IIAAÄS 38 INTANGIIBILIT ASSETIT

Question 1

What is IAS 38 about?

Answer 1

IAS 38 Intangible Assets is the international Financial Reporting Standard that specifies the accounting treatment for intangible assets that are not dealt with specifically by another Standard.

IAS 38:
o Requires an entity to recognize an intangible asset if specified recognition criteria are met
o Specifies how to measure the carrying amount of an intangible asset
o Requires specified disclosures about intangible assets

Question 2

What is an intangible asset?

Answer 2

Intangible asset is an IDENTIFIABLE non-monetary asset WITHOUT PHYSICAL SUBSTANCE.

Question 3

What is an asset?

Answer 3

Asset is a resource CONTROLLED by an entity as a result of past events and from which future ECONOMIC BENEFITS are expected to flow to the entity.

Question 4

What are monetary assets?

Answer 4

Monetary assets are money held and assets to be received in fixed or determinable amounts of money.

Question 5

Carrying amounts are what?

Answer 5

Carrying amount is the amount at which an asset is recognized in the statement of financial position after deducting any accumulated amortization and accumulated impairment losses thereon.

Question 6

What is cost?

Answer 6

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of acquisition or construction, or when applicable, the amount attributed to that asset when initially recognized in accordance with specific standard.

Question 7

What is Depreciable amount?

Answer 7

Depreciable amount = is the cost of an asset, or other amount substituted for cost, less its residual value.

Question 8

Residual value?

Answer 8

Residual value = is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Question 9

Explain useful life?

Answer 9

Useful life is either

A) The period over which an asset is expected to be available for use by an entity, or

B) the number of production or similar units expected to be obtained from the asset by an entity.

Question 10

Entity-specific value?

Answer 10

Entity-specific value = is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.

Question 11

Fair value?

Answer 11

Fair value = is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 12

Impairment loss?

Answer 12

Impairment loss = is the amount by which the carrying amount of an asset exceeds its receivable amount.

Question 13

What is research?

Answer 13

Research = is original and planned investigation undertake with the prospect of gaining new scientific or technical knowledge and understanding.

Question 14

What is development?

Answer 14

Development = is 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.

Question 15

What assets are included in the scope of IAS 38?

Answer 15

Assets included and excluded from the scope of IAS 38:

 Expenditure on advertising
 Training
 Start-up activities
 Research and development activities (may result in physical asset, but the intangible side is the more important one -> YLEISESTIKIN: judgement is used to determine whether intangible or tangible element is more important: is it accounted for in terms of PPE or intangible asset)
 Some intangible assets are evidenced by a physical form: legal paper documentation of license or patent, or computer software on a disc esim.

Question 16

Assets EXCLUDED from the scope of IAS 38?

Answer 16

Excluded: IAS 38 to be applied for all intangible assets EXCEPT:
 Ones within the scope of another Standard
 Financial assets, as defined in IAS 32 Financial Instruments: Presentation
 Recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources
 Expenditure on the development and extraction of minerals, oils, natural gas and similar non-generative resources

Other Standards, for example:
 Leases that are within the scope of IFRS 16 Leases
 Deferred tax assets -> apply IAS 12 Income Taxes
 Goodwill acquired in a business combination -> apply IFRS 3 Business Combinations
 Non-current intangible assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
 Intangible assets held by an entity for sale in the ordinary course of business -> apply IAS 2 and IAS 11 Construction Contracts

Question 17

Give examples of intangible assets?

Answer 17

o Computer software
o Fishing license: Se voi olla fyysisesti paperille kirjoitetuna, mutta sen paperin arvo on huomattavasti pienem, kuin sen itse lisenssin.
o Registered patent on a product
o The copyright on a publication or article
o Right to produce or film a movie
o Franchises
o Customer relationships
o Internet domain names
o Newspaper mastheads

Question 18

Lue vaan: IDENTIFIABILITY Identifying intangible asset

Answer 18

Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance, or enhancement of intangible resources.
o Expenditure on intangible resources is recognized as an asset if it meets the definition and recognition criteria or an intangible asset: IDENTIFIABLE, NON-MONETARY asset WITHOUT PHYSICAL SUBSTANCE.

Intangible asset needs to be IDENTIFIABLE from other assets to meet the definition of an intangible asset (and to distinguish it from goodwill!)

