CHAPTER 44: INTANGIBLE ASSETS

44 -1. Define an intangible asset.

Answer: PAS 38, paragraph 8, simply defines an intangible asset as an identifiable
nonmonetary asset without physical substance.
Paragraph 8 further states that the intangible asset must be controlled by the entity as a
result of past event and from which future economic benefits are expected to flow to the entity.
44 - 2. What are the two conditions for the recognition of an intangible asset?
Answer: 1. It is probable that the future economic benefits that are attributable to the asset will
flow to the entity.
2. The cost of the intangible asset can be measured reliably.
44 - 3. What are the three essential criteria in the definition of an intangible asset?
Answer: The three essential criteria in the definition of an intangible asset are:
1. Identifiability
2. Control
3. Future economic benefits
44 - 4. Explain the meaning of identifiability.
Answer: An asset is identifiable when:
a. It is separable.
This means that the asset is capable of being separated from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a related contract,
asset or liability.
b. It arises from contractual or other legal rights.
44 - 5 Explain the element of control of an intangible asset?
Answer: Control is the power of the entity to obtain the future economic benefits flowing from
the intangible asset and restrict the access of others to those benefits.
The entity must be able to enjoy the future economic benefits from the asset and prevent others
from enjoying the same benefits.
The capacity of an entity to control the future economic benefits from an intangible asset
normally would stem from legal rights that are enforceable in a court of law, for example,
trademark, copyright and patent.
44 - 6. Explain the meaning of future economic benefits.
Answer: Future economic benefits may include revenue from the sale of products or services,
cost savings or other benefits resulting from the use of the asset by the entity.
For example, the use of intellectual property in a production process or the legal right to
use a new technology may reduce future production costs rather than increase future revenue.
44 - 7 What is the cost of an intangible asset that is "acquired separately"?
Answer: The cost of an intangible asset comprises the purchase price, import duties and
nonrefundable purchase taxes, and any directly attributable cost of preparing the asset for the intended
use.
Directly attributable costs include costs of employee benefits arising directly from bringing the
asset to the working condition, professional fees arising directly from bringing the asset to the working
condition, and costs of testing whether the asset is functioning properly.
44 - 8 What is the cost of an internally generated intangible asset?
Answer: The cost of an internally generated intangible asset comprises all directly attributable
costs necessary to create, produce and prepare the asset to be capable of operating it in the manner
intended by management.
Examples of directly attributable costs are:
a. Cost of materials and services used or consumed in generating the intangible asset
b. Cost of employee benefits arising from the generation of the intangible asset
c. Fees to register a legal right
d. Amortization of patents and licenses that are used to generate the intangible asset
PAS 38, paragraph 63, explicitly provides that internally generated brands, mastheads,
publishing titles, customer lists und items similar in substance shall not be recognized as
intangible assets.
Accordingly, such expenditures shall be expensed when incurred
44 - 9 Explain the measurement of an intangible asset after initial recognition.
Answer: Initially, an entity shall measure an intangible asset at cost.

However, after initial recognition, an entity shall choose either the cost model or
revaluation model as its accounting policy.
Cost model
An intangible asset shall be carried at cost, less any accumulated amortization and any
accumulated impairment loss.
Revaluation model
An intangible asset shall be carried at a revalued amount, less any subsequent
amortization and any subsequent accumulated impairment loss.
An intangible asset can only be carried at revalued amount if there is an active market for
the asset.
44 - 10 Explain the amortization of an intangible asset.
Answer: Amortization is the systematic allocation of the amortizable amount of an intangible
asset over the useful life.
PAS 38 provides the following guidelines on amortization:
a. Paragraph 97 states that intangible assets with limited or finite life are amortized over the
useful life.
However, such intangible assets are tested for impairment at the end of reporting
period when there is an indication of impairment.
b. Paragraphs 107 and 108 state that intangible assets with indefinite life are not amortized but are
tested for impairment at least annually and whenever there is an indication that the intangible
asset may be impaired.
44 - 11 Explain the useful life of an intangible asset.
Answer: The useful life of an intangible asset must be assessed as either indefinite or finite.
If finite, the useful life may be expressed in terms of years or the number of units to be
produced.
The useful life of an intangible asset is indefinite when there is no foreseeable limit to
the period over which the asset is expected to generate net cash flows.
44 - 12 What is the method of amortizing the cost of an intangible asset?
Answer: The method of amortization shall reflect the pattern in which the economic benefits from
the asset are consumed.
However, if such pattern cannot be determined reliably, the straight-line method of
amortization shall be used.
Amortization shall begin when the intangible asset is available for the intended use.
44 - 13 Explain the residual value of an intangible asset.
Answer: The residual value of an intangible asset shall be presumed to be zero, except:
a. When a third party is committed to buy the intangible asset at the end of the useful life.
b. When there is an active market for the intangible asset so that the expected residual value can
be measured, and it is probable that there will be a market for the asset at the end of the useful
life.
44-1 Multiple Choice (PAS 38)

