Chapter 7: Accounting for other assets

Question 1

IAS 38

Answer 1

intangible assets

Question 2

recognise criteria as set out by the framework

Answer 2

probable that the expected future economic benefits attributed to the asset will flow to the entity

costs measured reliably

Question 3

examples of intangible assets

Answer 3

Scientific or technical knowledge

design and implementation of new processes

licenses

intellectual property

Trademarks

Goodwill

Question 4

Goodwill

Answer 4

excess of net assets

purchased goodwill is recognised which can be reliably measured

Internally generated goodwill cannot be measured as difficult to be reliably measured

Question 5

research and development

Answer 5

IAS 38 treats these as two distinct items !

research is an expense and cannot be capitalised

Development can be capitalised

Question 6

Capitalise development expenditure if meets PIRATE criteria

direct costs being capitalised:

Answer 6

Probable future economic benefits

Intention to complete to use / sell

Resource adequate and available to complete and use/sell

Ability to use / sell

Technical feasibility of completing asset for use/sale

Expenditure can be measured reliably

material, salaries and legal fees can be capitalised

selling,admin&other general overheads, staff training or operating losses cannot

Question 7

Amortisation

Answer 7

equivalent of depreciation

should be applied if the asset has a finite life, for those with an indefinite life no amortisation is required but an impairment review must be carried out in accordance of IAS 36

Question 8

why do we impair assets? what does it ensure

Answer 8

ensures that we do not carry assets in our financial statements at a value above their recoverable amounts

Question 9

impairment loss

Answer 9

carrying amount exceeds recoverable amount

Question 10

recoverable amount

Answer 10

value of an asset and is calculated as the higher of the value in use and its fair value less costs to sell

Question 11

value in use - asset

Answer 11

present value of future cash flows to be generated through the use of asset

Question 12

how often review

Answer 12

IAS36 states that the entity should annually look for indicators of impairment of assets and if so an impairment test should be carried out

An impairment occurs when the carrying amount exceeds the recoverable amount

Question 13

indicators of impairments - external

Answer 13

External
Significant fall in the market value of the asset

adverse effect on the business in the technological, market, economic or legal environment in which the entity operates (eg a recession)

increased market interest rates that reduce the value in use

Question 14

indicators of impairments - internal

Answer 14

evidence of obsolescence or physical damage

asset is not used much in the business as it once was

internal evidence that the asset’s performance will be worse than expected

Question 15

Impairment review

Answer 15

Recoverable amount is the higher of fair value less cost to sell and value in use

Question 16

if recoverable amount is found to be lower than the carrying value then the asset should be reduced in value :

Double entry

Answer 16

Debit - impairment

Credit - Non-current asset

Question 17

asset has been previously revalued is found to be impaired

Answer 17

Debit - revaluation surplus (to remove)
Debit - SPL (with any excess)

Credit - asset