Accounting for intangible assets

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Financial reporting
International financial reporting and analysis (essential
reading) Chapters 14, 15
IAS 38 Intangible assets
IFRS 3 Business combinations
IAS 36 Impairment of assets

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Financial reporting
IAS 38 Intangible assets
Intangible assets are defined by IAS 38 as non-monetary assets without physical
substance. They must be:
Identifiable
Controlled as a result of a past event
Able to provide future economic benefits
The objectives of the standard are:
(a) To establish the criteria for when an intangible assets may or should be
recognised
(b) To specify how intangible assets should be measured
(c) To specify the disclosure requirements for intangible assets

It applies to all intangible assets with certain exceptions: deferred tax assets (IAS
12), leases that fall within the scope of IAS 17, financial assets, insurance
contracts, assets arising from employee benefits (IAS 19), non-current assets held
for sale and mineral rights and exploration and extraction costs for minerals etc
(although intangible assets used to develop or maintain these rights are covered
by the standard). It does not apply to goodwill acquired in a business combination,
which is dealt with under IFRS 3 Business combinations.
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Financial reporting
Intangible asset: must be identifiable
An intangible asset must be identifiable in order to
distinguish it from goodwill. With non-physical items, there
may be a problem with “identifiability”.
(a) If an intangible asset is acquired separately through
purchase, there may be a transfer of a legal right that would
help to make an asset identifiable.
(b) An intangible asset may be identifiable if it is separable
(could be rented or sold separately).

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Financial reporting
Examples of intangible asset
purchased brands and trade marks
patents
copyrighted material
customer contracts (and customer relationships under certain
circumstances)
databases (client lists)
computer software
licences and franchises
research and development costs
net investment in lease (IAS 17)
secret technological know-how

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Financial reporting
Intangible asset: control by the entity
Evidence of control may be a legally enforceable right, but is not always a
necessary condition.
(a) Control over technical knowledge or know-how only exists if it is
protected by a legal right.
(b) The skill of employees, arising out of the benefits of training costs, are
most unlikely to be recognisable as an intangible asset, because an entity
does not control the future actions of its staff.
(c) Similarly, market share and customer loyalty cannot normally be
intangible assets, since an entity cannot control the actions of its
customers.

Intangible asset: expected future economic benefits

Economic benefits may come from the sale of products or services, or from a
reduction in expenditures (cost savings).

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Financial reporting
Initial recognition
An intangible asset, when recognised initially, must be measured at cost.

It should be recognised if, and only if both the following occur:

(a) It is probable that the future economic benefits that are attributable to the asset
will flow to the entity.
(b) The cost can be measured reliably.

Management has to exercise its judgement in assessing the degree of certainty

attached to the flow of economic benefits to the entity. External evidence is best.
(a) If an intangible asset is acquired separately, its cost can usually be measured
reliably as its purchase price (including incidental costs of purchase such as legal
fees, and any costs incurred in getting the asset ready for use).
(b) When an intangible asset is acquired as part of a business combination, the cost
of the intangible asset is its fair value at the date of the acquisition.

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Financial reporting
Initial recognition in business combinations
IFRS 3:
The fair value of intangible assets acquired in business combinations can normally be
measured with sufficient reliability to be recognised separately from goodwill.

Quoted market prices in an active market provide the most reliable measurement of
the fair value of an intangible asset. If no active market exists for an intangible asset,
its fair value is the amount that the entity would have paid for the asset, at the
acquisition date, in an orderly transaction between market participants, on the basis
of the best information available. In determining this amount, an entity should
consider the outcome of recent transactions for similar assets. There are techniques
for estimating the fair values of unique intangible assets (such as brand names) and
these may be used to measure an intangible asset acquired in a business
combination.

In accordance with IAS 20, intangible assets acquired by way of government grant and
the grant itself may be recorded initially either at cost (which may be zero) or fair
value.

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Financial reporting
Exchange of intangible assets

If one intangible asset is exchanged for another, the cost of the intangible
asset is measured at fair value unless:
(a) The exchange transaction lacks commercial substance, or
(b) The fair value of neither the asset received nor the asset given up can
be measured reliably.
Otherwise, its cost is measured at the carrying amount of the asset given
up.

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Financial reporting
Cost of an internally generated intangible asset
The costs allocated to an internally generated intangible asset should be only 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. The principles
underlying the costs which may or may not be included are similar to those for
other non-current assets and inventory.

