When you run a business, it’s likely you’ll also own assets. Assets are classified in different ways, and it’s important your business classify them correctly on your records. One classification that can be unclear is AASB 138 – Intangible Assets.
When preparing your financial statements, it can be hard to know which assets go where. Classifying your assets in particular way carries different implications. It can be even more complicated when you consider your assets that are not physical, but rather, intangible. In this article, we’ll explain what intangible assets are and how to know which assets are intangible.
The Australian Accounting Standards Board (AASB)
The Australian Accounting Standards Board (AASB) sets the criterion for how assets are to be identified. The AASB aims to develop and enforce strict and high financial reporting standards for Australian companies. This is so that there is consistency in the way businesses report their finances. Many countries throughout the world have similar standard-setting bodies.
The AABS standards cover the ways in which business have to report their finances. Compliance with the Standards is required under the Corporations Act.If you breach these requirements, you may be prosecuted. To ensure that you are compliant with your financial reporting obligations, you should seek legal guidance.
Classifying your intangible assets
An asset is defined as as a resource that is:
- Controlled by an entity as a result of past events; and
- From which future economic benefits are expected to flow to the entity.
Virtually everything your business owns is an asset – even those which are not physical objects.
Who needs to comply?
Essentially it is for companies who are reporting entities – that is, those who reasonably expect users to rely on their reports . This can apply to public companies, some non-for-profit organisations and even government agencies.
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What is AASB 138?
One of the many important accounting standards is AASB 138 regarding most intangible assets. For your asset to be considered intangible, there are some requirements which must be met:
1. It needs to be identifiable
For your asset to be in this category, it must be distinct. That is, able to be separated from your company. Further, your asset should arise from some sort of contract. For example, if your shoe business has an iconic logo which is the heel of a boot, this can be separated from your business and potentially sold.
2. It must be non-monetary
Can it be valued in dollar terms? If it can, then it’s not an intangible asset. This same logo would be hard to put a clear price on, because you didn’t purchase it from anywhere else first.
3. Lacks physical substance
The item must not be a tangible object, meaning it cannot be touched.
4. Control
Do you have control over the asset i.e. can you determine what happens to it? In this sense, being able to decide where the logo goes and who can use it means you have sufficient control.
5. Sale
If you sell the asset, will you receive an economic benefit from it? If you assigned the intellectual property of your logo, then you are likely to be paid an amount of money for it.
Some common examples of Intangible Assets
It can be hard to think of intangible assets off the top of your head, but there are many things which are immensely valuable to businesses which could be considered this way. Some common examples of intangible assets include software, patents, licences, franchises and copyrights.
For example, software runs on tangible assets but is itself intangible. If you have created special software for your business, then it forms part of your business’s intangible assets.
Implications
If assets are not recognised, they may have to be expensed which will affect your bottom line and hence your taxable profit. Further, the way you classify an asset may mean the market value of your company may be higher than the book value (as such items that do not classify as either a tangible or intangible asset will likely be put under ‘good will’, which is not recognised on the financial statements).
When organising your business finances, it’s important that you categorise them correctly to reflect the true value of your business. If you’re unsure as to what categories your assets fall into, a business lawyer can help you get it right.
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