9 INTANGIBLE ASSETS PERSPECTIVE AND ISSUES

Long-lived assets are those that will provide economic benefits to an enterprise for a number of future periods. Accounting standards regarding long-lived assets involve determination of the appropriate cost at which to record the assets initially, the amount at which to present the assets at subsequent reporting dates, and the appropriate method(s) to be used to allocate the cost or other recorded values over the periods being benefited. Under international accounting standards, while historical cost is the defined benchmar treatment, revalued amounts may also be used for presenting long-lived assets in the statement of financial position if certain conditions are met. Long-lived assets are primarily operational in character, and they may be classified into two basic types! tangible and intangible. "angible assets have physical substance, while intangible assets either have no physical substance, or have a value that is not conveyed by what physical substance they do have (e.g., the value of computer software is not reasonably measured with reference to the cost of the dis ettes on which these are contained). "he value of an intangible asset is a function of the rights or privileges that its ownership conveys to the business enterprise. #ntangible assets can be further categori$ed as either %. #dentifiable, or &. Unidentifiable (i.e., goodwill). #dentifiable intangibles include patents, copyrights, brand names, customer lists, trade names, and other specific rights that typically can be conveyed by an owner without necessarily also transferring related physical assets. 'oodwill, on the other hand, cannot be meaningfully transferred to a new owner without also selling the other assets and(or the operations of the business. )esearch and development costs are also addressed in this chapter. *ormerly the sub+ect of a separate international standard (#A, -), but more recently guided by the standard covering all intangibles (#A, ./), research costs must be e0pensed as incurred, whereas development costs, as defined and sub+ect to certain limitations, are to be classified as assets and amorti$ed over the period to be benefited. "he standard on impairment of assets (#A, .1) pertains to both tangible and intangible long-lived assets. "his chapter will consider the implications of this standard for the accounting for intangible assets. "he matter of goodwill, an unidentifiable intangible asset deemed to be the residual cost of a business combination accounted for as an acquisition, has been addressed by #A, && and is covered in 2hapter %%3 accounting for all other intangibles, addressed in #A, ./, is discussed in this chapter. As part of its twin pro+ects considering revisions to the standards on business combinations and related topics, which are now anticipated to result in new or revised standards no earlier than &445, the #A,6 has been reviewing the accounting for intangibles in general. "he ob+ective is for the accounting for acquired intangibles, including goodwill and in-process research and development, to be made more consistent with that prescribed for intangibles acquired by other means or internally generated by the reporting entity. 7ith regard to goodwill (discussed in greater detail in 2hapter %%, 6usiness 2ombinations and 2onsolidated *inancial ,tatements, it is e0pected that an acquirer will be required, as of the acquisition date to %. )ecogni$e goodwill acquired in a business combination as an asset3 and

&. #nitially measure that goodwill at its cost, being the e0cess of the cost of the business combination over the acquirer8s interest in the net fair value of the identifiable assets, liabilities, and any contingent liabilities recogni$ed. #t is well established that goodwill acquired in a business combination represents a payment made by the acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recogni$ed. "o the e0tent that the acquiree8s identifiable assets, liabilities, or contingent liabilities do not satisfy the criteria for separate recognition at the acquisition date, there is a resulting impact on the amount recogni$ed as goodwill. "his is because goodwill is measured as the residual cost of the business combination after recogni$ing the acquiree8s identifiable assets, liabilities, and contingent liabilities. Under the anticipated #A, revisions, subsequent to initial recognition, the acquiring entity will be required to measure goodwill acquired in a business combination at cost less any accumulated impairment losses. "his will essentially replicate the approach adopted under U, 'AA9 (,*A, %5&), which is a star departure from historical practice. )ather than being amorti$ed over its estimated economic life, goodwill acquired in a business combination will have to be tested for impairments annually, or more frequently if events or changes in circumstance indicate that it might be impaired, in accordance with #A, .1. ,ources of #A, #A, .1, ./ ,#2 1, .& :;*#<#"#=<, =* ";)>, Amorti$ation. #n general, the systematic allocation of the cost of a long-term asset over its useful economic life3 the term is also used specifically to define the allocation process for intangible assets. 2arrying amount. "he amount at which an asset is presented on the balance sheet, which is its cost (or other allowable basis), net of any accumulated depreciation and impairment losses. 2ash generating unit. "he smallest identifiable group of assets that generates cash inflows from continuing use, largely independent of the cash inflows associated with other assets or groups of assets. 2orporate assets. Assets, e0cluding goodwill, that contribute to future cash flows of both the cash generating unit under review for impairment and other cash generating units. 2ost. Amount of cash or cash equivalent paid or the fair value of other consideration given to acquire or construct an asset. :epreciable amount. 2ost of an asset or the other amount that has been substituted for cost, less the residual value of the asset. :epreciation. ,ystematic and rational allocation of the depreciable amount of an asset over its economic life. :evelopment. "he application of research findings or other nowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services prior to commencement of commercial production or use. "his should be distinguished from research. *air value. Amount that would be obtained for an asset in an arm8s-length e0change transaction between nowledgeable willing parties. 'oodwill. "he e0cess of the cost of a business combination accounted for as an acquisition over the fair value of the net assets thereof, to be amorti$ed over its useful economic life that, as a rebuttable presumption, is no greater than twenty years.

"he amount which could be reali$ed from the sale of an asset by means of an arm8s-length transaction. why incur those costsD). with enterprises in nations whose standards had not addressed accounting for intangibles typically being much more aggressive in capitali$ing a range of intangibles.9". 6ac ground =ver the years. 7hile all can agree that predicting the useful economic lives of certain . either from an enterprise to its owners or another entity. 7hile advocates for such practices have made the claim that future benefits will flow from such e0penditures (else. "his pattern of foregone periodic e0pense and sporadic charge-offs clearly impedes the utility of financial statements for one of their primary purposes. "ransfer of assets or services in one direction. accounts receivable. A<: . <onreciprocal transfer. )esidual value. as the @ nowledge-basedA economy becomes more dominant. <onmonetary assets without physical substance that are held for use in the production or supply of goods or services or for rental to others... . or for administrative purposes. the future benefits of which are very difficult to demonstrate. which are identifiable and are controlled by the enterprise as a result of past events. 9eriod over which an asset will be employed in a productive capacity. and from which future economic benefits are e0pected to flow. )UL. >onetary assets. "he original and planned investigation underta en with the prospect of gaining new scientific or technical nowledge and understanding. there has often been a great reluctance to amorti$e the costs against earnings over a reasonable time hori$on. until recently. 2=<2. net of estimated costs of disposal. An enterprise8s reacquisition of its outstanding stoc is a nonreciprocal transfer. or ignore entirely. "hus. )esearch.stimated amount e0pected to be obtained on ultimate disposition of the asset after its useful life has ended...?A>9L. e0perience has shown that these deferrals often result in a subsequent year in large @big bathA write-offs. <onmonetary transactions. Assets whose amounts are fi0ed in terms of units of currency. "his should be distinguished from development. including advertising costs and setup costs. accounting standards have tended to give scant attention to. namely. and notes receivable. on the basis that these have either indefinite or infinite lives. "he e0cess of the carrying amount of an asset over its recoverable amount. Bowever. or the number of production units e0pected to be obtained from the asset by the enterprise. as measured either by the time over which it is e0pected to be used. .#mpairment loss. vis-C-vis those entities operating under more strictly defined rules limiting cost deferral and requiring rapid amorti$ation of those costs which could be deferred. when intangibles such as @brand namesA and @internally generated goodwillA have been capitali$ed.0amples are cash. including internally generated goodwill. . in many countries it has been common practice to defer recognition of certain types of e0penditures. Useful life. #ntangible assets. practice has been e0ceptionally diverse. less costs of disposal. the appropriate means of reporting upon such assets.0changes and nonreciprocal transfers that involve little or no monetary assets or liabilities. the predicting of future economic performance (both in terms of earnings and cash flows) of the reporting entity. <et selling price. "he greater of an asset8s net selling price or its value in use. or from owners or another entity to the enterprise. )ecoverable amount. As a consequence. the role of intangible assets has grown more important for the operations and prosperity of many types of businesses. #n addition.

