Financial statements are crucial for organizations as they are the basis with a help of which crucial decisions are made. These statements portray a comprehensive picture of an organization's financial position, therefore, making them very useful for employees, management, prospective investors, tax authorities, and credit providers. Accounting standards differ from one country to another as accountancy bodies in different countries have put into place rules and guidelines on how various financial and non financial instruments should be used during reporting. Australian Accounting Standards provide guidelines on how corporations based in the country should treat intangible assets. This body dictates that under certain circumstances internally generated intangibles should not be disclosed in financial statements.

This report was commissioned by Australian Securities & Investments Commission's (ASIC) Financial Reporting Surveillance Program to investigate how Australian companies reported their intangible assets. The purpose of the report was also to determine whether their reporting practices were aligned with those dictated by Australian Accounting Standards. The report makes use of two companies: MDS Financial Group and Rubik Financial Limited. Both of them operate in the financial industry. These companies in their 2012 financial statements recorded intangible assets such as goodwill, websites, software, and client lists. No major differences were found between two companies’ intangible assets. It was also found that the companies have adhered to the set standards on the matters of reporting intangible assets. Recommendations made include investigation of reporting procedures on marketing related intangibles such as Internet domains, trademarks, and especially social media sites such as Twitter and Facebook since businesses have moved their marketing strategies into these platforms.

Businesses are required by law to prepare their financial statements by the end of each financial year. Financial statements provide a comprehensible picture about organization's financial position or performance as well as about any changes in financial performance of that organization. Financial reports, which include statements of financial position, comprehensive income, cash flows, and changes in equity, serve as a foundation based on which important decisions are made by business owners, managers, potential investors, financial institutions, and tax authorities. Employees also make use of financial statements to negotiate better remuneration and wages during collective bargaining agreements. Businesses are taxed according to their profitability and as such financial reports are important to tax authorities, whose task is to collect taxes from individuals and corporations. Financial institutions use financial statements to gauge credit worthiness of corporations, while prospective investors use these reports to determine whether to or not to invest in corporations (Das 2010).


Changes in corporate value creation process have led to greater relevance and increased disclosures of intangible assets. Informative disclosure leads to effective capital allocation stemming from minimized information asymmetry, greater stock liquidity, and minimized average cost of debt and equity. This further leads to improved investment decisions (Arvidsson 2003).

Intangible assets are assets that lack physical or financial quintessence, but which are beneficial for an organization in the future. According to  Australian Accounting Standards, for an asset to be considered intangible, it must satisfy three criteria of identifiability, it must be controlled by an organization, and must provide future benefits. Identifiability results from an ability of intangible asset to be transferred or separated from an entity or from legal rights whether transferable or not (CPA Australia 2007). Intangible assets are categorized as either customer related, market related, artistic related, contract related, technology related, or goodwill.

Customer related intangibles are created from interactions with outside parties. They include customer lists as well as contractual and non-contractual relationships between organizations and clients. Artistic related intangible assets revolve around ownership rights of artistic works, such as music and literally publications, which are protected by copyright. Contract related intangible assets, on the other hand, arise from contacts and agreements between business parties such as licenses or supply contracts. Technology-related intangible assets emanate from the technology adopted by entities, which add value to their operations.

Intangible assets lack physical existence and they cannot be treated as financial instruments. Intangible assets are only recognized if their cost can be precisely measured and if they provide future benefits. They include patents, brand names, and inimitable organizational infrastructures, which generate cost savings for organizations (Kang & Gray 2006). Arvidsson (2003) claims that disclosure of intangible assets is dependent on four factors. These factors are the size of the company, level of leverage, country of affiliation, and listing status.

In order to determine whether Australian corporations adhere to the Corporations Act and Australian Accounting Standards, two Australian companies in the financial sector were identified by using Google search engine and their financial reports were downloaded for investigation. The two corporations are the MDS Financial Group and Rubik Financial Limited. Both companies are listed in Australian Securities Exchange. MDS Financial Group is involved in corporate advisory, equity capital markets, and institutional dealing. The company came to existence as a result of a merger in 2006 between three companies. These were MDSnews Pty Ltd, Bourse Data Pty Ltd, and The Cube Financial Group Pty Ltd. The company further acquired Trader Dealer Online Pty Ltd and D2MX Pty Ltd. The company prides itself in providing wholesale trade execution facilities to institutional investors, broker dealers, and high net worth individuals (MDS Financial Group 2012).

