Enforcing Financial Reporting Standards: The Case of White ...

case, these requirements mean that the entity needs to increase their amount recognized as
intangible assets by 55 million Euros. Also, their retained earnings should be increased by the
same amount. In addition, IAS 8 requires an entity to disclose the nature of the prior period
error and, for each prior period presented, the amount of the correction for each line item and
the amount of the correction at the beginning of the earliest prior period presented. White
would have to present these disclosures in their annual report to let investors know the effect
of the misinterpretation.
The central decision that Peter has to make revolves around the subsequent
measurement of the intangible asset. If White applies the cost model to their intangible assets,
Peter needs to determine the useful life of the asset and the yearly amortization charges. If,
however, White uses the revaluation model for their intangibles, Peter also needs to
determine the fair value of the transdermal patch. Nevertheless, in calculating the fair value,
Peter has to consider IAS 38.76, which prohibits a revaluation of intangibles that have
previously not been recognized as assets. In addition to the fair value, Peter also has to
calculate yearly amortization charges when using the fair value model. What’s more, Peter
can also determine possible impairment losses that the transdermal patch may have been
subject to. When considering the discretion potential laid out above, one has to realize that
the net effect of recognizing the intangible asset three years after its acquisition may not be as
severe as expected.
When letting investors know, White needs to determine how much information they
want to disclose. Considering the fact that the error correction was due to a misinterpretation,
White may want to issue a press release covering the transaction and White’s motivation in
detail. On the other hand, if a company committed something close to fraud, they probably
choose a more restrictive investor communication strategy without disclosing many details on
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