CHAPTER-3 IAS 38: INTANGIBLE ASSETS

CHAPTER-3
INTERNATIONAL ACCOUNTING STANDARD-38
INTANGIBLE ASSETS

LO1: SCOPE AND DEFINITIONS

Scope IAS 38 applies to all intangible assets, except those that are within the scope of another
[Para 2,3] standard. For example, IAS 38 does not apply to the following:
1. intangible assets held by an entity for sale in the ordinary course of business (IAS
2: Inventories);
2. deferred tax assets (IAS 12: Income taxes);
3. leases of intangible assets IFRS 16: Leases;
4. financial assets (IAS 32, IFRS 10, IAS 27, IAS 28);
5. Goodwill acquired in a business combination (IFRS 3: Business combinations);
6. assets arising from contracts with customers (IFRS 15: Revenue from contracts
with customers)
Definitions Asset
[Para 8] A resource controlled by the company as a result of past events and from which future
economic benefits are expected to flow.
Intangible asset
An identifiable, non-monetary asset without physical substance.
Carrying amount is the amount at which an asset is recognised in the statement of
financial position after deducting any accumulated amortisation and accumulated
impairment losses thereon.
Cost is the amount of cash or cash equivalents paid or the fair value of other consideration
given to acquire an asset at the time of its acquisition or construction, or, when applicable,
the amount attributed to that asset when initially recognised in accordance with the
specific requirements of other IFRSs.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its
residual value.
Entity-specific value is the present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal at the end of its useful life or expects
to incur when settling a liability.
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Amortisation is the systematic allocation of the depreciable amount of an intangible asset
over its useful life.
The residual value of an intangible asset is the estimated amount that an entity would
currently obtain from disposal of the asset, after deducting the estimated costs of disposal,
if the asset were already of the age and in the condition expected at the end of its useful
life.
Useful life is:
- the period over which an asset is expected to be available for use by an entity; or
- the number of production or similar units expected to be obtained from the asset
by an entity.
Commentary Control [Para 13]
on Control means that a company has the power to obtain the future economic benefits

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Definitions flowing from the underlying resource and also can restrict the access of others to those
benefits.
Control would usually arise where there are legal rights, for example legal rights over the
use of patents or copyrights. However, legal enforceability is not a necessary condition for
control.
Is staff training or customer list an intangible?
1. Staff training: Staff training creates skills that could be seen as an asset
for the employer. However, staff could leave their employment at any
time.
2. Customer lists: There is no control because customers have no obligation
to make future purchases.

Future economic benefit [Para 17]

The future economic benefits flowing from an intangible asset may include revenue from
the sale of products or services, cost savings, or other benefits resulting from the use of the
asset by the entity.

Need to be identifiable [Para 11, 12]

IAS 38 states that to be identifiable an intangible asset:
1. must be separable (means it can be divided from the company, and sold,
transferred, licensed, rented or exchanged e.g. patent rights, copyrights and
purchased brands.); or
2. Must arise from contractual or other legal rights regardless of whether those rights
are transferable or separable from the entity or from other rights and obligations.
Sufi Limited
Sufi Limited incurred Rs.300,000 on a massive marketing campaign to
promote a new product. The accountant wishes to capitalize these costs.
The cost of the advertising campaign is not separable as it cannot be separated
from the entity and sold, transferred, rented or exchanged etc.
Furthermore, the advertising campaign does not arise from contractual or legal
rights.
Thus the cost of the advertising campaign is not identifiable and must be
expensed out.

Non-monetary
Intangible are non-monetary items. [Note: For list of monetary and non-monetary items
refer IAS-21]

Without physical substance [Para 8]

Intangibles have no physical substance. So non-physical form increases the difficulty of
identifying the asset.

Example-1
Computer software for a computer controlled machine tool that cannot
operate without that specific software is an integral part of the related
hardware and it is treated as property, plant and equipment. For example,
operating software.

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Example-2
Computer software, other than the operating system, is an intangible asset.
For example licences, patents or motion picture films etc.

Example-3
Marfoo Limited acquired a fishing license. The directors insist that it is a
physical asset since it is written on a piece of paper.
Although the fishing license has a physical form (the related legal
documentation), but actually it is just a piece of paper and real thing behind
piece of paper is fishing right which has no physical substance so it is an
intangible under IAS-38.
[Para 4]
Some intangible assets may be contained in or on a physical substance such as a compact
disc (in the case of computer software), legal documentation (in the case of a licence or
patent) or film. In determining whether an asset that incorporates both intangible and
tangible elements should be treated under IAS 16 Property, Plant and Equipment or as an
intangible asset under this Standard, an entity uses judgement to assess which element is
more significant.
For example, computer software for a computer-controlled machine tool that cannot
operate without that specific software is an integral part of the related hardware and it is
treated as property, plant and equipment. The same applies to the operating system of a
computer.
When the software is not an integral part of the related hardware, computer software is
treated as an intangible asset.

LO2: INTIAL RECOGNITION AND MEASUREMENT

The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:
a) the definition of an intangible asset; and
b) the recognition criteria in para 21
The above requirement applies to costs incurred initially to acquire or internally generate an intangible
asset and those incurred subsequently to add to, replace part of, or service it. [Para 18]
Recognition An intangible asset must be recognised if (and only if):
a) it is probable that future economic benefits specifically attributable to the asset
will flow to the company; and,
b) The cost of the asset can be measured reliably. [Para 21]

An entity shall assess the probability of expected future economic benefits using
reasonable and supportable assumptions that represent management’s best estimate of the
set of economic conditions that will exist over the useful life of the asset. [Para 22]
Initial An intangible asset must be measure at cost when first recognised. [Para 24]
Measurement
Means of A company might obtain control over an intangible resource in a number of ways.
acquiring Intangible assets might be:
intangible 1. purchased separately; [Para 25]
assets 2. acquired in exchange for another asset; [Para 45]
3. Given to a company by way of a government grant.[Para 44]
4. acquired in a business combination; or[Para 35]
5. internally generated; [Para 51]

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1. Purchased separately/ Separate acquisition

Normally, the price an entity pays to acquire separately an intangible asset will reflect expectations about
the probability that the expected future economic benefits embodied in the asset will flow to the entity.
Therefore, the probability recognition criterion in paragraph 21(a) is always considered to be satisfied for
separately acquired intangible assets. [Para 25]
In addition, the cost of a separately acquired intangible asset can usually be measured reliably. This is
particularly so when the purchase consideration is in the form of cash or other monetary assets. [Para 26]
The cost of a separately acquired intangible asset comprises: [Para 27]
(a) Its purchase price, import duties and non-refundable purchase taxes after deducting trade
discounts and rebates.
(b) any directly attributable cost of preparing the asset for its intended use
Examples of directly attributable costs are:
(a) costs of employee benefits (as defined in IAS 19) arising directly from bringing the asset to its
working condition;
(b) professional fees arising directly from bringing the asset to its working
(c) costs of testing whether the asset is functioning properly. [Para 28]
Examples of expenditures that are not part of the cost of an intangible asset are:
(a) Costs of introducing a new product or service (including costs of advertising and promotional
activities)
(b) costs of conducting business in a new location or with a new class of customer (including costs of
staff training); and
(c) Administration and other general overhead costs. [Para 29]

Recognition of costs in the carrying amount of an intangible asset ceases when the asset is in the
condition necessary for it to be capable of operating in the manner intended by management. Therefore,
costs incurred in using or redeploying an intangible asset and initial operating losses are not included in
the carrying amount of that asset. [Para 30]

Income and expenses relating to incidental operations (not directly attributable) are recognized
immediately in profit or loss, and included in their respective classifications of income and expense.
[Para 31]

If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price
equivalent. The difference between this amount and the total payments is recognised as interest expense
over the period of credit unless it is capitalised in accordance with IAS 23 Borrowing Costs. [Para 32]
[Note for students: We will study a similar concept in IFRS-15]

2. Exchange of assets [Para 46, 47]

Sometimes instead of selling we exchange the old asset with the new one. In this case normally we will
receive new asset and will hand over the old asset to the person from whom new asset is bought.
Obviously some cash will also be paid to settle the transaction. In this case following steps will be
performed while passing the journal entry.
Step 1 The old asset will be removed from books by crediting old asset and by debiting
accumulated depreciation a/c.
Step 2 The cash paid to settle the transaction will be credited.
Step 3 The cost of new asset will be debited in books.
Step 4 The balancing figure will be gain or loss.