The cost of an internally operated intangible asset 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 recognised as expenses
before management could demonstrate that the criteria have been met, this
earlier expenditure should not be retrospectively recognised at a later date as part
of the cost of an intangible asset.

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Financial reporting
Recognition of an expense
All expenditure related to an intangible which does not meet the criteria for
recognition either as an identifiable intangible asset or as goodwill arising on an
acquisition should be expensed as incurred.

The IAS gives examples of such expenditure.

Start up costs
Training costs
Advertising costs
Business relocation costs

Prepaid costs for services, for example advertising or marketing costs for
campaigns that have been prepared but not launched, can still be recognised as a
prepayment.

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Financial reporting
Internally generated intangible assets
The standard prohibits the recognition of internally generated brands,
mastheads, publishing titles and customer lists and similar items as intangible
assets. These all fail to meet one or more (in some cases all) the definition and
recognition criteria and in some cases are probably indistinguishable from
internally generated goodwill.

Internally generated goodwill may not be recognised as an asset.

The standard deliberately precludes recognition of internally generated goodwill

because it requires that, for initial recognition, the cost of the asset rather than
its fair value should be capable of being measured reliably and that it should be
identifiable and controlled. Therefore, you do not recognise an asset which is
subjective and cannot be measured reliably.

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Financial reporting
Example: Recognition criteria
Kerry Co is developing a new production process. During 2014, expenditure incurred
was $100,000, of which $90,000 was incurred before 1 December 2014 and $10,000
between 1 December 2014 and 31 December 2014. Kerry Co can demonstrate that,
at 1 December 2014, the production process met the criteria for recognition as an
intangible asset. The recoverable amount of the know-how embodied in the process
is estimated to be $50,000.
How should the expenditure be treated?

Answer
At the end of 2014, the production process is recognised as an intangible asset at a
cost of $10,000. This is the expenditure incurred since the date when the recognition
criteria were met, that is 1 December 2014. The $90,000 expenditure incurred
before 1 December 2014 is expensed, because the recognition criteria were not met.
It will never form part of the cost of the production process recognised in the
statement of financial position.

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Financial reporting
 Subsequent measurement
IAS38 allows two methods of valuation for intangible assets after they have been
first recognised:
Cost model: an intangible asset should be carried at its cost, less any accumulated
depreciation and less any accumulated impairment losses.
Revaluation model: an intangible asset to be carried at a revalued amount, which is
its fair value at the date of revaluation, less any subsequent accumulated
amortisation and any subsequent accumulated impairment losses:
 The fair value must be able to be measured reliably with reference to an
active market in that type of asset.
 The entire class of intangible assets of that type must be revalued at the
same time (to prevent selective revaluations).
 If an intangible asset in a class of revalued intangible assets 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 losses.
 Revaluations should be made with such regularity that the carrying amount
does not differ from that which would be determined using fair value at the
year end.
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Financial reporting
 Revaluation surplus
The guidelines state that there will not usually be an active market in an
intangible asset; therefore the revaluation model will usually not be available. For
example, although copyrights, publishing rights and film rights can be sold, each
has a unique sale value. In such cases, revaluation to fair value would be
inappropriate. A fair value might be obtainable however for assets such as fishing
rights or quotas or taxi cab licences.
Where an intangible asset is revalued upwards to a fair value, the amount of the
revaluation should be credited directly to equity under the heading of a
revaluation surplus.
However, if a revaluation surplus is a reversal of a revaluation decrease that was
previously charged against income, the increase can be recognised as income.
Where the carrying amount of an intangible asset is revalued downwards, the
amount of the downward revaluation should be charged as an expense against
income, unless the asset has previously been revalued upwards. A revaluation
decrease should be first charged against any previous revaluation surplus in respect
of that asset.
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Financial reporting
Realisation of revaluation surplus
When the revaluation model is used, and an intangible asset is revalued upwards,
the cumulative revaluation surplus may be transferred to retained earnings when
the surplus is eventually realised.
The surplus would be realised when the asset is disposed of.
The surplus may also be realised over time as the asset is used by the entity. The
amount of the surplus realised each year is the difference between the
amortisation charge for the asset based on the revalued amount of the asset, and
the amortisation that would be charged on the basis of the asset's historical cost.
The realised surplus in such case should be transferred from revaluation surplus
directly to retained earnings, and should not be taken through profit or loss for
the year.

