AASB PREPARER and AUDITOR SURVEY: Is there a gap in the information provided to the users of financial statements in relation to Intangible Assets that can be filled in a cost-effective way?

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* 1. Background

In March 2021 we distributed an online survey to ascertain whether users of financial statements think there is a financial statements information gap in respect of intangible assets. In light of the feedback received, we are now seeking your views as a preparer or auditor of financial statements about intangible assets accounting requirements.

Financial reporting of intangibles is prescribed by AASB 138 Intangible Assets. Operative since 2005, it incorporates the International Accounting Standards Board’s IAS 38 of the same name.

Intangible assets are non-monetary assets without physical substance and are identifiable (ie separable or arise from legal rights). Examples of intangible assets include brands, mastheads and customer lists.

The scope of this survey is limited to intangible assets (emphasising those that are internally generated). It excludes acquired and internally generated goodwill.

Intangible assets meeting AASB 138’s balance sheet recognition criteria are:

- initially measured at cost
- subsequently measured at cost or a revalued amount (i.e., fair value)
- amortised on a systematic basis over their useful lives (if useful life is limited) or not amortised (if useful life is indefinite)
- subject to AASB 136 Impairment of Assets.

AASB 138 requires many acquired intangible assets to be recognised in the balance sheet whereas many of the same kinds of assets, if internally generated, are prohibited from being recognised. Furthermore, even where intangible assets are recognised, many of them are not permitted to be subsequently revalued to fair value.

Despite the absence of information resulting from non-recognition of so many intangible assets, AASB 138 only requires limited disclosures about them in financial statements; and in some cases only encourages disclosures.

A question arises as to whether AASB 138 results in users getting sufficient information in financial statements, especially about unrecognised internally generated intangible assets. In addition, as a preparer or auditor, do you believe financial statements appropriately convey useful information about intangible assets in a cost-effective way? On balance, should AASB 138 be amended with the objective of improving the quality of information in a way that would not be too costly for you to prepare or audit?

Objective

Our aim is to gain a better understanding of your view. Your response together with that of users will assist us in formulating an AASB Staff Paper to assist the AASB’s deliberations and serve as an input to a submission to the IASB’s Agenda Consultation, which is due by 27 September 2021. In the longer term, it is envisaged the Paper will provide a significant contribution to the international debate on the issues it addresses or, ideally, useful input to any intangible assets project the IASB might agree to add to its active agenda.

As a preparer or auditor of financial statements, do you believe that overall the information about intangible assets currently required or encouraged by Australian Accounting Standards (or equivalent national or international Accounting Standards) to be provided in financial statements strikes the right balance between the costs to preparers of providing the information and the benefits to users of getting the information?

Yes

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* 2. Your interest in financial statements and in particular the accounting for intangible assets arises primarily from your current role as: (please select the one that you will use to reflect your views for the rest of this survey)

A preparer of private sector for-profit financial statements

A preparer of private sector not-for-profit financial statements

A preparer of public sector for-profit financial statements

A preparer of public sector not-for-profit financial statements

An auditor of private sector for-profit financial statements

An auditor of private sector not-for-profit financial statements

An auditor of public sector for-profit financial statements

An auditor of public sector not-for-profit financial statements

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* 3. As a preparer or auditor of financial statements, do you believe the information about intangible assets currently required or encouraged by Australian Accounting Standards (or equivalent national or international Standards) to be provided in financial statements (whether through recognition or disclosure) appropriately reflects an entity’s recognised and unrecognised intangible assets?

Yes

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* 4. The views expressed in this survey represent:

your personal views

the views of your employer/organisation

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* 5. Even if the responses do not represent your employer’s/organisation’s views, please state the name of your employer/organisation (if any)

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* 6. Which specific industry sector is your greatest experience in? (e.g., financial services, mining, construction, technology, communication, healthcare, education, research (e.g., medical, pharmaceutical) etc.).