#dentifiable intangible assets include patents. therefore. the need to honor the matching principle and to provide relevant information for use by investors. Bowever. creditors and others has driven most standard setters to impose rather stringent requirements on the recognition and measurement of intangible assets. #n many but not all cases. computer software. measurement bases. import quotas. #A.%. . leasehold improvements. "his standard does not apply to intangible assets arising in insurance companies from contracts with policyholders.intangibles is e0ceptionally challenging. and they have a decline in utility over that period which can be measured or reasonably assumed. or development and e0traction of. natural gas. As the rules presently e0ist. ./. including development costs. #t prescribes the accounting treatment for intangible assets. which was promulgated after a rather long and contentious gestation period that included the issuance of two .& and covered by #A. and disclosure requirements for intangible assets.cope of the standard. . it does not apply to intangible assets covered by other #A. the #A. and speciali$ed now-how.2 considerably streamlined and rationali$ed the accounting standards relating to accounting for intangible assets. the standard does apply to intangible assets that are used to develop or maintain these activities. &/. &&). the former #A. by imposing additional burdens on those who would assign lives greater than twenty years to such assets. #n fact.0posure :rafts. copyrights. and .6 is currently weighing revisions that would remove the refutable presumption of a twenty-year ma0imum economic life and would further ac nowledge the e0istence of indefinite-life intangibles. mar eting rights. "hese items have in common the fact that there is little or no tangible substance to them. . and financial assets as defined by #A. Bowever. leases that fall within the purview of #A. %&. nor to mineral rights and the costs of e0ploration for. (. minerals. "his is to ensure that only assets having recoverable values are capitali$ed and carried forward to future periods. licenses. they have an economic life of greater than one year. the standard set a rather conservative approach to recognition and measurement of intangibles.3 for instance.ee further discussion in 2hapter %%. in this case to the recently revised U. "he standard also prescribes impairment testing for intangible assets. . #f adopted. the asset is separable3 that is. but will have to be evaluated for impairment regularly. %E. goodwill arising on a business combination and dealt with by #A.-./ is a comprehensive standard which superseded an earlier standard dealing solely with research and development e0penditures. #t is interesting to note that in prescribing the amorti$ation period. &&. #A. Bowever. #t establishes recognition criteria. not sub+ect to amorti$ation at all (at least. #nternational accounting standards first addressed accounting for intangibles in a thorough way with #A. by simultaneously withdrawing the e0isting standard on research and development costs (the former #A. &E. brand names./. ./ has ruled out the concept of intangible assets having infinite or indefinite lives. "he standard applies to all enterprises.) Also. 'AA9 standards on business combinations and intangibles. assets arising from employee benefits that are covered by #A. -) and revising the standard on business combinations (#A. goodwill will no longer be sub+ect to amorti$ation. reversing the position ta en by #A. it could be sold or . customer lists.68s effort to @convergeA its standards. deferred ta0 assets covered under #A. and similar nonregenerative resources. they do form a coherent and consistent set of requirements for the financial reporting on all such assets. to be underta en on a regular basis. oil. "hese potential revisions are being pondered largely as part of #A. . until a finite life was determinable). %-.

being sub+ective and open to interpretation.otherwise disposed of without simultaneously disposing of or diminishing the value of other assets held. different techniques have been used by commentators.e. 7hether future economic benefits can be e0pected to flow to the enterprise3 and 5. such as a certificate indicating that a patent had been granted. the creation of alternative definitions and concepts is probably not appropriate. "he ey criteria for determining whether intangible assets are to be recogni$ed are %./). the coining of a phrase such as @intangible resourcesA (which is found neither in the #A. there may be some confusion about whether to classify them as tangible or intangible assets. is treated as part of the hardware equipment (i. . computer software that is not an integral part of the related hardware equipment is treated as software (i. assets that have no physical substance. . #n various attempts to e0plain this concept. even so far as to argue that #A. such as the operating system. "he concept embodied in this standard is somewhat controversial./ draws a distinction between an @intangible assetA and an @intangible resource. while others (perhaps e0hibiting over enthusiasm to clarify the concept) have gone further.A is ill-advised. the latter e0pression has been conceived of a broader concept that includes intangible assets (as defined by #A./ (paragraph E) has defined an asset as a @resourceGcontrolled by the enterpriseGA./) to be used in distinction from the term @intangible asset..ome intangible assets may be contained in or on a physical substance such as a compact disc (in the case of computer software)3 and F #dentifiable assets that result from research and development activities are intangible assets because the tangible prototype or model is secondary to the nowledge that is the primary outcome of those activities.2 *ramewor nor in #A. . 7hether the intangible asset has an identity separate from other aspects of the business enterprise3 &. Bowever. #ntangible assets are. and equipment). plant. 7hether the use of the intangible asset is controlled by the enterprise as a result of its past actions and events3 . and the accounting for them is accordingly very similar. by definition. 2onversely. As a rule of thumb. *or e0ample F "here may be tangible evidence of an asset8s e0istence. and equipment as opposed to an intangible asset).A #n this typology.ome have restricted themselves to detailed e0amples. 2onsiderable +udgment is required in properly classifying such assets as either intangible or tangible assets. 7hether the cost of the asset can be measured reliably. as well as other hypothetical assets. but also items such as customer lists and internally generated brands (which do not meet the definition of intangible assets). the asset should be classified as either an intangible asset or a tangible asset based on the relative or comparative dominance or significance of the tangible or the intangible component (or element) of the asset.. certain computer software.e. 'iven the fact that #A. there may be instances where intangibles also have some physical form. #n the case of assets that have both tangible and intangible elements. . .. plant. *or instance. as an intangible asset). )ecognition 2riteria #dentifiable intangible assets have much similarity to tangible long-lived assets (property. and in some respects also vague and unclear. that is essential and an integral part of a computer. . 7hile this may serve some useful purpose./). *or e0ample. but this does constitute the asset itself3 F . . intangible resources would include not only items such as patents and copyrights (which would meet the qualifying criteria set forth for intangible assets in #A. as property.

6 is embar ed upon a thorough review of accounting for business combinations.) "o capitali$e the cost of an intangible asset other than goodwill. that neither of these characteristics are intended to be absolute requirements. As to the first issue. an asset. it must have an independently observable e0istence and a cost that can be assigned to it. impairment-tested asset under a revised or superseded #A. #t is worth noting that while #A. 'oodwill is the residual cost of a business acquisition that cannot be assigned either to tangible assets. :emonstration of the separability of an asset can assist an enterprise in identifying an intangible asset3 and &. therefore. that an owner can convey them without necessarily also transferring related physical assets. . ./. "he inability of an enterprise to demonstrate the separability of an asset will ma e it harder to demonstrate that there is an identifiable intangible asset. Unli e identifiable intangibles. it appears that the e0isting philosophy for intangible asset recognition will be essentially continued. but rather.#dentifiability. sell. many intangible assets (for e0ample. . on the other hand. . goodwill cannot be separated from the assets (the physical as well as the identifiable intangible) it was acquired with. #A. and hence. or to identifiable intangibles. &&. a license to operate a radio station) would not be shown separately in the financial statements even if they meet the (#A. net of any liabilities assumed. form part of the definition of an asset. "he e0istence of contractual or legal rights and separability will not. the #A. a corollary of which is the accounting for intangibles (including goodwill and in-process research and development) acquired in such combinations.0posure :rafts who had advocated the inclusion of @separabilityA as an additional recognition criterion. 2urrently. #ndependently observable e0istence can be established if the enterprise can rent. At the time it adopted #A. (6ut note that goodwill may become a nonamorti$ing. however. often made as brief as possible. and recognition criteria for. perhaps the most noteworthy is the following! Gif a @separabilityA criterion was applicable to all intangible assets. . #dentifiability can be demonstrated by a legal right over an asset or by the fact that the asset is separable from the rest of the business. cannot be meaningfully transferred to a new owner without also selling other assets. #A.2 6oard re+ected the views of commentators on the antecedent . &&3 see 2hapter %% for a discussion. accordingly. the principal concern is to distinguish these intangibles from goodwill arising from a business combination.2 supported the view that %. will not meet the recognition criteria for intangible assets as defined by #A.2) *ramewor 8s definition of. for instance) still retain it as one of the qualifying criteria for recognition. which would continue current practice in this area. the accounting for which is addressed by #A. or distribute the future economic benefits from the assets without also disposing of other assets3 that is. 7hile not supportive of imposing separability as a threshold criterion for intangible assets. #t would appear. its real value is often questioned and the period over which it can be amorti$ed is. A replacement for #A. #n setting forth the basis for its conclusions./. 6ased on deliberations to mid-&44&. the 6oard cited several reasons for this re+ection. some national standards (UH 'AA9. && will li ely stipulate that intangible assets acquired in a business combination should be recogni$ed separately from goodwill if they arise as a result of contractual or legal rights or are separable from the business. Among these./ does not regard @separabilityA as an additional recognition criterion.ince goodwill cannot be severed and sold. 'oodwill. will serve as indicators that an entity controls the future economic benefits embodied in the item. e0change.

