IFRS Chapter 5 Intangible Assets

8/8/2019 IFRS Chapter 5 Intangible Assets

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Chapter 5

Intangible Assetswww.xisu.edu.cn



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Accounting standards relatedto intangible assets:

IFRS 3 IAS36

IAS38 SIC32






1 IAS 38 Intangible Assets




1.1 The objectives of the standard

To establish the criteria for when anintangible asset may or should berecognized

To specify how intangible assets shouldbe measured

To specify the disclosure requirementsfor intangible assets.




1.2 Definition of an intangible asset

An intangible asset is an identifiablenon-monetary asset without physicalsubstance.

Do you know any examples of intangible assets?




Examples of Intangible Assets

Copyrights

Patents

Goodwill

Customer list

Tradename

IntangibleAssets

A Corporation




An intangible asset is an identifiablenon-monetary asset without physicalsubstance.

contr olled by the entity as a result of events in the past.

something fr om which the entity

expects f uture economic benefits to flow.




1.3 Intangible asset: must beidentifiable (Identifiability)

If an intangible asset is acquiredseparately through purchase, there maybe a transfer of a legal right that would helpto make an asset identifiable.

An intangible asset may be identifiable if it isseparable, i.e. if it could be rented or soldseparately.




1.4 Intangible asset: must becontrolled by the entity

An intangible asset must be under the contr olof the entity as a result of past event.

The entity must be able to enjoy the f uture

economic benefits fr om the asset, andprevent the access of others to thesebenefits.




Question

Whether technical know-how is under the contr ol of the entity or not?

What about market shareand customer loyalty?




1.5 Intangible assets: expectedfuture economic benefits

An item can be recognized as an intangible asset, if economic benefitsare expected to flow in the f uture fr om

ownership of the asset.Economic benefits may come fr om the

sale of pr oducts or services, or fr om areduction in expenditures.

$




When recognizing an intangible asset initially, it must be measured at cost, and it should berecognized only if the f ollowing occur:

It is pr obable that the future economicbenefits that are attributable to the asset willflow to the entity.

The cost can be measured reliably.




The measurement of cost depends on theacquirement method of an intangible asset.

Intangible assets can be acquired «

by separate purchase,as par t of a business combination,

by exchange of assets,

by a gover nment grant,

by self -creation (inter nal generation).




acquired separately: If the entity acquiresan intangible asset separately, the cost would be its purchase price.

part of a business combination: when there is an acquisition or takeover, an intangible included should be measured asits fair value at the date of acquisition.




Fair valueUnder G AAP, Fair Value is theamount at which the asset could be bought or sold in a current transaction between willing par ties, or transferred to an equivalent par ty, other than in a liquidation sale.

government grant: intangible assets acquired

by way of gover nment grant and the grant itself may be recorded initially either at cost or fair value.




1.7 Internally generated goodwill

Inter nally generated goodwill may not berecognized as an asset.

Inter nally generated goodwill is sub jective and

cannot be measured reliably.




2 Research and development costs




2.1 Research

What are the examples of research activities?

Research activities by definition do not meet the criteria f or recognition under I AS 38.

Research costs should be written off as anexpense as they incurred.




2.2 Development

Development costs may qualify f or recognition as intangible assts pr ovided the f ollowing strict criteria can be demonstrated.

The technical feasibility of completing the

intangible asset so that it will be available f or use or sale.

Its intention to completing the intangible asset so that it will be available f or use or sale.

Its ability to use or sell the intangible asset.




How the intangible asset will generate pr obablef uture economic benefits. Among other things,the entity should demonstrate the existence of

a market f or the output of the intangible asset or the intangible asset itself, or if it is to be usedinter nally, the usef ulness of the intangible asset.

its ability to measure the expenditure

attributable to the intangible asset during itsdevelopment reliably.




2.3 Other internally generatedintangible assets

The standard pr ohibits the recognition of inter nally generated brands,

mastheads, publishing titles andcustomer lists and similar items asintangible assets.




2.4 Cost of an internally generatedintangible asset

The cost of an inter nally operated intangibleasset is the sum of the expenditure incurredfr om the date when the intangible asset first

meets the recognition criteria.






How should the expenditure be treated?

Doug C. can demonstrate that, at 1 December 2008, thepr oduction pr ocess met thecriteria f or recognition as an

intangible asset.The recoverable amount of the

know-how embodied in thepr ocess is estimated to be

$50, 000




Answer

Tips:Whether the recognition criteria were met«

Expenses Intangible asset$90,000 $10, 000

2008 1 Dec. 31 Dec. 2009




2.5 Recognition of an expense

All expenditure related to an intangible which does not meet the criteria f or recognition either as an identifiable intangible asset or asgoodwill arising on an acquisition should be

expensed as incurred.

e.g. star t up costs, adver tising costs, training costs, business relocation costs






The accounting treatment of therevaluation model

When an intangible asset is revalued upwardsto a fair value, the amount of the revaluation should be credited directly to equity under the

heading of a revaluation surplus.However, if a revaluation surplus is a reversalof a revaluation decrease that was previouslychar ged against income, the increase can be

recognized as income.




Where the carrying amount of an intangibleasset is revalued downwards, the mount of thedownward revaluation should be char ged asan expense against income, unless the asset

has previously been revalued upwards. A revaluation decrease should be first char ged

against any previous revaluation surplus in respect of that asset.




Question

An intangible asset is measuredby a company at fair value.

The asset was revalued by $400in 2007, and there is a revaluation

surplus of $400 in the statement of financial position.

At the end of 2008, the asset isvalued again, and a downwardvaluation of $500 is required.

Required: State the accounting treatment f or thedownward revaluation.




Answer

The downward valuation of $500 can first be set against the revaluation surplus of

$400.The valuation surplus will be

reduced to 0 and a char ge of $100 made as an expense in

2008.




2.7 Useful life

An entity must assess whether the useful lifeof an intangible asset is finite or indefinite.

Intangible assets are classified as:

Indefinite life:

No f oreseeable limit to theperiod over which the asset is expected to

generate net cash inflows f or the entity.

Finite life: A limited period of benefit to the

entity.Determinants of the useful life of an

intangible asset




2.8 Amortization period andamortization method

An intangible asset with a finite usef ul life isamortized, and an intangible asset with aninfinite usef ul life is not.

Amortization period

When the

asset

is available

for use

The earlier of the date that theasset is ³held for sale´ anddiscontinued operations and thedate that the asset isderecognized.




The amor tization char ge f or each period shouldnor mally be recognized in profit and loss.

The residual value of an intangible asset with a

finite usef ul life shall be assumed to be zer o The amor tization period and the amor tization method f or an intangible asset with a finite usef ullife shall be reviewed at least at each financial

year-end.




2.9 Intangible assets withindefinite useful lives

An intangible asset with an indefinite usef ul lifeshall not be amortized.

Instead it should be tested f or impair ment annually and whenever there is an indication

that the intangible asset may be impaired.The standard excludes financial assets, mineral

rights, expenditure on the exploration,development and extraction of minerals and

intangible assets arising in insurance enterprisesfr om contracts with policy holders.




Question

Consider how to deter mine the usefullife of a purchased brand name.




Answer

Legal pr otection of the brand name and thecontr ol of the entity over the illegal use by others

of the brand name (i.e. contr ol over pirating)

Age of the brand name

Status of position of the brand in its par ticular market

Ability of the management of the entity to manage the brand name and to measureactivities that suppor t the brand name (e.g.adver tising and PR activities)




Stability and geographical spread of themarket in which the branded pr oducts are sold

Patter n of benefits that the brand name isexpected to generate over time

Intention of the entity to use and pr omote thebrand name over time (as evidenced per hapsby a business plan in which there will besubstantial expenditure to pr omote the brandname)



Documents

IFRS Chapter 5 Intangible Assets