Chapter 9 - Intangible Assets Flashcards
What is an intangible asset?
‘An intangible asset is an identifiable non-monetary asset without physical substance’
What are some examples of intangible assets?
- Patents and copyrights
- Licences
- Trademarks
- Brand names
- Franchises
Internally generated goodwill does NOT count
What does identifiable mean in relation to an intangible asset?
- Capable of separate disposal
- Arising from contractual or other legal rights
What is the definition of ‘an asset as a present economic resource’?
It is:
- controlled by the entity as a result of past events,
- with a right that has the potential to produce economic benefits
What does ‘controlled by an entity’ mean?
This means 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 cannot be considered an intangible asset as staff can leave their employment
What does ‘future economic benefits’ mean?
This means future revenue or future cost savings
Expected rather than potential
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 reliably measured
This is stricter than the asset definition of the Conceptual Framework
How do you treat an intangible asset under a separate acquisition?
- If 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 (include all directly attributable costs)
- Therefore an intangible asset should be recognised
(Otherwise known as a separate acquisition)
How do you treat an internally generated intangible asset?
Look at three areas:
- research expenditure
- development costs
- other internally generated intangible assets
Internally generated intangible assets (such as brands, publishing titles, customer lists) should not be recognised as assets
How do you account for research costs?
Research costs are written off to the statement of profit or loss as it is too early to determine whether future economic benefits are probable.
How do you account for development costs?
Development costs must be capitalised where the project meets all of the following criteria:
PIRATE
P - Probable flow of economic benefit I - Intention to complete the project R - Reliable measurement A - Adequate resources available T - Technically feasible E - Expected to be profitable (future benefit will exceed expense) (can include decreased costs and reduced cash outflows)
If any of these conditions are not met, the expenditure must be written off as incurred
All development costs on the project must be capitalised
How do you treat other internally generated intangible assets (like internally generated brands)?
These may not be capitalised because costs cannot be identified separately from the cost of developing the business as a whole.
Write off expenditure to SPL as incurred
How do you account for intangible assets acquired as part of a business combination?
- Intangible assets recognised on the acquired company’s statement of financial position
- Intangible assets not recognised by the acquired company
These will be recognised in consolidated financial statements initially at fair value
How do you initially measure an intangible asset?
Where an intangible asset meets the recognition criteria, it should be measured initially at cost plus directly attributable costs e.g. legal fees
How do you subsequently measure an intangible asset after the initial measurement at cost?
- Cost less accumulated amortisation and impairment losses
- Revalued amount less accumulated amortisation and impairment losses
When can an intangible asset be revalued?
An intangible asset may only be revalued if the fair value can be determined by reference to an active market
What is an active market?
An active market is a market in which:
- Items are homogenous
- Buyers and sellers can be found at any time, and
- Prices are available to the public
Nature of intangibles means that they are mostly not homogenous
What should you do if an item is revalued?
If an item is revalued, all assets of its class should also be revalued
Accounting for revaluation of intangible assets follows exactly the same treatment as for revaluation of tangible non-current assets
When does an intangible asset have a finite useful life?
An intangible asset has a finite useful life when there is a clear limit to the period over which the asset is expected to generate net cash inflows for the entity
How do you treat an asset with a finite life?
- Amortise the asset over its useful life starting when the asset is available for use
(Development expenditure is deemed to be available for use when commercial production of the product being developed begins) - Amortisation should reflect the pattern of use of the asset
How do you treat an intangible asset with an indefinite life?
Do not amortise, instead test for impairment annually. Review the useful life each accounting period. If the asset now has a finite useful life, it should be amortised
What is the residual value for an intangible asset with a finite life?
Residual value is zero unless:
- A third party has agreed to buy the asset at the end of the useful life
- There is an active second-hand market which can be used to measure a residual value
How do you account for profit or loss on disposal?
Recorded in the statement of profit or loss for the period:
Proceeds X
Carrying Amount (X)
Profit/(loss) X/(X)
How do you disclose an intangible asset?
Disclosure requirements are as for IAS 16 Property, Plant and Equipment with these in addition:
- 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 research and development expensed during the period
What are the differences between IFRS Standards and UK GAAP in relation to development costs?
If the criteria are met, IAS 38 requires all eligible development costs to be capitalised.
Under FRS 102, an entity gets the choice of whether or not to capitalise development costs.
What are the differences between IFRS Standards and UK GAAP in relation to useful lives?
Under IFRS Standards intangible assets can have an indefinite life.
FRS 102 treats all intangible assets as having a finite useful life with a rebuttable presumption that this should not exceed ten years. Assets will not be amortised but should be tested annually for impairment.
