ACCA Paper F 7 Financial Reoirting F7FR Session11 d08

OVERVIEW

Objective

¾

To explain the accounting rules for intangible non-current assets.

RECOGNITION AND INITIAL MEASUREMENT DISCLOSURE MEASUREMENT AFTER RECOGNITION USEFUL LIFE

¾ General criteria

¾ Initial measurement – cost

¾ Subsequent expenditure

¾ Cost model

¾ Revaluation model

¾ Accounting entries

on revaluation

¾ Factors

¾ Finite useful lives

¾ Indefinite useful lives

IMPAIRMENT AND

DERECOGNITION INTRODUCTION

TO IAS 38

¾ Scope

¾ Definitions

¾ Definition criteria

INTERNALLY GENERATED INTANGIBLE ASSETS

¾ Internally generated goodwill

¾ Other internally generated

assets

¾ Specific recognition criteria

¾ Recognition of expenses and

¾ Impairment losses

¾ Retirements and

disposals

¾ Intangible assets

¾ Revaluations

¾ Research and development

1

INTRODUCTION TO IAS 38

1.1

Scope

¾

The standard applies to all intangibles except:

‰ those covered specifically by other standards (IAS 2, IAS 11, IAS 12, IAS 19, IAS 32, IAS 39, IFRS 3, IFRS 4 and IFRS 5); and:

‰ mineral rights and expenditure on exploration for, development and extraction of minerals, etc.

1.2

Definition

Intangible assets are identifiable non-monetary assets without physical substance.

Commentary

Some intangibles may be contained in or on a physical medium, e.g. software on a floppy disk or embedded within the hardware. Judgement has to be used to determine which element is more significant, i.e. the intangible or the tangible asset.

Example 1

Classify each of the following assets as either tangible or intangible: (1) the operating system of a personal computer

(2) an off-the-shelf integrated publishing software package

(3) specialised software embedded in computer controlled machine tools (4) a “firewall” controlling access to restricted sections of an Internet website.

Definition

¾

An asset is a resource:

‰ controlled by an entity as a result of past events; and

‰ from which future economic benefits are expected to flow to the entity.

¾

Examples of intangibles include:

‰ Patents;

‰ Copyrights (e.g. computer software); ‰ Licences;

‰ Intellectual property (e.g. technical knowledge obtained from development activity); ‰ Trade marks including brand names and publishing titles;

‰ Motion picture films and video recordings.

1.3

Definition criteria

1.3.1

“Identifiability”

¾

An intangible asset, whether generated internally or acquired in a business combination, is identifiable when it:

‰ is separable; or

Commentary

So it is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability.

¾

arises from contractual or other legal rights.

Commentary

These rights are regardless of whether they are transferable or separable from the entity or from other rights and obligations.

1.3.2

“Control”

¾

Control means:

‰ the power to obtain the future economic benefits from the underlying resource; and ‰ the ability to restrict the access of others to those benefits.

¾

Control normally stems from a legal right that is enforceable in a court of law.

However, legal enforceability is not a prerequisite for control as the entity may be able to control the future economic benefits in some other way.

¾

Expenditure incurred in obtaining market and technical knowledge, increasing staff skills and building customer loyalty may be expected to generate future economic benefits. However, control over the actions of employees and customers is unlikely to be sufficient to meet the definition criterion especially where there are non-contractual rights.

1.3.3

“Future economic benefits”

¾

These are net cash inflows and may include increased revenues and/or cost savings.

Commentary

The use of intellectual property in a production process may reduce future production costs rather than increase future revenues.

2

RECOGNITION AND INITIAL MEASUREMENT

2.1

General criteria

¾

An intangible asset should be recognised when it:

‰ complies with the definition of an intangible asset (see above); and ‰ meets the recognition criteria set out in the standard.

¾

The recognition criteria are that:

‰ it is probable that future economic benefits specifically attributable to the asset will flow to the entity; and

‰ the cost of the asset can be measured reliably.

¾

The probability of future economic benefits should be assessed using reasonable and supportable assumptions, with greater weight being given to external evidence.

2.2

Initial measurement — cost

¾

Intangible assets should be measured initially at cost.

¾

An intangible asset may be acquired:

‰ separately;

‰ as part of a business combination; ‰ by way of a government grant; ‰ by an exchange of assets.

2.2.1

Separate acquisition

¾

The cost of the intangible asset can usually be measured reliably when it has been separately acquired (e.g. purchase of computer software).

