Chapter 11 Intangible assets Flashcards
1.1 IAS 38 Intangible assets
IAS 38 says an intangible asset is an identifiable non-monetary asset without physical substance. Such as patents, licences, and trademarks. Identifiable means capable of separate disposal or arising from contractual or other legal rights. This means internally generated goodwill does not fall within the definition of an intangible asset and cannot be disposed of individually.
The conceptual framework says an asset is a present economic resource controlled by the entity as a result of past events, and with a right that has potential to produce economic benefits. Controlled by an entity means the entity has the power to obtain future economic benefits for itself and restrict access of other parties to the benefits. This means people’s knowledge and skills cannot be considered an intangible asset as they can leave employment.
1.2 Recognition
IAS 38 states an asset can be recognised only if it is probable that future economic benefits will flow to the entity, and he cost of the asset can be reliably measured.
2.1 Types of intangible asset
- Separate acquisition: if a company purchases an intangible the purchase price is an indication that future economic benefits are probable, the cost is measured as the price paid and therefore it should be recognised
- Internally generated intangibles: need to look at 3 areas, research costs (original and planned investigation undertaken with the prospect of gaining new technical knowledge, these do not meet the recognition criteria and the costs should be written off to the P+L as incurred), development costs (application of research findings to design for the production of new substantially improved materials, products, processes or systems before start of commercial use, these can meet recognition criteria if completion of asset is feasible, intention is to use or sell the asset, the asset will generate future economic benefits, adequate resource is available to complete the asset and the expenditure can be measured reliably. If all meet, the asset is capitalised, if not is it written off as incurred) and other internally generated intangibles (such as brand, these may not be capitalised as costs cannot be identified separately from the cost of developing the business as a whole. Write off expenditure to P+L as incurred).
2.3 Acquisition as part of a business combination
When a company buys another, it may acquire intangible assets recognised on the acquired company’s statement of financial position and intangible assets not recognised. These will be recognised in consolidated financial statements initially at fair value.
3.1 Measurement of intangibles
Where an intangible asset meets the recognition criteria, it should be measured initially at cost plus directly attributable costs (such as legal fees). According to IAS 38 after the initial measurement at cost, an intangible asset should be valued at either cost less accumulated amortisation and impairment losses or revalued amount less accumulated amortisation and impairment losses.
3.2 Revaluation of intangible assets
An intangible asset may only revalued if the fair value can be determined by reference to an active market. This is items which are homogenous (identical), buyers and sellers can be found at any time, and prices are available to the public.
Typically markets of identical items will only exist for assets such as some licences or quotas. If an item is revalued, all assets of its class should be revalued. Accounting for revaluation of intangible assets is the same treatment of revaluation of tangible non-current assets.
4.1 Amortisation
If the asset has a finite useful economic life amortise the asset over its useful life starting when the asset is available for use (development expenses is deemed to be available when commercial product of the product begins). Amortisation should reflect the pattern of use of the asset. The residual value is zero unless a third party has agreed to buy the asset at the end of the useful life or there is an active second-hand market which can be used to measure a residual value.
If it has an indefinite useful life do not amortise, instead test for impairment annually and review the useful life each accounting period to see if it now has a finite life.
5.1 Disposal
A profit or loss should be calculated on the disposal of an intangible asset and recorded in the P+L for the period:
- Proceeds X
- Carrying amount (X)
- Profit/(loss) X
6.1 Disclosures
Disclosure requirements as the same as IAS 16 PPE, except in addition, the following must be made:
- If the asset has a finite or indefinite useful life
- For assets with indefinite lives, their carrying amount and why they have an indefinite life
- Individual assets if they are material
- Amount of R+D expensed during the period
7.1 UK GAAP differences
Development costs: IAS 38 requires development costs meeting the criteria to be capitalised. FRS 102 section 18 allows a choice between capitalisation and expensing the development costs as incurred.
Useful lives: IAS 38 allows intangibles with indefinite useful lives. There assets will not be amortised but should 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 ten years.
