Week 4: IAS 38 Intangibles and IAS36 Impairment of Assets Flashcards
What is the defintioin of an intangible asset?
An intangible asset is ‘an identifiable non-monetary asset without physical substance. An asset is a resource that is controlled by the entity, because of past events and from which future economic benefits are expected. ‘
What does seperable mean?
sperable is when something is Capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, like licenses or patents
define controlled?
Controlled is the Power to obtain benefits from the asset
Restrict the access of the others to the benefit
define future economic benefits?
Future economic benefits is the revenues from sale of products or service or Cost saving
How are internally generated intangible assets treated? why?
Internally generated intangible assets are expensed as incurred unless purchased in a business combination:
Why?
Cannot be separately identified from the costs of running the business
Cannot establish true benefit
Cannot establish true cost
Entity retains no legal or contractual right and therefore cannot restrict access of economic benefit to others
What are some other internally generated costs expensed as incurred?
Internally generated Other Costs Expensed as incurred:
Internally generated goodwill
Start-up, pre-opening and pre-operating costs
Training costs
Advertising and promotional costs
Relocation Costs
Are training costs intnagible assets?
no becuase they cannot guarantee future benefit
Cannot be separated from the entity
Entity retains no legal or contractual right
Cannot restrict access of economic benefit to others as staff can leave
Are software costs intangible assets?
Cannot guarantee future benefit
Cannot be separated from the entity
Entity retains no legal or contractual right
Cannot restrict access of economic benefit to others as staff can leave
capitalised vs expensed?
Capitalizing a cost means recording it as an asset on the balance sheet, while expensing a cost means recording it as an expense on the income statement. The main difference between capitalizing and expensing is the length of time the cost is expected to provide benefits:
Capitalizing
A cost is capitalized if it’s expected to provide benefits over more than one year. The cost is recorded as an asset on the balance sheet, and then depreciated or amortized annually as an expense on the income statement.
Expensing
A cost is expensed if it’s expected to provide benefits for a short period of time. The cost is recorded as an expense on the income statement in the same period it was incurred.
how are purchased intangible assets treated?
purchased intangible assets are Capitalised:
becuase they are Non-Monetary
May bring future benefit
Can be separated from the entity
Entity retains legal or contractual right
Can restrict access of economic benefit to others
Can be reliably measured
How are intangible assets classified based on their lifespan?
Classification based on useful life:
Finite lives:
a limited period of benefit to the entity
Infinite lives:
no foreseeable limit to the period over which the asset is expected to generate net cash inflows
If an intangible asset has a finite life how is treated?
If an intangible asset has a finite life there are two ways to treat it:
Historical Cost Method
Initial Recognition at cost
Amortisation based on pattern of use, or S/L if not possible to determine, and recorded in P&L
Amortisation charge should be reviewed at least annually
Impairment review if triggering event
Revaluation Method
Only allowed if there is an active market to determine cost (uncommon)
Examples: patents, copyrights, franchises, licensing agreements
During the 2021, A plc purchased a well-known fast-food franchise for £1M with the right to use for 20 years, receiving a franchise certificate in return. It is probable that future economic benefits will flow from the franchise to A plc.
Which of the following statements are correct? You may choose more than one.
The franchise is not an intangible asset and the cost of £1M should be expensed immediately in profit or loss.
The franchise, even though it is identifiable, is not an intangible asset because it has physical substance in the form of a franchise certificate.
The franchise is an intangible asset as it is identifiable and has no physical substance.
The franchise cost can be reliably measured at £1M and it is probable that A plc will generate revenue from its use and therefore it is an asset.
A plc controls the franchise through the contractual right to use the franchise over the period of 20 year.
The franchise is an intangible asset as it is identifiable and has no physical substance.
The franchise cost can be reliably measured at £1M and it is probable that A plc will generate revenue from its use and therefore it is an asset.
A plc controls the franchise through the contractual right to use the franchise over the period of 20 year.
If an intangibel asset has an indefinte lfie how can you treat it?
Historical Cost Method
Initial Recognition at cost
Subsequent expenditure usually expensed
Not amortised
Impairment tested annually
If events do not support indefinite life, then change to finite life (change in accounting estimate)
Revaluation Method
Not allowed
Examples: trademarks, trade names, brands, perpetual franchises etc
- Devon Cheeses Ltd wants to diversify into vegetarian organic sausages. The project team produced a list of costs associate with the new endeavor:
Recipes from an international chef
A license to use a specialized computer-controlled oven
Registration of a trade name “The Organo One”
Training courses for management in sausage making
Which costs can be capitalised and recorded as an intangible asset?
Recipes from an international chef. YES
A license to use a specialized computer-controlled oven YES
Registration of a trade name “The Organo One”. YES
Identifiable from contractual rights
Control Future Economic Benefit
Reliably measured
Probable benefit received
Trade name defensive intangible to protect benefits
Training courses for management in sausage making NO
Can improve management expertise but not controllable