¾

As the price paid will normally reflect expectations of future economic benefits, the probability recognition criteria is always considered to be satisfied for separately acquired intangible assets.

¾

“Cost” is determined according to the same principles applied in accounting for other assets. For example:

‰ Purchase price + import duties + non-refundable purchase tax.

‰ Deferred payments are included at the cash price equivalent and the difference between this amount and the payments made are treated as interest.

¾

As with other assets, expenditure that would not be classified as “cost” include those associated with:

‰ Introducing a new product or service (including advertising and promotion); ‰ Conducting business in a new location or with a new class of customer; ‰ Administration and other general overheads;

‰ Initial operating costs and losses;

‰ Costs incurred while an asset capable of operating in the manner intended has not yet been brought into use;

Example 2

Kirk is an incorporated entity. On 31 December it was successful in a bid to acquire the exclusive rights to a patent that had been developed by another entity. The amount payable for the rights was $600,000 immediately and $400,000 in one years time. Kirk has incurred legal fees of $87,000 in respect of the bid. Kirk operates in a jurisdiction where the government charges a flat rate fee (a “stamp duty”) of $1,000 for the registration of patent rights. Kirk’s cost of capital is 10%.

Required:

Calculate the cost of the patent rights on initial recognition.

Solution

$ Cash paid

Deferred consideration Legal fees

Stamp duty

________

Cost on initial recognition _{________}

2.2.2

Business combination

¾

The cost of an intangible asset acquired in a business combination is its fair value at the date of acquisition, irrespective of whether the intangible asset had been recognised by the acquiree before the business combination. (IFRS 3 “Business Combinations”)

¾

The fair value of intangible assets acquired in business combinations can normally be measured with sufficient reliability to be recognised separately from goodwill.

¾

Fair value at the date of the acquisition might be measured using:

‰ the current bid price in an active market (where one exists); ‰ the price of the most recent, similar transactions for similar assets; ‰ multiples applied to relevant indicators such as earnings;

‰ discounted future net cash flows.

Commentary

Example 3

Picard is an incorporated entity. On 31 December it paid $10,000,000 for a 100% interest in Borg.

At the date of acquisition the net assets of Borg as shown on its statement of financial position had a fair value of $6,000,000. In addition Borg also held the following rights:

(1) The brand name “Assimilation”, a middle of the range fragrance. Borg had been considering the sale of this brand just prior to its acquisition by Picard. The brand had been valued at $300,000 by Brand International, a reputable firm of valuation specialists, who had used a discounted cash flow technique.

(2) Sole distribution rights to a product “Lacutus”. It is estimated that the future cash flows generated by this right will be $250,000 per annum for the next 6 years. Picard has determined that the appropriate discount rate for this right is 10%. The 6 year, 10% annuity factor is 4.36.

Ignore taxation.

Required:

Calculate goodwill arising on acquisition.

Solution

Picard will recognise the two intangible assets on consolidation. They are taken into account when the cost of acquisition is allocated in accordance with IFRS 3 Business Combinations.

$000 Cost

Net assets recognised in Borg’s statement of financial position Brand acquired

Distribution rights _____

_____

Goodwill on acquisition _{_____}

2.2.3

Exchanges of assets

¾

The cost of an intangible asset acquired in exchange for a non-monetary asset (or a combination of monetary and non-monetary assets) is measured at fair value unless:

‰ the exchange transaction lacks commercial substance; or

¾

If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

¾

An exchange transaction has commercial substance if, for example, there is a significant difference between the risk, timing and amount of cash flows from the asset received and those of the asset transferred.

2.3

Subsequent expenditure

2.3.1

Intangible assets

¾

In most cases, there are no additions to an intangible asset, nor the replacement of parts of such assets.

¾

Most subsequent expenditures maintain the expected future economic benefits embodied in an existing intangible asset and do not meet the definition of an intangible asset and IAS 38 recognition criteria.

¾

Also, it is often difficult to attribute subsequent expenditure directly to a particular intangible asset rather than to the business as a whole.

¾

Therefore, only rarely will subsequent expenditure be recognised in the carrying amount of an asset. Normally, such expenditure must be written off through profit or loss.

¾

Subsequent expenditure on brands, mastheads, publishing titles, customer lists etc

(whether internally or externally generated) must always be recognised as an expense.

¾

In the rare circumstances that subsequent expenditure meets the basic asset recognition

criteria, it is added to the cost of the intangible asset.

