4 Intangible Assets

Question 1

1.1 The objectives of the standard:

Answer 1

(a) To establish the criteria for when an intangible asset may or should be recognised (b) To specify how intangible assets should be measured (c) To specify the disclosure requirements for intangible assets

Question 2

An intangible asset is an identifiable non-monetary asset without physical substance The asset must be:

Answer 2

a) Controlled by the entity as a result of events in the past (b) Something from which the entity expects future economic benefits to flow

Question 3

An intangible asset must be identifiable in order to distinguish it from goodwill. With non-physical items, there may be a problem with ‘identifiability’.

Answer 3

(a) If an intangible asset is acquired separately through purchase, there may be a transfer of a legal right that would help to make an asset identifiable(b) An intangible asset may be identifiable if it is separable, ie if it could be rented or sold separately. However, ‘separability’ is not an essential feature of an intangible asset.

Question 4

Another element of the definition of an intangible asset is that it must be under the control of the entity as a result of a past event. The entity must therefore be able to enjoy the future economic benefits from the asset, and prevent the access of others to those benefits. A legally enforceable right is evidence of such control, but is not always a necessary condition.

Answer 4

(a) Control over technical knowledge or know-how only exists if it is protected by a legal right. (b) The skill of employees, arising out of the benefits of training costs, are most unlikely to be recognisable as an intangible asset, because an entity does not control the future actions of its staff. (c) Similarly, market share and customer loyalty cannot normally be intangible assets, since an entity cannot control the actions of its customers.

Question 5

An intangible asset, when recognised initially, must be measured at cost. It should be recognised if, and only if both the following occur.

Answer 5

(a) It is probable that the future economic benefits that are attributable to the asset will flow to the entity. (b) The cost can be measured reliably.

Question 6

Management has to exercise its judgement in assessing the degree of certainty attached to the flow of economic benefits to the entity. External evidence is best

Answer 6

(a) If an intangible asset is acquired separately, its cost can usually be measured reliably as its purchase price (including incidental costs of purchase such as legal fees, and any costs incurred in getting the asset ready for use). (b) When an intangible asset is acquired as part of a business combination (ie an acquisition or takeover), the cost of the intangible asset is its fair value at the date of the acquisition.

Question 7

If one intangible asset is exchanged for another, the cost of the intangible asset is measured at fair value unless:

Answer 7

(a) The exchange transaction lacks commercial substance, or (b) The fair value of neither the asset received nor the asset given up can be measured reliably.

Question 8

Research activities by definition do not meet the criteria for recognition under IAS 38. This is because, at the research stage of a project, it cannot be certain that future economic benefits will probably flow to the entity from the project. There is too much uncertainty about the likely success or otherwise of the project. Research costs should therefore be written off as an expense as they are incurred.True/ False

Answer 8

True

Question 9

Examples of research costs

Answer 9

a) Activities aimed at obtaining new knowledge (b) The search for, evaluation and final selection of, applications of research findings or other knowledge (c) The search for alternatives for materials, devices, products, processes, systems or services (d) The formulation, design evaluation and final selection of possible alternatives for new or improved materials, devices, products, systems or services

Question 10

Development costs may qualify for recognition as intangible assets provided that the following strict criteria can be demonstrated.

Answer 10

(a) The technical feasibility of completing the intangible asset so that it will be available for use or sale (b) Its intention to complete the intangible asset and use or sell it (c) Its ability to use or sell the intangible asset (d) How the intangible asset will generate probable future economic benefits. Among other things, the entity should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. (e) Its ability to measure the expenditure attributable to the intangible asset during its development reliably

Question 11

Examples of development costs include:

Answer 11

(a) The design, construction and testing of pre-production or pre-use prototypes and models (b) The design of tools, jigs, moulds and dies involving new technology (c) The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production (d) The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services

Question 12

Intangible assets should be initially be measured at cost, but subsequently they can be carried at cost or at a revalued amount. True/ False

Answer 12

True

Question 13

All expenditure related to an intangible which does not meet the criteria for recognition either as an identifiable intangible asset or as goodwill arising on an acquisition should be expensed as incurred. The IAS gives examples of such expenditure:

Answer 13

 Start up costs  Advertising costs  Training costs  Business relocation costs

Question 14

Prepaid costs for services, for example advertising or marketing costs for campaigns that have been prepared but not launched, can still be recognised as a prepayment.T/F

Answer 14

Prepaid costs for services, for example advertising or marketing costs for campaigns that have been prepared but not launched, can still be recognised as a prepayment.

Question 15

The revaluation model allows an intangible asset to be carried at a revalued amount, which is its fair value at the date of revaluation, less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.

