a) The internally generated intangibles are capitalised in accordance with IAS 38, Intangible Assets. It appears that Scramble is correctly expensing the maintenance costs as these do not enhance the asset over and above original benefits. The decision to keep intangibles at historical cost is a matter of choice and therefore policy. Scramble’s accounting policy in this
regard is acceptable. An intangible asset can have a finite or indefinite life and IAS 38 states that an intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. An indefinite life does not mean infinite and IAS 38 comments that given the history of rapid changes in technology, computer software and many other intangible assets are susceptible to technological obsolescence and the useful life may be short.
If the life of an intangible is indefinite then, in accordance with IAS 36, an entity is required to test for impairment by comparing its recoverable amount with its carrying amount
(a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.
The useful life of an intangible asset that is not being amortised shall be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. To determine whether the asset is impaired, IAS 36 must be applied and the intangible asset’s recoverable amount should be compared to its carrying amount. The way in which Scramble determines its value in use cash flows for impairment testing purposes does not comply with IAS 36 Impairment of Assets. Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. Management should assess the rasonableness of its assumptions by examining the causes of differences between past cash flow projections and actual cash lows. This process does not seem to have been carried out by Scramble. Additionally, cash flow reactions should relate to he asset in its current condition and future restructurings to which the entity is not committed and expenditures to improve r enhance the asset’s performance should not be
anticipated. The cash flows utilized to determine the value in use were not estimated for the asset in its current condition, as they included those which were expected to be incurred in improving the imes and cash inflows expected as a result of those improvements. Further estimates of future cash flows should not include Cash flows or outflows from financing activities, or income tax receipts or payments. Scramble has taken into account the tax effects of future cash flows.
b) The calculation of the discount rate is not wholly in accordance with the requirements of IAS 36 because the discount rate applied did not reflect the market assessment of the contributing factors. According to IAS 36, the discount rate to be applied in these circumstances is a pre-tax rate that reflects the current market assessment of the time value
of money and the risks specific to the assets for which the future cash flow estimated have not been adjusted. IAS 36 specifies that a rate that reflects the current market assessment of the time value of the money and the risks specific to the assets is the return that the investors would require if they chose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to derive from the assets.
If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of money over the asset’s life as well as country risk, currency risk,
price risk, and cash flow risk. This would include considering the entity’s own weighted
average cost of capital, the entity’s incremental borrowing rate and other market borrowing rates. Therefore, the inputs to the determination of the discount rates should be based on current credit spread levels in order to reflect the current market assessment of the time value of the money and asset specific risks. The credit spread input applied should reflect the current market assessment of the credit spread at the moment of impairment testing, irrespective of the fact that Scramble did not intend taking any additional financing. Scramble has not complied with the disclosure requirements of IAS 36, in that neither the events and circumstances that led to the impairment loss nor the amounts attributable to the two CGUs were separately disclosed. IAS 36 requires disclosure of the amount of the loss and as regards the cash-generating unit, a description of the amount of impairment loss by class of assets. The fact that the circumstances were common knowledge in the market is not a substitution for the disclosure of the events and circumstances.
c) According to IAS 38, the three critical attributes of an intangible asset are:
2. control (power to obtain benefits from the asset);
3. future economic benefits (such as revenues or reduced future costs).
An intangible asset is identifiable when it is separable or arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. IAS 38 requires an entity to recognise an intangible asset if, and only if, it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably. This requirement applies whether an intangible asset is acquired externally or generated internally. The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination.
The registration rights meet the definition and recognition criteria of IAS 38 because they arise from contractual rights. Scramble has control because the right can be transferred or extended and the economic benefits result from the fee income Scramble can earn as fans come to see the player play.
Under IAS 38 the cost of separately acquired assets comprises: (a) its purchase price,
including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and (b) any directly attributable cost of preparing the asset for its intended use. IAS 38 gives examples of directly attributable costs which include professional fees arising directly from bringing the asset to its working conditions. In this business, the players’ registration rights meet the definition of intangible assets and the agents’ fees
represent professional fees incurred in bringing the asset into use.
The requirements above apply to costs incurred initially to acquire or internally generate an intangible asset and those incurred subsequently to add to, replace part of, or service it. Thus the agents’ fees paid on the extension of players’ contracts can be
considered costs incurred to service the player registration rights and should be treated as intangible assets.