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* 7. What are the main types of intangible assets you have accounting/auditing experience with (whether recognised or unrecognised)? Select all that apply:

Brands

Copyrights

Customer lists

Development costs

Licences

Mastheads

Patents

Production/Import/Export quotas

Publishing titles

Research/intellectual capital

Trademarks

Other (please specify)

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* 8. This question and questions 9-11 focus on whether you agree with the current accounting requirements applicable to intangible assets.

Please read the following brief background information before answering questions 8-11:

AASB 138 prescribes the financial statements’ definition, recognition, measurement and disclosure requirements applicable to intangible assets.

Intangible assets are non-monetary assets without physical substance and are identifiable (i.e., separable or arise from legal rights).

AASB 138 requires many acquired intangible assets to be recognised in the balance sheet whereas many of the same kinds of assets, if internally generated, are prohibited from being recognised.

Intangible assets that meet the balance sheet recognition requirements in AASB 138 are:
- initially measured at cost
- subsequently measured at cost or, only where there is an active market, are permitted to be measured at a revalued amount (i.e., fair value)
- amortised on a systematic basis over their useful lives (if they have a finite useful life, e.g., patents, licences, trademarks, copyright) or not amortised (if they have an indefinite useful life, e.g., perpetual franchises, perpetual trademarks)
- subject to various disclosure requirements (with some relief for entities that do not have public accountability)
- subject to the impairment requirements of AASB 136 Impairment of Assets.

Publicly accountable entities (as defined in Appendix A of AASB 1053 Application of Tiers of Australian Accounting Standards, an example of a publicly accountable entity is one that has issued equity or debt that is traded in a public market) with intangible assets that fail the balance sheet recognition requirements in AASB 138 are encouraged to disclose a brief description of significant intangible assets not recognised as assets because they did not meet the recognition criteria in AASB 138.

Do you agree with the existing AASB 138 prohibition on the recognition by all entities of many internally generated intangible assets and the encouragement rather than a requirement for publicly accountable entities to disclose information about those unrecognised assets?

Yes

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* 9. Please state the reasons for your answer to question 8.

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* 10. Do you agree with the existing AASB 138 restrictions (requirement for an active market) on the subsequent revaluation of acquired intangible assets?

Yes

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* 11. Please state the reasons for your answer to question 10.

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* 12. This question and question 13 focus on your views about the gap between an entity’s market capitalisation and its book value.

Some argue the current accounting for internally generated intangible assets under AASB 138 inappropriately results in a significant gap between the book value and market capitalisation of listed entities because book value is much lower than market capitalisation.

Generally, as a preparer or auditor, do you think the gap between market capitalisation and book value is a good reason for AASB 138 to be amended to require more internally generated intangible assets to be recognised and more recognised intangible assets to be revalued? (Select one option only):

Yes

Not relevant to me, I do not prepare or audit financial statements of listed entities

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* 13. Please state the reason for your response to question 12.

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* 14. This question and questions 15-17 focus on your view about the apparent asymmetry in current accounting requirements for intangible assets.

Please read the brief background information (in italics) before answering questions 14 and 15:

Some argue there is currently asymmetry in Australian Accounting Standards because many kinds of intangible assets are recognised if acquired (whether in a business combination or otherwise) but the same kinds of intangible assets cannot be recognised if they are internally generated.

Notwithstanding your answer to Q8, do you think the so called asymmetry in relation to the initial accounting for internally generated intangible assets (where any costs are expensed) compared with acquired intangible assets (where costs are capitalised) can be justified?

Yes

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* 15. Please provide a reason for your answer to question 14.

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* 16. Some argue there is currently asymmetry in Australian Accounting Standards because a recognised acquired intangible asset can only be subsequently revalued to fair value if an active market for the asset exists (which is considered uncommon for intangible assets) whereas there is no such limitation on tangible assets.

Notwithstanding your answer to Q10, do you think the so called asymmetry in relation to the subsequent accounting for recognised acquired intangible assets (where revaluations are significantly restricted) compared with tangible assets (where there are far fewer restrictions on revaluations) can be justified?

Yes

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* 17. Please provide a reason for your answer to question 16.