initial operating losses. do not qualify as an intangible asset. and equipment). plus any directly attributable e0penditures incurred in preparing the asset for its intended use. customer loyalty. *uture economic benefits. plant. customer relationships. even if an enterprise incurs considerable e0penditure on training that will supposedly increase staff s ills. thus including employee benefits arising directly from bringing the asset to its wor ing condition. "he cost of an intangible asset acquired separately is determined in a manner largely analogous to that for tangible long-lived assets as described in 2hapter /. #n other words. and the cost of the asset can be measured reliably. not capitali$ed. ./. customer loyalty (unless protected by enforceable legal rights). "he recognition criteria for intangible assets are derived from the (#A. A patent gives the holder the e0clusive right to use the underlying product or process without any interference or infringement from others. capitali$ation of costs ceases at the point when the intangible asset is ready to be placed in service in the manner intended by management. As with tangible assets. 2ontrol implies the power to both obtain future economic benefits from the asset as well as restrict the access of others to those benefits. but while it has yet to be placed into service.imilarly. etc. the cost comprises the purchase cost. less any trade discounts and rebates. to ensure its control over an intangible asset. and portfolio of clients. staff training e0penditures./ require that an enterprise should be in a position to control the use of the intangible asset. on #ntangible Assets.. including any ta0es and import duties. will have difficulty meeting this recognition criteria in spite of e0pected future economic benefits from them. #t would also include professional fees and other costs. the practice of deferring training costs based on the reasoning that future economic benefits from enhanced staff s ills will flow to the enterprise can no longer be +ustified. Any costs incurred in using or redeploying intangible assets are accordingly to be e0cluded from the cost of those assets. long-term training benefits. "he future economic benefits envisaged by the standard may ta e the form of revenue from the sale of products or services. . A good e0ample of other benefits resulting from the use of the intangible asset is the use by an enterprise of a secret formula (which the enterprise has protected legally) that leads to reduced future production costs (as opposed to increased future revenue). Bence. would be e0penses. "he provisions of #A.2ontrol. *or instance. "hus. :irectly attributable e0penditures would include fully loaded labor costs. "his is due to the fact that the enterprise would find it impossible to fully control these resources or to prevent others from controlling them. =ther often-quoted e0amples of e0penses that do not qualify as intangible assets based on the criterion of control are mar et share. or other benefits resulting from the use of the intangible asset by the enterprise. . after the promulgation of the #A. no matter how material in amount. <ormally enterprises register patents. such as . cost savings. >easurement of 2ost of #ntangibles "he conditions under which the intangible asset has been acquired will determine the measurement of cost.2) *ramewor and are similar to the recognition criteria for tangible assets (property. Under #A. "hus. the economic benefits from s illed staff cannot be controlled. since trained employees could leave their current employment and move on in their career to other employers. #ntangible assets arising from technical nowledge of staff. any costs incurred while the asset is capable of being used in the manner intended by management. it is mandated that an intangible asset be recogni$ed only if it is probable that future economic benefits specifically associated therewith will flow to the reporting entity. etc. copyrights.

. that should be used to measure its cost. cannot be capitali$ed. Under U. 7here the fair value for the item received is more clearly evident than the fair value of the equity instruments issued. then that asset is not recogni$ed. intangible assets are obtained in e0change for equity instruments of the reporting entity./ will stipulate that under such circumstances the cost of the asset is the fair value of the equity instruments issued. 'AA9. it is li ely that any unallocated purchase price will have to be assigned to goodwill. #n other situations. the income and related e0penses of incidental operations must be recogni$ed in the operating results for the current period./. *urthermore. "hese incidental operations could occur either before or during the development activities. #f the intangible asset can be freely traded in an active mar et. Under #A.those incurred while demand for the asset8s productive outputs is being developed. 6ecause by definition such operations are not necessary to bring an asset to the condition necessary for it to be capable of operating in the manner intended by management./ as a consequence of the #A. however. . then the quoted mar et price is the best measurement of cost.g. unless this same process is usable with regard to the intangibles.indA e0ception described in the following paragraph applies. #f one or more of the assets are intangibles. . the e0tent of +udgment required in the allocation process becomes somewhat greater than would otherwise be the case3 in e0treme situations it may be impossible to determine how much. "he revisions to #A. then cost is determined based on the amount that the enterprise would have paid for the asset in an arm8s-length transaction at the date of acquisition. of the aggregate cost should be allocated to intangibles. #f the intangible asset has no active mar et. is included in goodwill. those based on discounted cash flow pro+ections) cannot be calculated. =n the other hand./ consequent to the #A. but rather. 2hanges being made to #A. intangible assets may be acquired in e0change or part e0change for other dissimilar intangible assets or other assets. According to the provisions of #A. the cost of an intangible asset acquired as part of a business combination is its fair value as at the date of acquisition. if any.. a condition for the recognition of an intangible asset is that the cost of the asset can be measured reliably./. #t is most li ely to be determinable when the intangibles were actually negotiated for in the transaction rather than being thrown in to the deal. the costs of the assets obtained are . but not be necessary in order to bring the asset to the condition where it would be capable of operating in the manner intended by management. the aggregate purchase cost is to be allocated to assets acquired and liabilities assumed. if the allocation of the purchase price to individual assets is accomplished by applying discounted present value measures to future revenue streams. . "he changes made to #A. identifiable intangibles are acquired as part of a business combination or other bul purchase transaction. .68s #mprovements 9ro+ect clarified that the reporting entity would be unable to determine reliably the fair value of an intangible asset when comparable mar et transactions are infrequent and when alternative estimates of fair value (e. Unless the @li e. #n some instances.68s #mprovements 9ro+ect will emphasi$e the fact that certain operations may occur in connection with the development of an intangible asset. further e0penditures made for the purpose of improving the asset8s level of performance would qualify for capitali$ation. the cost of an intangible asset acquired in e0change for a similar asset would be measured at the carrying amount of the asset given up when the fair value of neither of the assets e0changed could be easily determined reliably. #n some situations. #f the cost of an intangible asset acquired as part of a business combination cannot be measured reliably. to be reported in the respective classification of income and e0pense. *urthermore.

measured at the fair values of the assets given up. and assuming the benchmar accounting treatment (historical cost) is employed. #f the intangible is acquired free of charge or by payment of nominal consideration. #n such instances. capitali$ation) of such an asset on the boo s of the enterprise. "his amount is to be ascertained by reference to the fair value of the asset received. the cost of an intangible asset acquired is measured at the carrying amount of the asset given up when the fair value of neither of the assets e0changed can be determined reliably. ad+usted by the amount of any cash or cash equivalents transferred. #f the allowed alternative (fair value) method is used. and accordingly./ also will establish accounting procedures for what is commonly nown as a li e. . and F 2ontrol by the reporting enterprise. #f an active mar et does not e0ist for this type of an intangible asset. F Lac of an identity separate from other resources. ad+usted for any cash or cash equivalents transferred. #ntangibles acquired by means of government grants.g. "he revisions to #A. #n practice. those values are to be used to measure the transaction. #f the e0change involves similar assets to be used by the enterprise in essentially the same manner and for the same purpose as the item given up in the e0change. when the government grants the right to operate a radio station) or similar program.ind e0change. as #A. would not meet the criteria for recognition (i. "hese procedures are predicated upon the ability to reliably measure costs3 absent this ability. then the cost of the asset is measured at its fair value. 2ost would include those that are directly attributable to preparing the asset for its intended use./ categorically points out. given the probable lac of an active mar et. accountants are usually confronted with the desire to recogni$e internally generated goodwill based on the premise that at a certain point in time the mar et value of an enterprise e0ceeds the carrying value of its identifiable net assets. . the fair value should be determined by reference to an active mar et.0change of Assets #f an intangible asset is acquired in e0change or partial e0change for a dissimilar intangible or other asset.. the enterprise must recogni$e the asset at cost.e. it is unli ely that this situation will be encountered. as when comparable mar et transactions are infrequent and alternative estimates of fair value (e. acquired assets would not be sub+ect to recordation. #ntangibles Acquired through an . #nternally generated goodwill is not recogni$ed as an intangible asset because it fails to meet the recognition criteria of F )eliable measurement at cost. and hence. Bowever. obviously there will be little or no amount reflected as an asset.. #nternally 'enerated #ntangibles other than 'oodwill .g. it must be adequately disclosed in the notes to the financial statements. no gain or loss is recogni$ed. however. #f the asset is important to the reporting entity8s operations. as by means of a government grant (e. based on discounted cash flow pro+ections) cannot be calculated. such differences cannot be considered to represent the cost of intangible assets controlled by the enterprise. Bowever. ad+usted for any cash or cash equivalent (often called @bootA) given or received. the e0change is not deemed to be the culmination of an earnings process. since government grants are generally not transferable.. if the fair values of the assets received are more clearly evident than the fair values of the assets given up. "he new asset will be recorded at the carrying amount of the asset given up. which is equivalent to the fair value of the asset given up in the e0change. Bowever.

