AC2091 Session 11

Intangible
Non-Current Assets

Impairment of Assets
Session 11
AC2091: Financial Reporting

Learning Outcomes
• Define intangible assets, R&D and goodwill
• Describe and explain the accounting treatment
of intangibles, R&D and goodwill
• Explain the process of impairment reviews and
its relationship to deprival values
• Describe the areas of subjectivity and difficulty
in relation to the intangibles’ assets,
development expenditure and goodwill

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Intangible Assets (IAS 38)

• Definition
– Identifiable non-monetary asset without physical
substance
– Recognition criteria:

Control by Probable
Recognition
entity as a flow of
in Financial
result of economic
Statements
past events benefits

Intangible Assets (IAS 38)

• Identifiability
o Asset is identifiable if it either:
a) is separable , i.e. is capable of being divided from
the entity and sold, transferred, licensed, rented or
exchanged, either individually or together with a
related contract, identifiable asset or liability,
regardless of whether the entity intends to do so;
or
a) arises from contractuals or other legal right ,
regardless of whether those rights are transferable
or separable from the entity or from other rights and
obligations
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Intangible Assets (IAS 38)

• Control by entity
– usually entails that the enterprise has the power to
obtain the future economic benefits flowing from the
underlying resource and is able to prevent others
from accessing the economic benefits arising from
the asset

Intangible Assets (IAS 38)

• Control by entity (examples)
– Legally enforceable right is evidence of control, not
always a necessary condition
– Control of technical knowledge or know-how if
protected by legal right
– Skills of employees, customer loyalty etc not
recognised as entity cannot control actions of its
staff and customers

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Intangible Assets (IAS 38)

• Expected future economic benefits may come
from sale of product/services (revenue) or
reduction in expenditures (cost savings)
• Intangible asset is to be recognized at cost if the
following conditions are met:
o Probable flow of future economic benefits to entity
 External evidence preferred to assess certainty
o Cost of intangible asset can be measured reliably
 Acquired separately: cost = purchase price
 Part of business combination: cost = fair value at acquisition
date

Intangible Assets (IAS 38)

Initial Subsequent
Recognition Measurement

• Measured at • Cost model

cost • Revaluation
model

• Classification of intangible assets

o Separately acquired intangible asset
o Internally generated intangible assets

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Intangible Assets (IAS 38)

Intangible Assets

Internally
Acquired Externally
Generated

Intellectual Processes
Goodwill R&D
property & systems

Intangible Assets - Acquisition

• Initial recognition at cost

Directly Cost of
Purchase
Attributable Intangible
Price #
Costs * Asset

# Includes import taxes and non-refundable purchase taxes

* Examples include employee costs, professional fees & testing costs

– Costs such as general overheads, advertising and

initial operating losses are excluded

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Intangible Assets - Acquisition

• If tangible assets are exchanged, the cost of the
intangible asset received should be measured at
fair value unless:
a) Exchange lacks commercial substance
b) Fair value of both asset received and given up
cannot be measured reliably
• Intangible assets acquired by way of a government
grant (IAS 20)
o Measured at fair value; or
o Nominal amount plus directly attributable costs

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Intangible Assets - Acquisition

• Acquisition via business combination
o Cost of intangible asset is its fair value at the
acquisition date
o If asset is separable or arises from contractual or
other legal rights, asset is recognised separately
from goodwill
o Expenditure that does not meet definition and
recognition criteria for intangible asset should form
part of amount attributed to goodwill

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Intangible Assets - Acquisition

• Subsequent measurement
o Cost model
Cost less accumulated amortization and (if any)
accumulated impairment losses
Methods include:
 Straight line
 Reducing balance
 Unit of production

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Intangible Assets - Acquisition

• Subsequent measurement
o Revaluation model
Revalued amount should be the fair value of the asset
at the date of revaluation less any subsequent
accumulated and (if any)
subsequent impairment losses
Fair values should be determined by reference to an
(evidenced by frequency
of transactions and homogeneity)
Revaluations should be conducted regularly

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Intangible Assets - Acquisition

• Subsequent measurement
o Useful life
An entity shall assess whether the useful life of an
intangible asset is finite or indefinite
Indefinite useful life:
– Based on an analysis of all of the relevant factors, there
is no foreseeable limit to the period over which the
asset is expected to generate net cash inflows for the
entity
Finite useful life
– Limited period of benefit to entity
– Length of useful life, or number of production units