1. Which condition must be met for an item to be recognized as an intangible asset other than goodwill?

a. The fair value can be measured reliably.

b. The item is part of an activity aimed at gaining new scientific or technical knowledge.
c. The item is expected to be used in the production or supply of goods or services.
d. The item is nonmonetary, identifiable and lacks physical substance.

2. An intangible asset is identifiable when

a. It is separable.
b. It arises from contractual and other legal right.
c. It is either separable or it arises from contractual and other legal right.
d. It is neither separable nor it arises from contractual and other legal right.

3. Which statement is true in relation to control by the entity of the intangible asset?

a. The capacity of the entity to control the economic benefits from an intangible asset
would normally stem from legal rights that are enforceable in a court of law.
b. The skill of employees arising out of the benefits of training costs cannot be
recognized as intangible asset.
c. Market share and customer loyalty cannot normally be recognized as intangible asset
because an entity cannot control the action of customers.
d. All these statements are true.

4. An intangible asset shall be recognized if

a. It is probable that future economic benefits attributable to the asset will flow to the
entity.
b. The cost of the intangible asset can be measured reliably.
c. It is possible that future economic benefits attributable to the asset will flow to the
entity and the cost of the intangible asset can be measured reliably.
d. It is probable that future economic benefits attributable to the asset will flow to the
entity and the cost of the intangible asset can be measured reliably.
5. The cost of a separately acquired intangible asset comprises the purchase price and

a. Cost of introducing a new product or service

b. Cost of conducting a business in a new location
c. Administration and other general overhead cost
d. Directly attributable cost of preparing the asset for the intended use.
6. Directly attributable costs of preparing the intangible asset intended use include all the following,
except

a. Cost of employee benefit arising directly from bringing the asset to the working
condition
b. Professional fees arising directly from bringing the asset to the working condition
c. Cost of testing whether the asset is functioning properly
d. Initial operating losses

7. Which statement is true in relation to internally generated intangible asset?

a. Internally generated brand, masthead, publishing title, and customer list shall not be
recognized as an intangible asset.
b. The cost of internally generated intangible asset comprises all directly
attributable costs necessary to produce and prepare the asset for the intended
use.
c. Internally generated goodwill shall not be recognized as an intangible asset.
d. All of these statements are true.

8. The cost of an internally generated asset includes all of the following, except

a. Cost of materials and services used in generating the intangible asset.

b. Compensation costs of personnel directly engaged in generating the asset.
c. Fees to register a legal right.
d. Expenditure on training staff to operate the asset.

44-15 Multiple choice (PAS 38)

1. After initial recognition, an intangible asset shall be measured using

a. Cost model
b. Revaluation model
c. Cost model or revaluation model
d. Cost model or fair value model

2. An entity that acquired an intangible asset may use the revaluation model for subsequent
measurement only when

a. The useful life of the intangible asset can be reliably determined

b. An active market exists for the intangible asset.
c. The cost of the intangible asset can be measured reliably.
d. The intangible asset is a monetary asset.
3. Which statement is true concerning amortization and impairment of intangible assets?

a. Intangible assets with finite useful life are amortized over the useful life.
b. Intangible assets with finite useful life are tested for impairment at the end of reporting
period when there is an indication of impairment.
c. Intangible assets with indefinite useful life are not amortized but are tested for
impairment at least annually.
d. All of these statements are true.

4. An intangible asset is regarded as having an indefinite useful life when

a. There is no foreseeable limit to the period over the asset is expected to generate net
cash inflows to the entity.
b. There is a foreseeable limit to the period over which the asset is expected to generate
net cash inflows to the entity.
c. The useful life of the intangible asset arises from contractual right.
d. The useful life of the intangible asset arises from legal right.