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Scenarios
1. If Fair value of Both Assets or Fair value of only Old Asset is given than:
Cost of new Asset = Fair value of old asset Cash
However if “fair value of the acquired asset is more clearly evident” than its fair value will be
considered as cost.”
2. If Fair value of Only New Asset is given than:
Cost of new Asset = Fair value of new Asset
3. If Fair value of both assets is NOT given OR Transaction lacks Commercial substance (Means no
Cash Flow change expected after exchange e.g. Truck for Truck)
Cost of new Asset = Book value of old asset Cash

Example
Old Asset Cost 200
Old Asset Accumulated Depreciation (80)
WDV 120
Other Information
1. Fair value of Old Asset 130
2. Fair value of New Asset 150
3. Cash Paid 12
Required:
Calculate the cost of new Asset under following Scenarios.
Scenario # 1 If Fair value of both assets is given.
Scenario # 2 If Fair value of only new asset is given.
Scenario # 3 If Fair value of both assets is not given.
Solution
1. Cost of new Asset = 130 + 12 142
2. Cost of new Asset 150
3. Cost of new Asset = 120 + 12 132

3. Intangibles Granted by government [Para 44]

A government transfers or allocates intangible assets such as airport landing rights, licences to operate
radio or television stations, import licences or quotas or rights to access other restricted resources.
An intangible asset may be acquired free of charge, or for nominal consideration, by way of a government
grant.
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance, allows the
intangible asset and the grant to be recorded at fair value initially or at a nominal amount plus any
expenditure that is directly attributable to preparing the asset for its intended use.
Example
Government granted the entity an intangible asset. We paid a nominal amount of Rs. 2,000. However fair
value of intangible is Rs. 50,000. Life of intangible is 5 years
Required: Pass the Journal entries for first year.
Solution: There are 2 options:
Record at Nominal Amount:
Dr. Cr.
Intangible 2,000
Cash 2,000
Amortisation expense (2,000/5) 400
Accumulated amortisation 400

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OR
Record at Fair Value:
Dr. Cr.
Intangible 50,000
Deferred Income 48,000
Cash 2,000
Amortisation expense (50,000/5) 10,000
Accumulated amortisation 10,000
Deferred Income (48,000/5) 9,600
Income (P/L) 9,600

4. Acquired in a business combination [Para 33]

If an intangible is acquired in a business combination its cost is its fair value at the acquisition date. The
fair value of an intangible asset will reflect market participants’ expectations at the acquisition date about
the probability that the expected future economic benefits embodied in the asset will flow to the entity. If
an asset acquired in a business combination is separable or arises from contractual or other legal rights,
sufficient information exists to measure reliably the fair value of the asset. Thus, the reliable measurement
criterion in para 21(b) is always considered to be satisfied for intangible assets acquired in business
combinations. [Para 33]

An acquirer recognises at the acquisition date, separately from goodwill, an intangible asset of the
acquiree. [Para 34]

If cost cannot be measured reliably then the asset will be subsumed within goodwill.

Example
Company X buys 100% of Company Y.
Company Y owns a famous brand that it launched several years ago.
Analysis
The brand is not recognised in Company Y’s financial statements (IAS 38 prohibits the recognition of
internally generated brands).
From the Company X group viewpoint the brand is a purchased asset. So it will be recorded at its fair
value.
Goodwill of subsidiary
1. Internally generated goodwill will not appear in subsidiary separate financial statements as per
IAS-38
2. Purchased goodwill will be recorded as an intangible asset in consolidated financial statements as
per IFRS 3,10. IAS-38 will not apply on purchased goodwill.
Brands, masthead, Publishing title and customer list of Subsidiary
Scenario How to deal while preparing consolidated financial
statements
If these are internally The book value will be zero in subsidiary financial statements and if fair
generated by value is appearing in question than revaluation surplus will be equal to fair
Subsidiary value
If these are purchased The book value will be appearing in subsidiary financial statements and if
by Subsidiary fair value is given in question than revaluation surplus/(loss) will be
difference between book value and fair value

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5. Internally generated intangibles

An internally-generated intangible asset is created by a company through its own efforts.

It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition
because of problems such as:
- it is not identifiable
- its cost cannot be determined reliably [Para 51]

To assess whether an internally generated intangible asset meets the criteria for recognition, an entity
classifies the generation of the asset into:
a) a research phase; and
b) development phase. [Para 52]

5.1 Research Phase

Definition
Research is original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.
Accounting treatment [Para 54]
No intangible asset arising from research (or from the research phase of an internal project) shall be
recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised
as an expense when it is incurred.

Examples of research activities are:

(a) activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications of research findings or other
knowledge;
(c) the search for alternatives for materials, devices, products, processes, systems or services; and
(d) the formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services. [Para 56]

In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists
that will generate probable future economic benefits. Therefore, this expenditure is recognised as an
expense when it is incurred and no intangible asset arising from research (or from the research phase of an
internal project) is recognised. [Para 55]

5.2 Development Phase

Definition
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.
Accounting treatment
An intangible asset arising from development (or from the development phase of an internal project)
shall be recognised if, and only if, 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 can 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.

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(e) the availability of adequate technical, financial and other resources to complete the development
and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset during its
development. [Para 57]

Examples of development activities are:

(a) the design, construction and testing of pre-production or pre-use prototypes and models;
(b) the design of tools, jigs, moulds and dies involving new technology;
(c) the design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production; and
(d) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services. [Para 59]

In the development phase of an internal project, an entity can, in some instances, identify an intangible
asset and demonstrate that the asset will generate probable future economic benefits. This is because the
development phase of a project is further advanced than the research phase. Therefore, this expenditure is
capitalised if it meets certain criteria, otherwise this expenditure is recognised as an expense when it is
incurred. [Para 58]

Cost of An Internally Generated Intangible Asset

The cost of an internally generated intangible asset is the sum of expenditure incurred from the date when
the intangible asset first meets the recognition criteria.[Para 65]

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to
create, produce, and prepare the asset to be capable of operating in the manner intended by management.
Examples of directly attributable costs are:
(a) costs of materials and services used or consumed in generating the intangible asset;
(b) costs of employee benefits (as defined in IAS 19) arising from the generation of the intangible
asset;
(c) fees to register a legal right; and
(d) amortisation of patents and licenses that are used to generate the intangible asset. [Para 66]

The following are not components of the cost of an internally generated intangible asset:
- selling, administrative and other general overhead expenditure unless this expenditure can be
directly attributed to preparing the asset for use;
- identified inefficiencies and initial operating losses incurred before the asset achieves planned
performance; and
- expenditure on training staff to operate the asset. [Para 67]

5.3 Recognition prohibition [Para 63]

IAS 38 prohibits the recognition of the following internally-generated intangible items:
1. Goodwill [Para 48]
2. brands
3. Mastheads (Note: a masthead is a recognisable title, usually in a distinctive typographical form,
appearing at the top of an item. An example is a newspaper masthead on the front page of a daily
newspaper)
4. publishing titles
5. Customer lists.

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Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar
to it cannot be distinguished from the cost of developing the business as a whole. Therefore, such items
are not recognised as intangible assets. [Para 64]
Note for students: Any of these items would be recognised if they were purchased separately.

