IAS 38 (Intangible Assets)

Question 1

What is an intangible asset?

Answer 1

An intangible asset is an identifiable non-monetary asset without physical substance.

Question 2

If an intangible asset is purchased how is it recognised in the accounts?

Answer 2

Purchased intangibles are initially measured at cost. Subsequently there is a choice between cost model (cost less amortisation) and revaluation model (revalued amount less amortisation).

Question 3

The revaluation model for intangible assets is rare in practice as its use demands the existence of an active market. What features of an active market are needed for intangible assets to be revalued?

Answer 3

• Homogeneous (identical) products
• Willing buyers and sellers
• Prices available to the public

Question 4

True or false, intangible assets with an indefinite useful life are not amortised, but are tested annually for impairment?

Answer 4

True

Question 5

If an intangible asset has a finite life, how would this asset be treated within the accounts?

Answer 5

Intangible assets with a finite useful life are amortised over that life, usually on a straight-line basis, unless another basis is more appropriate.

Question 6

True or false, internally generated intangible assets are capitalised?

Answer 6

False, generally, internally generated intangible assets cannot be capitalised, as the cost of their creation is not capable of reliable measurement.

Question 7

What is goodwill?

Answer 7

Goodwill is the difference between the value of a business as a whole and the fair value of its identifiable net assets.

Question 8

True or false, non-purchased goodwill is recognised within the financial statements?

Answer 8

False, non-purchased or inherent goodwill is not recognised within the financial statements because it is not separable from the business.

Question 9

If an acquiring entity pays less for a business than the fair value of its separable nets assets, this creates negative goodwill. How do you recognise negative goodwill in the financial statements?

Answer 9

Negative goodwill is created when an acquiring entity pays less for a business than the fair value of its separable net assets and recognised as income in the statement of profit or loss.

Question 10

What is the difference between research and developement?

Answer 10

Research is original and planned investigation to gain new scientific knowledge or understanding.

Development is the application of knowledge to create some new or improved material, product, service, process or device.

Question 11

How is research expenditure accounted for?

Answer 11

Research expenditure is written off as incurred to the statement of profit or loss.

Question 12

How is development expenditure accounted for?

Answer 12

Development expenditure is capitalised only once all the recognition criteria are satisfied.

Question 13

What is the recognition criteria to satisfy capitalising development expenditure in the accounts?

Answer 13

PIRATE
Probable flow of economic benefit
Intention to complete the project
Reliable measurement of development cost
Adequate resources available to complete the project
Technically feasible
Expected to be profitable

Question 14

Does amortisation of development expenditure commence when commercial production begins or when development costs are fulfilled in the accounts?

Answer 14

Amortisation of development expenditure commences as soon as commercial production begins, either on a straight-line basis or in relation to expected production levels.

Question 15

Give some examples of intangible assets?

Answer 15

• Licences and quotas
• Intellectual property, e.g. patents and copyrights
• Brand names
• Trademarks

Question 16

For an asset to be identifiable IAS 38 Intangible Assets states that is must fall into one of two categories. What are these categories?

Answer 16

1. It is separable - the assets can be bought or sold separately from the rest of the business
2. It arises from legal / contractual rights - this will arise as part of purchasing an entire company

Question 17

An intangible asset is an identifiable non-monetary asset without physical substance. What is the definition of an asset?

Answer 17

Something which is controlled by the entity as a result of past events and from which future economic benefits are expected to flow (either from revenue or cost saving).

Question 18

If the recognition criteria for an intangible asset are met, how should intangible assets initially be recognised?

Answer 18

The intangible asset should be initially recognised at cost.

Question 19

Once an intangible asset is initially recognised there is a choice between two models regarding how to account for it in the accounts. What are these two models?

Answer 19

• Cost model; the intangible asset should be carried at cost less amortisation and any impairment losses. This model is more commonly used in practice.
• Revaluation model; the intangible asset may be revalued to a carrying amount of fair value less subsequent amortisation and impairment losses. Fair value should be determined by reference to an active market.

Question 20

True or false, an intangible asset with an indefinite useful life should not be amortised?

Answer 20

True - only intangible assets with a finite useful life should be amortised. However, indefinite intangible assets should be tested for impairment annually.

Question 21

Why are internally-generated intangible asset generally not capitalised?

Answer 21

Because the costs associated with these cannot be identified separately from the costs associated with running the business.

Question 22

What should happen to expenditure on brands and internally-generated intangible assets?

Answer 22

Written off as incurred. Internally-generated intangible assets and brands may never be recognised, because it’s hard to distinguish from the cost of development the business as whole, so should be written off as incurred. Where a brand name is separately acquired and can be measured reliable, then it should be recognised as an intangible non-current asset.

Question 23

What is fair value?

Answer 23

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as the measurement date.

Question 24

Why may goodwill exist?

Answer 24

Because of any number of different combinations, e.g.

• Reputation for quality or service
• Technical expertise
• Possession of favourable contracts
• Good management and staff

Question 25

When should amortisation of development expenditure be recognised in the accounts?

Answer 25

Development expenditure should be amortised over its useful life as soon as commercial production begins, and not before..

Question 26

Research expenditure is always written off as incurred to the statement of profit or loss. Development expenditure can be recognised as an intangible asset, if and only if, an entity can demonstrate all of the recognition criteria. What is this criteria?

Answer 26

PIRATE 
Probable flow of economic benefit
Intention to complete the project
Reliable measurement of development cost
Adequate resources available to complete the project
Technically feasible
Expected to be profitable

Question 27

If development expenditure is recognised as an expense in profit loss, and then subsequently turns into an intangible asset, can the expenditure already incurred be stated as an intangible asset?

Answer 27

No. Development expenditure recognised as an expense in the P/L cannot subsequently be reinstated as an asset.

Question 28

What is the difference in accounting for research and development costs?

Answer 28

Research always write off in SOPL.
Development costs can be recognised as an intangible asset if it can meet the PIRATE criteria, if not, expense to the SOPL.