ACT 4020-INTANGIBLE ASSETS NOV 2010

8/7/2019 ACT 4020-INTANGIBLE ASSETS NOV 2010

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3/8/2011 ACT 4020 INTANGIBLE ASSETSOCT 2008

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Intangible assets

Learning Points

1. IAS 38-Intangible assets

2.Characteristics of intangible assets

3.Costs included in valuation of intangible assets

4.Ammortization of intangible assets

5.Types of Intangible assets

6.Issues related to goodwill and research and development costs

7. Presentation and disclosure


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3/8/2011 ACT 4020 INTANGIBLE ASSETSNOV 2010

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Intangible Assets Provisions of IAS 38

Problem Addressed-allow entities to identify and recognize separately the value of

intangible assets on the balance sheet provided certain conditions are satisfied.

Scope of The standard-all intangibles not specifically dealt with in another IAS e.g.Brand names, computer software,licences,franchises and intangibles under

development. Covers definition,recognition,determination of carrying amount,

determination of impairment losses and disclosures

Key Concepts

Accounting treatment:

-recognition as an asset)& measurement reliably). Initial recognition at cost andsubsequently choose either the cost model (carrying amount= cost less accumulated

amortization) or revaluation model (fair value less subsequent amortization &

impairment)

-Research expenditure should be distinguished from development expenditure

-Useful Life-finite life amortize on a systematic basis and infinite life no amortization but

test for impairment annually.

Presentation & Disclosure- Accounting policies, income statement, balance sheet &

notes and additional information

Financial Analysis Interpretation-intangibles that are purchased or manufactured,

degree of recognition.


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Intangible Assets

Do not have physical substance ,neither are they financial instruments but have valueto the business. Arise when business has paid money to acquire them or hasincurred expenditure which has created an intangible asset. Provide services overalong period of years hence classified as long term assets.

They are recorded at cost

Types of intangible Assets:

1.Marketing related intangibles which are used in the marketing or promotion of productsor services.-trademarks, domain names

2.Customer related intangibles which are a result of interactions with outside parties

3.Artistic related intangibles which involve ownership rights to such items as plays andliterary works-Copyrights

4.Technology related intangibles-research and development-patents & trade secrets

5.Goodwill which arises in business combinations.

6.Contract related-value of rights from contracts e.g. franchise-McDonalds

VALUATION OF INTANGIBLE ASSETS:

1.Intangibles purchased from another party are recorded at cost and cost includes allcosts of acquisition and expenditures necessary to make intangible asset ready forits intended use. E.g. purchase price, legal fees, and other incidental expenses.


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Goodwill

Is the excess of the cost of the acquisition over the acquirers interest in the

fair value of the identifiable assets and liabilities acquired as at date of the

exchange transaction.

Purchased Goodwill-arises as a result of a purchase transaction (e.g.

when one business acquires another as a going concern). Normally

recognized in the accounts

Non Purchased good will is not generally recognized in the accounts

because no event has occurred to identify the value of the business as a

whole.

Accounting Treatment of Goodwill-Per IAS 22 requires goodwill arising on

an acquisition to be recognized as an asset and amortized over its usefullife. The useful life taken should not normally exceed twenty years but a

longer life maybe taken if it can be justified by the circumstances.

AMORTISATION is the term used for depreciation of intangible assets like

goodwill or development costs.


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Research and Development Costs

IAS 38 intangible assets governs the accounting treatment of these costs and

contains the following definitions:

Research is the original and planned investigation undertaken with prospect of gaining

new scientific or technical knowledge and understanding.

Development is the application of research finding or other knowledge to a plan or

design for the production of new or substantially improved materials, devices,products, process, systems or services prior to the commencement of commercial

production or use.

No intangible asset arising from Research should be recognized

An intangible asset arising from development should only be recognized if and only if

an enterprise can demonstrate:

1.Technical feasibility of completing the intangible asset so that it will be available for sale2.its intention to complete the intangible asset and use or sell it.

3.Its ability to use or sell the intangible asset

4.Its ability to measure reliably the expenditure attributable to the intangible asset during

development.


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Research and Development Costs ( Cont)

Amortization-capitalized development costs must be amortized once

commercial exploitation begins and the method should reflect the pattern in

which assets economic benefits are consumed by the enterprise. Normal

maximum period is 20 years.

DISCLOSURE

The financial statements should disclose:

1)The amortization method used and expected period of amortization

2)A reconciliation of the carrying amounts at the beginning and end of the

period, showing new expenditure incurred, amortization and amounts

written off because a project no longer qualifies for capitalization

3.Amortization during the period.The financial statements should disclose the total amount of research and

development expenditure recognized as an expense during the period.

Class exercise pg 205

Documents

ACT 4020-INTANGIBLE ASSETS NOV 2010