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Financial reporting
Example: Downward valuation
An intangible asset is measured by a company at fair value. The asset was
revalued by $400 in 2013, and there is a revaluation surplus of $400 in the
statement of financial position. At the end of 2014, the asset is valued again,
and a downward valuation of $500 is required.
Required
State the accounting treatment for the downward revaluation.

Answer
In this example, the downward valuation of $500 can first be set against the
revaluation surplus of $400.
The revaluation surplus will be reduced to 0 and a charge of $100 made as an
expense in 2014.

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Financial reporting
Useful life
Useful life of an intangible asset may be:
Finite
Infinite (there is no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity).

Factors considered in determining the useful life of an intangible asset:

• expected usage
• typical product life cycles
• technical, technological, commercial or other types of obsolescence
• the stability of the industry
• expected actions by competitors
• the level of maintenance expenditure required
• legal or similar limits on the use of the asset, such as the expiry dates of
related leases.

Important! The useful life of an intangible asset that arises from contractual or
other legal rights 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.
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Financial reporting
 Example: useful life
Consider how to determine the useful life of a purchased brand name and how to
provide evidence that its useful life might in fact exceed 20 years.

Answer
Factors to consider would include the following:
Legal protection of the brand name and the control of the entity over the (illegal)
use by others of the brand name (ie control over pirating)
Age of the brand name
Status or position of the brand in its particular market
Ability of the management of the entity to manage the brand name and to
measure activities that support the brand name (eg advertising and PR activities)
Stability and geographical spread of the market in which the branded products
are sold
Pattern of benefits that the brand name is expected to generate over time
Intention of the entity to use and promote the brand name over time (as
evidenced perhaps by a business plan in which there will be substantial
expenditure to promote the brand name)
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Financial reporting
Amortisation period and amortisation method
An intangible asset with a finite useful life should be amortised over its expected
useful life.
(a) Amortisation should start when the asset is available for use.
(b) Amortisation should cease at the earlier of the date that the asset is classified as
held for sale in accordance with IFRS 5 Non-current assets held for sale and
discontinued operations and the date that the asset is derecognised.
(c) The amortisation method used should reflect the pattern in which the asset's
future economic benefits are consumed. If such a pattern cannot be predicted
reliably, the straight-line method should be used.
(d) The amortisation charge for each period should normally be recognised in profit
or loss.
(e) The residual value of an intangible asset with a finite useful life is assumed to be
zero unless a third party is committed to buying the intangible asset at the end of its
useful life or unless there is an active market for that type of asset (so that its
expected residual value can be measured) and it is probable that there will be a
market for the asset at the end of its useful life.
(f) The amortisation period and the amortisation method used for an intangible asset
with a finite useful life should be reviewed at each financial year-end.
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Financial reporting
 Intangible assets with indefinite useful lives
An intangible asset with an indefinite useful life should not be
amortised.
IAS 36 requires that such an asset is tested for impairment at least
annually.
The useful life of an intangible asset that is not being amortised should
be reviewed each year 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
indefinite is an indicator that the asset may be impaired and therefore it
should be tested for impairment.

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Financial reporting
IAS 36 Impairment of Assets
Definitions (IAS 36.6):
The recoverable amount of an asset is the higher of its fair value less costs to sell
and its value in use.
The fair value less costs to sell of an asset is the amount obtainable from the
sale of an asset in an arm’s length transaction between knowledgeable, willing
parties, less the costs of disposal.
Value in use is the present value of the future cash flows expected to be derived
from an asset.

An asset is impaired when its carrying amount exceeds its

recoverable amount (IAS 36.8).

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Financial reporting
Indicators of a possible impairment of assets
(a) External sources of information:
(i) A fall in the asset's market value that is more significant than would normally
be expected from passage of time over normal use.
(ii) A significant change in the technological, market, legal or economic
environment of the business in which the assets are employed.
(iii) An increase in market interest rates or market rates of return on
investments likely to affect the discount rate used in calculating value in use.
(iv) The carrying amount of the entity's net assets being more than its market
capitalisation.
(b) Internal sources of information: evidence of obsolescence or physical
damage, adverse changes in the use to which the asset is put, or the asset's
economic performance.