Question 19

Lue vaan lisää: IDENTIFIABILITY Identifying intangible assets

Answer 19

Goodwill recognized in a business combination = is an asset representing the future economic benefits arising from other assets acquired in a business combination that are NOT INDIVIDUALLY IDENFITIED and separately recognized.

Asset is IDENTIFIABLE if it either:
A) Is separable, i.e., it is capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged.
B) Arises from contractual or other legal rights.

Question 20

Lue vaan: CONTROL when identifying intangible assets

Answer 20

CONTROL -> Asset definition states that an entity must CONTROL the resource of a past event. Thus, intangible asset should also be controlled before it can be recognized as an intangible asset. An entity controls an asset if it has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.

Market and technical knowledge may give rise to future economic benefits. An entity controls those benefits if, for example, the knowledge is protected by legal rights such as copyrights, a restraint of trade agreement (where permitted) or by a legal duty on employees to maintain confidentiality.

Incremental skills that employees have may lead to future economic benefits from training. BUT HOWEVER, an entity has insufficient control over these expected benefits for it to meet the definition of an intangible asset.
o Incremental = lisääntyvä

Customer relationships or Market share are not intangible assets in the absence of legal rights to protect, since the entity typically has insufficient control over the expected economic benefits. Exchange transaction for the same relationship can provide evidence of possible control. Because these exchange transactions also provide evidence that the customer relationships are separable, such customer relationships meet the definition of an intangible asset.

Question 21

Lue vaan: FUTURE ECONOMIC BENEFITS when identifying intangible assets

Answer 21

Intangible asset should generate future economic benefits that flow to the entity.

The future economic benefits may include:
o Revenue from sale of products or services
o Cost savings
o Other benefits from the use of the asset by the entity

Question 22

When is an item recognized as intangible asset?

Answer 22

The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:
o The definition of an intangible asset and
o The recognition criteria.

Question 23

What are the recognition criteria for intangible assets?

Answer 23

It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and
-> (Probability is based on management’s best estimate of the economic conditions that exist over the useful life of the asset)

The cost of the asset can be measured reliably

Question 24

How are intangible assets measured?

Answer 24

An intangible asset shall be measured initially AT COST. The cost of an intangible asset is the amount cash or cash equivalents paid or the fair value of other consideration given to acquire at the time of its acquisition or construction, or, when applicable, the amount attributed to that asset when recognized.

The cost of an intangible asset depends on the way in which the asset arose. The ways in which an intangible asset can arise are:
 Separate acquisition
 Acquisition as part of a business combination
 Acquisition by way of government grants
 By way of a government grant
 Exchange of assets
 Internally generated by the entity
 Internally generated goodwill

Question 25

What is a separate acquisition?

Answer 25

Separate acquisition: Intangible asset can be purchased from a third party in a separate acquisition. The cost can usually be measured reliably, especially when the purchase consideration is in cash or other monetary assets.

Question 26

Explain the probaility, cost and give examples on separately acquired intangible assets?

Answer 26

PROBABILITY = Entity expects there to be an inflow of economic benefits, even if there is uncertainty about the timing or the amount of the flow. -> Therefore, the probability recognition criterion is always satisfied for separately acquired intangible assets.

COST = Cost of a separately acquired intangible asset comprises:
-> A) its purchase price (including import duties and non-refundable purchase taxes after deducting trade discounts, and rebates = hyvitykset, kuten verohyvitys) and
-> B) any directly attributable cost of preparing the asset for its intended use.

Examples of directly attributable costs:
 Costs of employee benefits arising directly from bringing the asset to its working condition (IAS 19 Employee benefits)
 Professional fees arising directly from bringing the asset to its working condition
 Costs of testing whether the asset is functioning properly

Examples or expenditures that are not part of the cost of an intangible asset are costs of:
 Introducing a new product or service (including advertising and promotional activities)
 Conducting business in a new location or with a new class of customer (including staff training)
 Administration and other general overheads.

Question 27

Acquisition of intangible asset as a part of business combination?

Answer 27

o In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date.
o The entity expects there to be an inflow of economic benefits, even if there is uncertainty about the timing or amount of the inflow. -> Therefore, the probability recognition criterion is always considered to be satisfied for intangible assets acquired in business combinations.
o If an asset acquired in a business combination is separable or arises from contractual or other legal rights, sufficient information exists to measure reliably the fair value of the asset. Thus, the reliable measurement criterion is also always considered to be satisfied for intangible assets acquired in a business combination.
o In accordance with IAS 38 and IFRS 3, an acquirer recognizes at the acquisition date, SEPARATELY FROM GOODWILL, an intangible asset of the acquiree (vaikka se vanha omistaja ei olis sellasta tunnistanutkaan)

Question 28

Internally generated intangible asset?

