BBFA 2014 FINANCIAL REPORTING

IAS 38 / MFRS 138 Intangible Assets

1. Introduction

Only assets that meet the definition of an intangible asset (IA), i.e. they are identifiable, controlled
by the entity and capable of generating economic benefits can be recognized as intangible assets.

Examples of intangible assets provided by IAS 38 / MFRS 138 are patented technology, computer
software, copyrights and franchises.

Patented means registered with the patent office. A “patent” means an exclusive right over certain design
or process which only the entity owning it can exercise.

2. Overview

The objectives of IAS 38 / MFRS 138:

i. To establish the criteria for when an intangible asset may be or should be recognized.
ii. To specify how intangible assets should be measured
iii. To specify the disclosure requirements for intangible assets

3. Definition

Monetary assets are money held and assets to be received in fixed or determinable amounts of
money.

Intangible Asset (IA)

An intangible asset is an identifiable non-monetary asset without physical substance. The asset must
be:-
i. controlled by the entity as a result of past events; and
ii. the entity expects inflow of future economic benefits from this asset.

An item should not be recognized as an intangible asset unless it fully meet the definition stated by the
standard. The three critical qualities intangible assets must possess are:

(a) Identifiability
An intangible asset is identifiable when it:
(i) is separable i.e. capable of being separated from the entity and sold, transferred, licensed, rented
or exchanged, either individually or together with a related contract; or
(ii) it is acquired separately through purchase for which there may be a transfer of a legal right
that would help to make an asset identifiable.

(b) Control (power to obtain benefits from the asset)

An asset is an intangible asset when the entity has control over it as a result of past events either
through purchase or self-creation. With the control, the entity must be able to enjoy the future
economic benefits flowing from the asset and at the same time having the ability to restrict the access
of others to those benefits for example through a legally enforceable right which is an evidence of
such control.

Examples:
(i) Control over technical knowledge or know-how only exist if it is protected by a legal right.
(ii) The skill of employee, arising out of the benefits of training costs, are most UNLIKELY to be
recognized as an intangible asset, because an entity does not control the future actions of its
staffs.

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(iii) Market share and customer loyalty cannot normally be intangible assets, since an entity cannot
control the actions of its customers.

(c) Expected future economic benefits

An intangible asset must be something from which the entity expects future economic benefits
(increased revenue, cost savings, cash or other assets) to flow from ownership of the asset.

4. How intangible assets can be derived?

Intangibles can exist:

• by separate purchase eg patent

• as part of a business combination (when an entity obtains control over another entity thru
acquisition or merger) eg licence acquired as a part of a running business
• by a government grant eg licence to operate radio/tv station
• by exchange of assets eg plot of land given in exchange for a license
• by self-creation i.e. internally generated goodwill for a business running for 25 years.

5. Recognition

5.1 Initial recognition:

IAS 38 / MFRS 138 requires an entity to recognize an intangible asset, whether acquired externally or
self-created internally when it meets:

i. The definition of an intangible asset; AND

ii. It is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; AND
iii. the cost of the asset can be measured reliably.

The management must exercise judgment when assessing the degree of certainty on the flow of economic
benefits to the entity. It must be based on reasonable and supportable assumptions about conditions that
will exist over the life of the asset. The probability recognition criterion is always considered to be
satisfied for intangible assets that are acquired separately or in a business combination.

If an intangible item does not meet both the definition of and the criteria for recognition as an intangible
asset, IAS 38 / MFRS 138 requires the expenditure on this item to be recognized as an expense when it
is incurred. Once expensed, the amount cannot be capitalized in the future. IAS 38 / MFRS 138 gives
examples of such expenditure:
• Start-up costs
• Training costs
• Advertising costs
• Business relocation or reorganization costs

The followings are excluded by IAS 38 / MFRS 138 to be recognized as IA:

(a) Internally generated goodwill

IAS 38 / MFRS 138 deliberately do not allow recognition of internally generated goodwill because
it does not meet the initial recognition criteria. In order to meet the identifiability component, the
item has to be separable or it should arise from a contractual or other legal rights.