Internally generated goodwill is not recognised as an asset because it is not an identifiable resource (i.e. it
is not separable nor does it arise from contractual or other legal rights) controlled by the entity that can be
measured reliably at cost. [Para 49 Last lines]
Differences between the fair value of an entity and the carrying amount of its identifiable net assets at any
time may capture a range of factors that affect the fair value of the entity. However, such differences do
not represent the cost of intangible assets controlled by the entity. [Para 50]

5.4 Points to remember

1. Expenditure on an intangible item that was initially recognised as an expense shall not be
recognised as part of the cost of an intangible asset at a later date. [Para 71]
2. IAS 23 also applies for internally generated intangible (Means if internally generated intangible
takes substantial period of time for development than borrowing cost incurred on loan obtained
for project will be capitalized.) [Para 66]
3. If the research phase cannot be distinguished from the development phase the expenditure will be
treated as research expense. [Para 53]

5.5 Buying in process research and development

An acquirer recognises as an asset separately from goodwill an in-process research and development
project of the acquiree if the project meets the definition of an intangible asset. An acquiree’s in-process
research and development project meets the definition of an intangible asset when it:
(a) meets the definition of an asset; and
(b) is identifiable, i.e. is separable or arises from contractual or other legal rights. [Para 34]
(Note for students: Here research is capitalized as well)

Subsequent (further) expenditure on such a project is accounted for in the usual way by applying the IAS
38. (Note for students: It means research will be expensed, however if development meet conditions it
will be capitalized). [Para 42 and 43]

Journal entries
Entry for acquisition of intangibles:
Particulars Dr. Cr.
Patent/ Franchise/ Other intangible xxx
Cash xxx
(Intangibles/ patent/ acquired)

Entry for research expense:

Particulars Dr. Cr.
Research expense xxx
Cash xxx
(Recording of research expense)

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Entry for development expenditure not meeting criteria:

Particulars Dr. Cr.
Development expense xxx
Cash xxx
(Recording of development expense)

Entry for development expenditure meeting criteria:

Particulars Dr. Cr.
Development asset xxx
Cash xxx
(Recording of development asset)

Entry for purchase of “in process research and development”:

Particulars Dr. Cr.
Research and Development asset xxx
Cash xxx
(Recording of purchase of in process R & D asset)

Entry for transfer of development asset to intangible asset:

Particulars Dr. Cr.
Intangible xxx
Development asset xxx
(Transfer of development asset to intangible asset)
Entry for amortization expense:
Particulars Dr. Cr.
Amortization expense xxx
Accumulated amortization xxx
(Recording of amortization expense)

Entry for impairment loss expense:

Particulars Dr. Cr.
Impairment loss expense xxx
Accumulated impairment loss xxx
(Recording of impairment loss expense)

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Comprehensive Example:
Ahmed & Co. provided the following information on intangible assets:
i. A patent was purchased from the Qasim Company for Rs. 60,000 on January 1, 2010.
ii. During 2010, a formula was purchased from the Ali Company for Rs. 80,000.
iii. Company incurred a research cost of Rs. 20,000 in year 2010.
iv. Company entered into a research and development project and development cost incurred is
Rs. 50,000.The development cost incurred does not meet the conditions specified in IAS-38.
v. Company incurred development cost of Rs. 78,000 which meets the criteria for recognition as
mentioned in IAS-38.
vi. Company bought an incomplete research and development project from another company for
Rs.89,000.
vii. An intangible costing Rs. 700,000 is to be amortised over 10 years.
viii. Goodwill of Rs. 200,000 already appearing in company’s books is to be impaired by 10%.
Required:
Pass journal entries in the books of Ahmed & Co.
Answer:
Entries in the books of Ahmed & Co Rs.
a)
Particulars Dr. Cr.
Patent 60,000
Cash 60,000
(Patent acquired)
b)
Particulars Dr. Cr.
Formula 80,000
Cash 80,000
(Formula acquired)
c)
Particulars Dr. Cr.
Research expense 20,000
Cash 20,000
(Recording of research expense)
d)
Particulars Dr. Cr.
Development expense 50,000
Cash 50,000
(Recording of development expense)
e)
Particulars Dr. Cr.
Development asset 78,000
Cash 78,000
(Recording of development asset)
f)
Particulars Dr. Cr.
Research and Development asset 89,000
Cash 89,000
(Recording of purchase of in process R & D asset)

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g)
Particulars Dr. Cr.
Amortization expense (700,000/10) 70,000
Accumulated amortization 70,000
(Recording of amortization expense)
h)
Particulars Dr. Cr.
Impairment loss expense (200,000 × 10%) 20,000
Accumulated impairment loss 20,000
(Recording of impairment loss expense)

LO3: MEASUREMENT AFTER INITIAL RECOGNITION

Choice of IAS 38 allows a business to choose one of two measurement models as its accounting
policy policy for property, intangible assets after acquisition. [Para 72]

The 2 measurement models for intangible assets after acquisition are:

1. Cost model and
2. Revaluation model

Cost model An intangible asset is carried at its cost less any accumulated amortisation and any
[Para 74] accumulated impairment losses after initial recognition.
Revaluation An intangible asset is carried at its fair value less any accumulated amortisation and any
model accumulated impairment losses after initial recognition. Fair value shall be measured by
reference to an active market. Revaluations shall be made with such regularity that at the
end of the reporting period the carrying amount of the asset does not differ materially
from its fair value. [Para 75]
An active market is a market in which transactions for the asset or liability take place with
sufficient frequency and volume to provide pricing information on an ongoing basis.
[IFRS 13 Appendix A]

The same model should be applied to all assets in the same class.

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 shall be carried at its cost less any
accumulated amortisation and impairment losses. [Para 81]

The items within a class of intangible assets are revalued simultaneously to avoid
selective revaluation of assets and the reporting of amounts in the financial statements
representing a mixture of costs and values as at different dates. [Para 73]

Revaluations shall be made with such regularity that at the end of the reporting period the
carrying amount of the asset does not differ materially from its fair value. The frequency
of revaluations depends on the volatility of the fair values of the intangible assets being
revalued. [Para 75]

The revaluation model does not allow:

(a) the revaluation of intangible assets that have not previously been recognised as assets;
or

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(b) the initial recognition of intangible assets at amounts other than cost. [Para 76]

The revaluation model is applied after an asset has been initially recognised at cost.
However, if only part of the cost of an intangible asset is recognised as an asset because
the asset did not meet the criteria for recognition until part of the way through the process
(e.g . development costs in para 65), the revaluation model may be applied to the whole of
that asset. [Para 77]

Also, the revaluation model may be applied to an intangible asset that was received by
way of a government grant and recognised at a nominal amount. [Para 77]

It is uncommon for an active market to exist for an intangible asset, although this may
happen. For example, in some jurisdictions, an active market may exist for freely
transferable taxi licences, fishing licences or production quotas. However, an active
market cannot exist for brands, newspaper mastheads, music and film publishing rights,
patents or trademarks, because each such asset is unique. [Para 78]

If the fair value of a revalued intangible asset can no longer be measured by reference to
an active market, the carrying amount of the asset shall be its revalued amount at the date
of the last revaluation by reference to the active market less any subsequent accumulated
amortisation and any subsequent accumulated impairment losses. [Para 82]

The fact that an active market no longer exists for a revalued intangible asset may indicate
that the asset may be impaired and that it needs to be tested in accordance with IAS 36.
[Para 83]

If the fair value of the asset can be measured by reference to an active market at a
subsequent measurement date, the revaluation model is applied from that date. [Para 84]

Two ways of passing journal entries [Para 80]

When an intangible asset is revalued, any accumulated amortisation at the date of the
revaluation is treated in one of the following ways:
Method 1 (Gross replacement method)
Restate accumulated amortisation proportionately with the change in the gross carrying
amount of the asset.
Method 2 (Net replacement method)
 Step 1: Transfer the accumulated amortisation to the asset account.
 Step 2: Change the balance on the asset account to the revalued amount.