Answer 28

Internally generated intangible asset = intangible asset arisen when an entity embarks on a project to develop a concept, idea or product.

It can be hard to assess whether internally generated intangible asset qualifies for recognition because of problems in identification and cots.

Question 29

Acquisition of intangible assets by way of government grants?

Answer 29

Intangible asset may be acquired free of charge, or for nominal consideration, by way of government grant, i.e., government transfers or allocates to an entity intangible assets e.g. airport landing rights, license to operate radio station, or access to other restricted resources.

Question 30

Acquiring intangible assets using Exchange of asset?

Answer 30

Intangible assets may be acquired in exchange for non-monetary assets or a combination of monetary and non-monetary assets. The cost of such intangible asset is measured at FAIR VALUE unless:

o The exchange transction lacks commercial substance or
o The fair value of neither the asset received nor the asset given up can be measured reliably.
o If fair value is not used, its cost is measured at the CARRYING AMOUNT of the asset given up.

Question 31

What is Internally generated goodwill?

Answer 31

o Sometimes expenditure is incurred to generate future economic benefits, but it does not result in the creation of an intangible asset that meets the recognition criteria in IAS 38. Such expenditure is often described as contributing to internally generated goodwill.

o Internally generated goodwill is always EXPENSED and never capitalized or recorded as an asset, because it is not identifiable (not separable nor arise from contractual or other legal rights) or controlled by the entity that can be measure reliably at cost.

Question 32

What is the treatment for expenses on intangible assets incurred in RESEARCH and what about DEVELOPMENT?

Answer 32

All expenses incurred in the RESEARCH phase of a project are EXPENSED and all costs in the DEVELOPMENT phase are CAPITALIZED as an intangible asset (assuming all the criteria are met).

Muistisääntö: RE DC

Question 33

Tell me more about the the treatment of intangible asset related to research?

Answer 33

Intangible assets related to research activities should NOT be recognized because the entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Instead, such expenditure is recognized as an expense when it is incurred.

What are examples of research activities?
o Activities aimed at obtaining new knowledge
o Formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services
o The search for, evaluation and finals selection of applications of research findings or other knowledge
o The search for alternatives for materials, devices products, processes, systems or services

Question 34

What are the recognition criteria for intangible asset that arises from development?

Answer 34

Intangible asset that arises from development shall be recognized IF and ONLY IF, an entity can demonstrate ALL of the following:
o Technical feasibility of completing the intangible asset so that it will be available for use or sale
o Its intention to complete the intangible asset and use or sell it
o Its ability to use or sell the intangible asset
o How the intangible asset will generate future economic benefits.
o The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset and
o Its ability to measure reliably the expenditure attributable to the intangible asset during its development

Question 35

What are examples of development activities?

Answer 35

o Design, construction and testing of pre-production/pre-use of prototypes and models
o The design of tools, jigs, molds and dies involving new technology
o The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production
o The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

Question 36

IAS 38 EXCLUDES certain internally generated intangibles from being recognized as an asset. Esimerkkejä näistä on internally generated:

Answer 36

o Brands
o Mastheads
o Publishing titles
o Customer lists and
o Items similar in substance

Expenditure on these cannot be distinguished from the cost of developing the business as a whole and are therefore not recognized. ANY EXPENDITURE INCURRED IS EXPENSED IMMEDIATELY!

Question 37

WHAT IS THE COST OF AN INTERNALLY GENERATED INTANGIBLE ASSET?

Answer 37

Cost of an internally generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria
o Probability
o Cost can be reliably measured and
o All the requirements in the development phase of an internally generated intangible asset are met

Expenditure on an intangible item that was initially recognized as an expense should not be recognized as part of the cost of an intangible asset at a later date.

Question 38

The cost of an internally generated intangible asset?

Answer 38

The cost of an internally generated intangible asset comprises ALL directly attributable costs necessary to create produce and prepare the asset to be capable of operating in the manner intended by management.

Question 39

What are EXAMPLES OF DIRECTLY ATTRIBUTABLE COST?