Internally generated goodwill is not separable from the entity and it is not the result of a contractual
or legal right. The cost of the asset rather than its FV should be capable of being measured reliably.
An asset which is subjective and cannot be measured reliably is not recognized as an asset.

(b) Other internally generated intangible assets

The standard prohibits the recognition of internally generated brands, mastheads, publishing titles
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& customer lists and similar items as intangible assets. These all fail to meet one or more (in some
cases all) the definition and recognition because of problems in

o Identifying whether and when an identifiable asset will generate expected future economic
benefits; and

o Determining the cost of the asset reliably.

In some cases, the cost of generating an intangible asset internally cannot be distinguished
from the cost of maintaining or enhancing the entity’s internally generated goodwill or of
running day-to-day operations.

6. Measurement

Intangible assets that meet the relevant recognition criteria are:-

- initially measured at cost,
- subsequently measured at cost or using the revaluation model and
- amortized on a systematic basis over their useful lives (unless the asset has an indefinite useful
life, in which case it is not amortized).

An intangible asset is measured initially at cost.

(a) If an intangible asset is acquired separately (eg patent purchased), its cost can usually be
measured reliably as:-
- its purchase price (including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates) and
- Any directly attributable costs of preparing the asset ready for its intended use

Examples of directly attributable costs are:

• costs of employee benefits arising directly from bringing the asset to its working
condition;
• professional fees (eg legal fees) arising directly from bringing the asset to its working
condition; and
• costs of testing whether the asset is functioning properly.

When an intangible asset is in the condition required for it to operate in the manner planned by
management, costs are no longer recognised in the carrying amount. As a result, expenditures
associated with using or redeploying an intangible asset are not reflected in the asset's carrying
value.

For example, the following costs are not in included in the carrying value of an intangible asset.

(a) costs incurred while an asset capable of running in the manner envisaged by management has
yet to be put into use; and

(b) initial operating losses, such as those sustained while demand for the asset's output builds up,
are not included in the carrying value of an intangible asset.

The cost of an IA is the cash price equivalent if payment is delayed beyond typical credit terms.
Unless it is capitalised in line with IAS 23 Borrowing Costs, the difference between this amount
and the total payments is reported as interest expense throughout the credit period.

(b) When an intangible asset is acquired as part of a business combination (i.e. an acquisition or
takeover), the cost of the intangible asset is its fair value at the date of the acquisition. IFRS 3
states that the fair value of intangible assets acquired in business combinations can normally be
measured with sufficient reliability to be recognized separately from goodwill.

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(c) For intangible asset acquired by way of a government grant (eg licenses to operate radio
stations/telecommunication network or airport-landing rights), it may be initially recorded at:
• The fair value or
• Nominal amount plus cost incurred in preparing the asset for its intended use (which may
be zero).

(d) In the case of intangibles acquired through exchange of assets (non-monetary assets or a
combination of monetary and non-monetary assets), the cost is measured at fair value. The
acquired asset will be measured at the carrying amount of the asset given up:

• if the exchange lacks commercial substance or

• if the fair value of neither the asset received nor given up can be measured reliably.

(e) The costs allocated to an internally generated (self-created) intangible asset should be only
the costs that can be directly attributed or allocated on a reasonable and consistent basis to
creating, producing or preparing the asset for its intended use. It is the sum of the expenditure
incurred from the date when the intangible asset first meets the recognition criteria.
If, as often happens, considerable costs have already been recognized as expenses before
management could demonstrate that the criteria have been met, the earlier expenditure should
not be recognized at a later date as part of the cost of an intangible asset.

Example 1.0 : Deferred payment

On 1 January 2020, Entity X entered into a contract to purchase a licence. At the signing of the contract,
Entity X paid RM2 million and the balance, RM1 million to be repaid on 1 January 2022. The applicable
discount rate is 6%.

