ACC702 Tutorial – Intangible Assets

Qn 1 i} What are the key characteristics of an intangible asset?

Para 8 of IAS 38 defines an intangible asset as:

An identifiable non-monetary asset without physical substance.

Key characteristics are:

 Identifiable [see 2 below]: because of its emphasis on markets is inserted to exclude
many possible intangibles that are difficult to measure eg staff morale, good customer
relations;
 Non-monetary: this characteristic excludes financial assets such as receivables from
being classified as intangibles, and
 Without physical substance: excludes items of PP&E covered by IAS 16

ii) What intangibles can never be recognised if internally generated? Why?

Para 63 states:

Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognised as intangible assets

Para 64 gives the reason:

Expenditure on internally generated brands, mastheads, publishing titles, customer lists and
items similar in substance cannot be distinguished from the cost of developing the business
as a whole. Therefore, such items are not recognised as intangible assets.

iii). Explain the difference between ‘research’ and ‘development’.

Para 8 contains the following definitions:

Research is original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.

Development is the application of research findings or other knowledge to a plan or design

for the production of new or substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or use.

Para 56 gives examples of research activities:

(a) activities aimed at obtaining new knowledge;

(b) the search for, evaluation and final selection of, applications of research findings or
other knowledge;
 (c) the search for alternatives for materials, devices, products, processes, systems or
services; and
(d) the formulation, design, evaluation and final selection of possible alternatives for new
or improved materials, devices, products, processes, systems or services.

Para 59 gives examples of development activities:

(a) the design, construction and testing of pre-production or pre-use prototypes and
models;
(b) the design of tools, jigs, moulds and dies involving new technology;
(c) the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
(d) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services

iv) Explain why managers may prefer to expense outlays on intangibles rather than
capitalise them.

See section 10.2.9 of the text. Some reasons are:

1. Managers prefer to inflate future profits.

2. Investors generally consider write-offs as one-time items, of no consequence for
valuation.
3. Immediate expensing obviates the need to provide explanations in case of failure.
4. Cost and benefit.
5. Lack of relevance of capitalised numbers.
6. Volatility.

Qn 2 The value of software comparison relies to a great extent on:

- brand names
- technology support
- human resource skills re programmers
- marketing skills

These are generally internally generated.

Some of these assets do not meet the definition of intangible assets, not being separable –
particularly human resource skills.

Being internally generated, much of the costs of generation are not recognisable under para. 57.

Qn 3 Accounting for brands under IAS 38:

(a) internally generated

- internally generated intangibles must meet the recognition criteria in para 57.
 - para 63 specifically excludes the recognition of internally generated brands

(b) acquired brands:

- Recognised at cost.
- If acquired as part of a business combination must meet the recognition criteria of
IFRS 3, para 37 (c), namely that fair value can be measured reliably [see also paras
45-46 of IFRS 3]
- Initially measured at cost = fair value.
- Subsequently can be measured at cost or revalued amount, but use of the latter
requires the existence of an active market.
- Amortisation based on useful life, or non-amortisation on indefinite life

Qn 4 Subject to certain tests for deferral, expenditure on development activity can be deferred
to future periods and disclosed as an asset. Expenditure on research activities is to be
written off as an expense as incurred. Paragraph 59 of AASB 138 provides examples of
development activities. These are:

(a) the design, construction and testing of pre-production or pre-use prototypes and
models;
(b) the design of tools, jigs, moulds and dies involving new technology;
(c) the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
(d) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.

The $50 000 spent on developing a general understanding of water flow dynamics would
be considered as research and would be written off as incurred.

The $30 000 spent on understanding what local surfers expect from a surfboard would be
research and would be written off as incurred.

The $90 000 spent on testing and refining a certain type of fin and the $190 000 spent on
the prototype would be construed as development expenditure and to the extent that the
expenditure satisfies the tests for deferral then the expenditures will be capitalised.