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Intangible Assets - Acquisition

• Amortisation of Intangible Assets

Finite Useful Life Indefinite Useful Life

Amortised over asset’s

No amortisation
useful life

Amortisation starts once Tested for impairment at

asset is ready for use least annually

Amortisation charge Review of useful life

recognised in profit or loss annually

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Intangible Assets - Acquisition

• Intangible assets with finite lives
o Amortisation method used shall reflect the pattern in
which the asset’s future economic benefits are
expected to be consumed by the entity
 If that pattern cannot be determined reliably, the straight-
line method shall be used
o Residual value assumed to be zero unless :
a) there is a commitment by a third party to purchase the asset
at the end of its useful life; or
b) residual value can be determined by reference to active
market and it is probable that such a market will exist at the
end of the asset’s useful life

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Intangible Assets - Acquisition

• Intangible assets with finite lives
o Amortisation method and period should be reviewed
at least at each financial year-end
 If differences in period or expected pattern of consumption
of future economic benefits, the amortisation period and
method are to be changed accordingly
o Amortisation charge is recognised in profit or loss
unless another it is included in the cost of another
asset
o Assessed for impairment in accordance with IAS 36
Impairment of Assets

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Intangible Assets - Acquisition

• Intangible assets with indefinite lives
o Shall
o Useful life shall be reviewed each period to
determine whether events and circumstances
continue to support an indefinite useful life
assessment for that asset
o If they do not, the change in the useful life
assessment from indefinite to finite shall be
accounted for as a change in an accounting estimate

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Intangible Assets - Acquisition

• Intangible assets with indefinite lives
o in accordance
with IAS 36 Impairment of Assets
o Entity is required to test an intangible asset with an
indefinite useful life for impairment by comparing its
recoverable amount with its carrying amount
a) annually, and
b) whenever there is an indication that the intangible
asset may be impaired

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Intangible Assets - Goodwill

• Difference between the value of a business as a whole
and the aggregate value of its

• Arises from economic advantages attached to existing

business and includes:
 Reputation
 Skilled employees
 Market share

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Intangible Assets - Goodwill

• Internally generated goodwill

Lack of objective value since it is inherent in business

Goodwill with customers may change
Does not meet recognition criteria in IAS 38
• Goodwill creating and maintaining expenses (e.g.
training, advertising) are charged to profit or loss

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Intangible Assets - Goodwill

• Purchased goodwill is derived when a business is sold
as a going concern
• Recorded as in financial statements:
o Future economic benefits are expected to flow to the
buyer of the business
o It is controlled by the entity as a result of past
transactions or events
o Its cost or value is measured reliably from the purchase
price and net tangible asset values

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Intangible Assets – Goodwill (IFRS 3)

• Excess of cost of business combination over acquirer's
share of net assets
• Initial recognition
o Purchased goodwill is recognised by acquiror as an asset
from acquisition date
o Negative goodwill are
• Subsequent measurement
o No amortisation of goodwill
o Carried at cost less any accumulated impairment losses
in accordance with IAS 36 Impairment of Assets
o Must be annually

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Intangible Assets - Goodwill

• Possible treatment of purchased goodwill
o Recognise it as asset and amortise over useful life
through profit or loss complies with matching principle
o Carry it as asset and amortise over useful life by writing
off against its reserves contradicts matching principle
o Eliminate it against reserves immediately on acquisition
o Retain it as asset indefinitely, subject to impairment
Risk of double-counting or over deduction from asset
o Charge it as an expense against profits in the period
when it is acquired
over conservative and
o Deduct from shareholders’ equity overstate profits
o Revalue it annually to incorporate non-purchased
goodwill open to abuse & contradicts IAS 38
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Intangible Assets - Goodwill

• Alternative treatments of purchased goodwill
o SSAP 22
Write off goodwill immediately against reserves
Amortise goodwill to profit or loss over its useful life
o FRS 10
Capitalise and amortise to profit or loss over useful life
Maximum useful life of 20 years for intangible assets
o IAS 22
Goodwill not to be written off against reserves in year
of acquisition
Required to amortise goodwill to profit or loss over
estimated useful life
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Intangible Assets - Internally Generated

Internally Generated Intangible Assets

Research Development
• Original and planned • Application of research
investigation findings to plan or design
undertaken with the for the production of new
prospect of gaining new or substantially improved
scientific or technical products, systems or
knowledge and services before
understanding commercial production