What is the initial cost of this licence?

Example 1.1: Intangible asset acquired separately

Rum Co, a company in the liquor industry, purchased the popular drinks brand “Monster” for RM16.5m.
It paid RM0.6m towards lawyers’ fees for drafting the agreement and RM0.3m on registration of the
agreement. The company also incurred training expenses of RM1m to train the existing staff regarding
manufacture of the new brand. Due to introduction of “Monster” the management decided to stop the
production of one of its existing similar brands. The cost of closure is RM2m.

How much intangible asset to be recognized?

Answer:

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Example 2: Exchange of assets

ABC Co acquired two licenses in exchange for two plots of land which have a carrying value of
RM200,000 each. The first license had a fair value of RM300,000 but the fair value of the second one
could not be determined.

How will the intangible asset be recognized?

Answer:

Example 3: Internally generated IA

D Co is developing a new production process. During 20x3, expenditure incurred was RM100,000 of
which RM90,000 was incurred before 1 December 20x3 and RM10,000 between 1 December 20x3 and
31 December 20x3. D Co can demonstrate that at 1 December 20x3, the production process met the
criteria for recognition as an intangible asset. How should the expenditure be treated?

Answer:

6.1 Subsequent expenditure

Most subsequent expenditure will rarely meet the recognition criteria and so is written off.

7. Subsequent measurement

(a) Cost model

Under this model, an intangible asset should be carried at its cost, less any accumulated amortization and
less any accumulated impairment losses.

IA = Cost - accumulated amortisation - accumulated impairment loss.

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(b) Revaluation model

The revaluation model allows an intangible asset to be carried at a revalued amount (based on its fair
value at the date of revaluation) less any subsequent accumulated amortization and any subsequent
accumulated impairment losses.

This model can be used ONLY IF fair value can be determined by reference to an active market.

According to IAS 38 / MFRS 138, such active markets are expected to be uncommon/unavailable for
intangible assets. A fair value might be available for certain intangible assets such as fishing rights,
quotas and taxi license. However, for others such as patents, trademarks. copyrights, publishing rights
and film rights which can be sold although infrequently, each has a unique sale value. In such cases,
revaluation to fair value would be inappropriate. This treatment is not available for the initial recognition
of intangible assets because the cost of the asset must be reliably measured.

For revaluation model to be used:

(a) The fair value must be able to be measured reliably with reference to an active market for that type
of assets.

(b) The entire class of IA of that type must be revalued at the same time (to prevent selective
revaluations).

(c) If an IA in a class of revalued IA cannot be revalued because there is no active market for this asset,
the asset should be carried at its cost less any accumulated amortisation and impairment loss.

(d) Revaluation should be made regularly so that the CA does not differ from that which would be
determined using FV at the end of the reporting period.

(e) The absence of an active market for a revalued intangible asset could suggest that the asset is impaired
and has to be assessed in accordance with IAS 36.

(f) After revaluation, the IA will be carried at its Fair value - subsequent accumulated amortisation -
subsequent accumulated impairment loss.

(i) Revaluation gain (Revalued upwards)

(i) If there was no previous decrease in value for the specific intangible asset, the increase is credited to
the Revaluation Reserve under Equity and recognized under the “Other Comprehensive
Income” in the SOPL & OCI.

(ii) If there was a previous decrease in the value, the previous revaluation loss would have been shown
as an expense in the SOPL. If there is now an increase, the gain will be used to reverse out the
previous revaluation loss. Any balance of the gain will be recognized under “Other Comprehensive
Income” in the SOPL & OCI and credited to the Revaluation Reserve under Equity.

(ii) Decrease in revaluation (Revalued downwards)

(i) If there is no balance in the revaluation surplus in respect of that asset, the entire decrease shall be
recognized as an expense in the SOPL.
(ii) If the asset had been revalued upwards, the increase would have been recognized in the Revaluation
Reserve under Equity and under the OCI in the SOPL & OCI. If there is now a decrease, the loss will
be used to reverse out the previous gain shown in the Revaluation Reserve and under the OCI in the
SOPL & OCI. Any balance of the loss will be recognized in the SOPL.