Answer 15

(a) The fair value must be able to be measured reliably with reference to an active market in that type of asset. (b) The entire class of intangible assets of that type must be revalued at the same time (to prevent selective revaluations). (c) If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset should be carried at its cost less any accumulated amortisation and impairment losses. (d) Revaluations should be made with such regularity that the carrying amount does not differ from that which would be determined using fair value at the end of the reporting period.

Question 16

Where an intangible asset is revalued upwards to a fair value, the amount of the revaluation should be credited directly to equity under the heading of a revaluation surplus. However, if a revaluation surplus is a reversal of a revaluation decrease that was previously charged against income, the increase can be recognised as income. True / False

Answer 16

True

Question 17

An entity should assess the useful life of an intangible asset, which may be finite or indefinite. An intangible asset has an indefinite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. Many factors are considered in determining the useful life of an intangible asset, including:

Answer 17

 Expected usage  Typical product life cycles  Technical, technological, commercial or other types of obsolescence  The stability of the industry; expected actions by competitors  The level of maintenance expenditure required  Legal or similar limits on the use of the asset, such as the expiry dates of related leases

Question 18

Amortisation period and amortisation method An intangible asset with a finite useful life should be amortised over its expected useful life.

Answer 18

(a) Amortisation should start when the asset is available for use. (b) Amortisation should cease at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 Non-current assets held for sale and discontinued operations and the date that the asset is derecognised. (c) The amortisation method used should reflect the pattern in which the asset’s future economic benefits are consumed. If such a pattern cannot be predicted reliably, the straight-line method should be used. (d) The amortisation charge for each period should normally be recognised in profit or loss.

Question 19

An intangible asset should not be eliminated from the statement of financial position when it is disposed of or when there is no further expected economic benefit from its future use. On disposal the gain or loss arising from the difference between the net disposal proceeds and the carrying amount of the asset should be taken to profit or loss as a gain or loss on disposal (ie treated as income or expense). True/ false

Answer 19

An intangible asset should be eliminated from the statement of financial position when it is disposed of or when there is no further expected economic benefit from its future use. On disposal the gain or loss arising from the difference between the net disposal proceeds and the carrying amount of the asset should be taken to profit or loss as a gain or loss on disposal (ie treated as income or expense).

Question 20

Summarise intangible assets

Answer 20

 An intangible asset should be recognised if, and only if, it is probable that future economic benefits will flow to the entity and the cost of the asset can be measured reliably.  An asset is initially recognised at cost and subsequently carried either at cost or revalued amount.  Costs that do not meet the recognition criteria should be expensed as incurred.  An intangible asset with a finite useful life should be amortised over its useful life. An intangible asset with an indefinite useful life should not be amortised

Question 21

What is goodwill?

Answer 21

Goodwill is created by good relationships between a business and its customers. (a) By building up a reputation (by word of mouth perhaps) for high quality products or high standards of service (b) By responding promptly and helpfully to queries and complaints from customers (c) Through the personality of the staff and their attitudes to customers

Question 22

On reflection, we might agree with this omission of goodwill from the accounts of a business based on:

Answer 22

(a) The goodwill is inherent in the business but it has not been paid for, and it does not have an ‘objective’ value. We can guess at what such goodwill is worth, but such guesswork would be a matter of individual opinion, and not based on hard facts. (b) Goodwill changes from day to day. One act of bad customer relations might damage goodwill and one act of good relations might improve it. Staff with a favourable personality might retire or leave to find another job, to be replaced by staff who need time to find their feet in the job, etc. Since goodwill is continually changing in value, it cannot realistically be recorded in the accounts of the business.

Question 23

Purchased goodwill is shown in the statement of financial position because it has been paid for. It has no tangible substance, and so it is an intangible non-current asset. True/ false

Answer 23

Purchased goodwill is shown in the statement of financial position because it has been paid for. It has no tangible substance, and so it is an intangible non-current asset.

Question 24

two methods of valuation are worth mentioning here

Answer 24

(a) The seller and buyer agree on a price for the business without specifically quantifying the goodwill. The purchased goodwill will then be the difference between the price agreed and the value of the identifiable net assets in the books of the new business. (b) However, the calculation of goodwill often precedes the fixing of the purchase price and becomes a central element of negotiation. There are many ways of arriving at a value for goodwill and most of them are related to the profit record of the business in question.

Question 25

What is Goodwill?

Answer 25

Goodwill. Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.

Question 26

What is negative Goodwill?

Answer 26

Negative goodwill arises when the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination. IFRS 3 refers to negative goodwill as the ‘excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost’.

Question 27

IFRS 3 requires extensive disclosures. These include a reconciliation of the carrying amount of goodwill at the beginning and end of the period, showing separately:

Answer 27

(a) The gross amount and accumulated impairment losses at the beginning of the period (b) Additional goodwill recognised during the period (c) Impairment losses recognised during the period (d) Net exchange differences arising during the period, and (e) The gross amount and accumulated impairment losses at the end of the period