3. Intangible assets Flashcards
Define an intangible asset
An identifiable non-monetary asset without physical substance
Give four examples of intangible assets
- Licences and quotas
- Intellectual property, e.g. patents and copyrights
- Brand names
- Trademarks
What is IAS 38?
Intangible assets
What are the two categories that an asset must fall under to be an intangible asset under IAS 38?
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
To be an intangible asset it must also meet what definition?
The definition of an asset
What is the definition of an asset?
- Controlled by the entity as a result of past events
- A resource from which future economic benefits are expected to flow
What are the recognition criteria for an intangible asset?
- It is probably that future economic benefits attributable to the asset will flow to the entity
- The costs can be reliably measured
What should an intangible asset be initially recognised at?
Cost
What are the two options for measuring the cost of an intangible asset after initial recognition?
- Cost model
- Revaluation model
What is the cost model for an intangible asset?
-The intangible asset should be carried at cost less amortisation and any impairment losses
Where is the cost model more commonly used for intangible assets?
In practice
How does amortisation work?
Same as depreciation
Where does the annual amortisation expense get shown?
Statement of profit or loss
How do we amortise an intangible asset with a finite useful life?
Straight line basis with no residual value
How do we amortise an intangible asset with an infinite useful life?
- Should not be amortised
- Should be tested for impairment annually
What is the revaluation model for intangible assets?
The intangible asset may be revalued to a carrying amount of fair value less subsequent amortisation and impairment losses
What is fair value determined by?
By reference to active markets
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.
An active market
What are two indicators of an active market?
- The items traded within the market are homogeneous (identical)
- Prices are available to the public.
Why can we generally not capitalise internally generated intangible assets?
The costs associated with these cannot be identified separately from the costs associated with running the business
Give 5 examples of internally-generated items that may never be recognised
- Goodwill
- Brands
- Mastheads
- Publishing titles
- Customer lists
When a brands name is separately acquired and can be measured reliably what should you do?
Recognised as an intangible non-current asset, and accounted for in accordance with the general rules of IAS 38
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
Goodwill
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.
Separable net assets
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
Fair value
Give four examples why goodwill may exist
- Reputation for quality of service
- Technical expertise
- Possession of favourable contracts
- Good management and staff
Describe purchased goodwill in three points
- 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.
Describe non-purchased goodwill in three points
- Is also known as inherent goodwill
- Has no identifiable value
- Is not recognised in the financial statements.
What is IFRS 3?
Business combinations
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
Goodwill
under IFRS 3
How do we treat negative goodwill?
As income
What is described below?
Original and planned investigation undertaken with the prospect of gaining new scientific knowledge and understanding
Research
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
Development
What is the accounting treatment of Research expenditure?
Write off as incurred to the statement of profit or loss.
Expense
What is the accounting treatment of Development Expenditure?
Recognise as an intangible asset if, and only if, an entity can demonstrate the requirements
What is the acronym for recognition of development as an asset?
PIRATE
What does the P acronym PIRATE for recognition of Development as an asset stand for?
P - Probable flow of economic benefit from the asset, whether through sale or internal cost savings.
What does the I acronym PIRATE for recognition of Development as an asset stand for?
I - Intention to complete the intangible asset and use or sell it
What does the R acronym PIRATE for recognition of Development as an asset stand for?
R - Reliable measure of development cost
What does the A acronym PIRATE for recognition of Development as an asset stand for?
A - Adequate resources to complete the project
What does the T acronym PIRATE for recognition of Development as an asset stand for?
T - Technical feasibility of completing the intangible asset so that it will be available for use or sale
What does the E acronym PIRATE for recognition of Development as an asset stand for?
E - Expected to be profitable, i.e. the costs of the project will be exceeded by the benefits generated.
When should development expenditure be ammortised?
Should be amortised over its useful life as soon as commercial production begins.
Can expenditure once treated as an expense, be reinstated as an asset?
No
Can depreciation of plant used specifically on developing a new product, be capitalised as part of development costs.
Yes
Can you capitalise internally generated intangible assets?
Nope
Except for development if its meets the PIRATE criteria.
What internally generated intangible asset is specifically prohibited from being capitalised and why can this be a problem?
Internally generated brands
Some major assets in modern businesses can go unrecognised