but these costs will also have ancillary benefits. and for that reason. intangibles are generated internally by an entity. it is considered to be unli ely that threshold criteria for recognition can be met in such a case. and possibly even enhancing employee morale and performance. franchises. of the cost may be capitali$ed as part of brand names. but that development costs were to be deferred (i. implying the amount of avoidable promotional costs each qualified name is worth).#n many instances./ permits recognition of internally created intangible assets to the e0tent the e0penditures can be analogi$ed to the development phase of a research and development program. Apart from the prohibited items. it was established that research costs were to be e0pensed as incurred.. or analogous to. and to ascertain how much. such as the oft-e0pressed notion that a customer list in the securities bro erage business is worth I%. Accordingly. #A./.J44 per name. rather than being acquired via a business combination or some other purchase transaction. Bowever. . are to be capitali$ed and amorti$ed over the pro+ected period of economic utility. copyrights. customer lists.e. . "he former costs are e0pensed as incurred3 the latter are capitali$ed.. #A. 7hile it may be argued that the e0penditures create or add to an intangible asset. distinguishing research-li e e0penditures from development-li e e0penditures may not be easily accomplished. research activity or development activity. and other assets will be recogni$ed at the . "hus. if any. however. mastheads./ provides that internally generated intangible assets. Under the now-superseded #A. capitali$ed) and e0pensed over the periods of e0pected benefit.e./ absorbed the guidance formerly found in #A. "hus. but would also result in a mismatching of income and e0pense in both the period of e0penditure and later periods when the related benefits would be reaped. -. such as promoting specific products that are being sold currently. historically there was somewhat of a bias against recognition of internally generated intangible assets. publishing titles. %. Assets such as brand names. such costs should be capitali$ed. "his would be especially true in the case of intangibles for which the measurement of economic benefits cannot be performed in anything appro0imating a direct manner. once costs have been e0pensed during the development phase. . Bowever.and e0panded it to cover other internally generated intangible assets. such as engaging in image-advertising campaigns. they cannot later be capitali$ed. internally developed patents. #n practice. trademar s. mastheads. and items similar to these in substance. 9er #A. and customer lists can prove quite resistant to such direct observation of value (although in many industries there are benchmar monetary amounts commonly associated with such items. e0penditures pertaining to the creation of intangible assets are to be classified alternatively as being indicative of. #f costs incurred in the development phase meet the recognition criteria for an intangible asset. #A. *or this reason the standard has specifically disallowed the capitali$ation of internally generated assets li e brands. 2osts incurred in the research phase are e0pensed immediately3 and &. "hus. if future economic benefits are reasonably li ely to be received by the reporting entity. 6ecause of the nature of intangibles. "hus. . provided certain criteria are met. as a practical matter it would be difficult to determine what portion of the e0penditures relate to which achievement. . the initial amounts at which these could be recogni$ed as assets) can prove to be rather challenging in practice. entities may incur certain e0penditures in order to enhance brand names. the actual measurement of the cost (i. a failure to recogni$e such assets would not only cause the entity8s balance sheet to underreport its economic resources.

but incremental administrative and other overhead costs can be allocated to the intangible and included in the asset8s cost. as further e0plained in the following paragraphs. "he standard ta es this view based on the premise that an enterprise cannot demonstrate that the e0penditure incurred in the research phase will generate probable future economic benefits. "he recognition of computer software costs poses several questions. evaluation. . and the need to recogni$e the cash equivalent price when the acquisition transaction provides for deferred payment terms. molds. financial and other resources to complete the development and to use or sell the intangible asset3 and F "he entity8s ability to reliably measure the e0penditure attributable to the intangible asset during its development. As with self-constructed tangible assets. cannot be deferred by being added to the cost of the intangible./ closely follows #A. etc. #A. #n the case of a company developing software programs for sale. and final selection of applications of research findings3 and the search for and formulation of alternatives for new and improved systems. the cost is determined using the same principles as for an acquired tangible asset. and dies3 design of a pilot plant which is not otherwise commercially feasible3 design and testing of a preferred alternative for new and improved systems.cost of creation. etc. on the other hand. . %. As noted above. such e0penditure should be e0pensed). and preparing the asset for its intended use. producing. %1 with regard to elements of cost that may be considered as part of the asset./ mandates that the e0penditure incurred during the research phase of an internal pro+ect should be recogni$ed as an e0pense when incurred (as opposed to recogni$ing it as an intangible asset). identify an intangible asset and demonstrate that this asset will probably generate future economic benefits for the organi$ation. the standard presents the concepts of the research phase and the development phase of a research and development pro+ect. e0clusive of costs which would be analogous to research.0amples of development activities include! the design and testing of preproduction models3 design of tools. and consequently. #A. #nitial operating losses. that an intangible asset e0ists (thus. . and that an enterprise can possibly. in certain cases. "hus. . "he standard recogni$es that the development stage is further advanced than the research stage. )ecognition of internally generated computer software costs. or should the costs be capitali$ed and amorti$edD . cost comprises all costs directly attributable to creating. provided the enterprise can demonstrate all the following! F "echnical feasibility of completing the intangible asset so that it will be available for use or sale3 F #ts intention to complete the intangible asset and either use it or sell it3 F #ts ability to use or sell the intangible asset3 F "he mechanism by which the intangible will generate probable future economic benefits3 F "he availability of adequate technical. should the costs incurred in developing the software be e0pensed. "hus. 7hen an internally generated intangible asset meets the recognition criteria. but must be e0pensed as incurred. the standard allows recognition of an intangible asset during the development phase. elements of profit must be eliminated from amounts capitali$ed. +igs.0amples of research activities include! activities aimed at obtaining new nowledge3 the search for.

"hus./ )ecognition 2riteria "he standard has specifically provided that e0penditures incurred for nonmonetary intangible assets should be recogni$ed as an e0pense unless . the cost of payroll or inventory software (purchased) may be treated as an intangible asset provided it meets the capitali$ation criteria under #A. the conservative approach would be to e0pense such costs as they are incurred. plant. the recognition criteria would not be met. control. the costs incurred in the development of software programs are research and development costs. *urther. a payroll program developed by the reporting enterprise itself. are treated as part of the related hardware.&. the carrying amount of the asset may not be recoverable and would accordingly have to be ad+usted. Apart from being capable of production. 2osts <ot . software held for licensing or rental to others should be recogni$ed as an intangible asset. and testing activities and established that the product can be successfully produced. "hus. #n the case of purchased software. *or e0ample. it would be difficult to demonstrate how the program would generate future economic benefits to the enterprise. for e0ample. the position can be clarified as follows! %. =n the other hand. and future economic benefits. or should it be e0pensed fully and immediatelyD #n view of the current #A. "echnological feasibility would be established if the enterprise has completed a detailed program design or wor ing model./ (in practice. 2ost of other software programs should be treated as intangible assets (as opposed to being capitali$ed along with the related hardware). cost of software purchased by an enterprise for its own use and which is integral to the hardware (because without that software the equipment cannot operate).atisfying the #A. designing. Also. the accounting approach would be different. such costs may need to be e0pensed. #n view of the impairment test prescribed by the standard. the enterprise should demonstrate that it has the intention and ability to use or sell the program. .oftware purchased for sale would be treated as inventory. Bowever. the cost of an operating system purchased for an in-house computer. #n the case of purchased software. on intangible assets. At this stage the software program would be able to meet the criteria of identifiability. . the treatment would differ on a case-to-case basis. Accordingly. the cost proposed to be capitali$ed should be recoverable. in the absence of any legal rights to control the program or to prevent others from using it. . all e0penses incurred until technological feasibility for the product has been established should be e0pensed. Action ta en to obtain control over the program in the form of copyrights or patents would support capitali$ation of these costs. or equipment.. #s the treatment for developing software programs different if the program is to be used for in-house applications onlyD . as they are not an integral part of the hardware. coding. would be treated as part of cost of the hardware and capitali$ed as property. #n the case of software internally developed for in-house use. since their ability to generate future economic benefits is always questionable). "he enterprise would have to demonstrate technical feasibility and probability of its commercial success. should the cost of the software be capitali$ed as a tangible asset or as an intangible asset.. &. or cost of software purchased for computer-controlled machine tool. all e0penses incurred in the research phase would be e0pensed. "he enterprise should have completed the planning. . #n the case of a software-developing company. 7hile the program developed may have some utility to the enterprise itself. and can thus be capitali$ed and amorti$ed as an intangible asset. 2onsidering the above facts.