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A revaluation decrease should be first charged against any previous revaluation surplus in respect
of that asset.

Example 4:

The carrying values of licenses A and B are RM70,000 and RM90,000 respectively. They are
revalued to RM60,000 and RM98,000. On the previous revaluations, A’s value was increased
by RM7,000 (included in revaluation surplus) and B’s decreased by RM5,000.

How should the revaluation for both the licenses accounted for?

Answer:

(iii) Excess amortisation of revalued assets

When the revaluation model is being followed and if the intangible has been revalued upwards,
the cumulative revaluation surplus may be transferred to retained earnings when the surplus is
eventually realized on disposal/retirement from use.

However, the surplus may also be realized over time as the asset is being used by the entity. The
realized amount is the difference between the amortization charge for the asset based on the
revalued amount and the amortization based on its historical cost if the asset is not revalued. This
portion of realized surplus should be transferred from revaluation surplus directly to
retained earnings and should not be taken through profit or loss.

8. Useful life

An entity should assess whether the useful life of an intangible asset is finite or indefinite. If the life of
the intangible asset is determined to be finite, then the length of the life or the number of production units
constituting the useful life.

An asset has an indefinite useful life when there is no foreseeable limit to the period over which the
asset is expected to generate net cash flows for the entity. A finite life means a limited period of benefit
to the entity.

The accounting treatment for an intangible asset is based on its useful life. An intangible asset with finite
useful life is amortised while an intangible asset with indefinite useful life is not amortised.

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Factors that determine the useful life of an intangible asset

(a) expected usage;

(b) typical product life cycles;
(c) technical, technological, commercial or types of obsolescence;
(d) expected actions by competitors;

Computer software and many other intangible assets usually have short lives because they are prone to
technological obsolescence. If it is expected that the selling price of an item produced using an intangible
asset is going to reduce in the future, this may be indication of the technological or commercial
obsolescence of the asset which might reflect a reduction in the future economic benefits from the asset.

For intangible assets that arise from contractual or other legal rights, the useful life should not exceed the
period of the rights but may be shorter depending on the period over which the entity expects to use the
asset. If contractual or legal rights can be renewed at an insignificant cost, the useful life can be included
in the renewal periods.

9. Amortization period and amortization method

9.1 Intangible assets with finite useful life

The cost less residual value of an intangible asset with a finite useful life should be amortized on a
systematic basis over that life

(a) Amortisation should start when the asset is available for use. If development cost is capitalized,
amortisation shall begin when the result of the development is successful and available for use that
means we have to look at :

• the purpose expected of the product development and

• when we start using the output/benefit from the development.

(b) Amortisation should end at the earlier of the date that the asset is classified as held for sale and the
date the asset is derecognized (either disposal/retirement).

(c) The amortization method used should reflect the pattern in which the asset’s future economic benefits
are consumed (which includes straight-line method, the diminishing balance method and the units of
production method). If such a pattern cannot be predicted reliably, the straight-line method should be
used.

(d) The amortization charge for each period should normally be recognized in profit or loss.

(e) The amortization period & method used must be reviewed at EACH financial year-end.

Expected future reductions in selling price of an item that was produced using an intangible asset could
be indicative of a higher rate of consumption of the future economic benefits embodied in an asset.

Only if there is indication of impairment, the recoverable amount is compared with the carrying amount
and any impairment loss is recognized where necessary.

The residual value of an intangible asset with a finite useful life is assumed to be zero unless:

- a third party is committed to buy the IA at the end of the useful life or
- there is an active market for that type of asset and it is probable that there will be a market for the asset
at the end of its useful life.

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Example 5:

ABC has incurred RM1.6m on the R&D on Project 254 in the year to 30 November 2014.