Treatment of Revaluation surplus [Para 87]

Option 1: Transfer revaluation surplus on yearly basis to retained earnings with the
amount of incremental amortization (it will be the difference between depreciation based
on the revalued carrying amount and depreciation based on original cost) and on disposal
transfer remaining balance to retained earnings.

Option 2: Do not Transfer revaluation surplus on yearly basis to retained earnings and on
disposal transfer full amount to retained earnings.

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Amortisation Useful life

and An entity shall assess whether the useful life of an intangible asset is finite or indefinite
impairment and, if finite, the length of, or number of production or similar units constituting, that
useful life. An intangible asset shall be regarded by the entity as having an indefinite
useful life when, 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. [Para 88]

The accounting for an intangible asset is based on its useful life. An intangible asset with
a finite useful life is amortised, and an intangible asset with an indefinite useful life is not.
[Para 89]

The useful life of an intangible asset that arises from contractual or other legal rights shall
not exceed the period of the contractual or other legal rights, but may be shorter
depending on the period over which the entity expects to use the asset. If the contractual
or other legal rights are conveyed for a limited term that can be renewed, the useful life of
the intangible asset shall include the renewal period(s) only if there is evidence to support
renewal by the entity without significant cost. [Para 94]

Intangible with indefinite useful lives

An intangible asset with an indefinite useful life shall not be amortised. [Para 107]

In accordance with IAS 36, an 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. [Para
108]

The useful life of an intangible asset that is not being amortised shall be reviewed each
period to determine whether events and circumstances continue to support an indefinite
useful life assessment for that asset. 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 in
accordance with IAS 8. [Para 109]

Intangibles with a finite useful life

The depreciable amount of an intangible asset with a finite useful life shall be allocated on
a systematic basis over its useful life. Amortisation shall begin when the asset is available
for use, ie when it is in the location and condition necessary for it to be capable of
operating in the manner intended by management. Amortisation shall cease at the earlier
of the date that the asset is classified as held for sale and the date that the asset is
derecognised. The 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. The amortisation charge for
each period shall be recognised in profit or loss unless this or another Standard permits or
requires it to be included in the carrying amount of another asset. [Para 97]
There is a rebuttable presumption that an amortisation method that is based on the revenue
generated by an activity that includes the use of an intangible asset is inappropriate. This
presumption can be overcome only in the limited circumstance in which the intangible
asset is expressed as a measure of revenue. [Para 98A]

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The residual value of an intangible asset must be 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) there is an active market for the asset and:
i. The residual value can be determined by reference to that market and
ii. It is probable that such a market will exist at the end of the asset's
useful life. [Para 100]

The amortisation period and the amortisation method for an intangible asset with a finite
useful life shall be reviewed at least at each financial year-end. [Para 104]

LO4: SUBSEQUENT EXPENDITURE ON INTANGIBLE ASSETS

Subsequent expenditure is only capitalised if it can be measured and attributed to an asset and enhances
the value of the asset.
Due to following reasons normally subsequent expenditure is not capitalized: [Para 20]
a) The nature of intangible assets is such that, in many cases, there are no additions to such an asset
or replacements of part of it.
b) Most subsequent expenditure is likely to maintain the expected future economic benefits rather
than meet the definition of an intangible asset and the recognition criteria.
c) Also it is often difficult to attribute subsequent expenditure directly to a particular intangible asset
rather than to the business as a whole.
Maintenance expenditure is expensed out in profit or loss account.

LO5: DISPOSAL
An intangible asset shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal. [Para 112]

The gain or loss arising from the derecognition of an intangible asset shall be determined as the difference
between the net disposal proceeds, if any, and the carrying amount of the asset. It shall be recognised in
profit or loss when the asset is derecognized. Gains shall not be classified as revenue. [Para 113]

If part of an intangible is disposed off and replaced then it will derecognise the carrying amount of the
replaced part. If it is not practicable for an entity to determine the carrying amount of the replaced part, it
may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it
was acquired or internally generated. [Para 115]

LO6: EXAMPLES OF INTANGIBLE ASSETS

Intangibles include scientific or technical knowledge, design and implementation of new processes or
systems, licences, intellectual property, market knowledge and trademarks (including brand names and
publishing titles).
Common examples include computer software, patents, copyrights, motion picture films, plays, television
progrmames. customer lists, mortgage servicing rights, fishing licences, import quotas, Internet domain
names franchises, customer or supplier relationships, customer loyalty, market share and marketing rights.

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LO7: SIC 32: INTANGIBLE ASSETS – WEB SITE COSTS

An entity may incur expenditure on the development and operation of its own web site for:
Types Purpose of site
1. external access  To promote and advertise own product and services (Pepsi website)
 Provide electronic services
 Sell products and services (Daaraz.pk and TCS courier service site)
2. internal access  Store company policies
 Store customer details
 Search relevant information

The issues are:

 whether the web site is an internally generated intangible asset; and
 the appropriate accounting treatment of such expenditure.

An entity’s own web site that arises from development and is for internal or external access is an
internally generated intangible asset that is subject to the requirements of IAS 38. [Para 7]

If a web site is developed solely (or primarily) for promoting and advertising its own products and
services, then an entity will not be able to demonstrate how it will generate probable future economic
benefits. All expenditure on developing such a web site should be recognised as an expense when
incurred. [Para 8]

The nature of each activity for which expenditure is incurred (eg training employees and maintaining the
web site) and the web site’s stage of development or post-development shall be evaluated to determine the
appropriate accounting treatment. [Para 9]

Consensus (conclusion)
An entity’s own web site is an internally generated intangible asset if:
 It is probable that future economic benefits will flow to the entity, and
 Cost can be measured reliably

Useful life
The best estimate of a web site’s useful life should be short. [Para 10]
SIC 32 does not apply
SIC 32 does not apply to expenditure on
 Purchasing, developing and operating hardware (e.g. web servers, production servers, staging
servers and internet connections) but IAS 16 applies.
 when an entity incurs expenditure on an internet service provider hosting the entity’s web site.
(This expenditure is recognised as an expense as and when the services are received).
 the development or operation of a web site for sale to another entity in the ordinary course of
business (e.g IAS 2 and IFRS 15)
 the lease that is accounted for in accordance with IFRS 16

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ACCOUNTING TREATMENT OF STAGES IN THE DEVELOPMENT OF A WEB SITE

CREATED FOR EXTERNAL OR INTERNAL ACCESS

Broad Stage Activities Accounting

categorization Treatment
Research Planning 1. Feasibility studies Expense when
2. Defining hardware and software incurred
specifications
3. Evaluating alternative products and
suppliers
4. Selecting preferences
Development *Application 1. Obtaining a domain name These will be
and 2. Developing operating software capitalized however
infrastructure (e.g. operating system and server if recording criteria
development software) of IAS 38 is not met
3. Developing code for the application than it will be
4. Installing developed applications expensed.
on the web server
5. Stress testing Expenditure incurred
*Graphical 1. Designing the appearance of web in development
design pages phase for
development advertisement
*Content 1. Creating, purchasing, preparing and purpose is expensed
development uploading information on the web for example
site before the completion of the professional fee paid
web site’s development. to expert for taking
digital pictures of
entity’s products.
Operation 1. Updating graphics and revising Expense when
(The operating content incurred,
stage begins 2. Adding new functions, features and unless it meets the
once content IAS38 criteria for the
development of 3. Registering the web site with capitalisation of
web site has search engines subsequent
been completed) 4. Backing up data expenditure
An entity 5. Reviewing security access (this will only occur
maintains and in rare
6. Analysing usage of the web site
enhances the circumstances).
applications.
Other 1. Selling, administrative and other Expense when
general overhead expenditure incurred
unless it can be directly attributed
to preparing the web site for use
2. Inefficiencies and initial operating
losses incurred
3. Training employees to operate web
site.
* These will be expensed when the purpose of creating a web site is solely promotion of the business
(marketing purpose).