2.3.2

Acquired in-process research and development

¾

Subsequent expenditure on an acquired in-process research and development project is accounted for like any cost incurred in the research of development phase of internally generated intangible asset .

‰ Research expenditure – expense when incurred.

‰ Development expenditure – expense when incurred if it does not satisfy the asset recognition criteria.

3

INTERNALLY GENERATED INTANGIBLE ASSETS

3.1

Internally generated goodwill

¾

Internally generated goodwill is not recognised as an asset.

¾

Although goodwill may exist in any business its recognition as an asset is precluded because it is not an identifiable resource (i.e. it is not separable nor does it arise from contractual or other legal rights) controlled by the entity that can be measured reliably at cost.

¾

When goodwill is “crystallised” by a business acquisition it is recognised as an asset and accounted for in accordance with IFRS 3.

3.2

Other internally generated assets

¾

It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition. Specifically it is often difficult to:

‰ identify whether there is an identifiable asset that will generate probable future economic benefits; and

‰ determine the cost of the asset reliably.

¾

It is sometimes difficult to distinguish the cost of generating an intangible asset internally from the cost of maintaining or enhancing the entity’s internally generated goodwill or of running day-to-day operations.

¾

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are not recognised as intangible assets.

Such expenditures cannot be distinguished from the cost of developing the business as a whole.

3.3

Specific recognition criteria for internally generated intangible assets

¾

In addition to complying with the general requirements for the recognition and initial

measurement of an intangible asset, an entity must also apply the following to all internally generated intangible assets.

¾

Generation of the asset must be classified into:

‰ a “research phase”; and

‰ a further advanced “development phase”.

3.3.1

Accounting in the research phase

¾

An entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits during the research phase.

¾

Expenditure on research should be recognised as an expense when it is incurred.

¾

Examples of research activities are:

‰ activities aimed at obtaining new knowledge;

‰ the search for, evaluation and final selection of, applications of research findings or other knowledge;

‰ the search for alternatives for materials, devices, products, processes, systems or services; and

‰ the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or devices.

3.3.2

Accounting in the development phase

¾

An intangible asset arising from development should be recognised if, and only if, an entity can demonstrate all of the following:

‰ the technical feasibility of completing the intangible asset so that it will be available for use or sale;

‰ its intention to complete the intangible asset and use it or sell it; ‰ its ability to use or sell the intangible asset;

‰ how the intangible asset will generate probable future economic benefits;

‰ the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

‰ its ability to measure the expenditure attributable to the intangible asset during its development reliability.

¾

Examples of development activities are:

‰ the design, construction and testing of pre-production or pre-use prototypes and models;

‰ the design of tools, jigs, moulds and dies involving new technology; ‰ the design, construction and operation of a pilot plant that is not of a scale

economically feasible for commercial production; and

¾

Expenditure on an intangible item that was initially recognised as an expense (e.g. research) should not be recognised as part of the cost of an intangible asset at a later date (e.g. after the development phase has commenced). In other words once the cost has been expensed it will stay expensed, the charge to profit or loss cannot be reversed.

Illustration 1

An entity is developing a new production process. The amount of expenditure in the year to 31 December 2007 is as follows:

$

1 January to 30 November 2,160

1 December to 31 December 240

_____ 2,400 _____

On 1 December the entity was able to demonstrate that the production process met the criteria for recognition as an intangible asset. The amount estimated to be recoverable from the process (including future cash outflows to complete the process before it is available for use) is $1,200.

Analysis

¾

At 31 December 2007 the production process is recognised as an intangible asset at a cost of $240 (expenditure incurred since 1 December when the recognition criteria were met). The intangible asset is carried at this cost (being less than the amount expected to be recoverable).

¾

The $2,160 expenditure incurred before 1 December is recognised as an expense because the recognition criteria were not met until that date. This expenditure will never form part of the cost of the production process recognised in the statement of financial position.

Illustration 1— continued

Expenditure in 2008 is $4,800. At 31 December 2008, the amount estimated to be recoverable from the process (including future cash outflows to complete the process before it is available for use) is $4,500.

Analysis

¾

At 31 December 2008, the cost of the production process is $5,040 (240 + 4,800). The entity recognises an impairment loss of $540 to adjust the carrying amount before impairment loss ($5,040) to its recoverable amount ($4,500).

3.4

Recognition of expenses and costs

¾

Expenditure on an intangible item shall be recognised as an expense when it is incurred unless:

‰ it forms part of the cost of an intangible asset that meets the recognition criteria; or ‰ the item is acquired in a business combination and cannot be recognised as an

intangible asset.

