Week 4 Everything

Question 1

intangible assets

Answer 1

Non-monetary assets without physical substance. The lack of physical substance does not preclude an item from being considered to be an asset

Question 2

Examples of intangible assets

Answer 2

patents, mastheads, brand names, copyrights, research and development, and
trademarks

Question 3

Classification of intangible assets

Answer 3

Identifiable

Unidentifiable

Question 4

Identifiable

Answer 4

Can be separated from the entity, and sold, rented

Has a specific value, (brand name, masthead etc.)

Question 5

Unidentifiable

Answer 5

they cannot be separately sold (loyal customers,

good reputation etc.) and are treated as goodwill.

Question 6

a distinction between

Answer 6

1) Intangible assets
a. Identifiable intangible assets (generally)
b. Research & development costs

2)Goodwill

Question 7

AASB138.21 specifies that Intangible Assets can only be recognised if:

Answer 7

a) it is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity

b) the cost of the asset can be measured reliably

Question 8

AASB138.24 requires Intangibles Assets to be initially valued at

Answer 8

Cost

Question 9

Purchased Intangible Assets

Answer 9

AASB138 requires all purchased intangible assets to be recognised as assets, including those intangible assets purchased, as part of
acquiring another business or entity.

Question 10

Purchased Intangible Assets satisfy the recognition criteria in AASB138.21 because:

Answer 10

a) the entity’s willingness to purchase the intangible asset indicates that the entity expects probable future economic benefits
b) the purchase cost can be reliably measured

Question 11

AASB138 specifically prohibits certain Internally Generated Intangible Assets from being recognised:

Answer 11

Internally Generated Goodwill

Research

Internally Generated Brands, Mastheads, Publishing Titles, Customer Lists and similar items

Question 12

Internally Generated Intangible Assets which do not meet Recognition Criteria

Answer 12

Expenditures on an Internally Generated Intangible Assets
which do not meet the recognition criteria in must be expensed. Expenditure on an intangible item that was initially recognised as an expense shall not be recognised as part
of the cost of an intangible asset at a later date, even if the expenditure subsequently
meets the recognition criteria. An Internally Generated Intangible Asset which was initially expensed cannot be subsequently recognised using the revaluation model, by revaluing the Intangible Asset upwards from zero.

Question 13

Measurement of Intangible assets

Answer 13

If the asset meets the requirements to be recognised as intangible assets then the initial measurements has to be at cost of acquisition.

Question 14

COST of acquisition comprises:

Answer 14

1) Purchase price;

2) Any directly attributable costs to prepare the asset to its intended use.

Question 15

SUBSEQUENT MEASUREMENT can be

Answer 15

AT COST Subject or not to
amortisation

AT FAIR VALUE ONLY if there is an active market

Subject or not to
amortisation

Question 16

Revaluation of intangible assets

Answer 16

Intangible assets may be revalued only if there is an ‘active market’

Question 17

Active market defined as:

Answer 17

A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Question 18

Most Intangible Assets are unique,

Answer 18

Most Intangible Assets are unique, and therefore do not have active markets. Transactions are infrequent, and are negotiated individually between buyers and sellers. Therefore, intangible assets usually cannot be revalued.

Question 19

But what if they are revalued?

Answer 19

Revaluation must be to fair value of asset

Question 20

amortisation for intangible assets

2 different situations for intangible assets

Answer 20

If intangible assets have a limited and defined useful life THEN AMORTISATION

If intangible assets have an indefinite useful life THEN NO
AMORTISATION BUT ANNUAL
IMPAIRMENT TEST

Question 21

Intangible assets subject to amortisation

Answer 21

Intangible assets are amortised only if useful life can be defined and is limited. The amortisation charge is calculated based on the useful life and the expected residual value of the asset.