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Financial reporting
 Accounting for impairment
An entity shall assess at each reporting date whether there is any indication that an
asset may be impaired. If any such indication exists, the entity shall estimate the
recoverable amount of the asset (IAS 36.9).
IAS 38 states that irrespective of whether there is any indication of impairment, an
entity shall also:
test an intangible asset with an indefinite useful life or an intangible asset not yet
available for use for impairment annually by comparing its carrying amount with its
recoverable amount.
test goodwill acquired in a business combination for impairment annually.
If, and only if, the recoverable amount of an asset is less than its carrying amount, the
carrying amount of the asset shall be reduced to its recoverable amount. This
reduction is an impairment loss (IAS 36.59) to be recognised in the income statement.
However, an impairment loss on a revalued asset is recognised in other
comprehensive income to the extent that the impairment loss does not exceed the
amount in the revaluation surplus for that same asset.
When impairment is applied to an asset with a finite useful life, “after the recognition
of an impairment loss, the depreciation (amortisation) charge for the asset shall be
adjusted in future periods to allocate the asset’s revised carrying amount, less its
residual value (if any), on a systematic basis over its remaining useful life” (IAS 36.63).
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Financial reporting
Cash generating unit (CGU)
When it is not possible to calculate the recoverable amount of a single
asset, then that of its cash generating unit should be measured instead.

A cash generating unit is the smallest identifiable group of assets for which
independent cash flows can be identified and measured.

Example
A bus company has an arrangement with a town's authorities to run a bus service
on four routes in the town. Separately identifiable assets are allocated to each of
the bus routes, and cash inflows and outflows can be attributed to each individual
route. Three routes are running at a profit and one is running at a loss. The bus
company suspects that there is an impairment of assets on the lossmaking route.
However, the company will be unable to close the loss-making route, because it is
under an obligation to operate all four routes, as part of its contract with the local
authority. Consequently, the company should treat all four bus routes together as a
cash generating unit, and calculate the recoverable amount for the unit as a whole.

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Financial reporting
 Example: CGU
Minimart belongs to a retail store chain Maximart. Minimart makes all its retail
purchases through Maximart's purchasing centre. Pricing, marketing, advertising and
human resources policies (except for hiring Minimart's cashiers and salesmen) are
decided by Maximart. Maximart also owns five other stores in the same city as
Minimart (although in different neighbourhoods) and 20 other stores in other cities.
All stores are managed in the same way as Minimart. Minimart and four other stores
were purchased five years ago and goodwill was recognised.
What is the cash-generating unit for Minimart?

In identifying Minimart's cash-generating unit, an entity considers whether, for

example:
(a) Internal management reporting is organised to measure performance on a store-
by-store basis.
(b) The business is run on a store-by-store profit basis or on a region/city basis.
All Maximart's stores are in different neighbourhoods and probably have different
customer bases. So, although Minimart is managed at a corporate level, Minimart
generates cash inflows that are largely independent from those of Maximart's other
stores. Therefore, it is likely that Minimart is a cash generating unit.

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Financial reporting
 Disposals/retirements of intangible assets

An intangible asset should be eliminated from the statement of financial

position when it is disposed of or when there is no further expected
economic benefit from its future use.

On disposal the gain or loss arising from the difference between the
net disposal proceeds and the carrying amount of the asset should be
taken to the profit or loss for the year as a gain or loss on disposal.

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Financial reporting
Research and development costs
IAS 38.8

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.

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Financial reporting
Research
Examples of research costs:
(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
(d) The formulation, design evaluation and final selection of possible alternatives for
new or improved materials, devices, products, systems or services

Research activities by definition do not meet the criteria for recognition under IAS
38. This is because, at the research stage of a project, it cannot be certain that future
economic benefits will probably flow to the entity from the project. There is too
much uncertainty about the likely success or otherwise of the project.

Research costs should therefore be written off as an expense as they are incurred.

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Financial reporting
 Development
Examples of development costs:
(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
(d) The design, construction and testing of a chosen alternative for new or
improved materials, devices, products, processes, systems or services

Development costs are incurred at a later stage in a project, and the probability
of success should be more apparent.