¾

Reliable measurement of costs requires a costing system that is able to identify costs to particular courses of action.

¾

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.

¾

Examples include:

‰ costs of materials and services used;

‰ salaries, wages and other employment related costs; ‰ fees to register a legal right;

‰ depreciation of equipment used in the development phase;

‰ amortisation of patents and licences used to generate the intangible asset; ‰ other directly attributable costs;

‰ overhead costs that can be allocated on a reasonable and consistent basis.

¾

Costs that are not components of the cost of an internally generated intangible asset

include:

‰ selling, administration and other general overhead costs;

‰ identified inefficiencies and initial operating losses incurred before the asset achieves planned performance;

‰ costs that have previously been expensed (e.g. during a research phase) must not be reinstated;

‰ training expenditure.

¾

Expenditure incurred to provide future economic benefits for which no intangible asset can be recognised is expensed when incurred. Examples include:

‰ research costs;

‰ pre-opening costs for a new facility;

‰ plant start-up costs incurred prior to full scale production (unless capitalised in accordance with IAS 16);

‰ training costs involved in running a business or a product line; ‰ advertising and related costs.

This does not preclude recognising a prepayment when payment for goods or services has been made in advance of the delivery of goods or the rendering of services. In particular, a prepayment asset may be recognised for advertising or promotional expenditure (e.g. mail order catalogues) up to the point at

4

MEASUREMENT AFTER RECOGNITION

¾

An entity can choose either a cost or revaluation model.

4.1

Cost model

¾

Cost less any accumulated amortisation and any accumulated impairment losses.

4.2

Revaluation model

¾

Revalued amount, being fair value at the date of the revaluation less any subsequent accumulated amortisation and any accumulated impairment losses.

¾

Fair value must be determined by reference to an active market (see below).

¾

This is different to the treatment of revaluation under IAS 16 where depreciated

replacement cost can be used when there is no evidence of market value.

¾

Revaluations must be sufficiently regular so that the carrying amount of the asset is not materially different from its fair value.

¾

The revaluation model does not allow:

‰ the revaluation of intangible assets that have not previously been recognised as assets;

‰ the initial recognition of intangible assets at amounts other than their cost.

¾

The revaluation is carried out according to the same principles applied in accounting for other assets. For example:

‰ Surplus is taken directly to revaluation reserve, through other comprehensive income;

‰ Deficit is expensed unless covered by a previously recognised surplus; ‰ All intangibles in the class must be revalued, etc.

4.3

Accounting entries on revaluation

¾

A surplus is credited to the revaluation reserve (unless reversing a deficit in respect of the same asset which was previously recognised as an expense)

¾

Any balance on the revaluation surplus, which is included in equity, may be transferred to retained earnings when the surplus is realised (e.g. on retirement or disposal).

¾

Where some of the surplus is realised as the asset is used by the entity, the difference between amortisation based upon the revalued amount and amortisation that would have been charged based on the asset’s historical cost is a transfer to retained earnings.

This is effected through a movement in reserves reconciliation. The surplus cannot be reclassified through the statement of comprehensive income.

5

USEFUL LIFE

5.1

Factors

¾

The useful life of an intangible asset should be assessed as finite or indefinite.

¾

A finite useful life is assessed as a period of time or number of production or similar

units. An intangible asset with a finite life is amortised. “Indefinite” does not mean “infinite”.

¾

Useful life is regarded as indefinite when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows.

This must be based on an analysis of all of the relevant factors. An intangible asset with an indefinite life is not amortised.

¾

Factors to be considered in determining useful life include: ‰ expected usage of the asset by the entity;

‰ typical product life cycles for the asset;

‰ public information on estimates of useful lives of similar types of assets that are similarly used;

‰ technical, technological, commercial or other obsolescence;

For example, computer software is susceptible to technological obsolescence and so has a short useful life.

‰ stability of the industry in which the asset operates; ‰ changes in market demand for the output from the asset; ‰ expected actions by competitors or potential competitors;

‰ the level of maintenance expenditure or of funding required and the entity’s ability and intent to reach this level;

‰ whether or not the useful life of the asset is dependent on the useful life of other assets of the entity.

5.2

Finite useful lives

5.2.1

Contractual or other legal rights

¾

The useful life of an intangible asset arising from contractual or other legal rights should not exceed the period of such rights, but may be shorter.

