Revise lecture 9
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Alternative to historical cost
accounting
The alternative to historical cost accounting is
a form of current value accounting, either:
1. Constant purchasing power (CPP) or
2. Current cost accounting (CCA)
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Alternative to historical cost
accounting
Constant purchasing power accounting
1. Accounts figures are adjusted to show all figures
in terms of money with the same purchasing
power
2. A general price index is used for this
3. Figures in the IS and SFP are adjusted by the CPP
factor
4. CPP factor = Index at the reporting date / Index
at the date of entry in accounts
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Alternative to historical cost
accounting
Advantages of CPP accounting
1. CPP accounting is both simple and objective.
It relies on the standard index
2. It adjusts for changes in the unit of
measurement and therefore is a true system
of inflation accounting
3. It measures the impact on the company in
terms of shareholders purchasing power
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Alternative to historical cost
accounting
1.
2.
3.
4.
Disadvantages of CPP
Its fails to capture economic substance when
specific and general price movements diverge
The unfamiliarity of information stated in terms
of current purchasing power units
CPP does not show the current values (value to
the business) of assets and liabilities
The general price index used is not necessarily
appropriate for all assets in all businesses
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Alternative to historical cost
accounting
1.
2.
3.
4.
5.
6.
Current cost accounting (CCA)
It is based on deprival values or value to the business
Stock and non-current assets are valued at deprival
value
Monetary assets (cash, receivables, payables, loans)
are not adjusted
Assets are stated at their value to the business
Holding gains are eliminated from profit
Users will be able to assess the current state or recent
performance of the business
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Alternative to historical cost
accounting
1.
2.
3.
4.
Disadvantages of CCA
Possibility greater subjectivity and lower
reliability than historical cost
Lack of familiarity
Complexity
CCA only adjust values for non-monetary
asset not all assets and liabilities
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Fair presentation
Q: When do financial statements show fair
presentation?
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Solution
• Financial statements will generally show a fair
presentation when:
1. They conform with accounting standards
2. They conform with the any relevant legal
requirements
3. They have applied the qualitative
characteristics from the framework
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Intangible assets
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Intangible assets
• The objective of IAS 38 is to prescribe the
specific criteria that must be met before an
intangible asset can be recognised in the
accounts
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Intangible assets
Definition
• An intangible asset is an identifiable nonmonetary asset without physical substance.
• To meet the definition the asset must be
identifiable, i.e. separable from the rest of the
business or arising from legal rights.
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Intangible assets
It must also meet the normal definition of an
asset:
• Controlled by the entity as a result of past
events (normally by enforceable legal rights)
• A resource from which future economic
benefits are expected to flow (either from
revenue or cost saving)
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Intangible assets
Recognition
To be recognised in the financial statements an
intangible asset must
• Meet the definition of an intangible asset, and
• Meet the recognition criteria of the framework:
–
–
It is probable that future economic benefits attributable
to the asset will flow to the entity.
The cost of the asset can be measured reliably.
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Internally-generated intangibles
The following internally-generated items may
never be recognised:
1. Goodwill
2. Brands
3. Mastheads
4. Publishing titles
5. Customer lists
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Intangibles
• Purchased and internallygenerated intangibles
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Purchased intangibles
• If an intangible asset is acquired in a business
combination, the fair value of that asset at the date of
acquisition is taken.
• The determination of that fair value is easy if an active
market exists, otherwise it may be necessary to take
the price the entity would have paid in an arm’s length
transaction.
• Any intangible which cannot be measured reliably in
an acquisition has to be included in goodwill.
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Internally-generated intangibles
• It is impossible to separate the costs of
internally-generated intangibles from the
normal costs of running and developing a
business, so these intangibles cannot be
measured reliably.
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•
Brands
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Internally-generated intangibles
Brands:
1. The accounting treatment of brands has been
a matter of controversy for some years.
2. IAS 38 intangible assets has now ended the
controversy by stating that internallygenerated brands and similar assets may
never be recognised
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Internally-generated intangibles
3. Expenditure in internally-generated brands
cannot be distinguished from the cost of
developing the business as a whole, so should be
written off as incurred.
4. Where a brand name is separately acquired and
can be measured reliably, then it should be
separately recognised as an intangible noncurrent asset and accounted for in accordance
with the general rules of IAS 38.
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Example – Intangible classification
Q: How should the following intangible assets
be treated in the financial statements?
1. A publishing title acquired as part of a
subsidiary company
2. A licence purchased in order to market a new
product
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Example – Intangible classification
1. A publishing title acquired as part of a subsidiary
company
Answer:
The answer depends on whether the asset can
be valued reliably. If this is possible, the title will
be recognised at its fair value, otherwise it will
be treated as part of goodwill on acquistion of
the subsidiary
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Example – Intangible classification
• A licence purchased in order to market a new
product
Answer:
• As the licence has been purchased separately
from a business, it should be capitalised at
cost
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Measurement of intangible assets
Measurement after initial recognition
There is a choice between
1. The cost model
2. The revaluation model
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Measurement of intangible assets
The cost model
• The intangible asset should be carried at cost
less amortisation and any impairment losses
• This model is more commonly used in practice
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Measurement of intangible assets
The revaluation model
• The intangible asset may be revalued to a
carrying value of fair value less subsequent
amortisation and impairment losses.
• Fair value should be determined by reference
to an active market.
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Measurement of intangible assets
Features of an active market are that
1. The items traded within the market are
homogeneous
2. Willing buyers and sellers can normally be
found at any time
3. Prices are available to the public
• In practice such markets are rare
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