THE IMPACT OF ACCOUNTING ESTIMATES ON FINANCIAL POSITION AND

BUSINESS PERFORMANCE CASE OF NON-CURRENT INTANGIBLE AND

TANGIBLE ASSETS.
A) MAIN ISSUES
1) The distinction of research and development phase.
According to the International Standard (IAS 38) , the formulation, design, evaluation
and final selection of possible alternatives for new and improved materials for its new
product is the typical example research activities. The entity cannot demonstrate the
existence of intangible assets that will generate probable future economic benefit
economics. This expenditure recognized as an expense when it is incurred. The entity
is conducting the development activities which include design and construction of
prototypes and models of a new product. IAS 38 conducting the development
activities which include the design and construction of prototypes and models of a
new product are the typical examples of development activities. An intangible assets
arising from development shall be recognized if and only if can entity can
demonstrate all of the following :
I.
The technical feasibility of completing the intangible asset so that it will be
II.
III.

available for use or sale.

Its ability to use or sale the intangible asset.
The availability of adequate technical, financial and other resources to

IV.

complete the development and to use or sell the intangible asset.

Its ability to measure reliably the expenditure attributable to the intangible

V.

asset during its development.

Its intention to complete the intangible asset and use or sell.

The distinction of research and development phase has two model. First model is the
entity can demonstrate all the criteria from development. The cost arising from the
development phase can be identified as intangible asset. This is because the
development phase of a project is more advanced than the research phase. The
estimation of management would increase the amount of total asset by 2,000 euro
while the cost in the research activities would be recognize in profit and loss account.
The assumption of the first model is that expenditure for development is financed by
current liabilities.

Second model is the entity cannot demonstrate all the criteria from development. The
costs arising from the activities I the development phase are recognized in the profit
and loss account. The estimation would increase the costs by total 3,000 euro.
The volatility of financial position and business performance of an entity as a result of
different accounting estimates in the area of distinction the research and development
phase of intangible assets. The rate of return on asset and profit margin varies
according the management estimates. The indebtedness of a companys measured by
the equity to assets ratio and interest coverage ratio differs among the presented
models.

2) The assessment of indefinite and definite useful life for licences.

The management estimates whether the useful life of a licence is finite or indefinite. an tangible
asset shall be regarded by the entity as having an indefinite useful life, when, based on the
analysis of all relevant factor, there is no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity (IAS 38). Many factors are considered in
determining the useful life of an intangible asset.
a) Model 1 licence with indefinite useful life

A company acquired the licence for the period of 5 years can be renewed by the entity without
significant costs. The management estimates the licence as having an indefinite useful life and
intangible asset with indefinite useful life is not amortised and are not recorded in the income
statement.
b) Model 2 licence with finite useful life (amortization period 5 years)
A company acquires a licence over the period of 5 years. After the period of 5 years the licence
can be renewed and the cost of renewal is significant. The useful life of 5 years and the straight
line method is used for amortization. The depreciable amount is the cost of an asset (5000 euros).
The amortization for the first year is recorded and the residual value of the licence with finite
useful life is assumed to be zero and considered as period costs.
c) Model 3 licence with finite useful life (amortization period 2 years)
The contractual and other legal rights expire after 2 years and can be renewed after the period
with significant cost. The management estimates the useful life over the two years and uses
straight method of amortization. The residual value of the licence with finite useful life is zero
and the costs of amortization are period costs.

3) Estimating the residual value of a equipment.

The impact of accounting estimates on the financial position and business
performance of tangible asset is demonstrated on the case of equipment. A significant
that related to the measurement of the cost of assets refers to estimating residual
value. The residual value of an asset is estimated amount that an entity would
currently obtain from disposal of the asset after deducting the estimated cost of
disposal if the asset were already of the age and in the condition expected at the end
of its useful life.

a) Model 1 The residual value of an equipment assumed to be zero

Designed under the several assumptions that an entity acquired a equipment for
conducting its business. The cost of equipment recognized in the balance sheet are
25,000 euro. The management estimated the useful life of 5 years and uses the
straight line method amortization. The residual value of licence with finite useful
life is assumed to be zero. The management estimates that residual value is
insignificant in the calculation of the depreciable amount.
b) Model 2 The management estimated the residual value
Where the management estimates the residual value of the equipment of 15,000
euro. In the case when costs of assets are 25,000 euro that means the depreciable
amount is 10,000 euro. The management estimates the useful life of 5 years and
uses straight line method of amortization.
c) Model 3 The management estimated the residual value at lower level
Where the management estimates the residual value of the equipment to the
amount of 5,000 euro. The management estimated the useful life of 5 years and
straight line method of amortization.

B) COMMENT
Research is original and planned investigation , undertaken with the prospect of gaining new
scientific or technical knowledge and understanding. The company is researching the
unknown and therefore at this early stage, no future economic benefit can be expected to
flow to the entity. Development is the application of research findings or other knowledge to
a plan or design for the production of new or substantially improved materials, devices,
products, processes, systems or services before the start of commercial production or use.

An entity shall access whether the useful life of an intangible asset is finite or definite. If
finite, the length or number of production or similar units constituting that useful life. An
intangible asset shall regarded by the entity as having an indefinite useful life when based on
an analysis of all the relevant factors, there is no foreseeable limit to the period over which
the asset expected to generate net cash inflows for the entity.

The depreciable amount of an intangible asset with finite useful life shall be allocated on a
systematic basis over its useful life. Amortisation shall begin when the asset is available for
use when it is in the location and condition necessary for it to be capable of operating in the
manner intended by management. Amortisation shall cease at the earlier of the date that the
asset is classified as held for sale and the date of asset is derecognized. The amorisation
method used shall reflect the pattern in which the assets future economic benefits are
expected to be consumed by entity. The residual value of an intangible asset is the estimated
amount that an entity would currently obtain from disposal asset after the estimated amount
that an entity would currently obtain from disposal of the asset after deducting the estimated
costs of disposal if the asset were already of the age and in the condition expected at the end
of its useful life.

The residual value can be determined by reference to that market and it is probable that such
a market will exist at the end of the assets useful life. The amortization period and the
amortization method for an intangible asset with a finite useful life shall be reviewed at least
at each financial year end. If there has been a change in the expected pattern of consumption
of future economic benefits embodied in the asset, the amortization method shall be changed
to reflect the changed pattern.

Intangible assets do not generally have active markets and therefore the use of the revaluation
model is rare, although the accounting policy option remains available. If no active market
exists, the intangible asset must be carried at cost, less amortization and impairment. It is
important to note that criteria relate to the intangible asset generated by the development
work and not the physical products that might arise as a result of the development. The
intangible asset is the applied knowledge that has been gained, which can either be sold to
another business in the form of a patent or used by the business itself.