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LO8: DISCLOSURES
LO 8.1 Class of intangible assets
A class of intangible assets is a grouping of assets of a similar nature and use in an entity’s operations.
Examples of separate classes may include:
1. brand names;
2. mastheads and publishing titles;
3. computer software;
4. licences and franchises;
5. copyrights, patents and other industrial property rights, service and
6. operating rights;
7. recipes, formulae, models, designs and prototypes; and
8. Intangible assets under development. [Para 119]

LO 8.2 General Disclosures

An entity shall disclose the following for each class of intangible assets, distinguishing between
internally generated intangible assets and other intangible assets:
a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortisation
rates used;
b) the amortisation methods used for intangible assets with finite useful lives;
c) the gross carrying amount and any accumulated amortisation (aggregated with accumulated
impairment losses) at the beginning and end of the period;
d) the line item(s) of the statement of comprehensive income in which any amortisation of intangible
assets is included;
e) a reconciliation of the carrying amount at the beginning and end of the period showing:
i. additions, indicating separately those from internal development, those acquired
separately, and those acquired through business combinations;
ii. disposal;
iii. increases or decreases during the period resulting from revaluations and from impairment
losses recognised or reversed
iv. any amortisation recognised during the period;
v. net exchange differences and
vi. other changes in the carrying amount during the period [Para 118]

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LO 8.3 Disclosure under certain circumstances

An entity shall also disclose:
a) for an intangible asset assessed as having an indefinite useful life, the carrying amount of
that asset and the reasons supporting the assessment of an indefinite useful life. In giving
these reasons, the entity shall describe the factor(s) that played a significant role in
determining that the asset has an indefinite useful life.
b) a description, the carrying amount and remaining amortisation period of any individual
intangible asset that is material to the entity’s financial statements.
c) for intangible assets acquired by way of a government grant and initially recognised at fair
value (see paragraph 44):
i. the fair value initially recognised for these assets;
ii. their carrying amount; and
iii. whether they are measured after recognition under the cost model or the revaluation
model.
d) the existence and carrying amounts of intangible assets whose title is restricted and the
carrying amounts of intangible assets pledged as security for liabilities.
e) the amount of contractual commitments for the acquisition of intangible assets. [Para 122]

LO 8.4 Intangible assets measured after recognition using the revaluation model
If intangible assets are accounted for at revalued amounts, an entity shall disclose the following:
a) by class of intangible assets:
i. the effective date of the revaluation;
ii. the carrying amount of revalued intangible assets; and
iii. the carrying amount that would have been recognised had the revalued class of
intangible assets been measured after recognition using the cost model; and
b) the amount of the revaluation surplus that relates to intangible assets at the beginning and end of
the period, indicating the changes during the period and any restrictions on the distribution of the
balance to shareholders. [Para 124]

LO 8.5 Research and development expenditure

An entity shall disclose the aggregate amount of research and development expenditure recognised as an
expense during the period. [Para 126]

Research and development expenditure comprises all expenditure that is directly attributable to research
or development activities. [Para 127]

LO 8.6 Other information

An entity is encouraged, but not required, to disclose the following information:
a) a description of any fully amortised intangible asset that is still in use; and
b) a brief description of significant intangible assets controlled by the entity but not recognised as
assets because they did not meet the recognition criteria [Para 128]

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Accounting policies
Below is a typical note which covers many of the possible areas of accounting policy for intangible assets.
PACKAGES FINANCIAL STATEMENTS
INTANGIBLES NOTES ON ACCOUNTING POLICIES
4.5 Intangible assets
4.5.1 Goodwill
Goodwill arise through acquisition of subsidiary. Goodwill on acquisition of subsidiary is
included in 'intangible assets'. It is tested annually for impairment and carried at cost less
accumulated impairment losses.
4.5.2 Software
Expenditure incurred to acquire computer software's and develop websites are capitalised as
intangible assets and stated at cost less accumulated amortisation and any identified impairment
loss.
Costs associated with maintaining intangible assets are recognised as an expense as incurred.
Development costs are recognised as intangible assets when the following criteria are met:
- it is technically feasible to complete the intangible asset so that it will be available use;
- management intends to complete the intangible asset and use or sell it;
- there is an ability to use or sell the intangible asset;
- it can be demonstrated how the intangible asset will generate probable future economic
benefits;
- adequate technical, financial and other resources to complete the development and to
use or sell the intangible asset are available; and
- the expenditure attributable to the intangible asset during its development can be reliably
measured
Directly attributable costs that are capitalised as part of the software include employee costs and
an appropriate portion of directly attributable overheads. Capitalised development costs are
recorded as intangible assets and amortised from the point at which the asset is ready for use.
4.5.3 Research and development
Research expenditure and development expenditure that do not meet the criteria are recognised as
an expense as incurred. Development costs previously recognised as an expense are not
recognised as an asset in a subsequent period.
4.5.4 Amortisation methods and periods
Intangible assets are amortised using the straight line method over the estimated useful lives at
the rates ranging from 10.00% to 33.00%. Goodwill and intangible assets that have an indefinite
useful life are not subject to amortisation and are tested annually for impairment. Useful lives of
intangible assets are reviewed, at each statement of financial position date.
Amortisation on additions to intangible assets is charged from the month in which an asset is
acquired or capitalised while no amortisation is charged for the month in which the asset is
disposed of.

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Summary of Revaluation in IAS-38

Choice of policy Cost model
Or Revaluation model (only if active market exists)
1. An active market cannot exist for brands, newspaper mastheads, music
and film publishing rights, patents or trademarks, because each such asset
is unique
2. If for a revalued asset later on active market is not available then keep at
last revalued amount less accumulated amortization and impairment. The
fact that active market is not available now may indicate testing it for
impairment.
3. If later on market available now we will again switch to revaluation
model.
Regularity of With such regularity that at end of each reporting period the carrying amount of
revaluation the asset does not differ materially from its fair value
An active market is a market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis.
For one class of Same model for all assets in that class.
intangible (such as
license is one class) Note: 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 shall be carried
at its cost less any accumulated amortisation and impairment losses.
All items in one Revalue them simultaneously
class
The revaluation - Revaluation of asset not previously recognized
model does not - Initial recognition at other than cost
allow:
Revaluation model is after an asset has been initially recognised at cost.
applied
CWIP is not revalued until it is complete.
Revaluation model To an asset received as Government grant and recorded at nominal value.
may be applied

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Solving Theory Questions-IAS 38

1 Initial Recognition

IAS-38 allows recognition of an intangible assets, if it fulfills the following

conditions:
 It is probable that expected future economic benefits that are
attributable to the asset will flow to the entity.
 The cost of the assets can be measured reliably.
Since ______ acquired/internally generated by organisation meet the above
conditions, it should recognized as an intangible asset in the statement of financial
position (SOFP) of the company.
2 Initial measurement
(i) It should initially be measured at cost. Entity should capitalize the development
Costs to be work, trial run cost, testing cost, cost to register, depreciation of another asset used
capitalised in its production i.e. Rs. ___ million as intangible asset.
(ii) IAS-38 does not allow capitalization of cost relating to the research work, staff
Costs to be training and advertisement. So these costs should be charged to statement of
expensed comprehensive income in the period in which they incurred.
3 Subsequent to initial recognition

(i) Finite life

Amortisation/ Since the product has a finite life of ___ years, therefore amortization expense
Impairment amounting to Rs. ____ should be recorded in the statement of comprehensive
income (SOCI) based on useful life. Residual value of intangible asset shall be
assumed to be zero (if no active market and no commitment by third party).