Illustration 2

An entity has purchased an exclusive right to operate a passenger and car ferry for thirty years. There are no plans to construct tunnels or bridges to provide an alternative river crossing in the area served by the ferry. It is expected that this ferry will be in use for at least thirty years.

Illustration 3

An entity has purchased an exclusive right to operate a wind farm for 40 years. The cost of obtaining wind power is much lower than the cost of obtaining power from alternative sources. It is expected that the surrounding

geographical area will demand a significant amount of power from the wind farm for at least 25 years.

Commentary

The entity amortises the right to generate power over 25 (rather than 40) years.

¾

Where such rights are renewable the useful life includes renewal periods if there is evidence that the entity will renew without significant cost.

Commentary

Such evidence may be based on past experience or third party consent. If cost of renewal is significant it represents, in substance, a new intangible asset.

5.2.2

Amortisation

¾

The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life.

¾

Amortisation begins when the asset is available for use.

¾

Amortisation ceases at the earlier of the date that the asset is:

Commentary

IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” applies.

‰ derecognised.

Commentary

It does not cease when an intangible asset is temporarily idle, unless it is fully depreciated.

¾

The amortisation method used should reflect the pattern in which the asset’s economic benefits are consumed by the entity. If that pattern cannot be determined reliably, the straight-line method should be adopted.

¾

The amortisation charge for each period is recognised in profit or loss unless it is permitted to be included in the carrying amount of another asset.

Commentary

For example, the amortisation of a patent right exercised to manufacture a product would be a cost included in inventory.

5.2.3

Residual value

¾

The residual value of an intangible asset is assumed to be zero unless the following conditions are met:

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

‰ there is an active market for that type of intangible asset; and:

−

residual value can be measured reliably by reference to that market; and

−

it is probable that such a market will exist at the end of the useful life.

Commentary

If the residual value of an intangible asset increases to an amount equal to or greater than the asset’s carrying amount, the asset’s amortisation charge is zero – unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount.

5.2.4

Review

¾

The amortisation period and the amortisation method should be reviewed at least at each financial year end.

¾

Any changes in period or method are a change in estimate and accounted for in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”.

Example 4

On 1 April 2007 Brook established a new research and development unit to acquire scientific knowledge about the use of synthetic chemicals for pain relief. The following expenses were incurred during the year ended 31 March 2008.

(1) Purchase of building for $400,000. The building is to be depreciated on a straight line basis at the rate of 4% per annum on cost.

(2) Wages and salaries of research staff $2,355,000.

(3) Scientific equipment costing $60,000 to be depreciated using a reducing balance rate of 50% per annum.

Required:

Calculate the amount of research and development expenditure to be recognised as an expense in the year ended 31 March 2008.

Proforma solution

The following costs should be written off:

$ Building depreciation

Wages and salaries of research staff

Equipment depreciation _{________}

Example 5

In its first year of trading to 31 July 2008 Eco-chem incurred the following expenditure on research and development, none of which related to the purchase of property, plant and equipment.

(1) $12,000 on successfully devising processes to convert the sap extracted from mangroves into chemicals X, Y and Z.

(2) $60,000 on developing an analgesic medication based on chemical Z. No commercial uses have yet been discovered for chemicals X and Y.

Commercial production and sales of the analgesic commenced on 1 April 2008 and are expected to produce steady profitable income during a five year period before being replaced. Adequate resources exist for the company to achieve this.

Required:

Determine the maximum amount of development expenditure that may be carried forward at 31 July 2008 under IAS 38.

Solution

5.3

Indefinite useful lives

¾

An intangible asset with an indefinite useful life is: ‰ not amortised; but

‰ tested for impairment:

−

annually; and

−

whenever there is an indication of impairment.

¾

Reassessing a useful life as finite rather than indefinite is an indicator that the asset may be impaired.

Commentary

If not, the change in accounting estimate is accounted for in accordance with IAS 8.

6

IMPAIRMENT AND DERECOGNITION

6.1

Impairment losses

¾

IAS 36 Impairment of Assets contains provisions regarding: ‰ when and how carrying amounts are reviewed; ‰ how recoverable amount is determined; and

‰ when an impairment loss is recognised or reversed.

¾

The purpose of testing for impairment is to ensure recovery of the carrying amount. Note that the uncertainty about recovering the cost of an intangible asset before it is available for use (e.g. development costs) is likely to be greater than when it is brought into use.

6.2

Retirements and disposals

¾

An intangible asset should be derecognised (i.e. eliminated from the statement of financial position):

‰ on disposal; or

‰ when no future economic benefits are expected from its use or disposal.