Answer 39

o Costs of materials and services used or consumed in generating the intangible asset
o Costs of employee benefits (as defined in IAS 19) arising from the generation of the intangible asset
o Fees to register a legal right
o Amortization of patents and licenses that re used to generate the intangible asset

Question 40

Amortization?

Answer 40

Amortization = is the systematic allocation of the depreciable amount of an intangible asset over its useful life.

Question 41

Which standard specifies criteria to recognize borrowing costs as a cost element of an internally generated intangible asset?

Answer 41

IAS 23 Borrowing Costs

Question 42

What ARE NOT COMPONENTS OF THE COST OF AN INTERNALLY GENERATED INTANGIBLE ASSET?

Answer 42

o Selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use
o Identified inefficiencies and initial operating losses incurred before the asset achieves planned performance
o Expenditure on training staff to operate the asset

Question 43

Tell me about expensing the expenditure on an intangible item?

Answer 43

Expenditure on an intangible asset shall be recognized as an expense when it is incurred.

When expenditure is incurred to provide future economic benefits to an entity, but no intangible asset or other asset is acquired or created that can be recognized. In the case of the supply of goods/services the entity recognizes such expenditure as an expense when it has the right to access those goods or receives the services.

HOWEVER, intangible asset is NOT expensed if
 It forms part of the cost of an intangible asset that meet the recognition criteria OR
 The item is acquired in a business combination and cannot be recognized as an intangible asset. If this is the case, it forms part of the amount recognized as goodwill at the acquisition date.

Question 44

Give examples of expenditure recognized as an expense?

Answer 44

o Start-up activities, unless this expenditure is included in the cost of an item of property, plant, and equipment
o Training activities
o Advertising and promotional activities (including items such as mail order catalogues and brochures)
o Relocating or recognizing part or an entire entity

Question 45

Esimerkki: A company started to research about making a medicine. Six months in, the company starts the development and testing of the product. At this point they reached the development phase (ensin research phase, josta siirrytään developmentiin!). How should they treat the expenditure incurred in the research phase? What about in the development phase?

Answer 45

o All expenditure incurred within the research phase of the product should be expensed immediately.
o All expenditure incurred in the development phase f the product is capitalized as an intangible asset because all of the recognition criteria have been ment.

Question 46

An entity needs to adopt a policy for accounting for intangible assets after initial recognition. An entity shall choose between which two models?

Answer 46

Entity shall choose either
o The COST model or
o The REVALUATION model (revaluation certificate)

If an intangible asset is accounted for using the revaluation model, ALL the other assets in its class are also accounted for using the same model, unless there is no active market for those assets.

Question 47

THE COST MODEL?

Answer 47

THE COST MODEL

If an entity chooses to use the cost model, after initial recognition, an intangible asset shall be carried at:
o Its COST miinus ACCUMULATED AMORTIZATION and ACCUMULATED IMPAIRMENT LOSSES

Question 48

THE REVALUATION MODEL?

Answer 48

THE REVALUATION MODEL
The revaluation model is applied only after an intangible asset has been initially recognized at cost.

• Revalued amount = is the asset’s fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses.
• Within IAS 38, fair value is measured by reference to an active market.

Question 49

Revaluation model does not allow what?

Answer 49

o The revaluation of intangible assets that has not previously been recognized as assets, or
o The initial recognition of intangible assets at amounts other than cost

Question 50

Tell me about the Frequency of revaluations?

Answer 50

Frequency of the revaluations depends on the volatility of the fair value of the intangible asset. If the fair value differs materially from its carrying amount, revaluation is necessary.

Question 51

Tell me about the Accounting for revaluation?

Answer 51

When an intangible asset is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways:

o The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset.
o The accumulated amortization at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses or
o The accumulated amortization is eliminated against the gross carrying amount of the asset.
o HUOM! The amount of the adjustment of accumulated amortization forms part of the increase or decrease in the carrying amount.

Question 52

Related to the Revaluation model, when an active market does NOT exist?

Answer 52

Active market does NOT exist if an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset, the asset shall be carried at its cost less any accumulated amortization and impairment losses.

If the fair value of the asset can be measured against an active market, the revaluation model is applied from that date.

Question 53

Related to the Revaluation model, when an active market DOES exist?

Answer 53

Active market DOES exist if the fair value of a revalued intangible asset can no longer be measured by reference to an active market, the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less any subsequent accumulated amortization and any subsequent accumulated impairment losses.

