, goodwill is estimated by the cost less the accumulated impairment losses. In Harvey Norman, goodwill is also not amortized. Goodwill is also reviewed for impairment on annual basis or when an event occurs in the circumstance which indicates the value of the goodwill needs to be impaired. On the date of acquisition, the goodwill will be allocated to the cash generating unit which is expected to provide advantage by combining the synergy. In Harvey Norman, the impairment is determined through undertaking assessment of recoverable amount of the cash generating unit related to goodwill. Additionally, by referring to the notes to the financial statements it was found that when the recoverable amount is estimated to be less than the carrying amount of the cash generating unit, impairment loss occurs (Shim & Siegel, 2000). When goodwill is a part of the cash generating unit and the operational activities and the unit is disposed off, the carrying amount of operation must be considered in order to determine the loss or gain on disposal of the operation. The impairment losses associated with goodwill is not reversed (Harveynormanholdings.com.au, 2015).  

Treatment of Internally generated Intangible Assets in Telstra

The cost for undertaking research is considered as an expense. The judgment of management is important as it is important for determining whether the development cost will be capitalized or not. When the project is found to be commercially as well as technically feasible, Telstra capitalizes the development cost. Hence the company will be eligible for selling and utilizing the assets and it will have adequate resources for completing the developmental activities (Telstra2014ar.interactiveinvestorreports.com, 2015).

Software Assets

The direct cost related to the development of software for internal use such as material cost, consumption of service, payroll expenditure etc is recorded. The borrowing costs are capitalized which is directly associated with the production, acquisition of development (Singh, 2007). The software assets which are in use and which are being developed are reviewed. The business software assets are developed for internal purpose and it has a specific useful life. Hence, the software assets are amortized on straight line basis (Telstra2014ar.interactiveinvestorreports.com, 2015).

Treatment of Internally generated Intangible Assets in Harvey Norman

In Harvey Norman, intangible asset which is generated internally include cost related to software assets which are capitalized. The software asset is amortized over its useful life and the maximum life is mentioned to be 9.5 years. It is also continuously reviewed for impairment annually or at the time when an event takes place which may lead to impairment (Harveynormanholdings.com.au, 2015).

Acquired intangible assets in Telstra

The intangible assets are acquired as a part of business combination and it is recorded at the fair value on the date of acquisition. Additionally, it may be acquired through separate acquisition and will be recorded at cost. Management judgment is applied for determining the fair value of the intangible assets. In Telstra, the intangible assets having finite life are amortized on straight line basis over the useful life (Telstra2014ar.interactiveinvestorreports.com, 2015).

Acquired intangible assets in Harvey Norman

In case of Harvey Norman, the losses from de-recognition of the intangible assets are estimated to be the difference between the net proceeds from disposal and the carrying amount of the intangible asset (Harveynormanholdings.com.au, 2015). It is recognized in the income statement while the intangible asset is derecognized.

Deferred Expenditure in Telstra

In Telstra, deferred expense include the cost incurred due to the basic access installation as well as connection fees for the current and the new service along with the incremental cost in order to establish a customer contract. The deferred expenditure is amortized on the average period in which the advantages are forecasted to be realized.

The asset turnover ratio implies the efficiency of the company in utilizing its assets. In case of both Telstra and Harvey Norman, intangible asset turnover ratio will be calculated for the two consecutive years 2013 and 2014 (Gazely & Lambert, 2006).

Telstra

	Values are in million
	2014	2013
Net Revenue	$        26,296.00	$        24,776.00
Total Intangible Assets	$          6,382.00	$          8,202.00
Intangible Asset Turnover Ratio	4.120338452	3.020726652

In 2014, the intangible asset of Telstra has declined from the previous year. It demonstrated that the net revenue of the firm has increased. It indicates that the company has been effectively utilizing its intangible assets leading to increase in the intangible turnover ratio from 3.02 to 4.12 (Hansen & Mowen, 2000).

Harvey Norman

	Values are in '000
	2014	2013
Net Revenue	$  1,513,662.00	$  1,323,481.00
Total Intangible Assets	$        77,898.00	$        58,913.00
Intangible Asset Turnover Ratio	19.43133328	22.46500772

The intangible asset of Harvey Norman has been increased in 2014 from 2013. It has been estimated that the intangible asset turnover ratio has declined from 22.45 to 19.4. It indicates that the company has been holding excess intangible assets which are not being properly capitalized by the organization (Gazely & Lambert, 2006).

References

Atrill, P. (2006). Financial management for decision makers. Harlow, England: FT Prentice Hall.

Brigham, E., & Houston, J. (2004). Fundamentals of financial management. Mason, Ohio: Thomson/South-Western.

Epstein, M., & Lee, J. (2011). Advances in management accounting. Bingley, UK: Emerald.

Gazely, A., & Lambert, M. (2006). Management accounting. London: SAGE Publications.

Hansen, D., & Mowen, M. (2000). Management accounting. Cincinnati: South-Western College Pub.

Harveynormanholdings.com.au,. (2015). Harvey Norman Annual Reports. Retrieved 21 January 2015, from https://www.harveynormanholdings.com.au/annualreports.htm

Marsh, C. (2012). Financial management for non-financial managers. London: Kogan Page.

Paramasivan, C., & Subramanian, T. (2009). Financial management. New Delhi: New Age International (P) Ltd., Publishers.

Shim, J., & Siegel, J. (2000). Financial management. Hauppauge, N.Y.: Barron's.

Singh, Y. (2007). Accounting and financial management for I.T. professionals. New Delhi: New Age International.

Telstra2014ar.interactiveinvestorreports.com,. (2015). Home - Telstra Annual Report 2014. Retrieved 21 January 2015, from https://telstra2014ar.interactiveinvestorreports.com/

www.aasb.gov.au,. (2015). Compiled AASB Standard AASB 138 Intangible Assets. Retrieved 21 January 2015, from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPjun09_07-09.pdf.