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* 18. This question focuses on the other types of information you might be involved in preparing or auditing/reviewing in respect of intangible assets that supplements an entity’s financial statements. This is because it is not expected financial statements would be able to communicate the creation of shareholder/entity value arising from the entity’s expenditure on internally generated intangible assets for a number of reasons, including:

AASB 138 does not allow recognition of, nor require disclosures about many internally generated intangible assets, financial statements are produced infrequently and there is a lag between the reporting date and the issuance of financial statements.

Please select the other types of information you are involved in preparing or auditing/reviewing that compensate for the lack of information in financial statements caused by AASB 138 disallowing the recognition of, and not requiring disclosures about, many internally generated intangible assets.

Other parts of the Annual Report such as the Directors’ Report, Management’s Discussion and Analysis, Chairman’s Statement

Analysts’ reports

Press releases

Media reports

Conference calls (i.e., earnings calls, significant events announcements, etc.)

Investor relation programmes such as investor presentations

Integrated Reports

Feedback from product users and interactions as a customer

Peer company disclosures

Academic and management consultancy work regarding the economic value of unrecognised intangible assets such as customers or subscribers

Survey data

Other (please specify)

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* 19. This question focuses on your reaction to some suggestions made by users of financial statements and others (such as academics) about how they think currently unrecognised internally generated intangible assets should be accounted for in financial statements.

For each, please indicate whether you broadly agree or disagree with the suggestion based on your perception of costs to prepare vs benefits to users.

The following lists different types of possible financial statements information from A to J:

Recognition-based approaches (A-D)

Disclosure-of-measurement-based approaches (E-G)

Disclosure-without-measurement-based approaches (H-I)

Other possible approaches (J)

	Agree or Disagree
A: Initially recognised and measured at fair value and subsequently revalued at fair value, with related disclosures	A: Initially recognised and measured at fair value and subsequently revalued at fair value, with related disclosures Agree or Disagree menu
B: Initially recognised and measured at cost and subsequently revalued at fair value, with related disclosures	B: Initially recognised and measured at cost and subsequently revalued at fair value, with related disclosures Agree or Disagree menu
C: Initially recognised and measured at cost and subsequently measured at cost, with related disclosures	C: Initially recognised and measured at cost and subsequently measured at cost, with related disclosures Agree or Disagree menu
D: Initially recognised and measured at cost, with an accounting policy choice of whether or not to be subsequently revalued at fair value, with related disclosures	D: Initially recognised and measured at cost, with an accounting policy choice of whether or not to be subsequently revalued at fair value, with related disclosures Agree or Disagree menu
E: Not recognised, but instead narrative descriptions of the nature of each class of intangible asset. In addition, initial and subsequent disclosure of fair value (including valuation methodology and underlying significant estimates and judgements) in the notes to the financial statements	E: Not recognised, but instead narrative descriptions of the nature of each class of intangible asset. In addition, initial and subsequent disclosure of fair value (including valuation methodology and underlying significant estimates and judgements) in the notes to the financial statements Agree or Disagree menu
F.Not recognised, but instead narrative descriptions of the nature of each class of intangible asset. In addition, initial and subsequent disclosure of cost in the notes to the financial statements	F.Not recognised, but instead narrative descriptions of the nature of each class of intangible asset. In addition, initial and subsequent disclosure of cost in the notes to the financial statements Agree or Disagree menu
G. Not recognised, but instead narrative descriptions of the nature of each class of intangible asset. In addition, initial and subsequent disclosure of some related financial information that might be pertinent to a user making their own estimate of fair value (e.g., indications of costs incurred during the reporting period) in the notes to the financial statements	G. Not recognised, but instead narrative descriptions of the nature of each class of intangible asset. In addition, initial and subsequent disclosure of some related financial information that might be pertinent to a user making their own estimate of fair value (e.g., indications of costs incurred during the reporting period) in the notes to the financial statements Agree or Disagree menu
H: Not recognised, but instead narrative descriptions in the notes to the financial statements of the nature of each class of intangible asset but without any financial information initially and subsequently	H: Not recognised, but instead narrative descriptions in the notes to the financial statements of the nature of each class of intangible asset but without any financial information initially and subsequently Agree or Disagree menu
I: Not recognised, keep with the status quo (i.e., no changes are required to AASB 138 – keep the encouraged disclosure)	I: Not recognised, keep with the status quo (i.e., no changes are required to AASB 138 – keep the encouraged disclosure) Agree or Disagree menu
J:Not recognised and not disclosed, financial statements are not the appropriate vehicle for conveying information about internally generated intangible assets	J:Not recognised and not disclosed, financial statements are not the appropriate vehicle for conveying information about internally generated intangible assets Agree or Disagree menu