The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset is impaired and needs to be tested for impairment under IAS 36 Impairment of Assets

Question 54

The effect is an increase or decrease in the carrying amounts of an intangible asset as a result of a revaluation. How is the INCREASE in value treated?

Answer 54

If intangible asset’s carrying amount INCREASES because of revaluation, the increase is recognized in OTHER COMPREHENSIVE INCOME and accumulated in equity under revaluation surplus.

However, the increase is recognized in PROFIT OR LOSS to the extent it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

Question 55

The effect is an increase or decrease in the carrying amounts of an intangible asset as a result of a revaluation. How is the DECREASE in value treated?

Answer 55

If an intangible asset’s carrying amount is DECREASED because of revaluation, the decrease is recognized in PROFIT OR LOSS.

However, the decrease shall be recognized in OTHER COMPREHENSIVE INCOME, under revaluations surplus to the extent of any existing credit balance in the revaluation surplus relating to that asset. The decrease recognized in other comprehensive income REDUCES the amount accumulated in equity under the heading of revaluation surplus.

Question 56

Entity shall assess whether the useful life of an intangible asset is finite or indefinite.

Answer 56

• If FINITE, the length of the asset’s life, or the number of production or similar units, constitutes the useful life.
• Intangible asset has INDEFINITE useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset’s expected to generate net cash inflows for the entity.

Question 57

How do you account for intangible assets with either finite and indefinite useful lifes?

Answer 57

• FINITE: An intangible asset with a finite useful life is amortized over its useful life.
• INDEFINITE: An intangible asset with an indefinite useful life is not amortized.

Question 58

What are the factors determining the useful life of intangible assets?

Answer 58

• Expected usage of the asset and whether the asset could be managed efficiently by another management team
• Typical product life cycles and estimates of useful lives for similar assets
• Technical, technological, commercial or other types of obsolescence
• Stability and demand in the industry for the product or services output from the asset
• Level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity’s ability and intention to reach such a level
• Expected actions by competitors and potential competitors
• Period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases
• Whether the useful life of the asset is dependent on the useful life of other assets of the entity.

Question 59

Explain why INDEFINITE is not the same as INFINITE?

Answer 59

• Infinite means without boundaries: going on forever (loputon)
• Indefinite is related meaning without established boundaries (määrittelemätön)

Question 60

Explain INDEFINITE and INFINITE useful lives for intangible assets?

Answer 60

• Useful life of an intangible asset reflects only that level of future maintenance expenditure required to maintain the asset at its standard performance assessed at the time of estimating the useful life, and the entity’s ability and intention to reach such a level.
• A conclusion that the useful life of an intangible asset is INDEFINITE should not depend on planned future expenditure in excess of that required to maintain the asset at that standard of performance.
• Technology ages quickly, so useful life is often short.
• Useful life of an intangible asset may also be very long or even indefinite. Uncertainty justifies estimating the useful life of an intangible asset on a prudent basis, but it does not justify choosing a life that is unrealistically short.
• Prudent basis = varovaisuuden periaate

Question 61

Intangible assets arising from Contractual or other legal rights

Answer 61

• Useful life of an intangible asset that arises from contractual or other legal rights SHOULD NOT EXCEED the period of the rights, BUT CAN BE SHORTER depending on the period over which the entity expects to use the asset.
• If the rights are conveyed for a limited term that can be renewed, the useful life on the intangible asset shall include the renewal period only if there is evidence to support renewal by the entry without significant cost.
• The useful life of a required right recognized as an intangible asset in a business combination is the remaining contractual period of the contract in which the right was granted and shall not include renewal periods.

Question 62

FINITE useful life: Amortization period?

Answer 62

For intangible assets with finite useful lives, IAS 38 specifies the amortization period and the methods that can be used.

AMORTIZATION PERIOD: The amount of depreciation of an intangible asset with a FINITE life shall be allocated on a systematic basis over is useful life.
o Amortization begins when the asset is available for use in a way the management intended.
o Amortization ceases at the EARLIER of the A) date that the asset is classified as held for sale in accordance with IFRS 5 and B) the date that the asset is derecognized. (eli kumpi onkaan aikaisemmin)

Question 63

FINITE useful life: Amortization method?

Answer 63

The amortization method used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of the benefits.