Project 254 followed a previous research project and was completed during the year after a period of 15
months. It has achieved its aim of reducing the material cost of a new product. Production of the product
commenced on 1 September 2014. The first sales are expected in February 2015 and the expected life of
the product is four years. The company expects the product to be very profitable.

What is the minimum amount which ABC may charge against profit for the year to 30 November 2014?

Answer:

Amortisation charge/year = RM1,600,000 ÷ 4 = RM400,000.

Amortisation charge for the year ended 30 November 2014 = RM400,000 x 3/12 = RM100,000.

9.2 Intangible assets with indefinite useful life

An intangible asset with an indefinite useful life should not be amortized.

However, IAS 36 Impairment of Assets required such asset to be tested for impairment annually &
whenever there is an indication that the asset is impaired. This is done by comparing its recoverable
amount with its carrying value.

Carrying amount > Recoverable amount ➔ Impairment loss

The useful life for unamortized intangible asset should be reviewed annually to determine whether it
is still appropriate to assess its useful life as indefinite. Reassessing the useful life of an intangible asset
as finite rather than an indefinite is an indicator that the asset may be impaired and therefore it should be
tested for impairment. A change from indefinite life to finite life is accounted as a change in accounting
estimate.

Example 6:

XYZ Bhd holds a trademark with a carrying value of RM1.7m which it uses to produce consumer goods.
It is expected that the products will continue to be in demand for the foreseeable future and the trademark
has an indefinite life. As at 31 December 2013, an independent expert estimated that the recoverable
amount of the trademark is only RM1.6m.

Discuss the amortization and impairment of the trademark.

Answer:

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10. Derecognition of IA

An intangible asset is derecognized i.e removed from the SOFP:

(a) on disposal (sold); or
(b) when there is no further expected economic benefits from its future use (retired).

Gain/loss on derecogition (SOPL) = Net disposal proceeds – CA

At derecognition, any surplus on revaluation is now realised. The cumulative revaluation surplus on the
disposed asset may now be transferred to the retained earnings.

11. Research and development (R&D)

11.1 Introduction

Business entities are always on the lookout for new and more efficient way of doing things i.e. either in
a better manner or at a lesser cost or both. This requires them to undertake research and development
activities and they routinely spend money on them. For some industries such as pharmaceuticals, R&D
is an essential activity in developing new medicines.

What would happen if there were no rules to recognize the intangible assets developed out of the R&D
process? Companies would build an intangible asset which does not have a substance and does not meet
the definition of an asset. In view of the risks for wrongly recording an intangible, IAS 38 / MFRS 138
lays down the required rules pertaining to R&D.

The activities related to internally-generated intangible asset are divided into 2 phases i.e.:
(a) the research phase; and
(b) the development phase

11.2 Definitions

Research

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

Development

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, process, systems or services
prior to the commencement of commercial production or use.

11.3 Research

Research means performing trial and error, trying out different possibilities and checking their outcomes.
Costs incurred on research activities are written off as expenses in the period they are incurred.
Research activities by definition do not meet the criteria for recognition under IAS 38 / MFRS 138. This
is due to the fact that at the research stage of a project, the future economic benefits that will probably
flow to the entity from the project cannot be ascertained reliably. There is too much uncertainty as to the
likely outcome of the project.

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 material, devices, product, process, systems or services;
(d) The formulation & design of possible new/improved product/process alternatives for new or
improved materials, devices, products, systems or services.

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11.4 Development

Development costs are incurred at a later stage in a project and the probability of success should be more
apparent. It comprises of all directly attributable costs necessary to create, produce and prepare the
asset for intended use which include the followings:-
• Personnel costs
• Cost of materials & services consumed
• Depreciation costs include a reasonable allocation of overhead costs
• Other costs such as cost of intangibles purchased from others that are used in these activities
• Cost of services performed by other enterprises in connection with the development activities
• Legal fees

The probability of success should be more apparent, expenses of development activities include the
followings:

(a) The design, construction & testing of pre-production or pre-use prototypes & models;
(b) The design of tools, jigs, moulds & dies involving new technology;
(c) The design, construction & operation of a pilot plant that is not of a scale economically feasible for
commercial productions; &
(d) The design, construction & testing of a chosen alternative for new or improved product or process.