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* 20. For the suggestions that you disagree with in Question 19, if any, please explain why you disagree.

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* 21. Are you satisfied with the existing AASB 138 disclosures, whether required or encouraged, in respect of recognised and unrecognised intangible assets?

Yes

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* 22. Notwithstanding your answer to Question 21, this question focuses on the disclosures about unrecognised intangible assets some users and/or academics think should be made in financial statements if AASB 138 were to continue to disallow recognition of many internally generated intangible assets in the balance sheet. However, this question assumes AASB 138 will be amended to require disclosures in the notes to the financial statements rather than just encouraging them. In those circumstances, from the list below, please indicate which ones you disagree with:

A) Estimates (by the directors’ or independent valuer) of the fair value of significant identifiable intangible assets not recognised in the financial statements, supplemented with relevant contextual information

B) Cost (accumulated and amortised) of significant unrecognised intangible assets

C) An estimate of the financial effect of each significant unrecognised intangible asset with an indication of the uncertainties relating to the amount or timing of inflows expected from the asset; but only where there is more than a remote possibility of any inflow, and it is practicable to make the disclosure and it would not be prejudicial to the entity’s competitiveness

D) Expenses associated with each significant unrecognised intangible asset, being those incurred with a view to benefit in subsequent accounting periods clearly differentiated from expenses that unambiguously relate to the period, supplemented with relevant contextual information

E) Non-financial indicators (e.g., market size and share and customer retention data)

F) Intellectual capital statements, which can be used to show non-financial quantitative and qualitative information about the intellectual capital of an entity. These statements might help explain the difference between an entity’s market capitalisation and book value

G) The operating segments in which significant unrecognised intangible assets (e.g., brands) are used

H) Legal restrictions on the title of significant unrecognised intangible assets

I) Intentions to sell any significant unrecognised intangible assets

J)The expected life of significant unrecognised intangible assets

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* 23. Please provide reasons why you disagree, if any, with the suggested disclosures in Question 22.

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* 24. Besides the suggested disclosures in Question 22, please let us know if you would recommend any other disclosures for unrecognised intangible assets.

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* 25. If new disclosures were to be required, which types of entities should be subject to them?

publicly accountable entities (as defined in Appendix A of AASB 1053 Application of Tiers of Australian Accounting Standards, an example is an entity that has issued equity or debt that is traded in a public market)

non-publicly accountable entities

All of the above

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* 26. Intangible assets are non-monetary assets without physical substance and are identifiable (ie separable or arise from legal rights). Examples of intangible assets include brands, mastheads and customer lists. They do not include acquired and internally generated goodwill. Paragraph 128(b) of AASB 138 encourages publicly accountable entities to disclose in the financial statements “a brief description of significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria in this Standard”.

Has paragraph 128(b) ever resulted in you being involved with making or auditing the encouraged disclosure?

Yes

Not applicable (i.e., you have not been involved with publicly accountable entities)

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* 27. If your answer to Q26 is NO, can you please identify the reasons for entities you have had involvement with not voluntarily making the disclosure? Please select all that apply:

The cost of providing such information is excessive

Fear of disclosing proprietary information, resulting in a potential loss of the entity’s competitive advantage

The cost of auditing such information is excessive

Other impediments to auditing such information, if yes, please identify them

Users would not find the information useful

On its own, the information is incomplete

Users can readily access the information they need about unrecognised intangible assets from other parts of the annual report such as Management’s Discussion and Analysis

Users can readily access the information they need about unrecognised intangible assets from other publicly available sources (excluding the financial statements and annual report)

In relation to financial statements, the entity’s obligation is to only comply with the requirements in the Standard

Other (please specify)

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* 28. If your answer to Q26 is NO, if paragraph 128(b) were expressed as a requirement rather than an encouragement, would you be able to practically at a reasonable cost identify significant unrecognised intangible assets to disclose or to audit such disclosure?