5. What is the method of amortizing intangible asset?

a. The straight-line method, unless the pattern of the economic benefits can be
determined reliably
b. The double declining balance in all circumstances
c. A subjective amount of periodic amortization
d. The straight-line method in all circumstances

6. The residual value of an intangible asset with a finite useful life shall be assumed zero, except

a. When there is a commitment by a third party to purchase the asset at the end of the
useful life.
b. When there is an active market for the asset.
c. When there is a commitment by a third party to purchase the asset at the end of useful
life or there is an active market for the asset, and it is probable that such
market will exist at the end of useful life.
d. There are no exceptions.

7. One factor that is not considered in determining the useful life of an intangible asset is

a. Residual value
b. Provision for renewal or extension
c. Legal life
d. Expected action of competitors
8. Factors in determining the useful life of an intangible asset include all, except

a. The expected use of the asset

b. Any legal or contractual provision
c. Any provision for renewal or extension of the legal life
d. The amortization method

44-16 Multiple choice (IFRS)

1. Which does not qualify as an intangible asset?

a. Computer software
b. Registered patent
c. Copyright
d. Notebook computer

2. Which of the following would qualify as an intangible asset?

a. Advertising and promotion

b. Tuition fees paid to employees who decide to enroll in an M.B.A program while
working with the entity
c. Operating losses during the initial stages of the project
d. Legal costs paid to lawyers to register a patent

3. The recognition criteria for an intangible asset include which of the following conditions?

a. The intangible asset must be measured at cost.

b. The cost can be measured reliably.
c. It is probable that future economic benefit will arise from use.
d. It is probable that future economic benefit will arise from use and the cost can be
measured reliably.

4. Which statement in relation to intangible assets is true?

a. Intangible assets cannot be treated as having an indefinite useful life.

b. Intangible assets with a finite useful life shall be measured initially at cost and tested
annually for impairment.
c. Intangible assets acquired in a business combination shall only be recognized if the
assets have already been recognized by the acquirer.
d. Intangible assets acquired in a business combination shall be recognized separately
from goodwill.
5. Once recognized, intangible assets can be carried at

a. Cost less accumulated amortization

b. Cost less accumulated amortization and impairment losses
c. Revalued amount less accumulated amortization
d. Cost plus a notional increase in fair value since the intangible asset is acquired

6. Which is not a consideration in determining the useful life of an intangible asset?

a. Legal, regulatory or contractual provision

b. Provision for renewal or extension
c. Initial cost
d. Obsolescence

7. Amortization of an intangible asset with a finite useful life shall commence when

a. It is first recognized as an asset.

b. It is probable that it will generate future economic benefits.
c. It is available for the intended use.
d. The cost can be identified with reasonable certainty.

8. Which disclosure is not required with respect to intangible assets?

a. Useful life of the intangible asset

b. Reconciliation of carrying amount at the beginning and the end of the year
c. Contractual commitment for the acquisition of intangible asset
d. Fair value of similar intangible asset used by the competitor

44-17 Multiple choice (IFRS)

1. Intangible assets are reported

a. With an accumulated amortization account

b. Under property, plant and equipment
c. As a separate line item
d. All of these are allowed

2. Intangible assets are classified as

a. Amortizable and unamortizable

b. Limited life and indefinite life
c. Specifically identifiable and goodwill type
d. Legally restricted and goodwill type
3. Intangible assets with indefinite useful life are tested for impairment

a. Quarterly at the quarterly reporting date

b. Annually at the annual reporting date
c. Biannually at the reporting date
d. There is no definite guideline for impairment

4. The major problem for an intangible asset is determining

a. Fair value
b. Separability
c. Residual value
d. Useful life

5. Operating losses incurred during the start-up years of new entity should be

a. Accounted for like any other operating loss

b. Written off directly against retained earnings.
c. Capitalized and amortized over five years.
d. Capitalized as an intangible asset and amortized over twenty years.

44-18 Multiple choice (IAA)

1. Which statement does not describe an intangible asset?

a. The asset lacks physical substance.

b. The asset is monetary.
c. The asset provides future benefits.
d. The asset is classified as noncurrent asset.

2. Which is a characteristic of an intangible asset?

a. Physical existence
b. Claim for a specific amount of cash
c. Long-lived
d. Held for sale

3. Costs incurred internally to create an intangible asset are generally

a. Capitalized
b. Capitalized if useful life is indefinite
c. Expensed when incurred
d. Expensed if useful life is limited
4. An intangible asset that was acquired separately shall initially be recognized at

a. Recoverable amount
b. Either cost or fair value at the choice of the acquirer
c. Fair Value
d. Cost

5. Intangible asset with indefinite life tested at least annually for

a. Recoverability
b. Amortization
c. Impairment
d. Estimated useful life