Development costs exclude selling & administration costs, general overheads, inefficiencies, staff
training, start up costs, business relocations costs.

Development costs are normally expensed in the accounting period in which they are incurred. However,
costs incurred during the development phase are capitalized provided that ALL of the following strict
criteria can be demonstrated (PIRATE):

(a) The intangible asset will generate probable future economic benefits. It must be demonstrated that
there exist a market for the product if it is to be sold and if it is to be used internally, its usefulness to
the entity (P);
(b) The entity has the intention to complete the intangible asset & then use/sell it (I);
(c) The entity has adequate technical, financial or other resources to complete the development and to
use or sell the intangible asset (R);
(d) The entity has the ability to use/sell the intangible asset (A);
(e) The entity has the technical feasibility to complete the intangible asset so that it will be available for
use or sale (T); and
(f) The expenditure incurred on the project can be measured reliably (E).

Once the above criteria are met, the asset can be recognized. Amortization starts when the asset is
available for use for example when the new product is marketed or when the new production process is
used by the enterprise. Review of the amortization period, method & impairment are required on an
annual basis.

If an entity cannot distinguish the research phase of an internal project to create an intangible asset from
the development phase, the entity treats the expenditure for that project as if it were incurred in the
research phase only. Development expenditure which have been recognized as an expense cannot
subsequently be reinstated as an asset.

Example 7:

The following expenditures have been incurred:

(i) RM100,000 spent on the initial design work of a new product. It is anticipated that this design
will be taken forward over the next two period to be developed and tested with a view to
production in three years time.
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(ii) RM500,000 spent on the testing of a new production system which has been designed internally
and which will be in operation during the following accounting year. This new system should
reduce the costs of production by 20%.

How should each of these costs be treated in the financial statements of the entity?

Answer:

Example 8:

An entity is developing a new computer software. During year 2010, the expenditure incurred was
RM120,000 of which RM100,000 was incurred before 1 October 2010 and the balance was incurred from
October to December 2010.

Only on 1 October 2010, the entity is able to demonstrate that the project can meet all the criteria for
recognition as an IA.

In year 2011, the cost incurred was RM60,000. At the end of 2011, the recoverable amount (RA) was
RM75,000

Required:
Discuss the accounting treatment.

Answer:

12. Goodwill

Goodwill refers to the good image that customers have of an entity. Goodwill is based on factors such
as:
• The high quality of the goods and services provided by the entity;
• The work culture and personality of staff;
• Good service to customers for example, prompt and helpful response to customers queries.

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Goodwill results in loyalty and growth of customers leading to higher profits. It is developed over a long
period of time. Even though it is an invaluable asset, but it is very subjective. It is difficult to measure.
Therefore, goodwill is not brought to the books unless it is a purchased goodwill.

12.1 Purchased goodwill

If a business is sold as a going concern, its goodwill is sold along. Purchased goodwill is recognized in
the SOFP because the element of subjectivity has been reduced. The buyer has agreed as to how much
to pay. The amount paid represents purchase of the net assets and the balance is goodwill.

IFRS 3 defines purchased goodwill as an asset representing the future economic benefits arising from
assets acquired in a business’s combination that are not capable of being individually identified
and separately recognized. In other words, in a business combination, goodwill represents a balancing
figure after comparing the FV of the whole business and the FV of the separable net assets of the business.
It cannot be valued on its own.

Goodwill = FV of the business combination – (FV of all assets & liabilities, including intangible
(Purchase consideration) assets of the business acquired)

Goodwill acquired in a business combination is recognized as an asset and it is initially measured at cost.
After initial recognition, goodwill acquired in a business combination is measured at cost less any
accumulated impairment losses. It is not amortized but is tested for impairment at least annually.

