Chapter 7
Accounting for
intangibles
Objectives


Understand what types of assets can be
considered as intangible assets, and the
differences between intangible and tangible
assets.
Understand how to account for research and
development expenditure and, in particular,
be aware of how to apply the tests for
deferral of research and development
expenditure.
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PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Objectives (cont.)



Be able to describe some empirical research
that has been undertaken into corporate
research and development accounting
practices.
Be able to define ‘goodwill’ and explain how
it is calculated for accounting purposes.
Be able to explain and apply the
amortisation requirements applicable to
goodwill contained in FRS-36.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Objectives (cont.)


Be aware of the controversies that arose as
a result of the 1996 version of the Australian
goodwill accounting standard.
Be able to evaluate the deferral and
amortisation requirements of both the
research and development and the goodwill
financial reporting standards.
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PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Objectives (cont.)


Be aware of the brands and other internally
generated intangible assets debate, and
how it applies in New Zealand.
Be aware of some of the controversies that
arose as a result of the issue by the
Financial Reporting Standards Board of
ED-87 ‘Accounting for Intangible Assets’.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Intangible assets



Non-monetary assets without physical
substance.
Includes patents, goodwill, mastheads,
brand names, copyrights, research and
development, and trademarks.
Intangible assets, as a category, must
be separately disclosed in the
statement of financial position.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Identifiable versus
unidentifiable intangible
assets

Identifiable intangible assets
– a specific value can be placed on each individual
asset, and they can be separately identified and
sold.
– e.g. brand names, trademarks, research and
development, patents, licences.

Unidentifiable intangible assets
– intangible assets that cannot be separately sold.
– e.g. goodwill.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Amortisation of intangibles



Generally intangible assets have a limited
life.
They should be amortised over their useful
lives.
SSAP-3 ‘Accounting for Depreciation’
remains applicable to certain intangible
assets.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Research and
development



Refer to FRS-13 ‘Accounting for Research
and Development Activities’.
Research must be considered separately
from development.
Research defined as
– original and planned investigation undertaken
with the prospect of gaining new scientific or
technical knowledge and understanding.

Research costs must be recognised as an
expense when incurred.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Research and
development (cont.)

Development defined as
– the application of research findings or other
knowledge to a plan or design for the production
of new or substantially new improved materials,
devices, products, processes, systems or
services prior to the commencement of
commercial production or use.

Development costs recognised as an
expense in the period incurred unless the
criteria for asset recognition are met.
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Development costs
recognised as an asset

FRS-13 5.3 when, and only when, all the
following criteria are met:
– The product or process is clearly defined and
the costs attributable to the product or process
can be identified and measured reliably.
– The technical feasibility of the product or
process can be demonstrated.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
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Development costs
recognised as an asset
(cont.)

FRS-13 5.3 when, and only when, all the
following criteria are met (cont.):
– The entity intends to produce and market, or
use, the product or process.
– The existence of a market for the product or
process or its usefulness to the entity, if it is to
be used internally, can be demonstrated.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Development costs
recognised as an asset
(cont.)

FRS-13 5.3 when, and only when, all the
following criteria are met (cont.):
– Adequate resources exist, or their availability can
be demonstrated, to complete the project and
market or use the product or process.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Costs included as part of
research and development





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Salaries, wages and other related costs of
personnel engaged in R&D activities.
Costs of materials and services consumed in
R&D activities.
Depreciation of equipment and facilities used in
R&D.
Amortisation of other assets related to R&D.
Overhead costs related to specific R&D
activities.
Other costs that can be attributed to R&D
activities, such as amortisation of patents.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Amortisation of
development costs



Any development costs must be amortised
and recognised as an expense on a
systematic basis.
Amortisation begins when the product or
service is available for sale or use.
Amortisation period should not exceed
5 years, unless a longer period, not
exceeding twenty years, can be justified.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
Slides prepared by Grant Samkin
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Amortisation of
development costs (cont.)

Development costs recognised as an asset
should be reviewed annually to ensure the
carrying amount does not exceed
recoverable amount.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Government grants for
research and development

A grant received in relation to R&D would
meet the Statement of Concepts definition
of revenue and should be treated as such.
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Empirical research



Requirement to write-off R&D expenditure
caused smaller US R&D firms to reduce
R&D expenditure.
Requirement to write-off R&D may affect
management decisions about R&D
expenditure if management compensation
based on profits.
May also be based on debt contract
covenants.
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PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Disclosure requirements

FRS-13 5.19 requires disclosure of:
– the accounting policy adopted for R&D costs
– amount of R&D costs recognised as an expense
in the period
– the amortisation methods used
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PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Disclosure requirements
(cont.)

FRS-13 5.19 requires disclosure of (cont.):
– A reconciliation of the balance of unamortised
development costs at the beginning and end of
the period showing

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development costs recognised as an asset;
development costs recognised as an asset;
development costs allocated to other asset accounts;
and
development costs written back together with an
explanation of the change in circumstances that led to
the write-back as an asset.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Goodwill



Arises when one entity acquires another
entity, or part thereof.
An unidentifiable intangible asset.
Accounting governed by FRS-36.
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PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Internally generated vs.
purchased goodwill


Goodwill may be internally generated or
acquired by purchasing an existing business.
Only purchased goodwill is permitted to be
recorded
– purchased goodwill can be measured more
reliably than internally generated goodwill, based
on the amount paid.

Purchased goodwill is measured as the
excess of the cost of acquisition incurred
over the fair value of the net assets
acquired.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
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Fair value

Fair value is the amount for which an asset
could be exchanged between a
knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm’s
length transaction.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Amortisation of goodwill



Much opposition to amortisation
requirements.
When AAS 18 released, requirement to
amortise over a period not exceeding 20
years.
Innovative methods used for amortising
developed—inverted sum-of-years-digits.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
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Amortisation of goodwill
(cont.)


In NZ goodwill must be amortised on a
systematic basis over its useful life.
Period must not exceed 20 years.
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Empirical research



Amortisation method may impose costs on
firms with debt covenants in place.
May also affect management compensation
contracts.
Little evidence that goodwill amortisation
expense used in profit calculation reflects
information to investors in setting share
prices and returns.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
PPTs t/a New Zealand Financial Accounting 2e by Deegan and Samkin
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Accounting for brands


A brand is a symbol, design, name or
combination of these that identifies a seller’s
product and distinguishes it from the
competition.
Internally generated brands now being
recognised by a number of NZ companies.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
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Background to the brand
debate

Two basic origins:
– the problem of accounting for goodwill and other
assets obtained through the acquisition of
another company
– desire of companies to reflect value rather than
cost of certain assets on statement of financial
position.
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Brand/intangible asset
debate

Primary issue is the trade-off between two
of the qualitative characteristics of financial
reporting information.
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ED-87 Intangibles
requirements


Expenditure incurred on internally generated
assets such as brands cannot be
distinguished from the costs of developing
the business as a whole.
Where an intangible is recognised, it must
be measured initially at cost.
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ED-87 Intangibles
requirements (cont.)

If the intangible has been acquired as part
of an acquisition resulting in an entity
combination, it is not necessary for the fair
value of the asset to be determined by
reference to an active market.
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ED-87 Intangibles
requirements (cont.)

Where an active market does not exist, the
fair value initially recognised must be limited
to an amount that does not create or
increase any negative goodwill arising at the
date of acquisition.
Copyright  2003 McGraw-Hill New Zealand Pty Ltd.
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Slides prepared by Grant Samkin
7-32