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Intangible Assets - Research

• Examples of research activities:
a) activities aimed at obtaining new knowledge;
b) the search for, evaluation and final selection of,
applications of research findings or other knowledge;
c) the search for alternatives for materials, devices,
products, processes, systems or services; and
d) the formulation, design, evaluation and final selection of
possible alternatives for new or improved materials,
devices, products, processes, systems or services

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Intangible Assets - Research

• Research activities do not meet the criteria for
recognition since it is not certain that future economic
benefits will probably flow to the entity undertaking the
project
• Research costs are
in the profit or loss as they are incurred

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Intangible Assets - 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; and
d) the design, construction and testing of a chosen
alternative for new or improved materials, devices,
products, processes, systems or services.

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Intangible Assets - Development

• Development costs may quality for recognition as
intangible assets provided that the entity can
demonstrate the following:
a) Technical feasibility of completing the asset for use or sale
b) Its intention to complete the asset and use or sell it
c) Its ability to use or sell the intangible asset
d) The availability of adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset
e) Ability of intangible asset to generate future economic benefits
(i.e. existence of market; usefulness of intangible asset)
f) Its ability to measure expenditure attributable to asset during
its development reliably

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Impairment of Assets (IAS 36)

• IAS 36 prescribe the procedures that an entity
applies to ensure that its assets are carried at no
more than their recoverable amount
• Does not apply to assets such as:
– Inventories [IAS 2]
– Financial assets (e.g. trade receivables) [IFRS 9]
– Investment properties measured at fair value [IAS 40]
– Deferred tax assets [IAS 12]
– Contract assets and assets arising from costs to obtain
or fulfil a contract [IFRS 15]

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Impairment of Assets (IAS 36)

• Fall in value of an asset so that its
is less than its
in the statement of financial position

Carrying Recoverable Impairment

Amount# Amount of Asset

Net value shown in statement of Higher of fair value less costs of

financial position (after disposal and value in use
accumulated depreciation and
any impairment losses)
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Impairment of Assets (IAS 36)

• Indications of possible impairment
• Change in technological, market, legal
or economic environment
• Significant fall in asset’s market value
External
sources • Increase in market interest rates or rate
of return on investments
• Carrying amount of net assets being
more than its market capitalisation
• Obsolescence or physical damage
• Adverse changes in manner which
Internal
asset is used
sources
• Deterioration of asset’s economic
performance
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Impairment of Assets (IAS 36)

• An entity shall assess at the end of each reporting
period 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
• Following assets to be tested for impairment
annually regardless of indications
o Intangible assets with indefinite useful life
o Goodwill acquired in business combination

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Impairment of Assets (IAS 36)

• If recoverable amount is lower than carrying
amount, carrying amount should be reduced by the
difference
• Amount changed should be charged as an
in profit or loss as impairment loss
• Impairment loss for assets held at revalued amount
o Charged to if
such reserve held for asset
o Any excess to be charged to profit or loss
o Any subsequent depreciation on asset to be based
on new carrying amount
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Impairment of Assets (IAS 36)

Carrying amount
lower of

Carrying amount in Recoverable amount

financial statements
higher of

Fair value less costs to sell Value in use

Proceeds from sale of asset less Present value of

cost of disposal estimated future
cashflows derived from
continued use of asset
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Impairment of Assets (IAS 36)

• Calculating value in use
1) Estimating the future cash inflows and outflows to be
derived from continuing use of the asset and from its
ultimate disposal
 Cashflows should relate to asset at current condition, excluding
uncommitted future restructurings and improvements
2) Applying the appropriate discount rate to these future
cash flows
 The discount rate(s) used should be a pre-tax rate(s) that reflect(s)
current market assessments of the time value of money and risks
specific to the asset (i.e. market risk-free interest rate)

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Impairment of Assets (IAS 36)

• Cash-generating unit
o Smallest identifiable group of assets for which
independent cashflows can be identified and
measured
o If recoverable amount of single asset not
measurable, that of its cash generating unit should
be measured
o Carrying amount of a cash-generating unit should be
determined consistently with the way the
recoverable amount of the cash-generating unit is
determined

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Impairment of Assets (IAS 36)

• Cash-generating unit
o Allocation of impairment loss for CGU
1) First, to goodwill allocated to the cash-generating unit
(if any)
2) Then, to the other assets of the unit on a pro rata basis
based on the carrying amount of each asset in the unit

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Thank You

Q&A

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