12.2 Distinction between goodwill and other intangible assets

(i) Goodwill not identifiable i.e. it is not separable and it does not arise from contractual or other
legal rights. Goodwill cannot be disposed of as a separable asset. Other intangibles may be
identifiable.
(ii) Goodwill cannot be measured reliably unless it is purchased. Reliable measurement of the cost
of other intangible assets is normally possible, whether they are internally generated or acquired.
(iii) Goodwill is only recognized when a business on a going concern is purchased. Internally
generated goodwill is not recognized. Intangible assets are recognized when they are purchased
or internally generated.
(iv) Goodwill arises from various intangible factors such as skilled employees, effective advertising
or a strategic location. These factors cannot be valued.

13. Disclosure

IAS 38 / MFRS 138 requires extensive disclosure of intangible assets. The accounting policies adopted
for intangible assets should be disclosed.

For each class of IA, the followings are required to be disclosed:

➢ The amortization method

➢ The useful life of the IA or the amortization rate used
➢ The gross carrying amount, the accumulated amortization and the accumulated impairment losses
as at the beginning and end of the period
➢ A reconciliation of the carrying amount as at the beginning and at the end of the period (additions,
retirements/disposals, revaluations, impairment losses, reversal of impairment losses,
amortization charge for the period, net exchange differences, other movements).
➢ The carrying amount of internally generated IA.

Disclosures of the followings are also required:

• For IA assessed with indefinite useful life, disclose the carrying amounts and the reasons
supporting such assessments.

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• For IA acquired through government grant and initially recognized at fair value, disclose the fair
value initially recognized, the carrying amount and whether they are carried under the benchmark
or the allowed alternative treatments for subsequent remeasurements.
• The carrying amount, nature and remaining amortization period of any IA that is material to the
financial statements of the entity as a whole.

Where revaluation model is being used to account for IA, the followings are required to be disclosed:

- The effective date of the revaluation (by class of IA)

- The carrying amount of revalued IA
- The carrying amount that would have been shown (by class of assets) if the cost model had been
used, and the amount of amortization that would have been charged.
- The amount of any revaluation surplus on IA as at the beginning and end of the period and
movements in the surplus during the year (and any restrictions on the distribution of the balance
to shareholders).

The amount of R&D expenditure that have been charged as expenses of the period should be disclosed.

Sources:
(1) ACCA Approved Workbook, Financial Reporting (FR) 2021. Chapter 4
(2) FRS for Malaysia by Jane Lazar, 3rd Edition.2010. Chapter 35
(3) Paper P7 Financial Accounting & Tax Planning, Elsevier. 2009. Chapter 16

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Additional practice questions

Q1.
Miko Sdn. Bhd. (Miko) is a manufacturing entity that runs a number of operations including a bottling
plant that bottles carbonated soft drinks. Miko has been developing a new bottling process that will allow
the bottles to be filled and sealed more efficiently.

The new process took a year to develop. At the start of the development, Miko estimated that the new
process would increase output by 15% with no additional cost. Development work commenced on 1 May
2015 and was completed on 18 April 2016. Testing at the end of the development confirmed Miko’s
original estimates.

Miko incurred expenditure of RM180,000 on the above development in 2015/2016.

Miko plans to install the new process in its bottling plant and start operating the new process from 1 May
2016.

Required:

(a) Explain the requirement of IAS 38 / MFRS 138 Intangible Assets for the treatment of development
costs.

(b) Explain how Miko should treat its development costs in its financial statements for the year ended 30
April 2016.

Q2.
Lavenue Bhd. (Lavenue) has asked your opinion on how the following matters should be dealt with:

(a) On July 2016, Lavenue acquired Kiko Sdn. Bhd. (Kiko), a pharmaceutical company that specializes
in drug research and development. The purchase consideration was RM70 million through a share
exchange. The net assets of Kiko is RM30 million, excluding items referred to below:
(i) Kiko owns a patent for an established drug that has a remaining life of four years. The carrying
value of the patent is nil. The fair value of the patent is estimated as RM20 million by a firm of
branding specialists Zezo. Currently, the company is awaiting the outcome of clinical tests, and
if the tests are successful, the fair value of the drug will be RM30 million.

