7 - Intangible non-current assets

Question 1

what is an intangible asset

Answer 1

an identifiable, non monetary asset that has no physical substance

IDENTIFIABLE = can be sold separately without selling the business or arises from a contractual or legal right

eg:
- goodwill
- development costs
- brand names
- licenses
- patents
- computer software
- trade marks

Question 2

how are intangible assets purchased separately measured

Answer 2

intangible assets purchased separately are measured at cost
eg, a license to use computer software will be measured at cost

cost is the purchase price + any directly attributable costs

Question 3

what is goodwill and what is its initial measurement

Answer 3

goodwill = excess of the value of a business over the value of its individual assets and liabilities

arises from reputation of business, skill of management etc, can’t exist independently of the business

Question 4

what are different types of goodwill

Answer 4

distinction between goodwill arising from internal/external growth

internally generated = not recognised

arising on acquisition of another entity (purchased goodwill) = capitalise as an intangible asset and test annually for impairment

Question 5

how does goodwill arise on the acquisition of another entity

Answer 5

when an entity acquires the shares/assets/liabilities of another entity, it may be prepared to pay more than entity currently worth because it anticipates future economic benefits above fair value (eg shares)

GOODWILL = amount paid over and above the fair value of the identifiable net assets and liabilities acquired

Question 6

what is internally generated goodwill

Answer 6

• generates over time
• most businesses have it from reputation etc
• cant be recognised as an asset or measured reliably, subjective

Question 7

how is research an internally generated goodwill

Answer 7

RESEARCH:
- ‘costs incurred to gain new scientific or technical knowledge and understanding’
- not an intangible asset but shown as an expense in profit/loss statement
- no certainty of future economic benefit

Question 8

how is development an internally generated goodwill

Answer 8

• ‘application of research findings to a plan/design for the production new or substantially improved materials, products or processes prior to commercial production/use’
• must recognise as an intangible asset once all ‘PIRATE’ criteria are met

Probable future economic benefits generated
Intention to complete and use/sell asset
Resources adequate to complete asset
Ability to sell/use asset
Technical feasibility of completing asset
Expenditure can be measured reliably

Question 9

what is amortisation

Answer 9

= equivalent of depreciation but for intangible assets

management assess the useful life of intangible assets, which can be infinite or indefinite

Question 10

describe the different lives of assets

Answer 10

FINITE = amortise the intangible asset on a systematic basis over the useful life

INDEFINITE = no foreseeable limit to period over which the asset is expected to generate cash inflows for the organisation. intangible asset is not amortised