this e0penditure should form part of the amount attributable to goodwill as at the date of acquisition. enterprises can no longer defer such costs. mastheads. brands. plant. to preclude correction of an error made in an earlier period if the conditions for capitali$ation were met but interpreted incorrectly by the reporting entity at that time.) . "he criteria for recognition of intangible assets as provided in #A. these costs cannot be resurrected and capitali$ed in a later period. *urthermore. #t relates to an intangible asset dealt with in another #A. the #A. .2 has ensured that all such costs capitali$ed in the past would need to be ad+usted for impairment. in many cases. and other costs involved in organi$ing a business or product line3 F 2ustomer lists. . As a consequence of applying the above criteria. which are typically incurred in establishing a legal entity3 F "raining costs involved in operating a business or a product line3 F Advertising and related costs3 F )elocation.%. the following costs are e0pensed as they are incurred! F )esearch costs3 F 9reopening costs to open a new facility or business. #t is probable that those costs will enable the asset to generate specifically attributable future economic benefits in e0cess of its assessed standard of performance immediately prior to the incremental e0penditure3 and &. "hus. "his is because the nature of an intangible asset is such that.3 &. #n the past. .. and plant start-up costs incurred during a period prior to full-scale production or operation./3 or . it is not possible to determine whether subsequent costs are li ely to enhance the specific economic benefits that will flow to the enterprise from those assets. unless these costs are capitali$ed as part of the cost of an item of property.2 on this contentious issue. "hose costs can be measured reliably and attributed to the asset reliably. "his is not meant. and many enterprises will find that e0penditures either to acquire or to develop intangible assets will fail the test for capitali$ation. and publishing titles that are internally generated. all these costs must be e0pensed currently as incurred.2 has finally resolved the controversy regarding the potential deferral of costs li e preoperating e0penses. #n this case. the capitali$ation of any subsequent costs incurred on intangible assets is difficult to +ustify. the #A. *urther. :ue to the unequivocal stand ta en by the #A. by adding the provision relating to annual impairment testing of all internally generated intangible assets being amorti$ed (over a period e0ceeding twenty years). even if the conditions for such treatment are later met. #t is acquired in a business combination and cannot be recogni$ed as an identifiable intangible asset.ubsequently #ncurred 2osts Under the provisions of #A. #n such instances. restructuring. ./ are rather stringent. "he cost forms part of the cost of an intangible asset that meets the recognition criteria prescribed by #A. subsequent costs incurred on an intangible asset should be recogni$ed as an e0pense when they are incurred unless %. and equipment3 F =rgani$ation costs such as legal and secretarial costs. many enterprises have been nown to defer setup costs and preoperating costs on the premise that benefits from them flow to the enterprise over future periods as well. once e0pensed. "hus. however./.

444 legal fees to register the patent.444 to successfully defend a legal suit to protect the patent. even to fully write off the intangible asset. "he standard specifically prohibits the reinstatement of costs previously recogni$ed as an e0pense./ are as follows! %. F Legal costs of I. "he following e0ample should help to illustrate this point better.444. legal fees and other costs incurred in successfully defending a patent lawsuit can be capitali$ed in the patents account./ follow #A. 'AA9. if the enterprise were to lose the patent lawsuit. "he unique features of #A. Under U.444. "hus.. to the e0tent that value is evident. an intangible asset should be carried at its cost less any accumulated amorti$ation and any accumulated impairment losses. ."hus. %1.2 seems to be in favor of the conservative approach of e0pensing such costs. would be capitali$ed as patents. #n &44J./ concerning the recognition of subsequent costs.444 incurred in &44J to defend the enterprise in a patent lawsuit should be e0pensed. . possibly insurmountable hurdle. 7hat is required must be determined by the facts of the specific situation. %1 to the letter. "hus I&44. As with tangible assets under #A. they were e0pensed rather than capitali$ed) it would not be possible to later recogni$e them at fair value. 2osts incurred by the )K: department in &44. and in all probability. the #A. in most instances. because such costs are incurred to establish the legal rights of the owner of the patent.444.. amounting to I&44. F Alternatively. =nly such subsequent costs should be capitali$ed which would enable the asset to generate future economic benefits in e0cess of the originally assessed standards of performance. . #f the intangibles were not initially recogni$ed (i.J. "he costs do not result in an identifiable asset capable of generating future economic benefits. cannot be reinstated and capitali$ed. legal costs incurred in connection with defending the patent. #nasmuch as most of the particulars of #A. . in view of the stringent conditions imposed by #A.4. "his represents. #n &445. on the @research phaseA amounted to I&44. >easurement subsequent to #nitial )ecognition 6enchmar treatment. amounting to I. the enterprise incurred I. these will not be repeated here./. technical and commercial feasibility of the product was established. should be e0pensed. with the asset being written up to fair value. . recogni$ed as an e0pense in the previous financial statements. then the useful life and the recoverable amount of the intangible asset would be in question. "he enterprise would account for these costs as follows! F )esearch and development costs incurred in &44.e. as they do not meet the recognition criteria for intangible assets. Allowed alternative treatmentLrevaluation. if the above two criteria are met. "he company has established technical and commercial feasibility of the product. would not meet the recognition criteria under #A.0ample An enterprise is developing a new product. the standard for intangibles permits revaluation subsequent to original acquisition. and were described in detail in 2hapter /. After initial recognition. which could be considered as e0penses incurred to maintain the asset at its originally assessed standard of performance. "he enterprise would be required to provide for any impairment loss.4. F 9ersonnel and legal costs incurred in &445. Bowever.444 personnel costs and I%J.444. as well as obtained control over the use of the asset. a very high. any subsequent e0penditure on an intangible after its purchase or its completion should be capitali$ed along with its cost. . 2osts incurred in &445 were I&4.

management is uncertain that the process can actually be made economically feasible.0ample of revaluation of intangible assets A patent right is acquired Muly %. &J4. Amorti$ation will be ta en over .444 %&(. the #A.444. which necessitates a I%J4. As with the rules pertaining to plant. =n Manuary %. "he entry at year-end &44.444 charge to income (carrying value.%(4J Amorti$ation e0pense&J.444 9atent &J. As a consequence. for I&J4.444 9atent &J. 9atent &J4.444). and thus it is presumed that revaluation will not be applied to these types of assets in the normal course of business. is to record amorti$ation based on original cost.%(45 Amorti$ation e0pense&J. management estimates a useful life of only J years. .444 2ash. if some intangible assets in a given class are sub+ected to revaluation. and equipment under #A. Amorti$ation e0pense&J.%(4.traight-line amorti$ation will be used. &445.. %1) is deemed to be too unreliable in the realm of intangibles.444 9atent &J.444 'ain on asset value recovery %44.444 %(%(41 9atent &EJ. having perfected the related production process. less fair value.444 %&(. primarily because it would tend to commingle the impact of identifiable assets and goodwill. "he entries to reflect these events are as follows! E(%(4. &445. .44. At Manuary %. property. Active mar ets providing meaningful data are not e0pected to e0ist for such unique assets as patents and trademar s.444 %&(. the asset is now appraised at a sound value of I.444(J) 0 OP. fair value of an intangible asset should only be determined by reference to an active mar et in that type of intangible asset. since there had been no revaluations through that time3 only a half-year amorti$ation is provided N(I&J4. all the assets in that class should be consistently accounted for unless fair value information is not or ceases to be available. Also in common with the requirements for tangible fi0ed assets. the estimated useful life is now believed to be 1 more years. #A. IEJ. due to rapidly changing technology. and decides to write down the patent to an estimated mar et value of IEJ. *urthermore.444 )evaluation surplus %EJ.444 %(%(45 Loss from asset impairment %J4.2 has effectively restricted revaluation of intangible assets to only freely tradable intangible assets. :eriving fair value by applying a present value concept to pro+ected cash flows (a technique that can be used in the case of tangible assets under #A. years from that point. &44. %1.444.4443 while it has a legal life of %J years. . &441. e0cept to the e0tent that previous impairments had been recogni$ed by a charge against income. the impairment is recorded by writing down the asset to the estimated value of IEJ. =n Manuary %./ requires that revaluations be ta en directly to equity through the use of a revaluation surplus account.444.444 2ertain of the entries in the foregoing e0ample will be e0plained further. .444. etc. Accordingly.444 9atent %J4.&. I&&J.

