Financial reporting considerations for amortization of intangible assets with finite useful lives.

Background
The amortisation method for intangible assets with finite useful lives has recently attracted the attention of international and national accounting standard setters. In 2012, the IASB issued exposure draft ED/2012/5 Clarification of Acceptable Methods of Depreciation and
Amortisation. In April 2013 the AASB responded to that exposure draft (the “AASB Response”). The AASB Response URL address is listed in the resources below. The IASB released an amended international accounting standard for intangible assets (IAS 38) in May 2014, and at the time of writing this group assignment the AASB was yet to amend the Australian accounting standard (AASB138) to accommodate the IASB’s changes.
Your group is required to prepare answers to questions about accounting for intangible assets and the accounting standard setting process. Marks will be awarded for work which clearly demonstrates an in depth understanding of the broader issues for standard setters, financial
statement preparers and users. As stated in the attached marking criteria, up to 2 marks will be awarded for the generic skills required to prepare this assignment (referencing, structure and professional presentation).
Resources:
Students should refer to the following resources listed below when completing this assignment:
• AASB 138 Intangible Assets (for-profit compiled October 2013)
• The IASB’s exposure draft ED/2012/5 Clarification of Acceptable Methods of
Depreciation and Amortisation http://www.ifrs.org/Current-Projects/IASBProjects/
Depreciation-and-Amortisation/Exposure-Draft-and-comment-letters-[Dec-
2012]/Documents/ED-Clarification-of-Acceptable-Methods.pdf
• AASB Response to the IASB exposure draft ED/2012/5 Clarification of Acceptable
Methods of Depreciation and Amortisation available at:
http://www.aasb.gov.au/admin/file/content102/c3/M130_3.13_AASB_submission_on
_IASB_ED_2012_5.pdf
• “IASB amends IAS 16 and IAS 38 to clarify acceptable methods of depreciation and
amortisation” Deloitte IFRS in Focus, May 2014, available at:
http://www.iasplus.com/en/publications/global/ifrs-in-focus/2014/depreciation
• “IASB prohibits revenue-based depreciation” EY IFRS Developments, Issue 78 May
2014, available at:
http://www.ey.com/Publication/vwLUAssets/IFRS_Developments,_Issue_78:_IASB_
prohibits_revenue-based_depreciation/$File/Devel78-IntAssets-PPE-May2014.pdf
• REA Group Limited (ASX code: REA) financial statements for the year ended 30 June
2013, available at: http://www.rea-group.com/irm/content/ar2013/11.financialstatements.
pdf

Part A 6 marks (550 words)
a) In your own words:
(i) Explain what a revenue based amortisation method is; and
(ii) Referring to AASB 138 Intangible Assets (for-profit compiled October 2013) explain how, under the current standard, entities could apply
revenue based amortisation methods for intangible assets with finite useful lives. Include appropriate technical references from AASB 138 Intangible Assets (for-profit compiled October 2013) to support your explanations. 3 marks (275 words)
b) Further to your group’s Part A (a) answer, identify and describe two (2) factors that are most likely to influence an entity’s accounting policy choice for the amortisation of intangible assets with finite useful lives. Your answer must draw on supporting evidence and appropriate referencing. 3 marks (275 words)

Part B 2 marks (175 words)
An extract from Note 2(n) to the REA Group Limited financial statements for the year ended 30 June 2013 states:
iii) Customer lists / domain names / brand names / advertising relationships.
When these assets are acquired as part of a business combination they are recognised separately from goodwill. The assets are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives.
Assume the AASB revises AASB 138 Intangible Assets (for-profit compiled October 2013) to include the recent changes to IAS 38 that restrict the use of revenue based amortisation methods for intangible assets with finite useful lives. Using AASB 108 explain how in the year of adoption these amendments will affect:
a) the REA Group Limited accounting policy for the amortisation of customer lists, domain names, brand names and advertising relationships; and
b) the REA Group Limited statement of comprehensive income.

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