IAS 38 Intangible assets CL - ibr-ire.be fileIAS 38 Intangible assets Instituut van de Bedrijfsrevisoren 4 oktober 2010 FACILITATOR VÉRONIQUE WEETS Dr. Véronique Weets is a Professor

IAS 38 – Intangible assets

Véronique Weets

IAS 38 Intangible assets

Instituut van de Bedrijfsrevisoren 4 oktober 2010

FACILITATOR

VÉRONIQUE WEETS

Dr. Véronique Weets is a Professor of International Accounting and a faculty member at two Belgian

universities. In that role she is responsible a general IFRS course and a Financial Instruments course.

At regular occasions she participates in Master Programs of UAMS, Programs of Vlerick and the Solvay

Business School. Véronique Weets was also associated with the IFRS Technical desk of Deloitte in

Belgium, where she was involved in client work on matters such as the transition to IFRS and the

subsequent application of IFRS to listed companies. She was also responsible for client trainings as

well as trainings of the professional staff.

As from 2006 Véronique Weets created her own company in which she helps clients with the

application of IFRS on a daily basis through trainings or consultancy. This means that she actively

searches for the practical translation of this principle based framework of accounting in order to

provide realistic solutions to the clients. Therefore, facilitation sessions provided by Véronique Weets

always have a strong theoretical basis that is translated to practical applications that are relevant to

the business environments of the delegates. In addition to this, Véronique Weets is also an author of

a long list of technical accounting literature in English, French and Dutch.

DISCLAIMER

Whilst every effort is made to ensure that the contents of its case studies and other material handed

out during or in connection with courses are accurate and up‐to‐date, we shall not be under any

liability whatsoever for any inaccuracy or misleading information whether arising for negligence or

otherwise and in particular we shall not be liable for any consequential damage or expense of any loss

of profit or any liability to third parties incurred as a result of reliance on such inaccurate or

misleading information.

REFERENCES (OTHER THAN THE OFFICIAL PUBLICATIONS OF THE IASB)

Deloitte, iGAAP 2005 – IFRS Reporting in the UK, CCH

IVSC Discussion Paper, Determination of fair value of intangible assets for IFRS reporting purposes,

July 2007.

KPMG, Insights into IFRS 2005/6 Edition, Thomson.

KPMG, IFRS Accounting in the Telecommunications Industry, 2004

PWC, Manual of Accounting – IFRS for the UK 2007, CCH

PWC, International Financial Reporting Standards (IFRS) ‐ Issues and Solutions for the Pharmaceutical

Industry.

PWC, International Financial Reporting Standards (IFRS) ‐ Issues and Solutions for the Pharmaceutical

Industry (Vol. 2)..

IAS 38 Intangible assets

Instituut van de Bedrijfsrevisoren 4 oktober 2010

OVERVIEW


o Definition

o Recognition

o Acquiring intangible assets and determining the initial measurement

Purchased intangible assets

Internally generated intangible assets

Intangible assets acquired in a business combination

Acquisition by way of a government grant

Exchanges of assets

o Subsequent measurement

o Subsequent expenditures

o Retirements and disposals

Related topics

o Annual improvements 2007

o SIC 32 – Web site costs

o IFRIC 12 – Service concession arrangements

o Emission rights


1Insituut van de Bedrijfsrevisoren4 oktober 2010

IAS 38 – Intangible assetsVéronique Weets ([email protected])

© Veronique Weets 2010

Overview

Basic Principles Definition

R iti Recognition

Acquiring intangible assets and determining the initial measurement Purchased intangible assets

Internally generated intangible assets




Exchanges of assets

Subsequent measurement

Subsequent expenditures

Retirements and disposals



Overview

Related topics

Annual improvements 2007

SIC 32 – Web site costs

IFRIC 12 – Service concession arrangements

Emission rights


Definitions

An asset is a resource

Controlled by an entity as a result of past events; and

From which future economic benefits are expected to flow to the entity

An intangible asset is an identifiable non‐monetary asset without physical substance

Asset is identifiable when it:

is separable i e capable of being separated or divided from an


is separable, i.e. capable of being separated or divided from an entity and sold, transferred, licensed, rented or exchanged; or

arises from contractual or other legal rights, regardless of whether those rights are transferable or separable