(ii) Kiko carried out research for a client costing RM5 million. It had written off the cost.

(b) Lavenue has developed and patented a drug which has been approved by the Health Ministry. The
cost of developing the drug is RM12 million and the fair value is RM40 million. To date, the drug
had not been manufactured for commercial use.

(c) Lavenue received an exclusive special licence for five years to manufacture and sell vaccine for the
HFM disease. The firm of specialist has valued the licence to have fair value of RM6 million.
Lavender does not incur any cost to get the licence.

(d) Lavenue spent RM10 million on personal coaching and workshops for its sales personnel. The sales
revenue has increased tremendously as a result of the staff training.

Required:
Explain how the above-mentioned matters should be dealt with by Lavenue Sdn. Bhd.

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 BBFA 2014 FINANCIAL REPORTING
Question 3

As at beginning of the financial year ended 31 May 2021, Hexa Bhd. was working on developing
a new product and has paid RM15 million to acquire a patent to help with the development.

The project's initial investigation phase cost an additional $6 million, and it was concluded that
the product's future viability was certain. Following that, the product cost RM8 million to
develop, with RM5 million spent on the working prototype and the rest on making the device
safe and marketable. A further RM1 million was spent on marketing, and RM0.5 million was
spent on training salespeople on how to demonstract the product's use. The product had not yet
been completed at the time of reporting.

Describe how Hexa Bhd. should account for the expenditure in its financial statements for the
year ended 31 May 2021.

Suggested answer

Q1
(a) Under IAS 38 / MFRS 138, development costs will normally be recognised as an expense in
the accounting period in which they are incurred. However, costs incurred during the
development phase must be capitalized provided that the following strict criteria can be
demonstrated:
1. The entity has the technical feasibility of completing the intangible asset so that it will be
available for use or sale;
2. There is intention to complete the intangible asset & then use it/sell it;
3. It has the ability to use/sell the intangible asset;
4. The intangible asset will generate probable future economic benefits. There must be a market
for the product/if it is to be used internally rather than sold, its usefulness to the entity can be
demonstrated;
5. The entity has adequate technical, financial or other resources to complete the development
and to use or sell the intangible asset; and
6. The cost incurred on the project can be measured reliably

(b) Miko development costs meet all the above criteria. The development is complete, testing
has confirmed the probable future economic benefits and the costs involved can be reliably
measured. Miko should capitalise RM180,000 development cost at 30 April 2016.
Amortisation should be begin on 1 May 2016 and continue over the expected life of the
process.

Q2.
(a) The following assets will be recognised:
RMm
Purchase consideration 70
Less: Fair value of net assets acquired
FV of net assets 30
Patent –fair value 20
Research carried out for client 5
55
Purchased Goodwill 15

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 BBFA 2014 FINANCIAL REPORTING
The patent of Kiko will be recognized as an intangible asset in Lavenue’s consolidated SOFP. It
will be recorded at its fair value at date of acquisition i.e. at RM20m and amortised over its
remaining life of four years.

The research cost of RM5m is not Lavenue’s research expenditure but is for a research work
carried out for its client. Thus, whether the outcome of the research is successful or not, it will
be reimbursed from its client. So, it is a work-in-progress which is part of Kiko’s current asset,
so forms a part of the FV of net assets acquired.

The purchased goodwill amounted to RM15m which will be presented in Lavenue’s

consolidated SOFP. This purchased goodwill is not amortised but is subject to annual
impairment test.

(b) New drug - capitalised at RM12 million initially and amortised over its commercial life.

(c) Government licence – can be capitalised at RM6 million and amortise over five years.

(d) Training cost – cannot be capitalised

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