444 of postQ :ecember % costs as a development asset. after another IEJ. Bowever. results were not conclusively nown until *ebruary %J. relative to a new manufacturing process.0ample of accounting for revaluation of development cost . years from Manuary &445. however. the ad+ustment to fair value can be accomplished either by @grossing upA the cost and the accumulated amorti$ation accounts proportionally./ this is prohibited./.444 thus far) would qualify for capitali$ation.444 were incurred prior to :ecember %. 2reative management as s to restore the I%J4.#n &445 and &44J. and this is particularly true with regard to development costs. #n particular. the carrying value would have been I%&J. the &445 costs (IEJ. I144.444 in costs were incurred postQManuary %. . annual amorti$ation will be I&J. since it was not yet nown whether a portion of these qualified as development costs under #A.444 original cost. . against the asset account and then restating the asset to the net fair value as of the revaluation date. such that at any reporting date the carrying amounts are not materially different from the current fair values./. Under the guidance of #A. less &. 2reative has incurred costs during &44. and the full IEJ4. :evelopment costs pose a special problem in terms of the application of the allowed alternative method under #A. .4443 had the Manuary &445 revaluation not been made. many of which are brought to mar et successfully. . the net effect of the upward revaluation will be recorded in stoc holders8 equity as revaluation surplus3 the only e0ception would be when an upward revaluation is in effect a reversal of a previously recogni$ed impairment which was reported as a charge against earnings or a revaluation decrease (reversal or a yet earlier upward ad+ustment) which was reflected in earnings.0ample of development cost capitali$ation Assume that 2reative. the viability of the new process was still not nown. based on the facts nown. as is required by #A.%. although testing had been conducted on :ecember %.444 in research and development costs were e0pensed. #n either case. the recovery of I%44.444. which will fully recover the earlier write-down and add even more asset value than the originally recogni$ed cost. &44. is e0pected to be very unusual in practice. "he use of the available alternative method for development costs. As of :ecember . then it will be necessary to perform revaluations on a regular basis. #ncorporated incurs substantial research and development costs for the invention of new products. .444 (I&J4. &445. the carrying value of the patent is I&J.J years amorti$ation versus an original estimated life of J years). been shown as of :ecember %. *rom a mechanical perspective. Accordingly. were issued *ebruary %4. #f.. while theoretically valid. Under #A. since the new estimated life was .444.44. "he accounting for revaluations is illustrated as follows! . #ncorporated8s financial statements for &44. "he utili$ation of the allowed alternative method of accounting for long-lived intangibles is only permissible when stringent conditions are met concerning the availability of fair value information. As of Manuary %. =f these costs. "he new appraised value is I./. in all li elihood. and the enterprise desires to apply the allowed alternative (revaluation) method of accounting to development costs. #n general. in fact.444 that had been charged to e0pense should be ta en into income3 the e0cess will be credited to stoc holders8 equity. 2reative. prerevaluation. &445. #n fact. the e0pectation is that the benchmar (historical cost) method will be almost universally applied for development costs. 7hen it is learned that feasibility had. . amorti$ation must be provided on the new lower value recorded at the beginning of &4453 furthermore. it is determined that fair value information derived from active mar ets is indeed available. amounting to IEJ4.444. &441. or by netting the accumulated amorti$ation./. it will not be possible to obtain fair value data from active mar ets.

-. "he thrust of these requirements is to ma e the twenty-year life an upper limit for most intangibles.444 :evelopment cost (asset) %5. has accumulated development costs that meet the criteria for capitali$ation at :ecember . the useful life of which can be reliably determined to e0ceed twenty years. with amorti$ation being over a shorter useful life if nown. the rule is that a ma0imum twenty-year life is permissible./! the asset and accumulated amorti$ation can be @grossed upA to reflect the new fair value information. &44J. "here is an active secondary mar et for the intangible. amounting to I. "he entries to record this would be as follows! :evelopment cost (asset) &%. #f there is persuasive evidence that the useful life of an intangible asset is longer than twenty years.4443 the estimated useful life.J44 per year is anticipated.444 )evaluation surplus (stoc holders8 equity) %.444 %5. or the asset can be restated on a @netA basis.444. . 6rea through uses the allowed alternative method of accounting for its long-lived tangible and intangible assets.stimate the recoverable amount of the intangible asset at least annually in order to identify any impairment loss3 and F :isclose the reasons why the presumption has been rebutted. amorti$ation of I1.444 Amorti$ation 9eriod As with tangible assets sub+ect to depreciation or depletion. it obtains mar et information regarding the then-current fair value of this intangible asset. "he net upward revaluation is given by the difference between fair value and boo value. then the twenty-year presumption is rebutted and the enterprise must F Amorti$e the intangible asset over that longer period3 F . the cost (or revalued carrying amount) of intangible assets is sub+ect to rational and systematic amorti$ation.444 Q (& 0 I1.444 R I14.. the accumulated amorti$ation as of the date of the revaluation is eliminated against the asset account. or &. "he only e0ceptions would occur in those instances where the legal right has a life of greater than twenty years and either of the following conditions e0ists! %. has not changed.Assume 6rea through.444 Accumulated amorti$ationLdevelopment cost )evaluation surplus (stoc holders8 equity) E.444.444. #nc. #f the @gross upA method is used! . *or both illustrations. Accumulated amorti$ationLdevelopment cost :evelopment cost (asset) %.444. which suggests a current fair value of these development costs is I54.444 Q I&1.444.%. &44. which is then ad+usted to reflect the net fair value.ince the fair value after & years of the 1-year useful life have already elapsed is found to be I54. #t is estimated that the useful life of this intangible asset will be 1 years3 accordingly.. the gross fair value must be 1(5 0 I54. or I54.444 #f the @nettingA method is used! Under this variant..444 R I%5.444 %5. . the boo value (amorti$ed cost) immediately prior to the revaluation is I. At :ecember .J44) R I&1. however. 'iven that the useful economic life of many intangibles would be difficult to assess. "here are two ways to apply #A.-. "he intangible has an e0istence that is not separable from a specific tangible asset. "hese are both illustrated below.%.

"he amorti$ation method used should reflect the pattern in which the economic benefits of the asset are consumed by the enterprise. )esidual value is to be assessed at each balance sheet date. diminishing balance. . any change in amorti$ation method (e. #n other words.6 #mprovements 9ro+ect. inventory). "hus. often have little or no residual worth. "hus.. )esidual Salue "angible assets often have a positive residual value before considering the disposal costs because tangible assets can generally be sold for scrap. and that the method of amorti$ation also be reviewed at similar intervals. after deducting the estimated costs of disposal. "he thrust of these requirements is to ma e the twenty-year life an upper limit for most intangibles. #A. #A. specifies that the residual value of an intangible asset is the estimated net amount that the reporting entity currently e0pects to obtain from disposal of the asset at the end of its useful life. As for fi0ed assets accounted for in conformity with #A. 9eriodic review of useful life assumptions and amorti$ation methods employed. "here is the e0pectation that due to their nature intangibles are more li ely to require revisions . then the useful life of the intangible asset should not e0ceed the period of legal rights. ./ provides for amorti$ation of all intangible assets3 it does not subscribe to the view that any intangible asset can possess an infinite life./ requires that a $ero residual value be presumed unless an accurate measure of residual is possible. Amorti$ation should commence when the asset is available for use and the amorti$ation charge for each period should be recogni$ed as an e0pense unless it is included in the carrying amount of another asset (e. Accordingly. #A. unless the legal rights are renewable and the renewal is a virtual certainty. #f a method other than straight-line is used. and units of production methods. if the asset were of the age and in the condition e0pected at the end of its estimated useful life. . and residual value can be measured reliably by reference to that mar et and it is probable that such a mar et will e0ist at the end of the useful life. . or possibly be transferred to another user that has less need for or ability to afford new assets of that type.g. . changes in prices or other variables over the e0pected period of use of the asset are not to be included in the estimated residual value. "hus. the newer standard on intangibles suggests that the amorti$ation period be reconsidered at the end of each reporting period.imilarly. Any change to the estimated residual. on the other hand. #ntangible assets may be amorti$ed by the same systematic and rational methods that are used to depreciate tangible fi0ed assets.. as a practical matter. as revised by the consequential changes wrought by the #A.1) is to be accounted for prospectively. the residual value is presumed to be $ero unless F "here is a commitment by a third party to purchase the asset at the end of its useful life3 or F "here is an active mar et for that type of intangible asset. %1. again to be reflected only in future periodic charges for amorti$ation. the shorter legal life will set the upper limit for an amorti$ation period in most cases. from accelerated to straight-line) is dealt with as a change in estimate. it must accurately mirror the e0piration of the asset8s economic service potential. other than that resulting from impairment (accounted for under #A. since this would result in the recognition of estimated holding gains over the life of the asset (via reduced amorti$ation that would be the consequence of a higher estimated residual value). #ntangibles./ would seemingly permit straight-line.<ote that #A.g. only by varying future periodic amorti$ation./. lac ing the physical attributes that would ma e scrap value a meaningful concept. #f control over the future economic benefits from an intangible asset is achieved through legal rights for a finite period. .