Note: If legal life (contractual life) and useful life are different the amortisation
should be charged at shorter of its legal life (i.e. __ years) and its useful life (i.e. ___
years). Discussion of renewal cost

Also discuss about impairment loss if there is any external or internal indicator
given in question.

Indefinite life
Since there is an indefinite useful life of the intangible asset, it should not be
amortized. Instead, organization should test the intangible asset for impairment by
comparing its recoverable amount with its carrying amount.
(ii) (a) IAS-38 permits an entity to adopt the cost or revaluation model as its
Measurement accounting policy.
model (b) The revaluation model can only be adopted if intangible assets are traded in
an active market.
(c) The cost model requires intangible assets to be carried at cost less
accumulated amortization and accumulated impairment losses. Revaluation
model requires intangible assets to be carried at revalued amount less
accumulated amortization and accumulated impairment losses.
LO9: SUMMARY
On next page

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What is an asset? (Para 8) Amortisation / Impairment

 Controlled as a result of past event  Purchased goodwill

 Future economic benefits are expected to flow  An asset which meets the
Other intangibles
development conditions but
(Para 94) Amortised over shorter of:
yet not completed
 Legal life (include renewal
 Intangible having indefinite
Increase sales reduce costs period if at minimal
life [(period of benefit not
What is intangible? (Para 8) cost)
known (Para 107)]
OR
Separable  Useful life
And
(Para 108)
 Identifiable (Para105) Impairment test is
 Only impairment test is
performed (if any indication).
performed (compulsorily)
Legal or contractual rights (fishing right, software)
 No amortization is charged
 Non-Monetary Asset (Monetary asset means Cash or Bank)
 Without physical substance
Recognition (Para 21) Not an intangible (Para 67)
Recognised if and only if;
 Probable that future economic benefits will flow and  Advertisement expense
 Cost can be measured reliably  Staff training costs (no control on both of them)

Measurement Residual value (Para 100)

Initial measurement - at cost (Para 24)
The residual value shall be considered as zero unless:
Subsequent measurement;
 There is commitment by third party
 At cost model OR (Para 74)
OR
 Revaluation model (Para 75, 81)
 There is active market for sale
1. only be revalued if active market is available
2. If no active market and valuer assign a value we will not revalue
3. If there is restriction on transfer/sale we will not revalue
4. If there was active market but now there is no active market we will keep at latest market value.
(For entries refer Chapter 1 of this book on revaluation)

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IAS-38
Intangibles

Acquired Internally generated

Expensed out/Capitalised Not an intangible

Acquisition as a Part of
Separate Acquisition
Business Combination
(Para 27)
(Para 35)

Research Development  Internally generated goodwill

 Determining cost:
Phase (Para 8) Phase (Para 8) (Para 48)
 Purchase (net of trade Recorded at fair value on
discount)  Internally generated (Para 63)
date of acquisition
 Import duties  Brands (J. , NIKE)
 Non-refundable taxes To be expensed  Mastheads(Jang newspaper)
 Directly attributable Out  Publishing titles (PBP)
cost [(Para 54,  Customers list
 Testing cost 43(a)]

Not meeting Meeting

Conditions (Para 57) Conditions (Para 57)

To be expensed out To be capitalized

[Para 43(b)] [(Para 43(c)]

 Cost of material, services etc.

If goodwill, mastheads, customer list, publishing titles and brands are  Cost of employee benefits
(Para 66)
purchased then will be recognized as an intangible.
 Fees to register legal rights

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Concept building Questions

Question-1 (IAS-36 Revision)
A company purchased a bus costing Rs. 500 on 1 January 2013. Its useful life is 5 years. Following
further information is available:
1. On 31 December 2015 a competitor came in market so we decided to check our bus for
impairment test.
2. On 31 December 2015 future cash flows are estimated as follows:
Rs.
Annual inflows ( Fare from Passenger) 70
Annual outflows (Petrol Etc.) 15
3. At the end of life bus can be sold at Rs. 25. Cost to sell will be Rs. 2.
4. If we sell bus today i.e. at 31 December 2015.
Rs.
Fair value 130
Cost to sell 14
5. Discount rate is 12%.
Required:
Calculate impairment loss on 31 December 2015?

Question-2
Babar Textile Mills Limited (BTML) purchased a plant for Rs. 500 million on 1 July 2010. The plant has
an estimated useful life of 10 years and no residual value.
BTML uses revaluation model for subsequent measurement of its property, plant and equipment and
accounts for revaluations on net replacement value method. The details of revaluations performed by an
independent firm of valuers are as follows:
Revaluation date Fair value
1 July 2011 Rs. 630 million
1 July 2012 Rs. 320 million
1 July 2013 Rs. 560 million
Required:
Prepare journal entries for the year ended 30 June 2011, 2012, 2013 and 2014.

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Question-3
On 1 January 2001 an entity started research and development on a project. Details of cost incurred are as
follows:
Year Ended 31 December Rs.
2001 120
2002 100
On 01 September 01 recording criteria for capitalization of intangible development was met.
Rs.
Recoverable amount as on 31-12-01 90
Recoverable amount as on 31-12-02 110
Required:
Prepare journal entries for 2001 and 2002 assuming project is yet not complete on 31-12-02.

Answer-3
Date Particulars Dr. Cr.
31/12/01 Expense (120/12 x 8) 80
Intangible WIP (120/12 x 4) 40
Cash 120

Date Particulars Dr. Cr.

31/12/02 Intangible WIP 100
Cash 100

Date Particulars Dr. Cr.

31/12/02 Impairment loss (W-2) 30
Accumulated Impairment Loss 30

(W-1) Impairment loss (31-12-01)

Book value 40
Recoverable amount 90
No impairment loss

(W-2) Impairment loss (31-12-02)

Book value (40 + 100) 140
Recoverable amount (110)
impairment loss 30

Question-4
License cost = Rs. 200
Legal life = 10 years
Useful life (expected period of cash generation) = 12 years
Calculate amortization?
Answer-4
Shorter of useful and legal life is 10 years.
Amortisation = 200/10 = 20

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Question-5
A company purchased a license for 6 years for Rs. 30 mill. It is reneweable for further 4 years. Calculate
legal life assuming at end of 6th year it can be renewed at:
Option # 1 Rs. 14 million
Option # 2 Rs. 1 million

Answer-5
Options # 1 Legal life is 6 years as renewal not at minimal cost
Options # 2 Legal life is 10 years as renewal at minimal cost.

Question-6
On January 1, 2015 an entity bought four licenses for 10 years. Details are as follows:
A B C D
1. Cost (Rs.) 500 560 300 180
2. Expected period of cash generation 13 y Indefinite 7y 14 y
3. Renewal cost (Rs.) 80 120 3 2
Note: Licenses can be renewed for 5 years.
Required:
Calculate amortization for year ended 31 December 2015?

Answer-6
Description A B C D
Cost 500 560 300 180
Amortisation 50 56 43 13
(500/10) (560/10) (300/7) (180/14)

(W-1)Legal life and useful life

Description A B C D
Legal life 10 10 15 15
(10 + 0) (10 + 0) (10+5) (10+5)
Useful life 13 Indefinite 7 14
Lower of above 10 10 7 14
Where renewal cost is insignificant renewal period is considered while calculating legal life.

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Question-7
We obtained a license for 2 years on 1 January 2012 by paying Rs. 100 million. It can be renewed for
further period of 3 years by paying Rs. 60 million.
Required: Pass journal entries for year ended 31 December 2012 till 31 December 2016 assuming it was
renewed on 1 January 2014.

Answer-7

Date Particulars Dr. Cr.

