CHAPTER 9
INTANGIBLE ASSETS
Connolly – International Financial Accounting and Reporting – 4th Edition
8.1 INTRODUCTION
•
•
•
•
Intangible assets are important to the future success of a
business (e.g. brand, R&D)
Accounting treatment of intangible assets has caused
great difficulty and confusion over the years
Goodwill is arguably always present, but its value is
difficult to define and is constantly changing
Two primary forms:
 Legal: customer lists, copyrights, patents and goodwill
 Competitive: knowledge, collaboration and structural
activities
Connolly – International Financial Accounting and Reporting – 4th Edition
8.2 IAS 38 INTANGIBLE ASSETS
Objective:
• To prescribe treatment of intangible assets not covered by
other IFRSs
Scope:
• Applies to all intangible assets with certain exceptions
• Exceptions include:
• Goodwill (IFRS 3 – See Chapter 26)
• Financial assets (IAS 39 and IFRS 9 – See Chapter 25)
• Mineral rights, related exploration and development
expenditure incurred
Connolly – International Financial Accounting and Reporting – 4th Edition
Capitalising intangible assets
•
Must meet the definition of an asset:
 Asset – resource controlled by the entity as a result of
past events and from which future economic benefits
are expected to flow to the entity
•
Intangible asset – non-monetary asset without physical
substance that meets all of the following criteria:
 Identifiability
 Control over a resource
 Existence of future economic benefits
Connolly – International Financial Accounting and Reporting – 4th Edition
Identifiability
•
An intangible asset must be identifiable
•
It is identifiable if it is:

separable, or

arises from contractual or other legal rights
e.g. patents, motion picture films, fishing licences arise from
contractual rights
Connolly – International Financial Accounting and Reporting – 4th Edition
Control over a resource
•
•
•
•
Must satisfy the definition of an asset
Thus there must be control:
 Entity has power to obtain economic benefits flowing
from underlying resource, and
 Prevent access of others to those benefits
Control will generally result from legal rights enforceable
by law
Note there must be identifiability and control
Connolly – International Financial Accounting and Reporting – 4th Edition
Existence of future economic benefits
•
For recognition:
 Probable that future economic benefits that are
attributable to the asset will flow to entity
 Cost can be measured reliably
•
•
If all three criteria met, the asset should be recognised at
cost initially
Cost comprises:
 Purchase price (incl. duties)
 Any directly attributable costs of preparing asset for
intended use (cost of getting asset to working condition,
legal fees etc.)
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 9.1: Meeting recognition criteria
An entity is developing a new production process. During 2011,
expenditure incurred was €1,000, of which €900 was incurred
before 1 December 2011 and €100 was incurred in December
2011. At December 2011, the production process met the
criteria for recognition as an intangible asset. At end 2011 an
intangible asset of €100 should be recorded, with €900 being
expensed (i.e. incurred before recognition criteria made).
During 2012, further expenditure incurred amounted to €2,000.
At the end of 2012 the recoverable amount of the know-how is
estimated to be €1,900.
Therefore, at the end of 2012 the cost of the production process
is €2,100 (€100 + €2,000). An impairment loss of €200 needs to
be recorded, which may be reversed in a subsequent period if
the requirements of IAS 36 are met (See Chapter 10).
Connolly – International Financial Accounting and Reporting – 4th Edition
Internally generated goodwill
•
•
Distinguish between internally generated and purchased
goodwill
Internally generated goodwill should not be recognised as
an asset (related expenditure should be expensed in the
period incurred)
Note:
Purchased goodwill is an intangible asset – see IFRS 3
Business Combinations (See Chapter 26)
Connolly – International Financial Accounting and Reporting – 4th Edition
Internally generated intangible assets – development costs
•
Distinguish between research and development
expenditure
Connolly – International Financial Accounting and Reporting – 4th Edition
Research phase
• Obtaining new knowledge
• Searching for alternatives:
 Materials
 Products
 Processes
• Evaluation of alternatives
• Expense in the year incurred
• Not to be carried forward in SFP
• Rationale is that at this stage there is insufficient certainty
that expenditure will generate future economic benefits
Connolly – International Financial Accounting and Reporting – 4th Edition
Development phase
• Application of research findings to a plan for production of
new or substantially improved:
 Products
 Processes
 Systems
• Prior to commencement of commercial production
Connolly – International Financial Accounting and Reporting – 4th Edition
Development recognition criteria
Must meet ALL of the following criteria:
• Technical feasibility
• Intention to complete and use or sell
• Generate future economic benefits
 Existence of market for asset or output
• Availability of adequate resources to complete
 Technical
 Financial
 Reliable measurement of costs possible
• Expense if not recoverable from future revenue
Connolly – International Financial Accounting and Reporting – 4th Edition
Cost of internally generated intangible asset
• Directly attributable costs
 Materials
 Labour
 Fees such as patents
• Allocate on a reasonable and consistent basis
• Necessary and identifiable overheads:
 Depreciation
 Insurance premiums, rent
Connolly – International Financial Accounting and Reporting – 4th Edition
Subsequent expenditure
• Subsequent expenditure should be expensed unless:
 Will increase future economic benefits
 Can be attributed to the asset
 Can be reliably measured
Connolly – International Financial Accounting and Reporting – 4th Edition
Measurement after initial recognition
• After initial recognition an entity can choose between:
 Cost model
 Revaluation model
• Cost model – items are carried at cost less any accumulated
amortisation and less any accumulated impairment losses
• Revaluation model – items are carried at fair value at the
date of revaluation, less any subsequent accumulated
amortisation and less any subsequent accumulated
impairment losses
Connolly – International Financial Accounting and Reporting – 4th Edition
Revaluation gains and losses (the revaluation model)
In general, revaluation gains and losses are accounted for as
follows:
•
•
revaluation gains are credited to a revaluation reserve and
are recognised as ‘other comprehensive income’ in SPLOCI
revaluation losses are recognised as an expense in arriving
at profit or loss
The situation is more complex if an item is revalued upwards
after a previous downwards revaluation (or vice versa).
The treatment is the same as for property, plant and
equipment under IAS 16 (See Chapter 6), including
accumulated amortization.
Connolly – International Financial Accounting and Reporting – 4th Edition
Useful life of an intangible asset
• An intangible asset with indefinite useful live is not
amortised. Instead, the asset is reviewed annually to
assess whether there has been a fall in value in
accordance with IAS 36 Impairment of Assets (See
Chapter 10).
• An intangible asset with a finite useful life should be
amortised over its EUEL.
See Chapter 9, Example 9.2
Connolly – International Financial Accounting and Reporting – 4th Edition
Amortisation period and method
•
•
The amortisation method chosen should match the usage
pattern of that asset
Available amortisation methods include:


the straight-line method
the diminishing balance method
If the asset’s usage pattern cannot be estimated reliably,
the straight-line method should be used
Connolly – International Financial Accounting and Reporting – 4th Edition
Amortisation period and method (Cont’d)
•
•
•
The residual value and useful life should be reviewed at
least at the end of each financial year
If expectations differ from previous estimates, these should
be accounted for as a change in an accounting estimate in
accordance with IAS 8
Similarly, the amortisation method used should be
reviewed at least at the end of each financial year, with any
change being accounted for as a change in an accounting
estimate in accordance with IAS 8
See Chapter 9, Example 9.3
Connolly – International Financial Accounting and Reporting – 4th Edition
9.3 DISCLOSURE
• Accounting policies for intangible assets
• For each class of intangible asset
 Method of amortisation used for finite useful lives
 Whether useful lives are indefinite or finite. If finite, useful
life of assets or amortisation rates used
 Gross carrying amount, any accumulated amortisation
(aggregated with accumulated impairment losses) at
beginning and end of period
 Line items of the SPLOCI – P/L in which any amortisation
of intangible assets is included
 Reconciliation of the carrying amount at the beginning
and at the end of the period (additions, disposals,
revaluations, impairment, amortisation charge for period)
Connolly – International Financial Accounting and Reporting – 4th Edition
Disclosure
• Intangible assets that have indefinite useful life, the carrying
•
•
•
•
amounts and the reasons supporting the assessment of an
indefinite life
Carrying amount, nature and remaining amortisation period of
any individual intangible asset that is material to the financial
statements of the entity as a whole
The existence of (if any) and amounts of intangible assets
whose title is restricted and of intangible assets that have
been pledged as security for liabilities
Amount of any contractual commitments for the future
acquisition of intangible assets
Where intangible assets have been accounted for under
revaluation model
 Effective date of revaluation
 Carrying amount of revalued intangible assets
Connolly – International Financial Accounting and Reporting – 4th Edition
SUMMARY

Purchased intangible assets should be capitalised as assets

Internally generated goodwill should not be capitalised


Internally developed intangible assets should be capitalised
only where it is probable that future economic benefits will
flow to the enterprise and the cost of the asset can be
measured reliably
Capitalised intangible assets are subject to amortisation and
impairment review
Connolly – International Financial Accounting and Reporting – 4th Edition