Ch 7 - Intangible Assets Flashcards
What are intangible assets
An asset is an identifiable non-monetary asset without physical substance
Give some examples of tangible assets
Patents and copyrights Licences Trademarks brand names Franchises
What does ‘identifiable’ mean re intangible assets?
- Capable of separate disposal or
- Arising from contractual or other legal rights
Why doesn’t internally generated fall into intangible assets?
as it can’t be disposed of individually , which is a requirement of being ‘identifiable’ (part of definition of intangible asset
What is an asset?
an asset is a resource
- Controlled by an entity as a result of past events
- From which future econ benefits are expected to flow to the entity
What does it mean for an asset to be controlled by an entity?
The entity has the power to obtain future economic benefits for itself and restrict the access of other parties to those benefits
This requirement means that people’s knowledge and skills can’t be considered an intangible asset as staff can leave their employment
Why can’t peoples knowledge and skills be considered as intangible assets?
as staff can leave their employment and take them with them
What are future economic benefits?
Future revenue or future cost savings
When should an asset be recognised?
It is probable that future economic benefits will flow to the entity, and
The cost of the asset can be measured reliably
These criteria are given in FRS 102 section 18 and mirror the recognition criteria given in Section 2
What are the types of intangible assets?
Separate acquisitions
Internally generated intangibles
Acquisition as part of a business combination
What is an intangible asset from a separate acquisition?
f a company purchases an intangible asset, the purchase price is an indication that future economic benefits are probable
The cost can be measured as price paid
Should be recognise at initial cost plus any directly attributable costs
Directly attributable costs include testing and professional fees
Therefore, an intangible asset should be recognised
Give some examples of separate acquisition intangible assets
Brands Publishing titles Airport landing slots Patents & copyrights Computer software
What are the 3 key areas of internally generated intangibles
Research costs/expenditure
Development
Other Internally generated intangibles
Define research
Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
What is the accounting treatment for research?
Research costs don’t meet the recog criteria as research is too distant from commercial production for an inflow of econ benefits to be probable
Therefore, research costs should be written off to the P&L as incurred
Define development
Development is 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
What is the accounting treatment for development?
In some assets, development expenditure may meet the recognition criteria
FRS 102 Section 18 stipulates that this is only the case if all of the following conditions are met
Completion of the asset is technically feasible
The intention is to complete and use or sell the asset
The asset can be used or sold
The asset will generate future econ benefits
Adequate resource is available to complete the asset
The expenditure on the asset can be measured reliably
If all these condition or met, then the asset MAY be capitalised
If any are NOT met, then the expenditure must be written off as it is incurred
Any that is written off can’t be reinstated as an asset if and when the conditions are all met
Once the above conditions are met, all development costs on the project can be capitalised
What conditions must ALL be met to capitalise a development cost?
Completion of the asset is technically feasible
The intention is to complete and use or sell the asset
The asset can be used or sold
The asset will generate future econ benefits
Adequate resource is available to complete the asset
The expenditure on the asset can be measured reliably
If all these condition or met, then the asset MAY be capitalised
What happens if a development cost doesn’t meet all the required conditions?
If any are NOT met, then the expenditure must be written off as it is incurred
Any that is written off can’t be reinstated as an asset if and when the conditions are all met
Give examples of development costs that might be capitalised providing it meets all the critera
Material used in development
Depreciation on tangible fixed assets used in the development
Would the following be capitalised?
Project D is anticipated to be successful. It has clearly defined parameters. The project expenditure is carefully controlled. The prototype proved successful. The budget shows sales well in excess of total costs. The finance is readily available
Completion of the asset is technically feasible - YES, the prototype had been successful
The intention is to complete and use or sell the asset- YES, budgets for sales were drawn up
The asset can be used or sold- YES, sales budgeted
The asset will generate future econ benefits- YES, budget shows sales expected to exceed costs
Adequate resource is available to complete the asset- YES, financing is readily available
The expenditure on the asset can be measured reliably- YES, budget and accurate figures given
Therefore, the expenses may be capitalised
Would the following be capitalised?
Project E commenced during acc period. It was confirmed at the start of Nov that it is anticipated to be successful nd sufficient resources will be available. Of the £250k spent on project E, £78k was incurred after 1 Nov.
Completion of the asset is technically feasible, YES, at 1 Nov it looks successful
The intention is to complete and use or sell the asset, YES assumed
The asset can be used or sold, YES, assumed
The asset will generate future econ benefits- YES, assumed they wouldn’t keep researching if not
Adequate resource is available to complete the asset- YES, it was anticipated to be successful, but ONLY after 1 Nov 20X8
The expenditure on the asset can be measured reliably, accurate costs are given
Therefore, the costs can be capitalised AFTER the 1 Nov 20X8 as this is when the criteria became met, so the £78,000 after 1 Nov 20X8 can be capitalised
Would the following be capitalised?
Project F has invested £340k in a development project, but the tests are inconclusive at present
These expenses must be written off to the P&L as not all the conditions outlined by FRS 102 Section 18 have been met, since tests were inconclusive at the y/e
This is simply research, rather than development