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Processing, Reporting and Auditing Financial

Accounts

Intangible Assets & Impairment

IAS 38, IAS 36 and IFRS 3

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Intangible Assets - IAS 38 3 Criteria Identifiable Separable (capable of being separated and sold,

transferred, licensed, rented, or exchanged, either individually or as part of a package) or

Arises from contractual or other legal rights Control over a resource Means the company should have the power to

obtain future economic benefits Usually derived from a legal right Note IFAC definition of “intangible” includes Human

Capital Existence of future economic benefits This is expected over a period of years Intangibles are always Non-Current Assets

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Examples Examples of possible intangible

assets include: computer software patents copyrights motion picture films customer lists mortgage servicing rights licenses import quotas

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Examples

Intangibles can be acquired: by separate purchase as part of a business

combination by a government grant by exchange of assets by self-creation (internal

generation)

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Recognition Recognition criteria. IAS 38 requires an enterprise to

recognise an intangible asset, whether purchased or self-created (at cost) if, and only if

it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise

the cost of the asset can be measured reliably.

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Measurement When an item is recognised as

intangible it is measured initially at cost.

Purchased intangibles Can add directly attributable costs Once intangible is in a condition

where it can be used All costs treated as operating

expenses

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Failure to meet the criteria

If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset then

IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred

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Amortisation

Intangibles are non-current assets

Therefore should be amortised 2 models of carrying amounts A model must be chosen for each

class of intangible asset Cost model or Revaluation model

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2 models Cost model Carrying amount = Cost Less accumulated amortisation Less accumulated impairment losses Revaluation model After initial recognition at cost Carrying amount = Fair value at date of (regular) revaluation Less accumulated amortisation since

revaluation Less accumulated impairment losses since

revaluation

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Fair Value Fair value can only be determined by

reference to an active market Such active markets are expected to

be uncommon for intangible assets Examples might be Milk quotas Freely traded taxi licences Where no active market exists – use

cost model

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Accounting Under the revaluation model revaluation increases are credited

directly to "revaluation surplus" within equity except to the extent that it reverses a revaluation decrease previously recognised in the income statement

If the revalued intangible has a finite life and is, therefore, being amortised the revalued amount is amortised

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Classification of Intangible Assets Based on Useful Life

Intangible assets are classified as Indefinite life: No foreseeable limit to the period

over which the asset is expected to generate net cash inflows for the entity.

Finite life: A limited period of benefit to the

entity.

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Measurement Subsequent to Acquisition: Intangible Assets

with Finite Lives The cost less residual value of an intangible

asset with a finite useful life should be amortised over that life

The amortisation method should reflect the pattern of benefits

If the pattern cannot be determined reliably, amortise by the straight line method

The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of another asset.

The amortisation period should be reviewed at least annually

The asset should also be assessed for impairment in accordance with IAS 36

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Measurement Subsequent to Acquisition: Intangible Assets

with Indefinite Lives

An intangible asset with an indefinite useful life should not be amortised

Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset

If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate

The asset should also be assessed for impairment in accordance with IAS 36

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Research & Development (R&D)

Research Original and planned investigation

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

Development Application of research findings to a

plan or design for production of new or substantially improved materials, devices etc before the start of commercial production or use

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Basic rules are Charge all research cost to expense Development costs are capitalised only after technical and commercial feasibility

of the asset for sale or use have been established

Therefore the enterprise must intend and be able to complete the intangible asset and

either use it or sell it and be able to demonstrate how the asset

will generate future economic benefits

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Basic rules are If an enterprise cannot distinguish the

research phase of an internal project to create an intangible asset from the development phase

the enterprise treats the expenditure for that project as if it were incurred in the research phase only

If an asset is recognised as intangible It is shown in BS as development costs

capitalised It will be amortised from time it is available

for use Over period of expected economic benefit

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Internally-generated

Internally-generated intangible assets

May capitalise Costs of materials Labour costs Fees to register legal rights

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As an example Computer Software Purchased: capitalise Operating system for hardware: include in

hardware cost Internally developed (whether for use or

sale): charge to expense until technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost.

Amortisation: over useful life, based on pattern of benefits (straight-line is the default)

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Another example Inventions Ltd a company making

microwave/radar equipment wants to capitalise the following

Calibration equipment made by company ($600,000) used in calibrating lab equipment

Microwave detection equipment ($1.5m) has been made but found to be too large for aircraft. Company believes further $0.5m development would make a viable saleable product

In flight tracking system ($1.25m) has been trialled and planned production is for summer. Have advanced orders for 2 units & commercial viability is high.

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What are NOT intangibles

Brands Mastheads Publishing titles Customer lists and Items similar in substance

that are internally generated

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Goodwill and IFRS 3 Goodwill is the difference between Purchase value of a business and Fair value of separable net assets Inherent (internally-generated)

goodwill cannot be an intangible asset

Purchased Goodwill is and is the expectation of future economic benefits for the purchaser

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Conditions applying to recognition of Goodwill as an

intangible Goodwill is recognised by the acquirer as an asset

from the acquisition date and is initially measured as the excess of the cost of the

business combination over the acquirer's share of the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities

IFRS 3 prohibits the amortisation of goodwill Instead goodwill must be tested for impairment at

least annually in accordance with IAS 36 Impairment of Assets

Negative goodwill If the acquirer's interest in the net fair value of the

acquired identifiable net assets exceeds the cost of the business combination

that excess must be recognised immediately in the income statement as a gain

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Impairment of Assets- IAS 36

Purpose of IAS 36

To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is calculated

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Definitions Impairment an asset is impaired when its carrying

amount exceeds its recoverable amount. Carrying amount the amount at which an asset is

recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses

Recoverable amount the higher of an asset's fair value less

costs to sell and its value in use

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Definitions Fair value the amount obtainable from the sale of

an asset in a bargained transaction between knowledgeable, willing parties.

Value in use the discounted present value of

estimated future cash flows expected to arise from:

the continuing use of an asset, and from its disposal at the end of its useful life

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Cash-Generating Units Recoverable amount should be determined

for the individual asset, if possible If it is not possible to determine the

recoverable amount (fair value less cost to sell and value in use) for the individual asset

then determine recoverable amount for the asset's cash-generating unit

Which is the smallest identifiable group of assets

that generates cash inflows from continuing use, and

that are largely independent of the cash inflows from other assets or groups of assets

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Indications of Impairment External sources: market value declines negative changes in technology, markets,

economy, or laws increases in market interest rates company stock price is below book value Internal sources: obsolescence or physical damage asset is part of a restructuring or held for

disposal worse economic performance than expected

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Impairment Testing

When an asset is tested for impairment

Its recoverable amount needs to be determined

This = the higher of.. Value in Use and Fair Value less costs to sell

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Fair Value Less Costs to Sell

If there is a binding sale agreement, use the price under that agreement less costs of disposal

If there is an active market for that type of asset, use market price less costs of disposal

If there is no active market, use the best estimate of the asset's selling price less costs of disposal

Costs of disposal are the direct added costs only (not existing costs or overhead)

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Value in Use

Should reflect an estimate of the future

cash flows the entity expects to derive from the asset in an arm's length transaction