The IASB wish their standards to be ‘principles-based’ and in order for this to be the case, the
standards must be based on fundamental concepts. These concepts need to constitute a framework which is sound, comprehensive and internally consistent. Without agreement on a framework, standard setting is based upon the personal conceptual frameworks of the individual standard setters which may change as the membership of the body changes and results in standards that are not consistent with each other. Such a framework is designed not only to assist standard setters, but also preparers of financial statements, auditors and users.
A common goal of the IASB is to converge their standards with national standard setters. The IASB will encounter difficulties converging their standards if decisions are based on different frameworks. The IASB has been pursuing a number of projects that are aimed at achieving short term convergence on certain issues with national standard setters as well as major projects with them. Convergence will be difficult if there is no consistency in the underlying framework being used.
Frameworks differ in their authoritative status. The IASB’s Framework requires management to expressly consider the Framework if no standard or interpretation specifically applies or deals with a similar and related issue. However, certain frameworks have a lower standing. For example, entities are not required to consider the concepts embodied in certain national frameworks in preparing financial statements. Thus the development of an agreed framework would eliminate differences in the authoritative standing of conceptual frameworks and lead to greater consistency in financial statements internationally.
The existing concepts within most frameworks are quite similar. However, these concepts need revising to reflect changes in markets, business practices and the economic environment since the concepts were developed. The existing frameworks need developing to reflect these changes and to fill gaps in the frameworks. For example, the IASB’s Framework does not contain a
definition of the reporting entity. An agreed international framework could deal with this problem, especially if priority was given to the issues likely to give short-term standard setting benefits.
Many standard setting bodies attempted initially to resolve accounting and reporting problems by developing accounting standards without an accepted theoretical frame of reference. The result has been inconsistency in the development of standards both nationally and internationally. The frameworks were developed when several of their current standards were in existence. In the absence of an agreed conceptual framework the same theoretical issues are revisited on several occasions by standard setters. The result is inconsistencies and incompatible concepts. Examples of this are substance over form and matching versus prudence. Some standard setters such as the IASB permit two methods of accounting for the same set of circumstances. An example is the accounting for joint ventures where the equity method and proportionate
consolidation are allowed.
Additionally there have been differences in the way that standard setters have practically used the principles in the framework. Some national standard setters have produced a large number of highly detailed accounting rules with less emphasis on general principles. A robust framework might reduce the need for detailed rules although some companies operate in a different legal and statutory context than other entities. It is important that a framework must result in standards that account appropriately for actual business practice.
A framework provides standard setters with both a foundation for setting standards, and concepts to use as tools for resolving accounting and reporting issues. A framework provides a basic reasoning on which to consider the merits of alternatives. It does not provide all the answers, but narrows the range of alternatives to be considered by eliminating some that are inconsistent with it. It, thereby, contributes to greater efficiency in the standard setting process by avoiding the necessity of having to redebate fundamental issues and facilitates any debate about specific technical issues. A framework should also reduce political pressures in making accounting judgements. The use of a framework reduces the influence of personal biases in accounting decisions.
However, concepts statements are by their nature very general and theoretical in their wording, which leads to alternative conclusions being drawn. Whilst individual standards should be consistent with the Framework, in the absence of a specific standard, it does not follow that concepts will provide practical solutions. IAS8 ‘Accounting Policies, Changes in Accounting
Estimates and Errors’ sets out a hierarchy of authoritative guidance that should be considered in
the absence of a standard.
In this case, management can use its judgement in developing and applying an accounting policy, albeit by considering the IASB framework, but can also use accounting standards issued by other bodies. Thus an international framework may not totally provide solutions to practical accounting problems.
There are several issues which have to be addressed if an international conceptual framework is to be successfully developed. These are:
Agreement will be required as to whether financial statements are to be produced for shareholders or a wide range of users and whether decision usefulness is the key criteria or stewardship. Additionally there is the question of whether the objective is to provide information in making credit and investment decisions.
(ii) Qualitative Characteristics
The qualities to be sought in making decisions about financial reporting need to be determined. The decision usefulness of financial reports is determined by these characteristics. There are issues concerning the trade-offs between relevance and reliability. An example of this concerns