3. Intangible assets

Question 1

Define an intangible asset

Answer 1

An identifiable non-monetary asset without physical substance

Question 2

Give four examples of intangible assets

Answer 2

• Licences and quotas
• Intellectual property, e.g. patents and copyrights
• Brand names
• Trademarks

Question 3

What is IAS 38?

Answer 3

Intangible assets

Question 4

What are the two categories that an asset must fall under to be an intangible asset under IAS 38?

Answer 4

It is separable - The item can be bought or sold separately from the rest of the business

It arises from legal/contractual rights - Arise as part of purchasing an entire company

Question 5

To be an intangible asset it must also meet what definition?

Answer 5

The definition of an asset

Question 6

What is the definition of an asset?

Answer 6

• Controlled by the entity as a result of past events

- A resource from which future economic benefits are expected to flow

Question 7

What are the recognition criteria for an intangible asset?

Answer 7

• It is probably that future economic benefits attributable to the asset will flow to the entity
• The costs can be reliably measured

Question 8

What should an intangible asset be initially recognised at?

Answer 8

Cost

Question 9

What are the two options for measuring the cost of an intangible asset after initial recognition?

Answer 9

• Cost model

- Revaluation model

Question 10

What is the cost model for an intangible asset?

Answer 10

-The intangible asset should be carried at cost less amortisation and any impairment losses

Question 11

Where is the cost model more commonly used for intangible assets?

Answer 11

In practice

Question 12

How does amortisation work?

Answer 12

Same as depreciation

Question 13

Where does the annual amortisation expense get shown?

Answer 13

Statement of profit or loss

Question 14

How do we amortise an intangible asset with a finite useful life?

Answer 14

Straight line basis with no residual value

Question 15

How do we amortise an intangible asset with an infinite useful life?

Answer 15

• Should not be amortised

- Should be tested for impairment annually

Question 16

What is the revaluation model for intangible assets?

Answer 16

The intangible asset may be revalued to a carrying amount of fair value less subsequent amortisation and impairment losses

Question 17

What is fair value determined by?

Answer 17

By reference to active markets

Question 18

What is described below?

A market in which transactions for the asset take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Answer 18

An active market

Question 19

What are two indicators of an active market?

Answer 19

• The items traded within the market are homogeneous (identical)
• Prices are available to the public.

Question 20

Why can we generally not capitalise internally generated intangible assets?

Answer 20

The costs associated with these cannot be identified separately from the costs associated with running the business

Question 21

Give 5 examples of internally-generated items that may never be recognised

Answer 21

• Goodwill
• Brands
• Mastheads
• Publishing titles
• Customer lists

Question 22

When a brands name is separately acquired and can be measured reliably what should you do?

Answer 22

Recognised as an intangible non-current asset, and accounted for in accordance with the general rules of IAS 38

Question 23

What is described below?

The difference between the value of a business as a whole and the aggregate of the fair values of its separable net assets

Answer 23

Goodwill

Question 24

What is described below?

Those assets and liabilities which can be identified and sold off separately without necessarily disposing of the business as a whole. They include identifiable intangible assets such as patents, licences and trademarks.

Answer 24

Separable net assets

Question 25

What is described below? The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Answer 25

Fair value

Question 26

Give four examples why goodwill may exist

Answer 26

- Reputation for quality of service - Technical expertise - Possession of favourable contracts - Good management and staff

Question 27

Describe purchased goodwill in three points

Answer 27

- Arises when one business acquires another as a going concern - Includes goodwill arising on the consolidation of a subsidiary - Will be recognised in the financial statements as its value at a particular point in time is certain.

Question 28

Describe non-purchased goodwill in three points

Answer 28

- Is also known as inherent goodwill - Has no identifiable value - Is not recognised in the financial statements.

Question 29

What is IFRS 3?

Answer 29

Business combinations

Question 30

What is described below? An asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised

Answer 30

Goodwill under IFRS 3

Question 31

How do we treat negative goodwill?

Answer 31

As income

Question 32

What is described below? Original and planned investigation undertaken with the prospect of gaining new scientific knowledge and understanding

Answer 32

Research

Question 33

What is described below? 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

Answer 33

Development

Question 34

What is the accounting treatment of Research expenditure?

Answer 34

Write off as incurred to the statement of profit or loss. | Expense

Question 35

What is the accounting treatment of Development Expenditure?

Answer 35

Recognise as an intangible asset if, and only if, an entity can demonstrate the requirements

Question 36

What is the acronym for recognition of development as an asset?

Answer 36

PIRATE

Question 37

What does the P acronym PIRATE for recognition of Development as an asset stand for?

Answer 37

P - Probable flow of economic benefit from the asset, whether through sale or internal cost savings.

Question 38

What does the I acronym PIRATE for recognition of Development as an asset stand for?

Answer 38

I - Intention to complete the intangible asset and use or sell it

Question 39

What does the R acronym PIRATE for recognition of Development as an asset stand for?

Answer 39

R - Reliable measure of development cost

Question 40

What does the A acronym PIRATE for recognition of Development as an asset stand for?

Answer 40

A - Adequate resources to complete the project

Question 41

What does the T acronym PIRATE for recognition of Development as an asset stand for?

Answer 41

T - Technical feasibility of completing the intangible asset so that it will be available for use or sale

Question 42

What does the E acronym PIRATE for recognition of Development as an asset stand for?

Answer 42

E - Expected to be profitable, i.e. the costs of the project will be exceeded by the benefits generated.

Question 43

When should development expenditure be ammortised?

Answer 43

Should be amortised over its useful life as soon as commercial production begins.

Question 44

Can expenditure once treated as an expense, be reinstated as an asset?

Answer 44

No

Question 45

Can depreciation of plant used specifically on developing a new product, be capitalised as part of development costs.

Answer 45

Yes

Question 46

Can you capitalise internally generated intangible assets?

Answer 46

Nope Except for development if its meets the PIRATE criteria.

Question 47

What internally generated intangible asset is specifically prohibited from being capitalised and why can this be a problem?

Answer 47

Internally generated brands Some major assets in modern businesses can go unrecognised