This action might not be possible to undo. Are you sure you want to continue?
Intangible assets are long-term assets, which have a value to the business because they have been paid for, but which do not have any physical substance. Example of intangible includes goodwill, patents, research and deferred development costs, performing rights and authorship rights.
Accounting for intangible assets
Intangible assets are usually capitalised in the accounts and amortised over the estimated economic life of the intangible assets. Using the accrual concept, amortisation is intended to write off the asset over its economic life. Example A business buys a patent for $50,000. It expects to use the patent for the next ten years, after which it will have no value.
Research and development cost
Companies spent large amount of money on research and development (R&D). The accounting problem is how to treat the debit balance on the R&D account. There are two possible treatments that companies can take, either •
Transferred the balance to the income statement The amount on the account could be capitalised (deferring the expenditure) in the statement of financial position, the argument is based on the accrual concept. Therefore if the R&D activity ‘bears fruit’ in the future, which will generate revenue, the cost being carried forward can be matched against revenue in future accounting periods.
IAS 38 Intangible assets were developed to deal with the treatment of research and development costs. The standard was published in September 1998 and was revised in March 2004. The standard gives the following definitions
An intangible asset is an identifiable non-monetary asset without physical substance. The asset must be: Controlled by the entity as a result of past events; and Something from which the entity expects future economic benefits to flow
jigs.F3 Financial Accounting LECTURER: Marlon Smith Class Notes 6 – Intangible non-current assets • Research is the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. or (b) The number of production or similar units expected to be obtained from the asset by an entity. Development is the application of research findings or other knowledge to a plan or designed for the production of new or substantially improved materials. systems or services prior to the commencement of commercial production or use. construction and operation of a pilot plant that is not of a scale economically feasible for commercial production The design. Research Activities aimed at obtaining new knowledge The search for application of research findings or other knowledge The search for product or process alternatives The formulation and design of possible new or improved product or process alternatives Development The design. devices. processes. Depreciable amount is the cost of an asset. Useful life is: (a) The period over which an asset is expected to be available for the use by an entity. or other amount substituted for cost. • • • • The standard goes on to give example of activities which might be included in either research or development or which are neither but may be closely associated with both. products. less its residual value. Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life. moulds and dies involving new technology The design. Amortisation period and amortisation method should be reviewed at each financial yearend. construction and testing of pre-production prototypes and models The design of tools. construction and testing of a chosen alternative for new/improved materials .
Research costs should be recognised as an expense in the period in which they are incurred. • • The technical feasibility of completing the intangible asset so that it will be available for use or sale Its intention to complete the intangible asset and use or sell it . Development costs. related to R&D activities. The standard lists the costs that may be included in R&D.F3 Financial Accounting LECTURER: Marlon Smith Class Notes 6 – Intangible non-current assets Components of R&D costs Research and development cost will involve those costs that are directly attributable to research and development activities. to the extent that these assets are used for R& D activities. will be recognised as an expense in the period in which they are incurred unless the criteria for asset recognition identified below are met. Where this can be determined. Development expenditure should be recognised as an asset only when the business can demonstrate all of the following. where applicable • • • • • Salaries. the development costs should be carried forward as an asset. other than general administrative costs. these costs are allocated on bases similar to those used in allocating overhead costs to inventories Other costs. Recognition of R&D costs Recognition of R&D cost as an asset will only occur where it is probable that the cost will produce future economic benefits for the entity and where the cost can be reliable measured. wages and other employment related costs of personnel engaged in R&D activities Costs of materials and services consumed in R&D activities Depreciation of property. They should not be recognised as an asset in later period. in most instances. (a) In the case of research costs. such as the amortisation of patents and licences. plant and equipment to the extent that these assets are used for R&D activities Overhead costs. Development cost initially recognised as expensed should not be recognised as an asset in later period. this will not be the case due to uncertainty about the resulting benefit from them and therefore should be expensed in the period in which they are incurred. or that can be allocated on a reasonable basis. (b) Development activities tend to be much further advanced than research stage and so it may be possible to determine the likelihood of future economic benefit.
Once the intangible asset is available for use it should be amortised. Impairment of development costs Impairment is the fall in value of an asset.F3 Financial Accounting LECTURER: Marlon Smith Class Notes 6 – Intangible non-current assets • • Its ability to use or sell the intangible asset How the intangible asset will generate probable future economic benefits. The entity must consider either: (a) The revenue or other benefits from sale or use of the product or process (b) The period of time over which the product or process is expected to be sold or used If the pattern cannot be determined reliably. financial and other resources to complete the development and to use or sell the intangible asset Its ability to measure reliably the expenditure attributable to the intangible asset during its development • • The development cost of a project recognised as an asset should not exceed the amount that it is probable will be recovered from related future economic benefits. or if it is to be used internally. the straight-line method should be used. This must be done on a systematic basis. after deducting further development costs. related to production costs. Development costs should be written down to the extent that the unamortised balance is no longer probable of being recovered from the expected future economic benefit. the usefulness of the intangible asset The availability of adequate technical. it should not be amortised but should be subjected to an annual review. and selling and administrative costs directly incurred in marketing the product. Where an intangible asset is considered having an indefinite useful life. . The financial statements should disclose the accounting policies for intangible assets that have been adopted. so as to reflect the pattern in which the related economic benefits are recognised. Disclosure requirement of R& D IAS 38 Intangible assets have fairly extensive disclosure requirements. Amortisation of development costs Development cost that have been capitalised must be amortised and recognised as an expense to match the costs with the related revenue or cost savings. The entity should demonstrate the existence of a market for the output of the intangible asset itself.
net exchange differences. disclosure is required of the following. amortisation charge for the period. impairment losses. the accumulated amortisation and the accumulated impairment losses as at the beginning and the end of the period A reconciliation of the carrying amount as at the beginning and at the end of the period (additions. revaluation.F3 Financial Accounting LECTURER: Marlon Smith Class Notes 6 – Intangible non-current assets For each class of intangible assets (including development costs). • • • • The method of amortisation used The useful life of the assets or the amortisation rate used The gross carrying amount. retirements/disposals. impairment losses reversed. other movements) .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.