impairments will normally be charged to stoc holders8 equity to the e0tent that revaluation surplus e0ists. #n view of the above. #A. "he impairment of intangible assets other than goodwill (such as patents. if the allowed alternative method (presenting intangible assets at revalued amounts) is followed. :isposals of #ntangible Assets . although this presumption is rebuttable. the standard requires that goodwill be combined with other assets which together define a cash generating unit. affecting current and future periods8 reported earnings but not requiring restatement of previously reported periods. property. and that an evaluation of any potential impairment (if warranted by the facts and circumstances) be conducted on an aggregate basis. some enterprises may be tempted to F 2apitali$e intangible assets and defer amorti$ation for long periods on the grounds that the assets are not available for use3 and(or F )ebut the presumption of twenty-year life and amorti$e assets over a longer period. or being amorti$ed over greater than twenty years. =ther intangible assets that are amorti$ed over a period e0ceeding twenty years from the date when the asset becomes available for use./ has provided that F Amorti$ation of an asset should commence when the asset is available for use3 and F "he amorti$ation period should not e0ceed twenty years. )ecoveries are handled consistent with the method by which impairments were reported. . )eversals of impairment losses under defined conditions are also recogni$ed.e./ requires that an enterprise should estimate the recoverable amount of the following intangible assets at least at each financial year-end even if there is no indication of impairment! %. Apart from the special case of assets not yet in use. "hus. at historical cost). "he effects of impairment recognitions and reversals will be reflected in current period operating results. A more detailed consideration of goodwill is presented in 2hapter %%. . as described in detail in 2hapter /). . #mpairment Losses #A.. "o combat the ris that either of these strategies might be employed. in a manner entirely analogous to the e0planation earlier in this chapter dealing with impairments of plant. #ntangible assets that are not yet ready for use3 and &. customer lists. the standard provides that in addition to the universal provisions of #A. a direct evaluation of the recoverable amount of goodwill is not actually feasible3 accordingly. and only to the e0tent that the loss e0ceeds previously recogni$ed valuation surplus will the impairment loss be reported as a charge against earnings. trade names. copyrights. goodwill is amorphous and cannot e0ist. and franchise rights) should be considered in precisely the same way that long-lived tangible assets are dealt with. and equipment. Unli e other intangible assets that are individually identifiable.1 (which require that the recoverable amount of an asset should be estimated when certain indications of impairment e0ist. 2arrying amounts must be compared to the greater of net selling price or value in use when there are indications that an impairment may have been suffered. =n the other hand. from a financial reporting perspective./ (i. . #n either case.to one or both of these +udgments. a change would be accounted for as a change in estimate. apart from the tangible and identifiable intangible assets with which it was acquired. if the intangible assets in question are being accounted for in accordance with the benchmar method set forth in #A. the ma+or complication arises in the conte0t of goodwill.

evaluating alternative products and suppliers. %E in the case of disposal by a sale and leasebac ./. such as purchasing and developing hardware./. 2omprehensive additional guidance is provided in the Appendi0 to the #nterpretation and is summari$ed below. %/. %. "he determination of the date of disposal of the intangible asset is made by applying the criteria in #A. and only if. such as underta ing feasibility studies. should be e0pensed3 &. #f an enterprise is not able to demonstrate how a website developed solely or primarily for promoting and advertising its own products and services will generate probable future economic benefits. %13 . using the effective yield method. the need for accounting guidance became evident. or #A. 7ebsites have become integral to doing business and may be designed either for e0ternal or internal access.A many businesses now have their own websites. such as obtaining a domain name. 'ain or loss recognition will be for the difference between carrying amount (net. installing developed applications on the web server and stress testing. the guidance of #A. 7ebsite :evelopment and =perating 2osts 7ith the advent of the #nternet and growing popularity of @e-commerce. those developed for internal access may be used for displaying company policies and storing customer details. %/ for recogni$ing revenue from the sale of goods. paragraphs %.#2 . . Any internal e0penditure on development and operation of the website should be accounted for in accordance with #A. should be dealt with in accordance with #A././ virtually mirrors that of #A. if applicable.7ith regard to questions of accounting for the disposition of assets. As for other similar transactions. concluded that such costs represent an internally generated intangible asset that is sub+ect to the requirements of #A. "he recently promulgated interpretation. an enterprise can satisfy the requirements of #A. %1. with any difference between the nominal amount of the consideration and the cash price equivalent to be recogni$ed as interest revenue under #A. . . of any remaining revaluation surplus) and the net proceeds from the sale../ made by the #A. should be e0pensed when incurred unless the conditions prescribed by #A. "hus the stringent qualifying conditions applicable to the development phase. #f payment for such an intangible asset is deferred. the consideration receivable on disposal of an intangible asset is to be recogni$ed initially at fair value./.and 5J. the consideration received is recogni$ed initially at the cash price equivalent.68s #mprovements 9ro+ect observes that a disposal of an intangible asset may result from either a sale of the asset or by entering into a finance lease. . "he amendment to #A. and selecting preferences. . 9lanning stage e0penditures. are met3 . .&. . website costs have been li ened to @development phaseA (as opposed to @research phaseA) costs. =ther application and infrastructure development costs.A have to be met if such costs are to be recogni$ed as an intangible asset. such as @ability to generate future economic benefits. all e0penditure on developing such a website should be recogni$ed as an e0pense when incurred. "herefore. developing code for the application. Application and infrastructure development costs pertaining to acquisition of tangible assets. defining hardware and software specifications. developing operating software. "hose designed for e0ternal access are developed and maintained for the purposes of promotion and advertising of an entity8s products and services to their potential consumers. 7ith substantial costs being incurred by many entities for website development and maintenance. paragraph 5J. and that such costs should be recogni$ed if. =n the other hand.

*or instance. when a website does not meet the requirements of this .#2 . =perating costs. %.5. it is worth noting that it is in line with the provisions of #A././ for intangible assets and those imposed by #A. disclosure is required of %. comparative information should be disclosed in respect of the previous period for all numerical information in the financial statementsG.ELplease refer to the relevant chapter of the boo for details. =ther costs. such as creating.A (Another standard that contains a similar e0emption from disclosure of comparative reconciliation information is #A.and 5J3 1. . the item was to be derecogni$ed at the date when this . and uploading information on the website before completion of the website8s development should be e0pensed when incurred under #A. unless e0penditure meets conditions prescribed by #A./. disposals.#2 but was previously recogni$ed as an asset. #f previously capitali$ed costs are written off due to the imposition of . "he gross carrying amount and accumulated amorti$ation (including accumulated impairment losses) at both the beginning and end of the period3 5. preparing. . A reconciliation of the carrying amount at the beginning and end of the period showing additions./. and both demand e0tensive details to be disclosed in the financial statement footnotes. categorically states that @(u)nless an #nternational Accounting .&. paragraph . Another mar ed similarity is the e0emption from disclosing @comparative informationA with respect to the reconciliation of carrying amounts at the beginning and end of the period. paragraph 14. adding new functions. such as selling and administrative overhead (e0cluding e0penditure which can be directly attributed to preparation of website for use). %. registering website with search engines. . the e0pense may be handled under either the benchmar or alternative treatments specified by #A. . and training costs of employees to operate the website. are met3 J.and 5J. such as updating graphics and revising content. . such as designing the appearance of web pages. amounts written bac to recogni$e recoveries of prior . Useful lives or amorti$ation rates used3 . and equipment are very similar. paragraph JE(c). "he effects of adopting this #nterpretation was to be accounted for using the transition provisions originally established by #A. in which case such e0penditure is capitali$ed as a cost of the website3 and E. %1 for property. "his interpretation became effective in >arch &44&. bac ing up data. 'raphical design development costs. #A. /. :isclosure )equirements "he disclosure requirements set out in #A. should be e0pensed when incurred unless conditions prescribed by #A. e0pensed when incurred. to the e0tent content is developed to advertise and promote an enterprise8s own products or services3 otherwise. "he amorti$ation method(s) used3 &. 7hile this may be misconstrued as a departure from the well. retirements. should be e0pensed when incurred./. plant.) *or each class of intangible assets (distinguishing between internally generated and other intangible assets). ./. paragraphs %. purchasing.tandard permits or requires otherwise. paragraphs %. . initial operating losses and inefficiencies incurred before the website achieves planned performance. increases or decreases resulting from revaluations.. reviewing security access and analy$ing usage of the website should be e0pensed when incurred.#2 becomes effective. 2ontent development costs./. acquisitions by means of business combinations. reductions to recogni$e impairments. unless in rare circumstances these costs meet the criteria prescribed in #A.nown principle of presenting all numerical information in comparative form.

