Topic 2 - Intangible Assets

Question 1

What are intangible assets?

Answer 1

– identifiable non-monetary assets without physical substance

Question 2

What are some examples of identifiable intangible assets?

Answer 2

– patents, licences, trademarks and copyright

– brand names

– mastheads

– research and development

Question 3

What are some examples of unidentifiable intangible assets?

Answer 3

Goodwill:

– good customer relationships

– established reputation

– knowledgeable staff

Question 4

What internally generated intangible assets cannot be recognised?

Answer 4

– research

– brands, mastheads, publishing titles, customer list

– goodwill

Question 5

Other intangible assets require a cost to qualify for recognition.

These costs include:

– ?

– ?

– ?

Answer 5

– the consideration paid

– associated costs, e.g. fees, discounts

– costs of getting the asset ready for use

Question 6

Intangible assets are initially valued at cost if:

– ?

– ?

Answer 6

– they are internally generated and we can determine costs reliably

– they are purchased individually (as opposed to being purchased in a business combination)

Question 7

Define business combinations.

What is it also known as?

Answer 7

(mergers / acquisitions)

– intangibles acquired during a business combination must be valued at their fair value

– assumption: future economic benefits will flow from all intangibles acquired in a business combination

Question 8

Intangibles (other than goodwill) are normally amortised over their useful life.

Name two methods of amortisation.

Answer 8

1) Time-based (e.g. number of years)
2) Output capacity-based (e.g. number of units produced)

Question 9

Amortisation methods used must reflect the pattern in which benefits arise from the intangible asset.

What is the special case rule that does not exist for any other asset?

Answer 9

– if the pattern of benefits is uncertain, straight-line amortisation must be used

Question 10

Intangibles such as goodwill may have an indefinite useful life.

What does this mean regarding cash flows?

Answer 10

– this means that the period over which the asset generates cash flows is not foreseeable:

– no amortisation

– BUT: an impairment test must be conducted at the end of each reporting date

Question 11

Define research.

Answer 11

– an original investigation undertaken to gain scientific or technical knowledge and understanding

– expensed when incurred

Question 12

Define development.

Answer 12

– an activity undertaken where research knowledge is used to create products with a commercial value

Question 13

When can development be capitalised?

Answer 13

– completion of the intangible is technically feasible

– completion and use or sale are intended

– the entity is able to use or sell the completed asset

– future economic benefits for the entity are probable

– resources to complete the asset are available

– expenditure during asset development can be measured reliably

Question 14

When does goodwill arise?

What type of asset is it?

How is it recognised on the balance sheet?

What does it represent?

Answer 14

– goodwill may arise when one entity purchases another entity

– it is an unidentifiable intangible asset that cannot be separated from the entity

– internally generated goodwill can never be recognised on the statement of financial position

– it represents future economic benefits associated with:

• existing customers
• knowledge of staff
• reliable suppliers

Question 15

How is goodwill calculated?

Answer 15

– as the difference between the fair value of all net assets of the entity and the “price” paid for the entity

Question 16

When is an impairment required for goodwill?

Answer 16

– the value of goodwill must be tested for impairment at the end of each reporting period

– an impairment is required if the carrying amount exceeds the recoverable amount

– recoverable amount is the higher of:

• value in use (discounted future cash flow)
• fair value less costs to sell