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Financial reporting
Development costs MAY qualify for recognition as intangible assets provided
that the following strict criteria are met (IAS 38.57):

An entity can demonstrate all of the following:

(a) The technical feasibility of completing the intangible asset so that it will
be available for use or sale.
(b) Its intention to complete the intangible asset and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible asset will generate probable future economic benefits.
Among other things, the entity should demonstrate the existence of a market
for the output of the intangible asset or the intangible asset itself or, if it is to
be used internally, the usefulness of the intangible asset.
(e) Its ability to measure the expenditure attributable to the intangible asset
during its development reliably.

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Financial reporting
Summary: Reaserch & development costs

Type of costs Accounting

Research Write-off through PL
Development (not meeting Write-off through PL
criteria IAS 38.57)
Development (meeting criteria May be capitalised as an asset
IAS 38.57)

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Financial reporting
Example: Computer software and hardware
The treatments can be illustrated by reference to computer software and hardware.
The treatment depends on the nature of the asset and its origin.

Asset Origin Treatment

Computer software Purchased Capitalise
Operating system for hardware Purchased Include in hardware cost
Computer software Internally Charge to expense until
Operating system for hardware developed “Development criteria” are met.
(for use or sale) Amortise over useful life, based on
pattern of benefits.

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Financial reporting
 Example
Silverware Co develops and manufactures exotic cutlery and has the following
projects in hand.

1 2 3 4
$ ‘000 $ ‘000 $ ‘000 $ ‘000
Deferred development
expenditure b/f 280 450 - -
Development expenditure
Incurred during the year
Salaries, wages and so 35 - 60 20
Overhead costs 2 - - 3
Materials and services 3 - 11 4
Patents and licences 1 - - -
Market research - - 2 -

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Financial reporting
Project 1: was originally expected to be highly profitable but this is now in doubt,
since the scientist in charge of the project is now behind schedule, with the result
that competitors are gaining ground.
Project 2: commercial production started during the year. Sales were 20,000 units
in 20X1 and future sales are expected to be: 20X2 30,000 units; 20X3 60,000 units;
20X4 40,000 units; 20X5 30,000 units. There are no sales expected after 20X5.
Project 3: these costs relate to a new project, which meets the criteria for deferral
of expenditure and which is expected to last for three years.
Project 4: is another new project, involving the development of a “loss leader”,
expected to raise the level of future sales.

The company's policy is to defer development costs, where permitted by IAS 38.
Expenditure carried forward is written off evenly over the expected sales life of
projects, starting in the first year of sale.

Required
Show how the above projects should be treated in the accounting statements of
Silverware Co for the year ended 31 December 20X2 in accordance with best
accounting practice. Justify your treatment of each project.
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Financial reporting
Solution

Project 1 expenditure, including that relating to previous years, should all be

written off in 20X2, as there is now considerable doubt as to the profitability
of the project.

Since commercial production has started under project 2 the expenditure

previously deferred should now be amortised. This will be done over the
estimated life of the product, as stated in the question.

Project 3: the development costs may be deferred.

Since project 4 is not expected to be profitable its development costs should

not be deferred.

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Financial reporting
 Goodwill
IFRS3:
Goodwill is an asset representing the future economic benefits arising from
other assets acquired in a business combination that are not individually
identified and separately recognised.

Goodwill is created by good relationships between a business and its customers:

(a) By building up a reputation (by word of mouth perhaps) for high quality products
or high standards of service
(b) By responding promptly and helpfully to queries and complaints from customers
(c) Through the personality of the staff and their attitudes to customers

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Financial reporting
Value of goodwill
The goodwill is not usually valued in the accounts of a business at all due to:
(a) The goodwill is inherent in the business but it has not been paid for, and it does
not have an “objective” value.
(b) Goodwill changes from day to day. One act of bad customer relations might
damage goodwill and one act of good relations might improve it. Since goodwill is
continually changing in value, it cannot realistically be recorded in the accounts of
the Business.

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Financial reporting
Is goodwill an asset?
Asset definition has three important characteristics:
Control (ownership)
Transaction to acquire control has taken place
Future economic benefit
If a business has goodwill, it means that the value of the business as a going
concern is greater than the value of its separate tangible assets. The valuation of
goodwill is extremely subjective and fluctuates constantly. For this reason, non-
purchased goodwill is not shown as an asset in the statement of financial
position.

When a buyer purchases an existing business, he will have to purchase not only
its long-term assets and inventory (and perhaps take over its accounts payable
and receivable too) but also the goodwill of the business.