Examples of possible amortization methods:
o Straight-line method
o Unit of production method
o Diminishing balance method SUDan

Amortization is usually recognized in PROFIT OR LOSS. However, if the future economic benefits are absorbed in producing other assets, the charge constitutes part of the cost of the other asset and is included in its carrying amount.

• Rebuttable presumption = kumottavissa oleva vastaväite

Question 64

Amortization based on revenue (finite useful life)?

Answer 64

There is a rebuttable presumption that an amortization method that is based on the revenue generated by an activity that includes the use of an intangible asset is inappropriate.

This presumption can be overcome only in the limited circumstances
o The intangible asset is expressed as a measure of revenue OR
o When it can be demonstrated that the revenue and the consumption of the economic benefits of the intangible asset are highly correlated.

When choosing an appropriate amortization method, entity can determine predominant limiting factor which is inherent in the intangible asset. Such factor may be number of years, units produced or fixed amount of revenue to be generated.

Question 65

Finite useful life: residual value?

Answer 65

The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless there is commitment to purchase the asset by a third party at the end of the useful life, or there is an active market for the asset.

The depreciable amount of an asset with a finite useful life is determined after deducting its residual value. A residual value other than zero implies that an entity expects to dispose it before the end of its economic life.

Question 66

When an asset has a residual value?

Answer 66

An asset has a residual value if:

a) There is a commitment by a third party to purchase the asset at the end of its useful life OR

b) There is an active market for the asset and
->Residual value can be determined by reference to that market AND
->It is probable that such a market will exist at the end of the asset’s useful life

Question 67

What is the residual value of an asset?

Answer 67

An estimate of an asset’s residual value is based on the amount recoverable from disposal. The estimate is based on current prices of similar assets sold that have reached the end of their useful life and have operated under conditions similar to those in which the asset will be used.

The residual value is reviewed at least at each financial year-end.

Question 68

What if the residual value is greater than carrying value?

Answer 68

Residual value of an intangible asset may increase to an amount equal to or greater than the asset’s carrying amount.

If it does, the asset’s amortization charge is zero unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount.

Question 69

Finite useful life: Review of amortization period and method

Answer 69

During the life of an intangible asset, the estimated useful life might turn out to be inappropriate and the pattern of future benefits flow may change.

Therefore, the amortization period and the amortization method for an intangible asset with a finite useful life shall be reviewed at least at each financial year-end. And changed if needed.

Such change shall be accounted for as changes in accounting estimates in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Question 70

What could impairment loss tell about the amortization period?

Answer 70

The recognition of an impairment loss may indicate that the amortization periods needs to be changed.

Question 71

Intangible assets with indefinite lives, tell me about the amortization, impairment testing and useful life?

Answer 71

An intangible asset with an indefinite useful life should NOT be amortized but SHOULD be carried at either COST or the revaluation amount.

In accordance with IAS 36 Impairment of Assets, an entity is required to test an intangible asset with an indefinite life for impairment by comparing its recoverable amount with its carrying amount: ANNUALLY and WHENEVER THERE IS AN INDICATION THAT THE INTANGIBLE ASSET MAY BE IMPAIRED.

No amortized intangible asset’s useful life shall be reviewed each period to determine whether events continue to support and indefinite useful life assessment for that asset.
o If they do not, the change in the useful life assessment from indefinite to finite shall be accounted for as a change in accounting estimate.
o Reassessing the useful life of an intangible asset as finite rather than indefinite is and indicator that the asset may be impaired.

Question 72

What is the useful life of a trademark that is expected to contribute cash flows indefinitely?

Answer 72

The useful life of such trademark is INDEFINITE. Therefore, trademark will not be amortized until its useful life is no longer indefinite, but will be impairment tested according to IAS 36.

Question 73

When should an intangible asset be derecognized?

Answer 73

An intangible asset shall be derecognized either:
- On disposal, OR
- When no future economic benefits are expected from its use or disposal.

The disposal of an intangible asset may occur in a variety of ways, such as by sale, donation or entering into a finance lease.

Question 74

What is the gain or loss arising from the derecognition of an intangible asset?

Answer 74

The gain or loss arising from the derecognition of an intangible asset is the DIFFERENCE between:
- Possible net disposal proceeds, AND
- Carrying amount of the asset

Gain or loss is recognized in PROFIT OR LOSS when the asset is derecognized. HUOM! Gains shall not be classified as revenue.