1.1.12 Intangible 100
Cash 100
31.12.12 Amortization (100/2) 50
Accumulated amortization 50
31.12.13 Amortization (100/2) 50
Accumulated amortization 50
1.1.14 Intangible 60
Cash 60
31.12.14 Amortization (60/3) 20
Accumulated amortization 20
31.12.15 Amortization (60/3) 20
Accumulated amortization 20
31.12.16 Amortization (60/3) 20
Accumulated amortization 20

Question-7A
We obtained a license for 2 years on 1 January 2012 by paying Rs. 100 million. It can be renewed for
further period of 3 years by paying Rs. 6 million.
Required: Pass journal entries for year ended 31 December 2012 till 31 December 2016 assuming it was
renewed on 1 January 2014.

Answer-7A

Date Particulars Dr. Cr.

1.1.12 Intangible 100
Cash 100
31.12.12 Amortization (100/5) 20
Accumulated amortization 20
31.12.13 Amortization (100/5) 20
Accumulated amortization 20
1.1.14 Expense 6
Cash 6
31.12.14 Amortization (100/5) 20
Accumulated amortization 20
31.12.15 Amortization (100/5) 20
Accumulated amortization 20
31.12.16 Amortization (100/5) 20
Accumulated amortization 20

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Question-8
On 01-01-10 an entity started research on a project to build a formula. On 01-01-11 development phase
started but 6-criteria for recording intangible were only met on 30-09-11. Development was complete on
31-10-12. Life of intangible is 7 years.
Following are the details of expenses which are incurred evenly:
In 2010 50 Million
In 2011 60 Million
In 2012 25 Million

Required:
a) Pass the Journal entries for year ended December 31, 2010, 2011, and 2012.
b) Prepare Profit and Loss extracts for year ended December 31, 2010, 2011, and 2012.
c) Prepare Balance Sheet extracts as on year ended December 31, 2010, 2011, and 2012.

Answer-8
a)
Date Journal Entry Dr. Cr.
31-12-10 Research Expense 50
Cash 50
(recording of research expense)
31-12-11 Development Expense (60/12 x 9) 45
Intangible (bal.) 15
Cash 60
(recording of development expense and intangible asset )
31-10-12 Intangible 25
Cash 25
(recording of intangible asset )
31-12-12 Amortisation [ (25+15) = 40 now 40/7 x 2/12)] 1
Accumulated Amortisation 1
(recording of amortization )
b)
Profit and Loss (Extracts)
For the year ended
2012 2011 2010
Research expense - - 50
Development expense - 45 -
Amortistion 1 - -
c)
Balance Sheet (Extracts)
As on
2012 2011 2010
Non-current Asset
Intangible (CWIP) - 15 -
Intangible (40-1) 39 - -

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CHAPTER-3
INTANGIBLE ASSETS
PRACTICE QUESTIONS
Question-1
The following scenarios are all unrelated.

Part A
Apple Limited is a successful engineering business. Over the past number of years, the company has
prepared a customer list. At a recent board meeting, the directors suggested recognizing an intangible
asset for this.
Required:
To briefly discuss whether customer list can be recognized as an intangible asset in terms of IAS 38.

Part B
Banana Limited is a company in the IT industry. The success of the company is built around software
which it has developed internally and for which a patent is registered as well as the skills of the staff that
operate the software. Staff is required to give one month‟s notice of their resignation.
Required:
To briefly discuss whether the patent and the staff skills can be recognized as an intangible asset in terms
of IAS 38, Intangible Asset.

Part C
Carrot Limited operates toll roads on national routes throughout the country. The company purchased a
license to operate a toll road 17 years ago for Rs. 10,000,000. It was expected that toll road would be in
use for 20 years and economic benefits will flow evenly over 20 year. The estimated toll road usage is
1,000,000 cars per year. At the time, there were no plans to construct alternative routes in the area.
During the current year, Government announced plans, and construction began on a bridge in the area that
would significantly reduce usage of the toll road. The directors estimated that the economic benefits
would decrease each year over remaining three years. The estimated toll road usage is expected to drop to
800,000 cars, 600,000 cars and 400,000 cars, respectively, over the remaining three years of the license.
The right to operate the toll road was correctly recognized as an intangible asset upon purchase seventeen
years ago.
Required:
To discuss the accounting issues relating to the measurement of the license for the toll road over its
economic life.

Question-2
Muneer Limited is a small company involved in the fishing industry. It operates a number of fishing boats
and fishes mainly for “tuna”. The fish is processed and canned in its factory and the canned tuna is
supplied to supermarkets around the country.
On 2 January 20X6 the company acquired a fishing license at a cost of Rs. 600,000. The license has a
legal life of 4 years with no residual value. The license grants Muneer Limited the right to fish for tuna in
a demarcated area of the Karachi sea shore. No other fishing company may fish for tuna in this area
during the term of the license.
No entries have been made in the accounting records relating to the fishing license during the current
year.
Required:
Discuss the regonition, measurement and disclosure of the fishing license in the financial statements of
Muneer Limited at 31 December 20X6, in terms of International Financial Reporting Standards.

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Question-3
Hollywood Soap has acquired rights of producing very famous toilet soap. At present soap is very popular
and its popularity is increasing by every passing day. They paid Rs. 400 million for acquisition of
production rights without any time limit. At present, management believes that the product has an
unlimited useful life.
Required:
State accounting treatment of the above expenditure including its amortisation policy.

Question-4
Janes Company provided the following information on intangible assets:
a) A patent was purchased from the Lou Company for Rs. 700,000 on January 1, 2009. Janes estimated
the remaining useful life of the patent to be 10 years.
b) Effective January 1, 2011, based on new events that have occurred, Janes estimates that the remaining
life of the patent purchased from Lou is only five more years.
c) During 2011, a franchise was purchased from the Rink Company for Rs. 500,000. The contractual life
of the franchise is 10 years.
Required:
Prepare the entries necessary in 2009 to 2011 to reflect the above information.

Question-5
A company entered into a research and development project, the costs of which are as follows (all costs
are incurred evenly over the year):
Rs.
20X1: 120,000
20X2: 100,000
On 1 September 20X1, the recognition criteria for capitalisation of development costs are met.
The recoverable amounts are as follows: Rs.
31 December 20X1 90,000
31 December 20X2 110,000
Required:
Show all journals related to the costs incurred for each of the years ended 31 December 20X1 and 20X2.

Question-6
A company bought an incomplete research and development project from another company for Rs.
400,000 (considered to be a fair value) on 1 January 20X1. The purchase price has been analysed as
follows: Rs.
Research 100,000
Development 300,000
Subsequent expenditure has been incurred on this project as follows:
Research: Further research into possible markets was considered necessary 200,000
Development: Incurred evenly throughout the year. All recognition criteria for capitalisation 480,000
as a development asset were met on 1 June 20X1.
Required:
Show all journals related to the in-process research and development for 20X1.

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Question-7
During the financial year 2006, Uman Inc decided to expand its activities in the food industry. It
purchased a well-known franchise for Rs. 2,500,000 on 30 June 2006. The franchise is recognized
throughout Europe and Uman Inc obtained the right to use the franchise for a period of 20 year in France.
It is probable that future economic benefits will flow from the franchise which of the following statements
are correct.
1) The franchise is not an intangible asset and cost of Rs. 2,500,000 should be expensed immediately in
profit and loss A/c.
2) The franchise has indefinite life.
3) The franchise is an intangible asset as it is identifiable and has no physical substance.
4) The franchise cost can be measured at Rs. 2,500,000 and it is probable that Uman Inc will generate
revenue from its use therefore, it is an asset.
5) Uman controls the franchise through the legal right to use the franchise over the period of 20 years

Question-8
Kenoly Corporation owns a patent that has a carrying amount of Rs. 300,000. Kenoly expects future net
cash flows from this patent to total Rs. 210,000. The fair value of the patent is Rs. 110,000. Prepare
Kenoly's journal entry, if necessary, to record the loss on impairment on 31 December, 2012.