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Financial reporting
Accounting for goodwill
Traditionally there were two views on accounting for goodwill:
Goodwill is merely an accounting difference that should be either
carried indefinitely in the balance sheet (but subject to regular reviews
of its value) or written off as soon as possible.
Goodwill is an asset rather than a difference, which should be
capitalised and amortised like any other.

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Financial reporting
Different models to account for purchased goodwill

1. capitalisation and predetermined life; amortisation expense to the income

statement
2. capitalisation and predetermined life; amortisation expense to (profit)
reserves
3. capitalisation and annual review for impairment
4. immediate write-off to reserves
5. separate write-off reserve
6. separate write-off reserve with recoverability assessment
7. immediate write off to the income statement
8. annual revaluation to incorporate non-purchased goodwill created

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Financial reporting
How is the amount of this purchased goodwill decided?
1. The seller and buyer agree on a price without specifically quantifying the
goodwill. The purchased goodwill will then be the difference between the price
agreed and the value of the net assets in the books of the new business.

2. However, the calculation of goodwill often precedes the fixing of the purchase
price and becomes a central element of negotiation. There are many ways of
arriving at a value for goodwill and most of them are related to the profit record of
the business in question.

No matter how goodwill is calculated within the total agreed purchase price, the
goodwill shown by the purchaser in his accounts will be the difference between the
purchase consideration and his own valuation of the net assets acquired.

Example:
If A values its net assets at $40,000, goodwill is agreed at $21,000 and B agrees to
pay $61,000, what amount of goodwill will be in B’s financials?
For B the fair value of A’s net assets is only $38,000, then the goodwill in B's books
will be $61,000 – $38,000 = $23,000.
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Financial reporting
Goodwill is not amortised. Instead, it is tested for impairment at least
annually, in accordance with IAS 36 Impairment of assets.

Internally generated goodwill may not be recognised as an asset.

Goodwill recognised in a business combination is an asset and is initially

measured at cost. Cost is the excess of the cost of the combination over the
acquirer's interest in the net fair value of the acquiree‘s identifiable assets,
liabilities and contingent liabilities.

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Financial reporting
 Bargain purchase
A bargain purchase arises when the net of the acquisition-date amounts of the
identifiable assets acquired and the liabilities assumed exceeds the consideration
transferred.
A bargain purchase might happen, for example, in a business combination that is a
forced sale in which the seller is acting under compulsion. However, the recognition or
measurement exceptions for particular items may also result in recognising a gain (or
change the amount of a recognised gain) on a bargain purchase.

Before recognising a gain on a bargain purchase, the acquirer must reassess whether
it has correctly identified all of the assets acquired and all of the liabilities assumed
and must recognise any additional assets or liabilities that are identified in that review.
The acquirer must then review the procedures used to measure the amounts this IFRS
requires to be recognised at the acquisition date for all of the following:
(a) The identifiable assets acquired and liabilities assumed
(b) The non-controlling (formerly minority) interest in the acquiree, if any
(c) For a business combination achieved in stages, the acquirer's previously held
interest in the acquiree
(d) The consideration transferred
The purpose of this review is to ensure that the measurements appropriately reflect
all the available information as at the acquisition date.
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Financial reporting
 Question: Characteristics of goodwill
What are the main characteristics of goodwill which distinguish it from
other intangible non-current assets?
To what extent do you consider that these characteristics should affect
the accounting treatment of goodwill? State your reasons.

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Financial reporting
Answer: Characteristics of goodwill
Goodwill may be distinguished from other intangible non-current assets by reference
to the following characteristics.
(a) It is incapable of realisation separately from the business as a whole.
(b) Its value has no reliable or predictable relationship to any costs which may have
been incurred.
(c) Its value arises from various intangible factors such as skilled employees, effective
advertising or a strategic location. These indirect factors cannot be valued.
(d) The value of goodwill may fluctuate widely according to internal and external
circumstances over relatively short periods of time.
(e) The assessment of the value of goodwill is highly subjective.

It could be argued that, because goodwill is so different from other intangible non-
current assets it does not make sense to account for it in the same way. Therefore,
the capitalisation and amortisation treatment would not be acceptable. Furthermore,
because goodwill is so difficult to value, any valuation may be misleading, and it is
best eliminated from the statement of financial position altogether. However, there
are strong arguments for treating it like any other intangible non-current asset. This
issue remains controversial.
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Financial reporting
 Thank you for attention!

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Financial reporting