Week 4: IAS 38 Intangibles and IAS36 Impairment of Assets Flashcards

1
Q

What is the defintioin of an intangible asset?

A

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. ‘

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2
Q

What does seperable mean?

A

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

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3
Q

define controlled?

A

Controlled is the Power to obtain benefits from the asset

Restrict the access of the others to the benefit

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4
Q

define future economic benefits?

A

Future economic benefits is the revenues from sale of products or service or Cost saving

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5
Q

How are internally generated intangible assets treated? why?

A

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

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6
Q

What are some other internally generated costs expensed as incurred?

A

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

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7
Q

Are training costs intnagible assets?

A

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

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8
Q

Are software costs intangible assets?

A

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

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9
Q

capitalised vs expensed?

A

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.

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10
Q

how are purchased intangible assets treated?

A

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

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11
Q

How are intangible assets classified based on their lifespan?

A

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

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12
Q

If an intangible asset has a finite life how is treated?

A

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

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13
Q

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.

A

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.

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14
Q

If an intangibel asset has an indefinte lfie how can you treat it?

A

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

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15
Q
  1. 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?

A

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

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16
Q

what is the impairment of an asset defintion?

A

The amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount

17
Q

How do you determine the fair value of impaired asset?

A

The revised carrying value is the lower of carrying value or Recoverable amount (higher of Face Value or Value in use).

18
Q

how do you measure the value in use of an asset?

A

value in use is determined by estinating future cash inflows and outflows to be derivied from use of the asset and it’s ultimate disposal, and applying a suitable discount rate to these cashflows.

cashflows relating to financing activities or income taxes should not be included.

19
Q

How is the impairemnt loss treated for intangible assets?

A

Offset against specific asset, if possible.

If asset not previously revalued, take loss to income statement as expense

If asset previously revalued:
Offset loss against revaluation gain previously booked
Excess to income statement

20
Q

What are research costs?

A

Research Costs are:

Original and planned investigation

Undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

21
Q

How are research costs treated and why?

A

Research costs are expensed becuase:

They are controlled by the entity

They do not meet the definition of an asset

There is no guarantee of future economic benefit.

22
Q

What are development costs?

A

Development Costsare tge Application of research findings or other knowledge to a plan or design
To produce new or substantially improved materials, devices, products, processes, systems or services

Before the start of commercial production.

23
Q

How are development costs treated and why?

A

development costs are capitilised because they

Established technical and commercial feasibility of the asset

There is an intention and ability to complete the intangible asset and either use it or sell it

Can demonstrate ability to generate future economic benefits.

Separately identifiable from research phase

Must regularly review to ensure still meets criteria

Amortised over its useful live once production begins

24
Q

How is mixed r and d treated and why?

A

In process Research and Development Costs are Capitalised

Recognised at cost even if component is research

Subsequent expenditure expensed unless meets development criteria

25
Q

What is PIRATE used for?

A

PIRATE lays out the Conditions for Capitalisation

26
Q

What does pirate stand for?

A

P.robable future economic benefits through sale or internal cost savings

I.ntention to complete the asset and use or sell

R.eliable measurement of development costs

A.dequate resources to finish the project

T.echnical feasibility of completion so it will be available for use or sell

E.xpected to be profitable, benefits greater than costs

27
Q

An entity has incurred the following expenditure during the current year:

$100,000 spent on the initial design work of a new product – it is anticipated that this design will be taken forward over the next two-year period to be developed and tested with a view to production in three years’, time.

$500,000 spent on the testing of a new production system which has been designed internally and which will be in operation during the following accounting year. This new system should reduce the costs of production by 20%.

How should each of these costs be treated in the financial statements of the entity?

Expensed or Capitalised and why?

A

(a) Expenses: Research costs - early design stage, no guarantee of economic benefit

(b) Capitalised: Development stage costs - new production system is due to be in place soon and will produce economic benefits in the shape of reduced costs

28
Q
A