The financial accounting in New Zealand compliances with the Accounting Standards Review Board, the Financial Reporting Standards Board, the New Zealand Securities Commission and the New Zealand Exchange. This essay will analyze the New Zealand financial accounting environment and focus on the issue and implication of asset, especially intangible asset, based on the case of Consolidated Plastics Ltd. Many accounting standards and regulation involved in it, for example NZ IAS 38 Intangible assets, NZ IAS 16 Property, Plant and Equipment and NZ IAS 40 Investment Property
An asset is defined as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. It is important to note that it is probable that the service potential or future economic benefits embodied in the asset will flow to the entity and the asset possesses a cost or other value that can be measured with reliability. Assets can be divided into tangible asset and intangible assets. Tangible assets such as machinery, leased building and leased cars are relatively easy to identify. On the other hand, intangible assets are much more complex. Lev (2001) defines an intangible asset as a claim to future benefits that does not have a physical or financial embodiment. For example, patents, copyright agreement and brands. To be more exact, externally acquired intangible assets are purchased from outside the form and usually have identifiable costs and discernible benefits, and there have been difficulties in accounting for these assets. However, for internally-generated intangibles which developed within the firm, there are recognition problems. These assets are usually developed over a period of time, within the firm and have traditionally been ignored, so they are not recognized in the financial statements.
From the case of Consolidated Plastics Ltd, it can be seen that there are arguments on how to treat the goodwill which arose from a new acquisition. The Chairman of the Board thought that goodwill should be written off immediately, while a fellow director argued that a business would be worthless without goodwill. In order to decide how to treat the goodwill, it is necessary to figure out the importance of goodwill. The increasing proportion of the company’s market value attributable to the existence of intangible reflects the importance of company’s goodwill. Many companies’ brands make up 30% of companies’ total assets, some even account for 50% of total assets. In Consolidated Plastics Ltd case, Consolidated Plastics is a strong brand name and had ten years of successful trading, therefore, the goodwill would be very important for this company.
Further, the NZ IAS 38 provides more detail about intangible asset. The standards defines intangible asset as an identifiable non-monetary without physical substance. IAS 38 indicates that intangibles can be obtained by the firm in many ways, such as by separate purchase, by self-creation, by an exchange of assets or as part of a business combination. However, it is important to note that the definition of an intangible asset requires an intangible asset to be identifiable to distinguish it from goodwill. IAS 38 para.11 states that goodwill recognized in a business combination is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. When an acquisition is as part of business combination, the rule is different from what applies at the individual company level.
In Consolidated Plastics Ltd case, this company acquired a firm called Maxibrands Ltd. It is clear that the two companies carry on as individual entities and produce their own financial statements after the acquisition. Nevertheless, they still need to prepare another financial statement, adding the income and expenses, assets and liabilities of the individual companies in the group to produce a consolidated income statement and a consolidated balance sheet. IAS 38 allows intangible assets to be recognize when the assets of the subsidiary are added to those of the parent to form the consolidate balance sheet. In this case, the Consolidated Plastics Ltd obtained control of the assets, including intangibles, so the intangibles of the Maxibrands Ltd. should be recognized now. If an individual company with research and development expenditure is acquired by another company, all the project cost should be recognized as an asset in the consolidation balance sheet. If the fair value of the separable intangibles can be reliably measured, they can be recognized in the consolidate balance sheet, otherwise, they are recognized in goodwill. (Austin,2008) IAS 38 para.48 indicates that internally generated goodwill shall not be recognized as an asset, because it is not an identifiable resource. Para 63 states that internally generated brands, mastheads, customer lists and items similar in substance shall not be recognized as intangible assets. It is important to know the benchmark position for intangibles that both externally acquired and permitted internally generated intangibles are initially recognize at cost. All in all, according to the theory of IAS 38, goodwill is a function of the price paid for the acquisition, and it is important to company’s market value, in Consolidated Plastics Ltd case, it is better to keep the goodwill on the balance sheet.
Another issue stated in this case is how to account for a substantial area of land owned by Consolidated Plastics Ltd. NZ IAS 16 indicates that property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to others or for administrative purposes and are expected to used in more than one period. It is important that the cost of an item of property, plant and equipments shall be recognize as asset only if it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measure reliably. According to NZ IAS 40, the land also can be an investment property. The standard defines investment property as land or a building held to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services for administrative purposes or sale in the ordinary course of business. The para.16 indicates that it shall be recognized as an asset when and only when it is probable that the future economic benefits that are associated with the investment property will flow to the entity and the cost of the investment property can be measured reliably.
According to IAS 16, the land can be carried at its coast less accumulated depreciation and impairment losses, or carried at a revalued amount, which means fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. And the fair value of land is usually determined from market-base evidence by appraisal that is usually undertaken by professional valuers. If the land is revalued, the accumulated depreciation of the revaluation will be changed. In Consolidated Plastics Ltd case, if the land’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in profit or loss to the extent that it reverse a revaluation decrease of the same asset previously recognized in profit or loss. Similarly, according to NZ IAS 40, a gain or loss arising from a change in the fair value of investment property shall be recognized in profit or loss for the period in which it arises, and the fair value of investment property would reflect market conditions at the end of the reporting period. In this case, the land was recorded at its historical cost, if they record it at an updated value, they should do a revaluation of this land. As a result, the carrying amount could be increase or decrease and will be recognize in profit or loss. Therefore, it will definitely affect this company’s net profit.
Intangible assets have more complex measurement and recognition features than tangible assets, and it is difficult to develop a comprehensive accounting standard for it. When doing financial accounting in New Zealand, the financial accounting environment cannot be ignored. It is vital that every company should compliance with relevant accounting standards and regulation when they are doing business.
Austin, L.(2008). Accounting for intangible assets. Business Review. 9(1),pp63-78.
Lev,B. (2001). Intangibles: Management, Measuring and Recording. Washington,DC. Brookings Institution Press. P5.
NZ IAS 16 Property, Plant and Equipment.
NZ IAS 38 Intangible assets
NZ IAS 40 Investment Property