8. Intangible Non-Current Assets Flashcards
What are common examples of intangible non-current assets?
- Goodwill
- Licenses, purchased by companies to allow them to operate in a particular area
- Patents on ideas and designs that the business has developed or bought.
-Brands, help to distinguish that business’s products or services from those of other businesses.
Which intangible assets are not typically amortised?
A purchased brand may have an indefinite useful life (where it is expected to generate economic benefits over a period that cannot be readily determined). Brands are not amortised but instead are tested annually for impairment.
What is the journal entry when an intangible asset is purchased?
How is the cost on intangible non-current assets allocated to the statement of profit and loss?
Debit - Intangible non-current assets
Credit - Cash/payables
The cost of this intangible asset will need to be allocated to the statement of profit or loss as it is matched against the income it helps to generate. This process is essentially the same as depreciation for non-current assets, but it is called amortisation.
What is the journal entry to recognise amortisation?
Debit - Amortisation expense (P&L)
Credit - Accumulated amortisation
What is goodwill?
If a business has goodwill it means that the market value of the business as a going concern is greater than the carrying amount of its assets less its liabilities in its accounting records.
How is goodwill created? (3)
Goodwill is created by good relationships between a business and its customers, for example:
1. By building up a reputation (by word of mouth perhaps) for high quality products or high standards of service.
2. By responding promptly and helpfully to queries and complaints from customers.
3. Through personality of the staff, their attitudes to customers and their skills.
What is goodwill arising on acquisition?
Goodwill arising on acquisition is the excess of the purchase consideration paid for a business over the fair value of the individual assets and liabilities acquired.
How is goodwill recorded in the financial statements?
Although this goodwill can be an extremely valuable asset to a company, it is rarely recognised within the financial statements.
Internally generated goodwill cannot be recognised as an asset, because it is not separately identifiable from the business, it does not arise from legal rights and is not controlled by the entity.
Purchased goodwill arises when an entity purchases an existing business. Goodwill arising on an acquisition is the excess of the purchase consideration paid over the fair value of the individual assets and liabilities acquired.
What is the calculation for goodwill shown in the accounts of a purchaser?
Goodwill shown by the purchaser in their accounts will be the difference between the purchase consideration and their own valuation of the tangible net assets acquired.
What is the accounting problem related to how to treat internally generated intangible assets within financial statements?
Many businesses spend considerable amounts of money developing new or improved products that they hope will generate future income streams. The key is to identify whether this should be treated as revenue expenditure (expensed in the profit or loss) or capital expenditure (recognised as an intangible asset in the statement of financial position).
What development costs can be treated as intangible assets and what can’t?
All research must be expensed to profit or loss
Development which meets certain criteria must be capitalised as an intangible asset in the statement of financial position. It is then amortised over the commercial production period.
Internally generated brands cannot be capitalised as an intangible asset
What is the journal entry for development expenditure which is capitalised?
What is the accounting treatment for internally generated intangible assets?
When development expenditure is to be recognised as an asset, the accounting entries are:
Debit - Intangible non-current assets
Credit - cash/payables
Internally generated intangible assets should be amortised and tested for impairment.