Rubik Financial Group, on the other hand, provides software and financial technology services for banking institutions. These include phone banking, Internet banking, bank in a box, and card management systems. The company was formed in 2007 by Brent Jackson and Stephen Kunkler with the main aim of providing frictionless banking. The motivation behind Rubik idea is the high cost of IT systems in the banking sector, which leads to higher operating costs and challenging customer processes. Rubik thus provides cloud banking systems, which not only have lower cost, but also increase customer satisfaction due to efficiency. Company's partners with companies such as Vasco, Abuzz, Aculab, Dialogic, and Touchscreen Solutions (Rubik 2012).

In their 2012 financial reports the two companies listed some of their intangible assets. MDS Financial Group recorded a consolidated value of its intangible assets at 1.2 million AUD for the year 2012, as compared to 2.3 million AUD in the year 2011 (MDS Financial Group 2012). Rubik, on the other hand, recorded a consolidated value of intangible assets at 6.7 million AUD, which was lower than recordings of 2011, which amounted to 7 million AUD.  Specifically, in its financial reports, Rubik recognized intangible assets such as goodwill, internally generated software, and customer lists (Rubik Financial Ltd 2012). MDS, on the other hand, listed goodwill, websites, software development, client lists, and ASX membership under its intangible assets.

According to Australian Accounting Standards, as stipulated in the AASB 138, internally generated intangible assets such as brands, mastheads, publishing titles, customer lists, and assets from research and development form are recognized. However, an asset arising from internal development can be recognized only if specific conditions are met. Goodwill can be of two categories: internally generated and purchased goodwill. Internally generated goodwill is complex to quantify and is associated with costs or future benefits. Purchased goodwill, on the other hand, is recorded when an entity acquires another since it is a “going concern” and cannot be alienated from the company as a whole. The body also prohibits internally generated goodwill from being recognized. The reason behind this is that goodwill is not an identifiable resource that is controlled by an entity and cannot be accurately measured by cost (CPA Australia 2007).

MDS listed goodwill acquired through business combinations, which was determined through value-in-use calculation using discounted cash flow of a 12 month projection. This type of goodwill seems to be generated from acquisitions and has to be recognized. The goodwill recognized by Rubik also emanates from acquisitions and is thus permitted by the Australian Accounting Standards. Rubik Financial Limited recognizes internally generated software development. The rationale is technical feasibility of the software in the future. The software will be used or sold in the future and measurability of costs will be used to develop the software. According to Australian Accounting Standards, an internally generated intangible asset is recognizable if the cost of acquiring the asset is directly attributable or reliably measured. Rubik’s customer list and software are recognized. The reason is that they have finite lives with an amortization period of 5-6 years and 6 years respectively. AAS requires the finite life, the amortization rate, and amortization method to be stipulated in financial reports. MDS Financial Group software assets emanated from an agreement with IRESS Market Technology in 2011. These assets are thus external and recognizable as intangible assets. This also applies to ASX membership and the client list, which were acquired from D2MX Pty Ltd and MINC Financial Services Group respectively.

There is no big difference between intangible assets disclosed by the two companies. The two companies disclose in their financial records intangible records such as customer lists, software and website development, and goodwill. MDS Financial Group, unlike Rubik, also listed membership in Australian Securities exchange as an intangible asset. The disclosures are similar because they are supported by reasons such as feasibility in the future and external generation. Rubik Financial Limited amortizes its intangibles, especially customer lists, and developed software on a straight line basis overestimated finite lives of intangibles from the date they were availed for use. This helped Rubik to predict pattern of consumption and future economic benefits (Rubix 2012). MDS Financial Group, on the other hand, used a discounted cash flow.


I would recommend ASIC’s Financial Reporting Surveillance Program to focus on marketing related intangibles in its next review round, which are used in marketing and promotion of services and products. The program could focus on intangibles, such as trade names, newspaper mastheads, Internet domains, non-competitive agreements, and social media accounts. Today’s businesses are using Internet and social media marketing tools. Therefore, it would be interesting to know how businesses present the value they generate from Internet and social marketing strategies such as MySpace, Twitter, and Facebook and how it impacts disclosure requirements as dictated by the Australian Accounting Standards and other global accounting bodies.

The ASIC should also focus on disclosure requirements for intangible assets by non-profit organizations and financial reporting procedures adopted by non-profit organizations. According to the CPA Australia (2007), some of the rules in the AASB 138 are applicable to non-profit organizations. The AAS requires that intangible assets owned by non-profit organizations should be recorded at their fair value of acquisition if acquired at nominal costs or at no costs. Organizations are also required to offset related intangibles against each other due to increases and decreases in revaluations. Organizations can also exempt intangible assets depending on the revaluation model adopted. It would, therefore, be of benefit to determine how these organizations present their financial reports and determine whether they comply with these rules. The ASIC should also investigate disclosure requirements and how organizations report contact related intangible assets such as franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts.