Intangible Assets A122 1

7/30/2019 Intangible Assets A122 1

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Topic 6

MFRS 138

INTANGIBLE ASSET


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LEARNING OBJECTIVESBy the end of this chapter, you should be able to:

Measure the intangible assets at initialrecognition

Measure the intangible asset at subsequentmeasurement

Record the derecognition of intangible asset

Explain the disclosure requirement


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INTRODUCTION

Before we starts, can you answer the followingquestions?

What is intangible asset?

Examples of intangible asset?

What are the recognition criteria of intangible asset asper MFRS138?

If you cannot answer them, please refer to FAR1 subject

for revisions.

The following discussions focus on measurement,derecognition and disclosures issues of IntangibleAssets as stated in MFRS 138.


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Definition

an identifiable non-monetary (not associatedto money or claims to money) asset withoutphysical substance held for use in the productionor supply of goods or services, for rental toothers, or for administrative services


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MEASUREMENT AT

INITIAL RECOGNITION

Para 24- IA is measured at cost at its initial recognitiondate.

Cost = the amount of cash or cash equivalent paid toacquire or construct the asset at the time of itsacquisition


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MEASUREMENT AT

INITIAL RECOGNITIONTypes of Intangible Assets:

(1) When IA is acquired separately

(2) When IA is acquired from business combination

(3) IA acquired from government grant

(4) IA acquired through exchanges with other assets

(5) (a) IA internally generated(b) IA internally generated Research and development

(R&D) or Development Cost


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MEASUREMENT AT

INITIAL RECOGNITION(1) When IA is acquired separately :

Cost = Purchase price + taxes + duties discount -rebates + any directly attributable cost toprepare for its intended use + expenditure thatmeet recognition criteria

Expenditures for advertising, promotion, cost toconduct at new location, training new staff,administrative and general overhead costexpense (not capitalized) para 29


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MEASUREMENT AT

INITIAL RECOGNITION

(1) When IA is acquired separately (cont) :

Para 28:Examples of directly attributable costs are:a) costs of employee benefits (as defined in MFRS 1192004

Employee Benefits) arising directly from bringing the assetto its working condition;

b) professional fees arising directly from bringing the asset toits working condition; and

c) costs of testing whether the asset is functioning properly.


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MEASUREMENT ATINITIAL RECOGNITION

(1) When IA is acquired separately (cont) :

Example 1:

ABC purchased trademark from PRS at RM50,000.ABC also incurred legal fees of RM8,000 and legal costto defend the trademark of RM15,000. The company

also incurred additional RM5,000 for promotional costand obtained rebate of RM2,000.

Determine the cost of trademark and prepare journalentry.


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MEASUREMENT AT

INITIAL RECOGNITION(1)When IA is acquired separately (cont) :

Answer:

Cost of the trademark

= RM50,000+RM8,000+RM15,000-RM2,000

= RM71,000

Journal entry:

Dr. Intangible asset-Trademark 71,000

Cr. Cash 71,000

Dr. Promotional expense 5,000

Cr. Cash 5,000


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(2) When IA is acquired from business combination:

Cost = the Fair value of IA

*Fair value = quoted market price in active market (Para 39)OR

Value of the most recent transaction for similar

IA (Para 40)market method

OR

Discounted future net cash flows income method

Goodwill from consolidation (GOC) must be recordedseparately from other Intangible assets.


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Example 2:

ABC Bhd. acquired XYZ Bhd. at RM5 million. It wasdetermined that the fair value of XYZs net assets was

RM4 million at the combination date. Included in thisamount was a patent owned by XYZ Bhd. with fair valueof RM200,000.

REQUIRED:Identify the cost of intangible assets acquired by ABCBhd from this business combination arrangement.


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ANSWER 2:

Intangible assets

Patent RM 200,000Goodwill RM1,000,000 (RM5m RM4m)

Note: Goodwill must be separated from other intangible

assets as required by MFRS 138.


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MEASUREMENT AT

INITIAL RECOGNITION

3) IA acquired from government grant

Examples: airport landing rights, licences to operateradio or television stations, import licences or quotasor rights to access other restricted resources.

Cost of IA= FV of the grant

4) IA acquired through exchanges with other assets

Cost of IA= FV of assets given up


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MEASUREMENT AT

INITIAL RECOGNITION5 (a) IA internally generated

Cost = total sum of expenditure incurred that are

directly attributable to create, produce and preparethe asset for its intended use (Para 66).

Examples: cost of materials, services, registration fee,cost to defend the IA, amortization cost, interest on

capital

Cost that are not directly attributable shall be excludedsuch as selling and administrative expenses, identified

inefficiencies, initial operating loss, and training cost.


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Example 3:

ABC develop a trademark. It incur cost for registrationfees (RM15,000), design fee(RM3,000), legal

fee(RM20,000) and promotional cost (RM6,000).

Therefore, Cost of trademark= RM15,000+RM3,000+RM20,000=RM38,000 (exclude promotional cost).

Journal entryDr. IA- trademark 38,000Dr. Promotional expense 6,000

Cr. Cash 44,000


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MEASUREMENT AT

INITIAL RECOGNITION5 (b) IA internally generated Research & development

(R&D) or Development Cost

Cost = total sum of expenditure incurred from the date it metthe recognition criteria of an intangible asset as in Para 57,

MFRS138

Includes all directly attributable costs to create, produce, and

prepare asset as intended (usually in development phase)

Example: cost of materials, services, registration fee, cost to

defend IA, amortization cost, interest on capital

Cost that are not directly attributable expense (such as

administrative expense, initial operating losses).


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Example 4:The following costs incurred during the research phase and developmentphase in R&D activity of producing new product,

Research DevelopmentMaterials 12,000 7,000

Labour 10,000 6,000Professional fees 8,000 5,000Testing cost 8,000 4,000Depreciation of equipment used in R&D 3,000 3,000Training new staff cost 7,000 2,000Other directly attributable cost 3,000 1,000

Provided that all expenses incurred during the development phase hasfulfill the recognition criteria in Para. 57 MFRS138. Prepare journal entryto record the Intangible asset-R&D cost and other related expenses.


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MEASUREMENT AT

INITIAL RECOGNITIONCost of capitalized IA-R&D

= all expenses in development phase (after fulfill recognition criteria

except training cost)= RM26,000

Journal entry:

Dr. IA- R&D 26,000

Cr. Cash 26,000

Dr. Research expense 44,000

Dr. Training expense 9,000

Cr. Cash 53,000


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MEASUREMENT AT

SUBSEQUENT MEASUREMENT Para. 72- after its initial recognition, an intangible asset

shall be measured either using:

a) the cost model, orb) the revaluation model.


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MEASUREMENT AT

SUBSEQUENT MEASUREMENT

COST MODEL:

IA shall be carried at its cost less accumulatedamortization and any accumulated impairment loss(Para. 74).

Carrying amount

= Cost accumulated amortization - Impairment loss


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MEASUREMENT AT

SUBSEQUENT MEASUREMENTREVALUATION MODEL

IA shall be carried at revalued amount less any

subsequent accumulated amortization and anyaccumulated impairment losses (Para. 75)

Carrying amount = Revalued amount Subsq. Accm.

Amortization Accm. Impairment


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MEASUREMENT ATSUBSEQUENT MEASUREMENT

REVALUATION MODEL (cont)

Revalued amount = Fair value

If FV>CA revaluation increase (credited to revaluationsurplus)

If FV


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AMORTIZATION OF IA

Amortization systematic allocation of IA cost over its estimateduseful life

Amortize from the day the IA is ready for use until it is derecognizeor held for sale

Assume no residual value for IA

Estimated useful life : the shorter between legal life and economiclife.

Amortization method : must reflect the consumption of economic

benefit, or use s-line Journal entry:

Dr. Amortization expense xx

Cr. Accumulated amortization-

Intangible asset xx


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IMPAIRMENT OF IA

IA is subject to impairment test annually

Impairment test

Determine the Recoverable Amount (RA) of IA

Compare RA to Carrying Amount (CA)

If RACA : asset is not impaired Journal entry:

Dr. Impairment loss xx

Cr. Accm. Impairment-Intangible asset xx


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IA WITH FINITE LIFE vs

INDEFINITE LIFEIA with finite life :

when the length of the useful life can be estimated

Accounting treatment : Amortize AND do impairment test

IA with indefinite life :

when it has no foreseeable future limit of futureeconomic benefit

Accounting treatment:

no need amortize BUT need impairment


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Example 5:

On 1 January 2008, Zuhal Bhd internally established a distribution

right for motorcycles in the northern area of Peninsular Malaysia.The right met the definition and recognition criteria of an intangibleasset. The company incurred and capitalized a cost of RM300,000to develop the distribution right.

The right had a legal life over 20 years. However, the company

decided that the right might have a shorter economic life of 10years.

The companys policy was to use a straight-line method to amortizethe cost of its intangible asset.

On 31 December 2008, it was estimated that the recoverableamount of the right was RM200,000. It was determined that thefair value of the right on 1 January 2009 was RM350,000.


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REQUIRED:

1. Calculate and prepare journal entry to record:

a) The initial cost of the intangible asset.

b) The amortization of the intangible asset for year 2008.

c) The impairment loss (if any) of the intangible asset for year2008.

2. Determine the carrying amount of IA as at 1/1/2009 under:

a) Cost model

b) Revaluation model


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Answers:

(a) Cost of IA-right = 300,0001/1/2008

Dr. Intangible asset-right 300,000

Cr. Cash 300,000

(to recognize intangible asset-right)

(b) Amortization charge= Cost / estimated useful life= RM300,000 / 10 years= RM30,000

31/12/2008

Dr. Amortization expense 30,000Cr. A/Amortizn-Intangible asset-right 30,000


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Answers (cont):

(c) Carrying amount at 31/12/08= Cost accm. amortization= RM300,000 RM30,000= RM270,000

At 31/12/2008, the recoverable amount (RM200,000) is lower than thecarrying amount (RM270,000). Therefore, the intangible asset needs to beimpaired.

Impairment loss = Carrying amount recoverable amount= RM270,000 RM200,000= RM 70,000

31/12/2008

Dr. Impairment loss 70,000Cr. Acm. Impairment-IA(right) 70,000

(to charge impairment loss)


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(2) (i) Under cost model,

Carrying amount of IA-right as at 1/1/2009= 300,000 30,000 70,000

= RM200,000

(ii) Under revaluation model,

Carrying amount of IA-right as at 1/1/2009

= Fair value

= 350,000 *

*Revaluation surplus of RM150,000(350,000 - 200,000)must be recognized. The previous recognized amortizationshall be eliminated and the carrying amount of IA shall berestated at new FV amount.


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DERECOGNITION OF IA

Para. 112- IA shall be derecognize when it is:

Disposed

No more future economic benefits expected to flow into entity

Difference between the proceeds and the Carrying amount =Gain/loss on disposal

Journal entry:

Dr. Cash xx

Dr. Accm. Amortzn xx

Dr. Accm. Impairment xxDr. Loss on disposal* xx

Cr. Intangible asset xx

Cr. Gain on disposal* xx

*where applicable


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DISCLOSURE REQUIREMENT OF

INTANGIBLE ASSET

Refer Para 118-128 MFRS138

Among all:

Classify all IAs into different classes

Determine whether the IA has finite or infinite life

Estimated useful life

Amortization method

Gross carrying amount

Accumulated amortization and impairment


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References:

MFRS138 Intangible Assets

NEJ (2010)

Zaimah et al (2009)

Documents

Intangible Assets A122 1