Processing, Reporting and
Auditing Financial Accounts
Intangible Assets & Impairment
IAS 38, IAS 36 and IFRS 3
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Intangible Assets - IAS 38
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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
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Intangibles are always Non-Current Assets
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
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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
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 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
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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
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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
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