#n the case of business combinations. #ntangible assets under development. based upon the particular circumstances. 2opyrights. >anagement determines the estimated useful life of goodwill based on its evaluation of the respective company at the time of the acquisition.A . the net effect of translation of foreign entities8 financial statements. and any other material items3 and J. models. potential sales growth and other factors inherent in the acquired company. the +ustification therefor3 &. the financial statements should also disclose the following! %. designs and prototypes3 and E. "he standard e0plains the concept of @class of intangible assetsA as a @grouping of assets of similar nature and use in an enterprise8s operations. %--J. #f the amorti$ation period for any intangibles e0ceeds twenty years. "he line item of the income statement in which the amorti$ation charge of intangible assets is included. amorti$ation during the period. )ecipes. has been fully written off against reserves.0amples of intangible assets that could be reported as separate classes (of intangible assets) are %. is amorti$ed to income through administration and general overheads on a straight-line basis over its useful life. patents and other industrial property rights. the e0cess of the purchase price over the fair value of net identifiable assets is recorded as goodwill in the balance sheet. "he amorti$ation period is determined at the time of the acquisition. *or intangible assets acquired by way of a government grant and initially recogni$ed at fair value.. "he nature. service and operating right3 1.impairments. #ntangible assets may be combined (or disaggregated) to report larger classes (or smaller classes) of intangible assets if this results in more relevant information for financial statement users. Any restrictions on titles and any assets pledged as security for debt3 and J. which is denominated in the local currency of the related acquisition. formulae. >astheads and publishing titles3 5. #n addition.tatement :isclosures <ovartis A' *or the *iscal Tear ending :ecember . Licenses and franchises3 . #n addition. .. carrying amount. and ranges from five to twenty years. and whether they are carried under the benchmar or allowed alternative treatment for subsequent measurement3 5. Any resulting impairment loss is recorded in the income statement in general overheads. the fair value initially recogni$ed. &44& <otes to the consolidated financial statements #ntangible assets. 6rand names3 &. "hese are valued at their cost and reviewed periodically and ad+usted for any diminution in value as noted in the preceding paragraph. considering factors such as e0isting mar et share. and remaining amorti$ation period of any individual intangible asset that is material to the financial statements of the enterprise as a whole3 . 'oodwill relating to acquisitions arising prior to Manuary %. "he above list is only illustrative in nature. the financial statements should disclose the aggregate amount of research and development e0penditure recogni$ed as an e0pense during the period. 2omputer software3 J. 'oodwill. .0amples of *inancial . their carrying amount.%. "he amount of outstanding commitments for the acquisition of intangible assets.

& 1 1 #mpairment charge (. goodwill impairment charges were recorded of 2B* .&) (1&) 2onsolidation charges (&4) (J4) Amorti$ation charge (%5%) (&/1) (5%) :isposals .&&& 1%5 /J 2onsolidation changes % -(%%) Additions -.oftware =ther intangibles "otals &44& &44% (in 2B* millions) 2ost...%E4 1.J4/ 5JE 5-1 EJ& 1-1 (5&) (/-%) E1 E. >ar eting rights are amorti$ed over their useful lives commencing in the year in which the rights first generate sales.. due to changes in the research and .J5/ "he principal additions in both years were goodwill on acquisition and in &44% pitavastatin mar eting rights.--4 Accumulated amorti$ation Manuary % (55&) (JEE) (%./ J%J %&5 E/4 .ystemi0 #nc.5-) (&.E.5J5)(%.--4 1.% . to J years "rademar s are amorti$ed on a straight-line basis over the estimated economic or legal life.1 5.1-) (%4&) (%/) "ranslation effects -5 J.. &J :ecember .1.) (.J5 %J 5.55&) <et boo valueL:ecember . .% &.&1E . -.=ther acquired intangible assets are written off on a straight-line basis over the following periods! "rademar s %4 to %J years 9roduct and mar eting rights J to &4 years .% (/EJ) (-14) (%1%) (%4-) (&&-) (%) (%1) &1 (%.-& &. Manuary % &..55&)(1E/) (5&) (/&) (%-J) (%1) (1E) (JJ%) (J15) 5... whichever is shorter.4) (-J) (-) :ecember . #mutran Ltd. while the history of the 'roup has been to amorti$e product rights over estimated useful lives of five to twenty years.oftware .-..-E/ .million mainly related to the 9harmaceuticals division research and biotechnology activities of 'enetic "herapy #nc.1&5 E. 5%. #n &44&.4E% (5&) (J/) /.E J% %. #ntangible asset movements 'oodwill 9roduct and mar eting rights "rademar s . years =thers .% 1.. J 1J :isposals (E) (1) (1) (1) (%E) "ranslation effects (. "he useful lives assigned to acquired product rights are based on the maturity of the products and the estimated economic benefit that such product rights can provide. 5J (1) (5-J) (&%1) J %/1 (%.--) (.

elf-created intangible assets generally are not capitali$ed.-&.. .) (5) (1-1) 2hanges in scope of consolidation & E -Acquisitions .&1E -J. :ec.4JE &. such write-downs of goodwill are measured by comparison to the discounted cash flows e0pected to be generated by the assets to which the goodwill can be ascribed. 7rite-downs are made for impairment losses. 2ertain development costs relating to the application development stage of internally developed software are capitali$ed in the 'roup balance sheet. and licenses thereunder Acquired goodwill Advance payments "otal (U million) 'ross carrying amounts..) (511) "ransfers . "he ma+ority of the product and mar eting rights impairment related to a 2B* /4 million charge to the pitavastatin rights (&44%! 2B* &%1 million). &44& N%/P #ntangible assets Acquired intangible assets other than goodwill are recogni$ed at cost and amorti$ed by the straight-line method over a period of four to fifteen years.41 J/ Accumulated amorti$ation and write-downs.&/E .J )etirements (&5-) (&45) (%. . && (6usiness 2ombinations) and amorti$ed on a straight-line basis over a ma0imum estimated useful life of twenty years.. &44% J.&5.1.%.5& . industrial property rights. "he value of goodwill is reassessed regularly based on impairment indicators and written down if necessary. .-.1/% %%.-. 'oodwill.&54 %.development strategy. :ec. Assets are written bac if the reasons for previous years8 write-downs no longer apply.&5 2apital e0penditures . depending on their estimated useful lives. similar rights and assets. .-) -'ross carrying amounts. 2hanges in intangible assets in &44& were as follows! Acquired concessions. including that resulting from capital consolidation. &44% %.(. . &44& E.0change differences (J&-) (%1. #n compliance with #A. "hese costs are amorti$ed over their useful life from the date they are placed in service. -E& 5.%. :ec. is capitali$ed in accordance with #A. 6ayer A tingesellschaft Tear ended :ecember ...1 (#mpairment of Assets).%. 5&5 1. .%. and relating to the >edical <utrition and ="2 business units.

54/ <et carrying amounts. #n &44&. &44& J. /.cience and Sisible 'enetics acquisitions. :uring &44&. million of #9)K: for both acquisitions. which was e0pensed immediately.%. Under U. "he discounted cash flow approach uses the e0pected future net cash flows.&1. :ec.-JE &. . the income boo ed for the reversal of the amorti$ation of #9)K: recorded under #A. the 'roup ceased amorti$ation of its goodwill recorded under #A.-11 55& -&. for the 'roup8s #A. does not consider that in-process research and development (#9)K:) is an intangible asset that can be separated from goodwill. to determine an asset8s current fair value. "he ad+ustment reverses the amorti$ation recorded under #A.*A. :ec. #n-process research and development #A. #9)K: has been identified for U. &44% .0change differences (%5-) (5. &44& %.%. :ec. %5&.. as a component of other operating e0pense and selling e0pense amounted to UJ million in &44&. 'AA9 purposes. the 6ayer @2rossA and the pre-%--J goodwill recogni$ed for U.--E -EJ 5& %.11E . discounted to their present value.%./15 J/ <et carrying amounts. .-%. As a whole. goodwill of U%% million..4J/ &4J -of which write-downs(&5-) (%%) (--) (&14) 7rite-bac s ----)etirements (%/1) (%55) -(.. 'AA9 purposes in connection with the Aventis 2rop.4%5 "he e0change differences are the differences between the carrying amounts at the beginning and the end of the year that result from translating foreign companies8 figures at the respective different e0change rates and changes in their assets during the year at the average rate for the year. .4) "ransfers --. . its indefinite-lived intangible asset. *air value determinations were used to establish U%. as required by the newly implemented ./EJ.--Accumulated amorti$ation and write-downs. "he independent appraisers used a discounted cash flow approach and relied upon information provided by 'roup management..) -(%-&) 2hanges in scope of consolidation ----Amorti$ation and write-downs in &44& %. 'AA9 it is considered to be a separate asset that needs to be written off immediately following an acquisition as the feasibility of the acquired research and development has not been fully tested and the technology has no alternative future use.