Recognition

To be recognized, an intangible asset must meet

The definition of an intangible asset, especially

Control by the entity

Identifiable attributes of an asset

The recognition criteria

Probable that future economic benefits attributable to the asset will flow to the entity

Cost can be measured reliably


Acquiring intangible assets

Intangible assets can be acquired through:

Separate acquisition

Internal generation

Acquisition in a business combination


Exchanges of assets




Purchased intangible assets

Identifiable attributes: arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from othertransferable or separable from the entity or from other rights (examples: patents, copyrights, franchises, licenses, software)

Control: obtained through contractual or legal rights

Probability future economic benefits: price paid by the entity reflects expected future economic benefits Al id d t b ti fi d


Always considered to be satisfied

Cost: generally is based on cash paid or FV of consideration given. Includes directly attributable cost of preparing the asset for its intended use.

Internally generated goodwill

Is not recognised as an asset

Not an identifiable resource (is not separable nor does it arise )from a legal right)

Not controlled by the entity

Cannot be measured reliably




Internally generated intangibles

Difficult to assess whether these assets qualify for recognition

Identifying whether and when there is an identifiable asset that will generate expected future benefits; and

Determining the cost reliably

Sometimes can not be distinguished from the cost of maintaining or enhancing the entity’s internally generated goodwill or of running day‐to‐day operations



Internally generated brands, mastheads, publishing titles, customer lists, goodwill, etc. should not be recognized as

blintangible assets

fail to meet the recognition criteria of

reliable measurement of cost

identity separate from other resources, and

control by the reporting enterprise





Specific guidance on qualification as asset:

identifying the point of time when probable future economic benefits occur; and

reliable determination of cost of the asset

Classify the generation of the asset into:

research phase; and

development phase


development phase


Research phase

Examples

Activities aimed at obtaining new knowledge

Search for, evaluation, and final selection of applications of research findings

Search for and formulation of alternatives for new and improved systems

No intangible asset is recognized

Expense costs as incurred


Expense costs as incurred




Development phase

Examples of development activities

Design and testing of preproduction models

Design of tools, jigs, molds, and dies

Design of a pilot plant which is not otherwise commercially feasible

Design and testing of a preferred alternative for new and improved systems



Development phase – Capitalization is required if the entity is able to demonstrate:

Technical feasibility of completing the IA

Intention to complete the IA and use or sell it

Ability to use or sell the IA

How economic benefits will be generated

Availability of adequate resources to complete the IA and to use or sell it; and

14

;

Ability to measure the expenditure attributable to the IA during its development reliably





Demonstrating criteria – examples and issues:

Increase future cash flows on own or in combination with other assets

Financing witnessed by business plan / lenders willingness to finance it

Time recording system to capture costs of staff

Evaluation at each reporting date

15 © Veronique Weets 2010


Cost of an internally generated intangible asset = sum of expenditure incurred from the date when the recognition

criteria is first metcriteria is first met Cost of materials and services used or consumed in generating the intangible asset;

Costs of employee benefits arising from the generation of the intangible asset;

Fees to register a legal right; and

Amortization of patents and licenses that are used to generate the intangible asset

B i t i d ith IAS 23


Borrowing costs in accordance with IAS 23

Cannot reinstate expenditure previously expensed

Comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management




Examples of items to be expensed Non‐attributable selling, administrative and other general overhead expenditureoverhead expenditure

Establishment costs e.g. legal costs incurred to establishing a legal entity

Expenditure to open a new facility or business

Expenditures for starting new operations or launching new products or processes (i.e. pre‐operating costs)

Identified inefficiencies and initial operating losses


p g

Training staff to operate the asset

Advertizing and promotional activities

Relocating or reorganizing part or all of an entity


Probable economic benefits

Reflected in the fair value

Assumed in a business combination

If an asset is separable or arises from contractual or other legal rights, sufficient information exists to measure the fair value of the asset

Rebuttable presumption that finite life intangibles acquired in a BC have a reliable FV


a BC have a reliable FV




Purchased “in‐process R&D”

Capitalize if it meets the definition of an intangible and can be reliably measured; even if the criteria for “internally developed” R&D under IAS 38 have not been met

Subsequent development expenditure must be capitalized if it meets development cost criteria

Goodwill

Internally generated – expense (IAS 38)


Acquired in business combination

must not amortize but test for impairment (IFRS 3)


Recognize, separately from goodwill, the identifiable intangible assets acquired in a business combination

Meeting separability or contractual‐legal criterion

If the terms of a contract giving rise to a reacquired right are favorable or unfavorable, the acquirer shall recognize a settlement gain or loss

Items that are not identifiable

Assembled workforce


Assembled workforce

Potential contract that the acquiree is negotiating at the acquisition date




Measurement: fair value at acquisition date Include uncertainty

S ti t th ith th t ( t d k f i Sometimes together with other asset (eg: trademark for spring water together with spring)

Hierarchy Quoted market prices in an active market

Amount that an entity would have paid for it in an arm’s length transaction between knowledgeable and willing parties, on the basis of best information available

T h i

21

Techniques Applying multiples reflecting current market transatcions to indicators that drive the profitability of the assets or to the royalty stream that could be obtained from licensing the intangible asset to another party (« relief from royalty approach »)

Discounting estimated future net cash flows



Measurement at fair value

Sales comparison approach: market transactions method

Income capitalization approach

Relief from royalty method (royalty saving method);

Premium profits method (incremental income method);

Multi‐period excess earnings method

Cost approach: replacement cost method





Examples: airport landing rights, licences to operate radio or television stations, import licences or quotas or rights

h dto access other restricted resources

IAS 20 – Accounting for government grants and disclosures of government assistance

Recognise the intangible asset and the grant initially at

Fair value Fair value

Nominal amount plus any expenditure that is directly attributable to preparing the asset for its intended use.


Exchanges of assets

The cost of an intangible asset acquired in exchange for a non‐monetary asset or assets, or a combination of

d d fmonetary and non‐monetary asset is measured at fair value unless

The exchange transaction lacks commercial substance or

The fair value of neither the asset received nor the asset given up is reliably measurable




Subsequent measurement Cost model Carry at cost less accumulated amortization and impairment lossesp

Revaluation model IA is carried at FV at date of revaluation less any subsequent accumulated amortization and impairment losses

FV is determined by reference to an active market in that type of intangible (if no active market, the asset should not be revalued)

25

not be revalued) Deriving FV by discounting future projected cash flows is deemed too unreliable

Revaluations should be performed regularly



Revaluation model Active markets are not expected to exist for assets such as patents and trademarkspatents and trademarks

An active market is a market in which all of the following conditions exist:

the items traded in the market are homogeneous

willing buyers and sellers can normally be found at any time; and

prices are available to the public

26

prices are available to the public





Amortization period The depreciable amount of an intangible asset with a finite useful life is allocated on a systematic basis over its useful lifelife is allocated on a systematic basis over its useful life

Useful life is likely to be short for intangible assets that are susceptible to technological obsolescence E.g. computer software

The useful life of an intangible asset shall include renewal periods of contractual or other legal rights if there is evidence to support renewal by the entity without significant cost, for example Experience of renewal and/or consent of third party (if necessary)

27

Conditions to obtain renewal are met

Cost is not significant when compared with the future economic benefits

Useful life of a reacquired right in a business combination is the remaining contractual period of the contract (do not include renewal periods)


Subsequent measurement To consider when determining the useful life The expected usage of the asset by the entity and whether the asset

could be managed efficiently by another management team Typical product life cycles for the asset and public information on

estimates on useful lifes of similar assets that are used in a similar way; Technical, technological, commercial or other types of obsolescence The stability of the industry in which the asset operates and changes in

the market demand for the products or services output from the asset; Expected actions by competitors or potential competitors; The level of maintenance expenditure required to obtain the expected

future economic benefits from the asset and the entity’s ability and intention to reach such a level;


intention to reach such a level; The period of control over the asset and legal or similar limits on the use

of the asset, such as the expiry dates of related leases; and Whether the useful life of the asset is dependent on the useful life of

other assets of the entity




Residual value of an intangible asset is assumed to be zero unless

There is a commitment by a third party to purchase the asset at the end of its useful life; or

There is an active market for the asset and

The residual value can be determined by reference to that market; and

It is probable that such a market will exist at the end of the asset’s useful life


useful life.


Amortization

Begins when asset is available for use;

When it is in the location and the condition necessary for it to be capable of operating in the manner intended by management

Ceases at the earlier of the date that

The asset is classified as held for sale (IFRS 5) and

The date that the asset is derecognized.

The amortization method used reflects the pattern in which future economic benefits are expected to be consumed

30

future economic benefits are expected to be consumed

If that pattern cannot be determined reliably: straight‐line

Rarely evidence to support an amortization method that results in a lower amount of accumulated amortization than under the straight‐line method





Intangible assets with an indefinite useful life No amortization, but annual impairment test

Review each period to determine if circumstances continue to Review each period to determine if circumstances continue to support an indefinite useful life assessment If not, begin to amortize (change in estimate)

Amortization period, amortization method and residual value shall be reviewed at least at each financial year‐end.


Intangible assets with an indefinite useful life are tested at least annually for impairment in accordance with IAS 36 Other intangible assets are tested for impairment when there is an

indication for impairment


Most subsequent expenditures are likely to maintain the expected future economic benefits rather than meeting h d f f bl d hthe definition of an intangible asset and the recognition criteria

Only rarely will expenditure incurred after the initial recognition be recognized in the carrying amount of an asset

Subsequent expenditure on brands, mastheads, publishing titles, customer lists is always recognized in profit or loss as


incurred

Cannot be distinguished from expenditure to develop the business as a whole.




Subsequent research or development expenditures that relate to an in‐process research or development project

d l b b dacquired separately or in a business combination and recognized as an intangible asset is

Recognized as an expense when incurred if it is research expenditure

Recognized as an expense if it is development expenditure that does not satisfy the criteria for recognition as an intangible


asset; and

Added to the carrying amount if it meets the criteria for recognition as a development asset

Retirements and disposals

An intangible asset shall be derecognized

On disposal; or

When no future economic benefits are expected from its use or disposal

Difference between the net disposal proceeds and the carrying amount is a gain or loss arising from the derecognition of the intangible asset and shall be recognized in profit or loss (but not as revenue).


g p ( )



Related topics

Overview




Emission rights





Clarification that expenditure on advertising and promotional activities includes mail order catalogues

Th tit h ld i th dit i l ti t The entity should recognize the expenditure in relation to goods when it has access to those goods When it owns them

The entity should recognize services when it receives those services When they are performed by a supplier in accordance with a contract to deliver them


contract to deliver them E.g. when an advertisement is developed, not when the entity uses this to deliver an advertisement to customers

Does not preclude the recognition of a prepayment


The stages of a web site’s development can be described as follows: Planning Planning

Feasibility studies, defining objectives and specifications, evaluating alternatives and selecting preferences

Application and infrastructure development Obtaining a domain name, purchasing and developing hardware and operating software, installing developed applications and stress testing

Graphical design development


Graphical design development Designing the appearance of web pages

Content development Creating, purchasing, preparing and uploading information, either textual or graphical in nature




Operating stage starts once development of a web site has been completed

Maintaining and enhancing the applications, infrastructure, graphical design and content of the web site.



Issues Whether the web site is an internally generated intangible asset that

is subject to the requirements of IAS 38;is subject to the requirements of IAS 38;

The appropriate accounting of such expenditure

Consensus An entity’s own web site that arises from development and is for

internal or external access is an internally generated intangible asset

An intangible asset is recognized if the entity is able to demonstrate h i b i ill b bl f i b fi


how its web site will generate probable future economic benefits E.g. by enabling orders to be placed

Not if web site is developed solely or primarily for promoting or advertizing its own products and services




If criteria for capitalization are met

Planning stage = research phase

Expense

Application and infrastructure development, graphical design and content stage = development phase

Capitalize if expenditure is directly attributable and necessary to creating, producing or preparing the web site for it to be capable of operating in the manner intended by management

Content to advertize and promote products and services should be


Content to advertize and promote products and services should be expensed

Operating phase

Expense unless criteria for subsequent capitalization are met




Overview

Introduction

Definitions

Common features of service concession arrangements

Scope of IFRIC 12

Accounting for a SCA by the operator


Introduction

IFRIC 12 was issued 30/11/2006 and:

Applies to accounting by operators of private to public service concession arrangements

Entities shall apply the interpretation for annual periods beginning on or after 1/1/2008, retrospectively

No transitional provisions

!: prospective application is allowed if retrospective application is considered impracticable. In this case the asset shall be


ptested for impairment.



Definitions

Service concession arrangements are arrangements:

in which the public sector attracts private sector participation

in the development, financing, operation and maintenance

of infrastructure for public services.


Definitions

Service concession arrangement GRANTORGRANTOR OPERATOROPERATOR

Public Private

gsets out:

• Performance standards

• Mechanisms for adjusting prices

• Arrangements for arbitrating disputes


Operator activities:

• Construct/upgrade infrastructure

• Operate and maintain infrastructure for a specified period of time



Common features of a SCA

Contract Obliges the operator to provide the services to the public on behalf

of the grantorof the grantor

Sets the initial prices to be levied by the operator and regulates price revisions over the period of the service arrangement

The grantor is a public sector entity or a private sector entity to which the

responsibility for the service has been delegated

The operator i ibl f f h i f d l d


is responsible for management of the infrastructure and related services and does not merely act as an agent on behalf of the grantor

is obliged to hand over the infrastructure to the grantor in a specified condition at the end of the period of the arrangement, for little or no incremental consideration.

Scope of IFRIC 12

Public to Private’ service concession arrangements in which:

The grantor controls services provided by the operator; and

Either

The grantor controls any significant residual interest in the infrastructure at the end of the concession arrangement; or

No significant residual interest exists




Accounting for SCA by the operator The operator does not recognize the assets as PPE or leased assets

Financial assets if Financial assets if

Grantor agrees to pay a specified amount; or

Grantor agrees to guarantee the shortfall between amounts received from users and a specified amount

Intangible assets if

Grantor only pays when users use the service

Grantor only grants a right to charge users for the service Grantor only grants a right to charge users for the service

Bifurcated assets

If the consideration is partly by a financial asset and partly by an intangible asset


IFRIC 3 – Emission rights (withdrawn)




Entities have three options

Limit its emissions to its cap

Reduce its emissions to below its cap and sell (or carry forward) the allowances that it does not require

Produce emissions in excess of its cap, in which case it must buy additional allowances for the excess of its cap, in which case it must buy additional allowances for the excess emissions and/or incur a penalty.



A cap and trade scheme gives rise to:

An asset for allowances held

Allowances, whether issued by government or purchased, are intangible assets

Allowances that are issued for less than fair value shall be measured initially at their fair value !

A government grant

When allowances are issued for less than fair value, the difference between the amount paid and fair value is a government grant

52

between the amount paid and fair value is a government grant

A liability for the obligation to deliver allowances equal to emissions that have been made.

Measured at the best estimate: usually present market price





EC decided not to endorse (May 2005)

Intangible measured at fair value through profit and loss ?

Apply hedge accounting model ?

Mismatch measurement and presentation

IASB decided to withdraw (June 2005) and to have project on government grants including emission rights

Currently: « Reconsideration of IFRIC 3 has been deferred pending the conclusion of work on other relevant


pending the conclusion of work on other relevant projects »

CBN 179‐1 Boekhoudkundige verwerking van broeikasgasemissierechten/ Traitement comptable des quotas

d’émission de gaz à effet de serre



Gross method

Recognise emission rights as intangible assets

Measure at purchase price if purchased in market

Measure at fair value if received at cost lower than fair value

Difference in other income

Can be deferred until emission

Recognise a liability for the emission

Measure at initial cost of the rights for rights held by the entity

Measure at fair value on balance sheet date for rights to

55

Measure at fair value on balance sheet date for rights to purchase


Net method

Calculate at balance sheet date

Number of rights needed

Number of rights held

Recognise difference as asset/liability

Measured at fair value on balance sheet date though profit and loss statement




Disclaimer

Cethys BVBA takes every care in preparing course material to ensure that the content is accurate and up to date. This course material does not provide an exhaustive presentation ofmaterial does not provide an exhaustive presentation of treatment of topics presented in accordance with IFRS. As such, when evaluating the underlying accounting treatment, the original IFRS Standards and Interpretations should be consulted, and an advice of a qualified IFRS expert should be obtained when deemed necessary. No responsibility for loss occasioned to any person acting or refraining from acting as a


occasioned to any person acting or refraining from acting as a result of such material can be accepted by Cethys BVBA, or Véronique Weets.

Documents

IAS 38 Intangible assets CL - ibr-ire.be fileIAS 38 Intangible assets Instituut van de Bedrijfsrevisoren 4 oktober 2010 FACILITATOR VÉRONIQUE WEETS Dr. Véronique Weets is a Professor