W3 - Intangible assets

Question 1

What is an intangible resource (asset)?

Answer 1

Any resource that is both intangible (lacking physical substance) and of economic value to the firm.

This includes all types of:
- intellectual capital, including those items associated with the firm’s human capital (the value of employee training, morale, loyalty, knowledge, etc.)
- process-related capital (the value of intangibles associated with information technology, production processes, etc.)
- external relations (customer satisfaction, customer loyalty, business relationships, other components of brand values, etc.)”

Question 2

What are the issues concerning intangible asset recognition?

Answer 2

• Less defined property rights attached (i.e. control)
• Uniqueness
• Intrinsically tied to value of business

Identification of cost can be difficult.
Accounting systems are historic and transaction-based
Valuing intangibles often means looking forward
Value impacted by uncertainty, volatility and change
No ready market values
Difficulties in measurement may compromise qualitative characteristics of reliability and comparability

Question 3

What is Definition and recognition criteria of Intangible asset

Answer 3

“An identifiable non-monetary asset without physical substance”

Recognition criteria:
- Control
- Identifiable (capable of being transferred from the entity)
- Flow of economic benefits
- Reliable measurement

Question 4

What are the three ways to acquire intangible assets?

Answer 4

1. Externally purchased
2. Acquired as part of a business combination
   Separately identified on acquisition
   Goodwill on acquisition
3. Internally generated
   Recognition and measurement methods are determined by category

Question 5

How do you measure Intangible assets externally purchased?

Answer 5

At cost

Question 6

How do you measure Intangible assets acquired as part of a business combination?

Answer 6

If identifiable and can be measured reliably at fair value – recognise separately in consolidated financial statements at this fair value

If not – subsumed within goodwill arising on acquisition amount, which is capitalised on acquisition

Question 7

What is the only time you see goodwill?

Answer 7

It arises on acquisition of a subsidiary company – Appears only in the consolidated financial statement

Question 8

How do you measure Intangible assets internally generated?

Answer 8

The process of generation can be divided into two phases:
- Research
- Development phase

Research: expense (p&l)
Development: capitalised if and only if all 6 following criteria are met:
1. Technical feasibility
2. Intention to complete and use or sell the asset
3. Ability to use or sell the asset
4. The asset will generate future economic benefits – i.e. a market exists for the asset or the output from the asset, or it will be used internally
5. Adequate technical, financial and other resources are available to complete, sell or use the asset
6. Development expenditure can be measured reliably

Question 9

How do you amount for amortisation for intangible assets? (depreciation)

Answer 9

Life is FINITE (always!)

Amortisation usually uses straight-line

Estimation may be difficult in practice, and require judgement of:
- Technical/ commercial obsolescence
- Future changes in demand

Question 10

How do you amortise an intangible asset which useful life can’t be estimated?

Answer 10

Test every year for impairment.
Also, review every year whether life should become finite.