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
Give an example of ‘other internally generated intangibles’
internally generated brands
What is the accounting treatment for internally generated intangibles?
May not be capitalised because costs can’t be identified separately from the cost of developing the business as a whole
EVEN if it does meet the other 3 criteria
Therefore must write off expenditure to P&L as it is incurred
It is for this reason, that Bill Gates believes that 97% of the value of Microsoft is not recorded in its BS
Why does Bill gates believe that 97% of the value of Microsoft isn’t recorded in the BS?
As brand value may not be capitalised because costs can’t be identified separately from the cost of developing the business as a whole
EVEN if it does meet the other 3 criteria
What kind of intangible assets can a firm acquire in a business combination?
Intangible assets recognised on the acquired company’s SFP
Intangible assets not recognised by the acquired company
How are intangibles recognised in consolidated statement initially after a business combination?
At FV
Can the following be recognised as an intangible asset?
5 year licence acquired to manufacture specialised paint at a cost of £100,000 at the beginning of the year. Production commenced immediately
5 year license can be recognised as an intangible asset as meets all 4 criteria
It is identifiable i.e. it can be bought and sold
It is controlled by the entity i.e. with it they are allowed to make the paint- they can’t without it
Economic benefits are expected to flow
They will use the licence to make paint, which they will sell to generate revenue
Costs can be measured reliably
At the £100,000 price at which the licence was bought
Can the following be recognised as an intangible asset?
£90k on an advertising campaign during the first month. Subsequent sales have shown a significant improvement and it is expected this will continue for 3 years
Advertising cannot be recognised as an intangible asset and should be expensed. This is because it is not possible to identify the future economic benefits that are attributable to only this campaign
What is the initial measurement of an intangible?
Where an intangible asset meets the recognition criteria, it should be measured initially at cost plus directly attributable costs
E.g. legal fees
Give an example of directly attributable costs that are included in initial measurement of an intangible?
Legal fees
After initial measurement at cost, how should an intangible asset subsequently be measured?
Cost model
Cost less accumulated amortisation and impairment losses
Revaluation model
Revalued amount less accumulated amortisation and impairment losses
FRS 102 Section 18 is very strict on whether you can use this
It is not always an option
How do you use to cost model to calc intangible subsequent measurement?
Cost less accumulated amortisation and impairment loss
How do you use to revaluation model to calc intangible subsequent measurement?
Revalued amount less accumulated amortisation and impairment losses
FRS 102 Section 18 is very strict on whether you can use this
It is not always an option
Can the revaluation model always be used?
No, FRS 102 Section 18 is very strict on whether you can use this
It is not always an option
When can intangible assets be revalued?
may only be revalued if the fair value can be determined by reference to an active market
Define an active market
A market in which
- Items are homogenous (identical)
- buyers and sellers can be found at anytime
- Prices are available to the public
Are most intangibles homogenous?
The nature of most intangible assets means that they are not homogenous
Markets of identical items will only exist for assets such as some licences or quotas
Give an example of homogenous intangibles
Licences
Quotas
If an intangible asset is revalued, what must then be done?
All other assets of its class must also be revalued
How do you account for revaluation of intangible assets?
follows exactly the same treatment as for revaluation of tangible fixed assets
When must an intangible asset be amortised?
When it has a finite life use
What must be done with a finite intangible asset?
Amortise the asset over its useful life
Start with when the set is available for the use
If a reliable estimate can’t be made, the life should not exceed 10 years
However, this is rebuttable
When do you start to amortise an asset?
When the asset is available for use
Whats the maximum expected useful life of an intangible asset if a reliable estimate can’t be made
10 years
However, this is rebuttable
When is development expenditure deemed to be available for use?
when commercial production of the product being developed begins
What should amortisation reflect?
The pattern of use of the asset
What should the residual value be?
Zero unless
A third party has agreed to buy the asset at the end of the UEL
There is an active second-hand market which can be used to measure a residual value
Or other methods can be used if it more closely matches the amortisation to the benefits generated by the intangible
When would the residual value of an intangible asset not be zero?
A third party has agreed to buy the asset at the end of the UEL
There is an active second-hand market which can be used to measure a residual value
Or other methods can be used if it more closely matches the amortisation to the benefits generated by the intangible
If a company has capitalised development expenditure of £600k relating to the development of Brand X. it is expected demand for the product will stay at a high level for the next 3 years. Annual sales of 400k, 300k and 200k units respectively are expected over the period. Brand X sells for £10
How should the development expenditure be amortised?
There are 2 possibilities:
Write-off in equal instalments over the 3 year period
= £600,000 / 3 years = £200,000 per year
Write off in relation to total sales expected (total 900,000 units)
Year 1: 400,000/900,000 x 600,000 = £266,667
Year 2: 300,000/900,000 x 600,000 = £200,000
Year 3: 200,000/900,000 x 600,000 = £133,333
How should a prof/loss on the disposal of an intangible asset be recorded in the P&L?
Proceeds
Less NBV
= prof/loss
Unless the asset was held under the revaluation model and a revaluation reserve exists, on disposal this should be re-classified to the profit and loss account reserve
What are the disclosure requirements for intangible assets?
Disclosure requirements are as for FRS 102 Section 17 PPE except that, in addition, the following must be made
If the asset has a finite or indefinite useful life
For assets with indefinite lives, their NBV and why they have an indefinite life
Individual assets if they are material
Amount of R&D expensed during the period
What are the additional disclosures required for intangible assets?
If the asset has a finite or indefinite useful life
For assets with indefinite lives, their NBV and why they have an indefinite life
Individual assets if they are material
Amount of R&D expensed during the period
Describe the intangible assets reconciliation required in the disclosures
Along the top: use the titles of the intangibles given to you in the exam as column headings- there are not the same ‘standard classes’ with intangibles as there are for TFA
Down the side Cost at beginning additions disposals Cost at y.e
Amortisation/impairment at start
Charge for year
Disposal
Amortisation/impairment at y.e
NBV
at start
At year end
What are the main differences between UK GAAP and IFRS relating to development costs?
IAS 38 Intangible Assets requires development costs meeting the criteria to be capitalised (doesn’t get the choice unlike with FRS 102)
FRS 102 Section 18 allows a choice between capitalisation and expensing the development costs as incurred
What are the main differences between UK GAAP and IFRS relating to useful lives of intangible assets?
IAS38 Intangible Assets allows intangibles with indefinite useful lives
These assets won’t be amortised but should be tested annually for impairment
If at any point a useful life can be ascertained the asset should be amortised over the remainder of that life
FRS 102 has a rebuttable presumption that no intangible asset will have a useful life exceeding 10 years
What are the main differences between FRS 105 micro-entities and FRS 102?
For FRS 105
Internally generated intangible assets are not recognised as assets but are instead expensed to profit or loss
This includes development activities
There is no option to revalue intangible assets
Intangible assets acquired in a business combination are not recognised separately from goodwill