¾

Gains or losses arising are determined as the difference between:

‰ the net disposal proceeds; and ‰ the carrying amount of the asset.

Gains or losses are recognised in profit or loss in the period in which the retirement or disposal occurs. Gains are not classified as revenue.

7

DISCLOSURE

7.1

Intangible assets

7.1.1

General

¾

The financial statements should disclose the accounting policies adopted for intangible assets and, in respect of each class of intangible assets:

‰ whether useful lives are indefinite or finite and, if finite:

−

the useful lives or the amortisation rates used;

‰ the gross carrying amount and any accumulated amortisation (including

accumulated impairment losses) at the beginning and end of the period along with a reconciliation of the movement.

7.1.2

Individually material intangible assets

¾

Disclose the nature, carrying amount and remaining amortisation period of any individual intangible asset that is material to the financial statements as a whole.

7.1.3

Indefinite useful life

¾

Disclose the carrying amount and reasons supporting the assessment of an indefinite useful life (this includes describing the factors that played a significant role in

determining that the asset has an indefinite useful life).

7.1.4

Impairment

¾

Information on impairment of intangible assets is made in accordance with IAS 36.

7.1.5

Acquired by way of government grant

¾

For intangible assets acquired by way of a government grant and initially recognised at fair value:

‰ the fair value initially recognised for these assets; ‰ their carrying amount; and

‰ whether they are measured after recognition under the cost model or the revaluation model.

7.1.6

Other

¾

The existence and carrying amounts of intangible assets whose title is restricted and the carrying amounts of intangible assets pledged as security for liabilities.

¾

The amount of contractual commitments for the acquisition of intangible assets.

7.2

Revaluations

¾

The following should be disclosed when assets are carried at revalued amounts:

‰ the effective date of the revaluation (by class);

‰ the carrying amount of the revalued intangible assets (by class);

‰ the carrying amount that would have been recognised using the cost model (by class);

‰ the amount of the revaluation surplus that relates to intangible assets at the beginning and end of the period, indicating movements in the period and any restrictions on the distribution of the balance to shareholders;

7.3

Research and development expenditure

¾

Disclose the total cost of research and development that has been recognised as an expense during the period.

FOCUS

You should now be able to:

¾

discuss the nature and accounting treatment of internally generated and purchased intangibles;

¾

distinguish between goodwill and other intangible assets;

¾

describe the criteria for the initial recognition and measurement of intangible assets;

¾

describe the subsequent accounting treatment, including the principle of impairment

tests in relation to goodwill;

EXAMPLE SOLUTIONS

Solution 1 — Tangible versus intangible assets

(1) Tangible: the operating system (e.g. DOS or Windows) of a personal computer is an integral part of the related hardware and should be accounted for under IAS 16

Property, Plant and Equipment.

(2) Intangible: such computer software (e.g. QuarkXpress) is not an integral part of the hardware on which it is used.

(3) Tangible: specialised software integrated into production line “robots” is similar in nature to (1).

(4) Intangible: companies developing “firewall” software to protect their own websites may also sell the technology to other companies.

Solution 2

$

Cash paid 600,000

Deferred consideration (400,000 × 1 . 1

1 _{) 363,636}

Legal fees 87,000

Stamp duty 1,000

________

Cost on initial recognition _{________}1,051,636

Solution 3

Picard will recognise the two intangible assets on consolidation. They are taken into account when the cost of acquisition is allocated in accordance with IFRS 3 Business Combinations.

$000

Cost 10,000

Net assets recognised in Borg’s

statement of financial position 6,000

Brand acquired 300

Distribution rights (250,000 × 4.36) 1,090

_____ (7,390) _____

Goodwill on acquisition 2,610

Solution 4 — Research and development write-off

The following costs should be written off:

$ Building depreciation (400,000 × 4%)

Wages and salaries of research staff Equipment depreciation (60,000 × 50%)

16,000 2,355,000 30,000 _____________ 2,401,000 _____________

Solution 5 — Maximum carry forward

Cost

(1) This is research expenditure which cannot be capitalised under any circumstances and must therefore be expensed to profit or loss

(2) Initially recognise cost $60,000. Residual value is presumed to be zero.

Amortisation

Amortise from 1 April 2008 for a period of 5 years. Charge for 4 months is: 4/60 × $60,000 = $4,000

Carrying amount

$60,000 – $4,000 = $56,000.