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Hello Kim, hope u are doing good.
A patent has been purchased for $1.3 million, and this enables Aquamarine to manufacture specialised elevator equipment for the next five years. In accordance with IAS 38
Intangible Assets, this should be included as an intangible asset and amortised over its
five-year life.
If management has not correctly accounted for the patent, intangible assets and profits could be overstated.I cant quite understand how this could be an overstatement risk of patent, rather than misstatement, as there is no clear indication of which way around.
In general, it is more likely/there is greater risk that assets and income are OVERstated and that expenses and liabilities are UNDERstated. Error, management bias and fraud can all contribute to this generality. For example, liabilities can easily be omitted in error and often have to be searched for – hence significant risk is completeness (i.e. understatement). Management would generally rather have a “strong” statement of financial position and “healthy” profit, rather than report “weak” results – a bias which lends to asset overstatement (e.g. to recognise an asset rather than expense or revenue before it has been earned) Misappropriation of assets is usually accompanied by some cover-up to conceal it – this will always mean overstatement of assets (because a stolen asset no longer exists).
So in your example – having recognised an asset, there is a greater risk that it will be subsequently overstated – which would mean amoritised incorrectly over too long a period or not at all.
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