Week 2

Question 1

How does IAS 38 define intangible assets?

Answer 1

Intangible assets are non monetary assets without physical substance.

Question 2

In IAS 38 what must an intangible asset be?

Answer 2

Controlled by the entity as a result of past events.

Something from which the entity expects future economic benefits to flow.

Cost of the asset can be measured reliably.

Question 3

What are examples of intangible assets?

Answer 3

Goodwill
Brands
Software
Licences and franchises
Customer lists
Copyrights or patents
Recipes or formulae

Question 4

How are intangible assets treated in the financial statements (IAS 38)?

Answer 4

They are classed as a non-current asset in the FNST.

They are initially recognised at COST and subsequently carried either at cost or revalued amount.

Costs that do not meet the recognition criteria should be treated as expense when incurred.

Question 5

What is the problem with internally generated intangible assets?
How are these classified (IAS 38)?

Answer 5

Problems arise as it is difficult to measure cost reliably.

IAS 38 states that all internally generated intangibles must be treated as research and development costs:
Research Phase
Development Phase

Question 6

How are research and development costs classified?

Answer 6

These can bring future economic benefit and so can be classed as intangible assets.

Expenditure on R&D must be split into research phase and development phase.

Question 7

How are Research Phase costs classified (IAS 38)?

Answer 7

The Research Phase cannot be recognised as an asset under IAS 38 because it cannot be certain than future economic benefits will flow to the entity.

Instead, research costs should be written off as an expense as they are incurred.

Question 8

How are Development Phase costs classified (IAS 38)?

Answer 8

Expenditure during the development phase is recognised as an intangible asset if it meets the following criteria:
The project is technically feasible
The entity intends to complete the project and use or sell it
The asset will generate future benefits
The entity has adequate technical and financial resources
Expenditure on the asset can be measured reliably

Question 9

What is amortisation?

Answer 9

The equivalent of depreciation for intangible assets.

Tangible non current assets - Depreciate

Intangible assets - Amortise

Question 10

What does IAS 38 require from classifying intangible assets?

Answer 10

IAS 38 requires that intangible assets are assessed to determine whether their useful life is finite or indefinite.

Question 11

How are intangible assets amortised based on their life span?

Answer 11

Intangible assets with finite (limited) useful life should be amortised over its expected useful life.

Intangible assets with indefinite (not limited) useful life should not be amortised. Instead it is tested for impairment at least annually.

Question 12

What is IFRS 3 business combinations?

Answer 12

IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business. Such business combinations are accounted for using the acquisition method.
This requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.

Question 13

What is goodwill?

Answer 13

Goodwill is created by a good relationship between a business and its customers.

Question 14

How is goodwill classified in the FNST?

Answer 14

Generally goodwill in a business is not seen in financial statements.

Unless, when a business is sold, then it is purchased goodwill.

Internally generated goodwill is not recognised as an asset.

Question 15

How is purchased goodwill recorded in the FNST?

Answer 15

It is shown on the statement of financial position because it has been paid for.

It has no tangible substance so it is an intangible non-current asset.

NCA

Question 16

What is the value of goodwill?

Answer 16

The difference between net assets acquired and purchase price.

Question 17

How do we treat Goodwill?

Answer 17

Goodwill acquired in a business combination is recognised as an asset.

It is initially measured at cost.

It is NOT amortised.

After initial recognition measured at cost less any accumulated impairment losses.

It is tested for impairment annually (as per IAS 36).

Question 18

What is negative goodwill?

Answer 18

It occurs when the fair value of assets and liabilities exceeds the purchase price.

Can arise due to errors in measuring the fair value or can be a bargain price.

Question 19

How is negative goodwill disclosed in the FNST?

Answer 19

Negative goodwill should be disclosed in the income statement as a gain.

Question 20

How does IAS 36 define impairment of Assets?

Answer 20

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

Should be carried out annually for goodwill and for intangible assets with indefinite useful lives, other assets should be tested if there are indications of impairment.

Question 21

How are impairment losses recorded in the FNST?

Answer 21

Impairment losses are usually recognised as an EXPENSE in the income statement.

But, if an asset is carried at revalued amount, impairment losses are offset against those gains.

Question 22

What is property, plant and equipment according to IAS 16?

Answer 22

IAS 16 defines property, plant and equipment as tangible items that:
are held for use in the production or supply of goods or services, for rental to other or for administrative purposes.
are expected to be used during more than one period.

Question 23

What are some examples of property, plant and equipment?

Answer 23

Tangible non current assets such as:
land
buildings
machinery
computers
motor vehicles
office furniture

Question 24

How does IAS 16 recognise PPE?

Answer 24

The cost of an item of PPE is recognised an as asset if:
It is probable that future economic benefits associated with the item will flow to the entity.
The cost of the item can be measured reliably.

Question 25

How is the cost of a PPE asset determined?

Answer 25

Purchase price
Import duties
Directly attributable costs of bringing to the condition (site prep, delivery costs, installation costs, professional fees)

Question 26

How is PPE measured in IAS 16?

Answer 26

An asset is initially measured at cost.

After recognition, IAS 16 allows choice of either:

Cost model - carry the asset at its cost less depreciation

Revaluation model - carry the asset at a revalued amount. (only available if the fair value of the item can be measured reliably)

Question 27

How are revaluation gains and losses recorded in the FNST?

Answer 27

Revaluation gains are credited to a revaluation reserve and recognised as other comprehensive income.

Revaluation losses are recognised as an expense in the calculation of profit or loss.

Question 28

How does revaluation look in the journal?

Answer 28

Debit = cost of asset (SOFP - NCA)

Credit = revaluation reserve (SOFP - Equity)

Question 29

What are the standard states of depreciation (IAS 16)?

Answer 29

Depreciable amount - should be allocated on a systematic basis over its useful life.

Depreciation method - should reflect the pattern in which the assets economic benefits are consumed by the entity.

Depreciation charge - for each period should be recognised as an expense.

Question 30

What is investment property in IAS40?

Answer 30

Investment property is property (land and buildings) which is held to earn rentals or for capital appreciation or both.

Question 31

How is investment property measured?

Answer 31

Initial measurement is at cost.

After, property may be measured using either:

The fair value model - property is carried at fair value, gains and losses on adjusting fair value are recognised in the calculation of profit or loss.

The cost model - the property is carried at cost less any accumulated depreciation and less any accumulated impairment losses.

Question 32

What are IFRS’s 5 NCA held for resale?

Answer 32

Assets intended for sale
Listed separately
Measured at lower of cost and fair value
Not depreciated if held for sale