Question 22

The residual value of intangible assets with finite lives must be
zero, unless:

Answer 22

there is a commitment by a third party to purchase the asset at the end of its useful life

there is an active market for the asset, and the residual amount can be determined by reference to that market and it is probable that the market will still exist at the end of the useful life of the asset

Question 23

Intangible assets NOT subject to amortisation

Answer 23

If the useful life cannot be determined. Then the intangible assets have an ‘indefinite life’. NO AMORTISATION BUT IMPAIRMENT TESTING annually.

Question 24

Often Internally Generated Brands, Mastheads, Publishing Titles, Customer Lists and similar items, provide substantial economic benefits, and therefore satisfy the recognition criteria in AASB138.21, but AASB138.63 prohibits their recognition.

Answer 24

Therefore, for many entities, valuable Internally Generated Intangible Assets are not recognised in the Statement of Financial Position.

Question 25

Often Intangible Assets have fair values greatly in excess of their cost, but AASB138.75 prohibits the revaluing nearly all Intangible Assets.

Answer 25

Therefore, for many entities, Intangible Assets are significantly undervalued in the Statement of Financial Position.

Question 26

The non-recognition of valuable Internally Generated
Intangible Assets, such as Brand names, and the significant
undervaluation of Intangible Assets generally :

Answer 26

may discourage entities from developing new intangible
assets, even though they expected to generate future cash inflows therefore discouraging innovation, and reducing competitiveness

may discourage investors and lenders from providing funds to entities that rely heavily on intangible assets to conduct their operations

Question 27

Research

Answer 27

Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Does not have a specific commercial objective. Generally precedes development

Question 28

Development

Answer 28

Application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services prior to the commencement of commercial production or use. Typically follows research activity and involves the commercial application of knowledge generated in earlier research phases.

Question 29

Examples of development

Answer 29

design, construction and testing of prototypes, model, pilot plants; new technology; improved materials or devices

Question 30

Research and development

Answer 30

Expenditures in research and development, are undertaken with the objective of obtaining future economic benefits. But there is considerable uncertainty (risk) regarding whether research and development will be successful. As research and development may provide future economic benefits, they may qualify to be capitalised
as intangible assets

Question 31

Research expenditure CANNOT be

Answer 31

Research expenditure CANNOT be capitalised as intangible asset, and must be expensed as incurred

Question 32

Research expenditure CANNOT be capitalised as intangible asset, and must be expensed as incurred

Why?

Answer 32

It is considered that future economic benefits from research are too remote and uncertain, because there is no
specific commercial objective. Therefore, it is impossible to demonstrate that research will generate probable future economic benefits.

Question 33

Goodwill

Answer 33

Goodwill is an intrinsic part of a business. Represents the future economic benefits associated with a company’s existing customer base, efficient management, reliable suppliers, employees skills etc. Cannot be purchased or sold separately, but can only be acquired together with the entity

Question 34

Internally generated

goodwill

Answer 34

The customer base, efficient management, reliable suppliers, employees skills
etc built up over a number periods by a company. CANNOT be recognised
as intangible asset

Question 35

Purchased goodwill

Answer 35

The customer base, efficient
management, reliable suppliers, employees skills etc that are purchased together with the company that built it up by another company. CAN be recognised as intangible asset by the purchasing company.

Question 36

Goodwill (measurement)

Answer 36

Only purchased goodwill in a business combination is

permitted to be recorded because purchased goodwill can be measured reliably based on the amount paid for the entity.

Question 37

Purchased goodwill in a business combination where company. A purchases company B (which has a goodwill) is measured
as:

Answer 37

The total purchase price paid by company A to purchase company B

minus

The fair value of identifiable
net assets [identifiable total assets – (total liabilities + contingent liabilities)] of company B

Question 38

Goodwill is considered to have indefinite useful life therefore

Answer 38

Goodwill CANNOT be amortised. Instead, Goodwill must be tested annually for impairment. Goodwill is impaired if carrying amount of goodwill is higher than recoverable amount of goodwill. Internally Generated Goodwill cannot be recognised as an Intangible
Asset. Furthermore, goodwill cannot be revalued, (because this would result in recognising internally generated goodwill as an asset)