Intangible Assets Flashcards
Would searching for possible applications of new research findings or other knowledge be considered development activities?
No - Searching for applications of new research findings or other knowledge, would be included in research as at this stage the entity would not be able to demonstrate that an intangible asset exists that will generate probable future economic benefits.
An entity has $500,000 in the bank in liquid cash and a promise from the bank to lend them an an additional $1,000,000. The entity requires the $1,500,000 to complete a development project. Does the entity meet the criterion for capitalization of development costs which requires that adequate resources be available?
Yes - Adequate resources to complete the project do not necessarily have to currently exist, provided they are expected to be available and in this case they are available.
Genetic Ltd. (GL) has been internally developing a new semi-conductor which is expected to be a source of cash inflows for the next 20 years. They recently acquired a patent. GL intends to sell the patent in 8 years and it only plans to use the patent for 8 years. GL has been in negotiations with another company, Xetec Inc. (XI), who are interested and have agreed to purchase that patent in 8 years time for 50% of today?s value. Should GL assume a residual value for the patent in excess of 0?
The patent would be amortized over its useful life to the entity, which is 8 years. The residual value would be based on 50% of the patent?s fair value at the date it was acquired. The residual amount is not zero as there is a commitment by a 3rd party to purchase the asset at the end of its useful life.
Under IFRS is it correct that all intangibles must be tested for impairment on an annual basis and why?
No - An intangible asset that is subject to amortization would be tested for impairment, only when there is an indication that there has been an impairment rather than on an annual basis. Only an impairment with an indefinite life needs to be tested at least once a year.
Under IFRS it correct that subsequent to taking an impairment loss, if the value of the intangible increases, it should always be written up to its fair value?
Under IFRS one would be able to write up the asset to fair value provided fair value is not in excess of carrying value.Therefore one would not always be able to do so. For example If a company is using the cost method, they would only write the asset up to the carrying value that would have occurred without the impairment, which may be below fair value.
Under ASPE, is it correct that an intangible asset which is subject to amortization, should be written down when the carrying value of the asset exceeds its fair value and why?
No - An intangible asset which is not subject to amortization, should be written down based on a recoverability. The recoverable amount is based on the undiscounted cash flow from both using the asset and ultimately disposing of it. Therefore as long as the carrying value is recoverable it would not be written down even if carrying value falls below fair value.
Is it correct that when an intangible asset has a finite useful life, but the precise length is not known, it should be written off immediately?
No - When the intangible asset has a finite useful life, but the precise length is not known, it should be amortized over the best estimate of its useful life.
Is it correct that if an intangible asset has an indefinite life, it will never be amortized?
No ? If an intangible has an indefinite life it does not mean that it will never be amortized, given that in the future it may be determined that the intangible no longer has an indefinite life, at which time the company will start to amortize it.
Gem Inc. has an intangible assets, a customer list which was purchased for $500,000. The useful life to the enterprise of the customer list is 4 years. At the end of the 4 year period, the company expects to be able to sell the customer list to another company for $100,000. Although no purchaser has yet made a commitment to purchase the list, a number of companies are interested. The pattern of economic benefits from the customer list can not be reliably determined. What is the total annual amortization expense for the intangible asset?
The amount of an intangible asset to be amortized, is the amount initially assigned to that asset less any residual value. The residual value of an intangible asset is assumed to be <u>zero</u> unless, at the end of its useful life to the reporting enterprise, the asset is expected to continue to have a useful life to another enterprise, and:\n\n(A) the reporting enterprise has a commitment from a third party to purchase the asset at the end of its useful life; or\n\n(B) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset’s useful life.\n\nIn this case, no third party has made a commitment to purchase the asset at the end of its useful life and there is no information with respect to an existing market, so both conditions are not met. Therefore, no residual value is assumed and the total amortization expense is calculated as:\n\n$500,000/4 = $125,000.\n\nGiven that the pattern of economic benefits cannot be reliably determined, a straight?line amortization method is appropriate.
Alpha Ltd. has an intangible assets, a non patented technology which was acquired for $1,000,000. The useful life to the enterprise, of the non patented technology, is 10. At the end of the 10 year period, Alpha Ltd. expects to be able to sell the technology for $200,000, although currently there does not exist a market for this type of technology. What is the total annual amortization expense for the intangible asset?
The amount of an intangible asset to be amortized, is the amount initially assigned to that asset less any residual value. The residual value of an intangible asset is assumed to be <u>zero</u> unless, at the end of its useful life to the reporting enterprise, the asset is expected to continue to have a useful life to another enterprise, and:\n\n(A) the reporting enterprise has a commitment from a third party to purchase the asset at the end of its useful life; or\n\n(B) the residual value can be determined by reference to an exchange transaction in an existing market for that asset and that market is expected to exist at the end of the asset’s useful life.\n\nIn this case, there currently does not exist a market for this type of technology and there is no information that a third party has made a commitment to purchase the asset at the end of its useful life, so both conditions are not met. Therefore, no residual value is assumed and the total amortization expense is calculated as:\n\n$1,000,000/10 = $100,000.
Under what condition is an intangible asset not amortized?
When there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity, regardless of the legal life of the asset.
What is the difference between the frequency of impairment testing for goodwill, required by ASPE versus IFRS?
Under ASPE there is no requirement to test annually for impairment for goodwill. Goodwill only has to betested for impairment when events or changes in circumstances indicate that the carrying amount of the reporting unit to which the goodwill is assigned may exceed the fair value of the reporting unit.. Under IFRS goodwill is tested at least annually for impairment.
What is the definition of an intangible (3 key points)?
An intangible asset is an <u>identifiable</u> non-monetary asset without physical substance; the entity must have <u>control </u>of the asset and there must exist a <u>future economic benefit</u> (similar to any other asset).
Explain the meaning of or provide an example of an intangible that is identifiable?
An identifiable intangible must be separable from goodwill and can be sold or rented or arises from a legal right (for example,patent, license etc.).
What does the term ?control? mean, for the purpose of defining an intangible asset?
?Control? implies that the organization has the power to obtain the future benefits from the asset and can restrict access of others to those benefits.
Included in the definition of an intangible asset is the condition that the entity must have control of the asset. Does ?control? of an intangible asset necessarily mean that the entity legally controls the asset?
Normally ?control? stems from a legal right, but it does not have to.
In defining an intangible, does a ?future economic benefit? mean that the intangible will generate revenues?
No ? a ?future economic benefit? could be from cost savings or any other benefit (besides revenues).
What are the 2 recognition criteria for an intangible?
<ol>\n \t<li>Probable that expected future economic benefits attributable to the asset will flow to the entity; and</li>\n \t<li>Cost of the asset can be measured reliably.</li>\n</ol>
Which costs are not normally included (capitalized) for a separately acquired intangible?
Advertising and promotion costs to introduce a new product and service and general and admin overhead.
Provide an example of an activity that would constitute ?research??
Examples would include activities aimed at obtaining new scientific or technical knowledge and understanding.
How do we account for an intangible in the research phase?
The intangible is expensed.
Why is an intangible expensed in the research phase?
The future economic benefits cannot be demonstrated so it does not meet one of the definitions of an asset.
What are examples of activities that would constitute ?development??
Examples of activities in the development phase would include:\n\n(a) Design, construction and testing of prototypes and models;\n\n(b) Design of tools, jigs, moulds and dies involving new technology;\n\n(c) Application of research findings into a plan for the production of new materials, devices, products, processes etc.
