Week 3 Flashcards
Define research and development according to NZIAS 38.
Research: Research is defined as the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. It is the phase where the focus is on obtaining new knowledge and understanding, and not necessarily on creating a specific asset or product. Research is recognised as an expense when it is incurred.
Development: application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, products, processes, systems, or services before the start of commercial production or use.
* Development can be recognised as an intangible asset.
* Development can only be recognised if it is technical & financially feasible, and the expenditure can be reliably measured, and there is the intention and ability to use and sell the intangible asset and there are probable future economic benefits.
Determine whether an item is research or development in line with the definitions and examples in NZIAS 38.
Research is about exploration and gaining new knowledge with uncertain outcomes.
eg.
1. investigating new scientific principles without a specific end-use.
2. Conducting initial studies to understand new technologies or phenomena.
3. Exploring new methods or techniques that are not yet directed toward a particular product or service.
Development is about applying that knowledge to create or enhance specific products or processes with a clear commercial objective.
1. Designing and testing prototypes based on new research findings with the intention of producing a commercial product.
2. Developing a new software system after conducting research to establish its feasibility.
3. Creating a new manufacturing process based on research insights to improve efficiency or functionality.
Concept of recognition
The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets the definition of an intangible asset and it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and the cost of the asset can be measure reliably.
Amortisation
Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life. This process reflects the consumption of the asset’s economic benefits over time.
**Finite Useful Life: ** For intangible assets with a finite useful life (e.g., patents, copyrights), amortisation is applied. The amortisation method should reflect the pattern in which the asset’s economic benefits are consumed, though if such a pattern cannot be reliably determined, a straight-line method is used.
Indefinite Useful Life: Intangible assets with an indefinite useful life (e.g., goodwill, some trademarks) are not amortized but are instead tested for impairment annually
Amortization begins when asset available for use - when it is in the location and condition necessary for it to be capable of operating in the manner intended by management
Impairment
Impairment occurs when the carrying amount of an intangible asset exceeds its recoverable amount (i.e., the higher of its fair value less costs to sell and its value in use). When impairment is identified, the asset’s carrying amount must be adjusted downward to its recoverable amount.
Review for Indicators: Intangible assets must be tested for impairment if there are indicators that the asset may be impaired (e.g., a significant decline in market value or changes in the economic environment).
Annual Testing: Intangible assets with indefinite useful lives and goodwill are tested for impairment annually, regardless of whether there is an indication of impairment.
Valuation
Valuation involves determining the fair value of an intangible asset. This process is crucial for initial recognition, subsequent measurement, and impairment testing.
Application:
Initial Recognition: Intangible assets acquired in a business combination are initially recognized at fair value.
Subsequent Measurement: After initial recognition, intangible assets can be measured using either the cost model or the revaluation model:
1. Cost Model: Intangible assets are carried at cost less accumulated amortisation and impairment losses.
2. **Revaluation Model: **If an active market exists, intangible assets can be carried at revalued amount (fair value at the revaluation date) less any subsequent accumulated amortisation and impairment losses. This model is less commonly used for intangible assets due to the difficulty in determining fair value.
Fair Value Determination:
Market-Based: Using quoted prices for identical assets in an active market.
**Income-Based: **Using discounted cash flows to estimate future benefits expected from the asset.
Cost-Based: Estimating the cost to replace or reproduce the asset
Define an intangible asset
An intangible asset is one that is an identifiable non-monetary asset without physical substance.
Identifiable if it either:
(a) is separable, i.e., is capable of being separated or divided from the entity
(b) arises from contractual or other legal rights()
