Reading time: 4 minutes

If you own a business or prepare the financial statements for a business, it is important to understand the implications when classifying assets. Classifying tangible and intangible assets are crucial for valuation and tax purposes. Intangible assets are non-monetary assets that do not physically exist. They can therefore often be difficult to recognise and measure.  

Classifying intangible assets in financial statements can provide significant value to your business. However, in doing so, you must adhere to the strict accounting standards in Australia.

What are the Accounting Standards?

The Australian Accounting Standards Board (AASB) is a Commonwealth Government body that regulates the accounting standards by providing requirements that companies, not-for-profit entities and the public sector must follow. The AASB develops standards and interpretations that set out required accounting for particular transactions and events that affect the financial statements of a business.

Information presented through financial statements in compliance with accounting standards ensures transparency of a business. Further, it allows stakeholders to evaluate and then make crucial decisions.

What is AASB 138?

AASB 138 sets out the definition of an intangible asset. AASB 138 incorporates IAS 38 (Intangible Assets) as issued by the International Accounting Standards Board (IASB). AASB 138 specifies how to recognise an intangible asset, how to measure the intangible assets, and sets out the requirements for disclosing intangible assets.

Recognition – are your assets intangible?

You must consider the following factors when classifying an asset as intangible under AASB 138.

Identifiability For an asset to be identifiable, the asset must be able to either be separated from the business or must arise from a legal document (such as a contract) or legal right (such as a trade mark).
Non-Monetary An intangible asset must be non-monetary, in the sense that you cannot value it in fixed or determinable amounts of money.
Lack of Physical Substance There must be a lack of physical substance for an asset to be classified as intangible. Therefore it is something that you cannot physically touch or hold. For example, a trade mark is not physical.
Control You must be able to exert a level of control over the asset and what happens to it. Whether you have control over the asset also depends on whether you have the power to obtain future economic benefits. Further, you should be able to prevent others from obtaining any economic benefits.
Future Economic Benefit Another vital factor to consider is the future economic benefits of the asset. It is essential to be able to determine that the asset will result in the flow of future economic benefits of the asset. Further, you should be able to measure such future economic benefits reliably. Future economic benefits may include revenue from selling products or services and saving costs.

 

Examples of intangible assets include software, patents, copyrights, mortgage servicing rights, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights. However, not all intangible assets necessarily meet the definition of an intangible asset under AASB 138. It is therefore important to consider all factors per AASB 138. For example, brands, publishing titles, customer lists and the generation of internal goodwill are not recognised as assets.

Measurement and Disclosure

According to AASB138, you should initially measure all assets via cost. After recognising an asset as intangible per the factors under AASB 138, you can measure such asset via either a cost or revaluation model. Specifics of each model are set out under AASB 138.

AASB 138 also requires you to disclose information for each class of your intangible assets, distinguishing between intangible assets through internal generation and other intangible assets.

Key Takeaways

If you do not accurately identify, measure and disclose information about your assets on financial statements, they may be expensed rather than capitalised. In turn, this may affect your profits and tax. The way in which you classify your assets also impacts the value of your business. Classifying your intangible assets ensures that you can include them in the financial statements. Doing so can increase the value of your business.

As a business owner, it is important to be aware of how classifying your assets can affect your business. AASB 138 sets out the necessary considerations in determining whether you can classify assets as intangible. Consequently, the inclusion of such assets can ultimately ensure a rise in the value of your business.

If you have any questions about identifying assets, and the importance of intangible assets, or need advice for your business, get in touch with one of LegalVision’s business lawyers on 1300 455 755.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Casey D'Souza
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards