Doctorate of Business Administration

Intangible Assets (IAS 38)

By:

Associate Professor Dr. GholamReza Zandizandi@segi.edu.myc

2

• Intangible Assets• Recognition and Measurement• Research & Development• Goodwill • Impairments and Amortization

Topics to cover

3

• The market capitalization of a company is usually greater than the carrying amount of the net assets in its statement of financial position.

• This can relate partly to the fact that some assets are not carried at their fair value

• Or due to the fact that other items, such as level of staff morale, managerial expertise, customer loyalty and brand value, have tended not to be recognised as assets.

Intangible Assets

Intangible Assets

• Lack of physical substance• They exist without financial transaction• Separately purchased, included in goodwill and with a

finite life– Capitalise as part of goodwill.

• Separately purchased and capable of reliable measurement– Capitalise separately from goodwill and amortise.

Intangible Assets

• Intangible assets – internally developed

• Capitalize

IF

– Readily ascertainable market value

Intangible Assets – IndefiniteUseful Economic Life

• Annual impairment review – Improve transparency– Improve comparability

7

• IAS 38 applies to all intangible assets:– Intangible assets of Goodwill, Patents, Employee

Benefits– Intangible assets arising from insurance contracts

issued by insurance companies.

IAS 38

8

• According to IAS 38:• An intangible assets is an identifiable non-

monetary assets arises from contractual or other legal rights, and is capable of being separated from the entity and sold or licensed.

• Examples: brand names, licenses and franchises, copyrights, patents.

Definition of IA

9

• An intangible asset should be recognised if, and only if:– It is probable that the assets’ expected future

economic benefits will flow to the entity; and– Its cost can be measured reliably.

Recognition

10

• If an intangible item does not meet the definition of an intangible asset, or does not comply with the recognition criteria, it should not be capitalised as an intangible asset.

• IAS 30 prohibits the reinstatement of an intangible asset that was initially charged to expense.

Recognition

11

If the item meets the definition of an intangible, its costs can be measured reliably, it should be recognised as an intangible asset.

Intangible Assets Acquired Separately

12

• Harods Ltd acquired 100% of the equity share capital of HKL Ltd on 1/1/2010 at a cost of RM2.4 million. The fair value of the identifiable net assets of HKL Ltd at that date amounted to RM 1.9 million, which included RM250,000 in respect of product patents.

Intangible Assets Acquired as Part of a Business Combination

13

• The acquisition of HKL Ltd should be recorded as follows in Harods Ltd’s consolidated financial statements:

Dr Net tangible assets RM1,650,000 Patents 250,000 Goodwill 500,000Cr Bank 2,400,000

Intangible Assets Acquired as Part of a Business Combination

R&D Scorecard

The 2008 R&D scoreboard published by the Department of Innovation, Universities and Skills showed the scale of R&D expenditure:• £274 billion was invested globally in 2007–2008 by most active 1,400 companies most active in R&D which was an increase of 9.5% on the previous year.• Almost 80% of global R&D occurred in five countries: USA, Japan, Germany, France and the UK.• Global R&D intensity, measured as R&D expenditure as a proportion of sales, had remained broadly similar to the previous year at 3.3%.• The 88 UK companies in this group increased their R&D spend at a faster rate (10.3%) with 20% of the total taking place in the pharmaceuticals and aerospace sectors.

Research Defined

• Obtaining new knowledge• Search for alternatives

– Materials– Products– Processes

• Evaluation of alternatives

IAS 38 – Accounting Treatmentfor R&D

R&D Expenses will be treated as:

• Expense in the year in which it is incurred• Not to be carried forward in statement of financial

position.

IAS 38 Intangible Assets

• Development defined– Application of research findings to a plan for production

of new or substantially improved• products• processes• systems

– Prior to commencement of commercial production.

Development Costs Comprise

• Directly attributable costs– materials– labour– fees such as patents.

• Allocatable on a reasonable and consistent basis– Necessary and identifiable overheads

•depreciation•insurance premiums, rent.

IAS 38 – Development Recognition 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.

Activities that are neither Research or Development

SSAP 13 (but not IAS 38) identifies activities related to research and development, but is not classified for the purposes of the standard, e.g.• Engineering follow-through in an early phase of commercial production• Quality control during commercial production, including routine testing • Troubleshooting in connection with breakdowns during production• Routine efforts to improve the qualities of an existing product.

Goodwill

The main requirements of IFRS 3 Business Combinations and IAS 38 Intangible Assets are

• Purchased goodwill and 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 attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably.

• Capitalised assets are subject to amortisation and/impairment review.

The cost of Purchased Goodwill

IFRS 3 Business Combinations states:• Goodwill is the difference between the cost of

acquisition and the acquirer’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities acquired at the date of the exchange transaction.

Accounting Treatment of Goodwill

• Purchased goodwill is recognised in the statement of financial position as an asset

• Amortisation prohibited

• Annual impairment reviews

• Inherent goodwill not normally recognised in the accounts.

Brand accounting

• Typically not amortised but subject to impairment review.

25

• An entity may incur internal expenditure on the development and operation of its own website.

• SIC Interpretation 32 outlines the accounting treatment for website development:– Planning (feasibility studies)– Application and infrastructure development– Graphical design development– Content development

Website Costs

26

• Different stages apply different recognition on whether to expense or capitalised the expenditure.

Website Costs

27

• Once development is completed, the operating stage begins.

• Expenditure incurred during planning stage should be recognised as intangible assets only, if:– It is probable that the expected future economic

benefits attributable to the asset will flow to the entity and,

– The cost of the asset can be reliably measured,– It complies with the qualifying conditions for the

capitalisation of development costs under R&D.

Website Costs

28

• These items and similar in substance, should not be recognised as assets.

• Difficult to measure reliably.

Internally Generated Brands, Mastheads, Title, Customer Lists

29

• It is treated as property, plant and equipment.• Regarded as part of the machine.• Only when it is NOT regarded as an integral

part of the related hardware, it is treated as an intangible asset.

Computer Software

30

• Initially measured at cost.• Costs is the amount paid to acquire the asset.• But the following costs should be charged to

expense when incurred:– Start-up, pre-opening, pre-operating costs– Training costs– Advertising and promotion costs– Relocation and reorganisation costs– Internally generated goodwill

Measurement of IA

31

• Cost model– An IA should be carried at its cost, less any

amortisation and impairment losses.• Revaluation model

– IA may be carried at a revalued amount(based on FV) less any subsequent amortisation and impairment losses, only of FV can be determined by reference to an active market.

Measurement Subsequent to Acquisition

32

• Finite life– Cost less residual value should be amortised over

the useful life of the IA• Indefinite life

– Should not be amortised– Reviewed annually to determine if events and

circumstances continue to support an indefinite useful life for the asset.

Useful Lives and Amortisation

33

• On disposal• When an entity does not expect future

benefits from its use or disposal• The gains or loss on derecognition of an IA is

computed as the net disposal proceeds less the carrying amount. Recognise immediately in profit or loss.

Derecognition

34

• Useful life or amortisation rate• Amortisation model• Gross carrying amount• Accumulated amortisation and impairment

losses• Line items in which amortisation included• And many more….

Disclosure

35

• What is?

• Applies to:– Land, buildings, machinery and equipment, – Investment property at cost– Intangible assets, goodwill– Investment in subsidiaries, associates and JV at cost– Assets carried at revalued under IAS 16, IAS 38.

Impairment of assets

36

• At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired

Identifying Asset to be Impaired

37

• MV declines• Negative changes in technology, markets,

economy or laws• Increase in market interest rates• Net assets of the company higher than market

capitalisation

Indications of Impairment:External Sources

38

• Obsolescence• Asset is idle or held for disposal

Indications of impairment:Internal Sources

The End