Yes

Unsure

Not applicable

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* 29. If 'Yes' above, please briefly explain the process you would undertake to make/audit the relevant disclosure.

If 'No' above, please briefly explain why not. (e.g., what practical barriers do you envisage might impede access to sufficient supporting evidence?)

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* 30. You might have views pertinent to the accounting for (including disclosure of) intangible assets that you don’t feel this survey has adequately canvassed. Please add any additional comments you would like to make here:

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* 31. Please provide the following contact information in the box below.

Name

Position

Contact number

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* 32. Are you happy for us to contact you to gain further details about your views?

If yes, please provide the dates and times that you will be available below:

AASB PREPARER and AUDITOR SURVEY: Is there a gap in the information provided to the users of financial statements in relation to Intangible Assets that can be filled in a cost-effective way?

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* 2. Your interest in financial statements and in particular the accounting for intangible assets arises primarily from your current role as: (please select the one that you will use to reflect your views for the rest of this survey)

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* 4. The views expressed in this survey represent:

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* 5. Even if the responses do not represent your employer’s/organisation’s views, please state the name of your employer/organisation (if any)

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* 6. Which specific industry sector is your greatest experience in? (e.g., financial services, mining, construction, technology, communication, healthcare, education, research (e.g., medical, pharmaceutical) etc.).

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* 7. What are the main types of intangible assets you have accounting/auditing experience with (whether recognised or unrecognised)? Select all that apply:

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* 9. Please state the reasons for your answer to question 8.

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* 10. Do you agree with the existing AASB 138 restrictions (requirement for an active market) on the subsequent revaluation of acquired intangible assets?

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* 11. Please state the reasons for your answer to question 10.

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* 13. Please state the reason for your response to question 12.

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* 15. Please provide a reason for your answer to question 14.

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* 17. Please provide a reason for your answer to question 16.

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* 20. For the suggestions that you disagree with in Question 19, if any, please explain why you disagree.

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* 21. Are you satisfied with the existing AASB 138 disclosures, whether required or encouraged, in respect of recognised and unrecognised intangible assets?

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* 23. Please provide reasons why you disagree, if any, with the suggested disclosures in Question 22.

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* 24. Besides the suggested disclosures in Question 22, please let us know if you would recommend any other disclosures for unrecognised intangible assets.

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* 25. If new disclosures were to be required, which types of entities should be subject to them?

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* 27. If your answer to Q26 is NO, can you please identify the reasons for entities you have had involvement with not voluntarily making the disclosure? Please select all that apply:

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* 28. If your answer to Q26 is NO, if paragraph 128(b) were expressed as a requirement rather than an encouragement, would you be able to practically at a reasonable cost identify significant unrecognised intangible assets to disclose or to audit such disclosure?

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* 29. If 'Yes' above, please briefly explain the process you would undertake to make/audit the relevant disclosure.If 'No' above, please briefly explain why not. (e.g., what practical barriers do you envisage might impede access to sufficient supporting evidence?)

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* 30. You might have views pertinent to the accounting for (including disclosure of) intangible assets that you don’t feel this survey has adequately canvassed. Please add any additional comments you would like to make here:

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* 31. Please provide the following contact information in the box below.

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* 32. Are you happy for us to contact you to gain further details about your views? If yes, please provide the dates and times that you will be available below:

* 29. If 'Yes' above, please briefly explain the process you would undertake to make/audit the relevant disclosure.

If 'No' above, please briefly explain why not. (e.g., what practical barriers do you envisage might impede access to sufficient supporting evidence?)

* 32. Are you happy for us to contact you to gain further details about your views?

If yes, please provide the dates and times that you will be available below: