Chapter 6 (intangible assets)

Question 1

What criteria must be fulfilled in order to recognize an (intangible) asset?

Answer 1

Same as for an asset: “It must be a future economic benefit and the company must have control”

1. There must be an expectation of future economic benefits, such as revenue from the sale of goods or services, or cost savings.
2. Control. The entity must have the power to obtain the future economic benefits flowing from the resource.

Question 2

Explain the term “separable” in relation to intangible assets

Answer 2

“It can be separated from the entity and sold”

An asset is separable if it “is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged”

Question 3

Why is it difficult to recognize internally generated intangible assets?

Answer 3

”It is problematic to establish if it will generate future economic benefits”

It may be difficult to assess whether an internally generated intangible asset qualifies for recognition because of:

1. The problem of establishing whether or not there is an identifiable asset which will generate future economic benefits, and
2. The problem of determining the cost of the asset reliably

Question 4

Research phase

Answer 4

“Original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding”

Entities are not allowed to recognize an intangible asset arising from research work. Research expenditure must be written off as an expense. In other words: It is not possible to conclude if there will be future economic benefits from the research phase

Examples of research
activities include:

1. Activities aimed at gaining new knowledge
2. The search for applications of research findings
3. The search for alternatives for materials, products, processes etc.
4. The formulation, design, evaluation and selection of possible alternatives for new or improved materials, products, processes etc.

Question 5

Development phase

Answer 5

“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”

Examples of development activities include:

1. The design, construction and testing of pre-production prototypes and models
2. The design of tools, jigs, moulds and dies involving new technology
3. The design, construction and operation of a pilot plant
4. The design, construction and testing of a chosen alternative for new or improved
   materials, products, processes etc.

Question 6

Examples of expenditures on intangible assets that must be recognized as an expense

Answer 6

1. Start-up costs
2. Training expenditure
3. Expenditure on advertising and promotional activities
4. Expenditure on relocating or reorganising part or all of an entity.

Question 7

How is IAS36 applied on intangible assets with indefinite useful lives?

Answer 7

IAS36 explicitly states that intangible assets with indefinite useful lives should be reviewed for impairment every year

Question 8

Why is internally generated goodwill not accepted as an asset?

Answer 8

It is generally impossible to determine the cost (or the value) of internally generated goodwill.

Because of this very high level of “measurement uncertainty”, internally generated goodwill does not meet the recognition criteria set out in the Conceptual Framework.

However, this difficulty does not arise to the same extent if goodwill is purchased when an entity acquires an established business, since the cost of the goodwill can be measured reliably in these circumstances.

Question 9

How is goodwill in a business combination calculated?

Answer 9

“The price paid for the business, less the net asset value of identifiable assets/liabilities”

In a straightforward case the amount of the goodwill to be recognised is the excess of:

1. The price paid by the acquirer in the business combination, over
2. The acquirer’s interest in the net fair value of the acquiree’s identifiable assets and liabilities at the acquisition date.

Therefore the measurement of goodwill acquired in a business combination depends upon ascertaining the net fair value of the identifiable assets and liabilities acquired and then comparing this with the price paid by the acquirer.