Question-9
The following is the information of a license obtained by Alpha Limited for making and selling a life
saving drug.
License cost 8,300,000
Amortisation upto 31st December 2007 3,112,500
Total duration of the license 8 years
Unfortunately on 1st January 2009, government has introduced a legislation that effectively bans this type
of product. As a consequence of this, the product was lifted from the market and company decided to stop
the sale of this kind of drug.
Required:
Amounts to be charged to profit and loss account in year 2009 in respect for impairment loss.

Question-10
Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of Rs. 120,000
on April 1, 2010. The franchise grants Gershwin the right to sell certain products and services for a period
of 8 years. Prepare Gershwin's April 1 journal entry and December 31 adjusting entry.

Question-11
On September 1, 2010, Winans Corporation acquired Aumont Enterprises for a cash payment of Rs.
700,000. At the time of purchase, the fair value of net assets is Rs. 620,000. Compute the amount of
goodwill acquired by Winans.

Question-12
Larry Byrd, Inc. spent Rs. 68,000 as registration fees while developing the trade name of its new product,
the Mean Bean. Prepare the journal entries to record the Rs. 68,000 expenditure and the first year's
amortization, using an 8-year life.

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Question-13
An entity is developing a new production process. During 2005, expenditure incurred was Rs. 1,000, of
which Rs. 900 was incurred before 1 December 2005 and Rs. 100 was incurred between 1 December
2005 and 31 December 2005. The entity is able to demonstrate that, at 1 December 2005, the production
process met the criteria for recognition as an intangible asset.
During 2006, expenditure incurred is Rs. 2,000. At the end of 2006, the recoverable amount of the know-
how embodied in the process (including future cash outflows to complete the process before it is available
for use) is estimated to be Rs. 1,900.
Required:
Discuss the accounting treatment.

Question-14
Ace Ltd purchased a 5 year fishing licence for Rs. 100,000. The company expects to renew the licence at
the end of the 5 year period for a further 3 years. The government has indicated that they will re-grant the
licence to Ace Ltd.
Required:
Discuss the number of years over which the licence should be amortised, assuming that the costs
associated with the renewal is:
A. Rs. 100; or
B. Rs. 99,000.

Question-15
Yoyo has, for many years, manufactured a yoghurt drink called „Yog-Nog‟. This brand name was
originally acquired from a competitor. The cost of acquisition was Rs. 800,000, which was duly
capitalised. No amortisation had been charged since the brand was already 80 years old at the time of
acquisition and, at that time, there was no indication that demand for this drink will decrease.

Sales of Yog-Nog have, in recent times, been falling. The marketing department, after much research
suggested that the fall in sales was due to outdated brand name. The suggestion was accepted and the
drink was re-launched as „Yogi-Yippi‟. The cost of re-launching the drink came to Rs. 450,000 and was
capitalised as a Yogi-Yippi Brand name since it was expected that sales would now improve.

The previous brand name, „Yog-Nog‟, with a carrying amount of Rs. 800,000, was expensed in full in the
current year ended 31st December 20X0.

Required:
Critically analyse the above issue, explaining whether the treatment is correct or incorrect and justifying
your advice with reference to International Financial Reporting Standards.

Question-16
Quencher Limited‟s business involves the bottling and distribution of a wide variety of carbonated soft
drinks. Some drinks are developed internally, whilst other brands are purchased. The following
information is relevant to the business for the year ended 30 May 2X5.

N-Gee:
 On 1 April 20X5, Quencher acquired the well known brand, N-Gee for Rs. 2,500,000.
 In addition to this, Rs. 175,000 was spent on legal fees to secure the right to use this brand.
 Due to the fact that Quencher‟s staff had never previously been exposed to N-Gee, extensive training
took place during April 20X5. The total cost of training is Rs. 200,000.
 Sales of N-Gee drinks commenced on 15 May 20X5.
 The N-Gee brand has an estimated useful life of 15 years.
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Fliptop:
Fliptop is a revolutionary type of can which has been developed internally by Quencher. The can has a re-
sealable top which allows can to be sealed after opening to prevent the gas escaping. In January 20X4 the
idea for this new product was launched, and a loan of Rs. 5 million was obtained to finance this project.

The associated costs for the year ended 31 May 20X5 are as follows:
Date Nature of activity Expenditure
Market surveys to establish whether or not consumers would
01/06/20X4 -31/07/20X4 Rs. 40,000
want such a can
01/08/20X4 -15/09/20X4 Evaluation of a number of alternative designs Rs. 200,000
A design is chosen and engineers produce a plan which
30/09/20X4
indicates that it is technically possible to produce can.
1/10/20X4-31/01/20X5 Design and construction of a pilot manufacturing plant Rs. 1,100,000
01/02/20X5 - 31/05/20X5 Testing of a pilot manufacturing plant Rs. 600,000

The market surveys suggested that there is a market for the can.
Quencher has applied to register the Fliptop can as a patent.
Required:
a) IAS 38: Intangible Assets, defines an intangible asset as „an identifiable non-monetary asset without
physical substance‟.
Discuss, with reasons, and with reference to IAS 38: Intangible Assets,
i) whether the N-Gee brand can be recognized as an intangible asset
ii) the correct accounting treatment for all N-Gee costs in Quencher‟s financial statements for
the year ended 31 May 20X5.

b) IAS 38: Intangible Assets, defines research and development as follows:

‘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, systems or services before
the start of commercial production or use.‟
Discuss, with reference to IAS 38: Intangible Assets, the correct accounting treatment for all the costs
incurred in relation to the Fliptop can for the year ended 31 May 20X5.

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Question-17 (SIC-32)
During the year 2007, SKY Limited developed two inter-linked websites in house.

One of them is for external users and provides information about the company‟s products,

operations and financials. It can also be used for electronic order processing and accepting
payments through credit cards.
 The second website is for internal use like intra-net, providing and sharing company‟s policies,
customer details, employees‟ information, etc.
Both the websites were launched on September 30, 2007 and are now fully operational. The company has
received a few online orders which it believes will increase over time. On the other hand, use of internal
website has resulted in minor reduction in costs of communication and certain other administrative costs.
The management is optimistic that its utility will increase significantly. However, it is not in a position to
estimate the amount of economic inflows that this website can generate.

During the year ended December 31, 2007, the company incurred the following expenditure in the
development of websites:

(i) An amount of Rs. 0.3 million was incurred on undertaking a feasibility study and defining
hardware/software specifications for the websites.
(ii) Rs. 4 million were incurred on the development of internal website while an expenditure of Rs. 11
million has been made on development of external website. The expenditure on external website
includes an amount of Rs. 6 million paid for linking it with the credit card clearing facilities and
installation of security tools.
(iii) The company acquired two dedicated servers and one backup server costing Rs. 3 million in total.
Operating software for the server was acquired for Rs. 2.0 million whereas software related to data
processing and front-end development costed Rs. 3 million. The management is of the view that
these costs would not have been incurred if the website project had not been initiated.
(iv) With effect from October 1, 2007 the company has signed a one year contract for website
maintenance at a cost of Rs. 2.0 million.
(v) Two IT personnel were trained to operate the websites, at a cost of Rs. 0.2 million.
(vi) Rs. 0.4 million were incurred on the promotion of its external website. The company believes that
this advertising will boost the company‟s online sales.

Required:
Comment on the accounting treatment of each of the above mentioned costs in the light of relevant
International Accounting Standards. (12)

Question-18 [Example of revaluation]

1. A company provided you the following details as on 31 December 2014 before revaluation:
Rupees
Balance in Asset a/c 200
Balance in Accumulated Dep a/c 60
2. Asset is revalued at Rs. 250 on 31 December 2014.

Required:
Pass journal entries for revaluation on 31 December 2014 using:
a) Net replacement method
b) Gross replacement method

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Question-19 (Replacement of a part)

Bigboy Limited owned a car that had a carrying amount of Rs. 30,000 on 1 January 20X1. Details of this
cars, recorded as two significant parts, were as follows on 1 January 20X1:
 Car structure: Rs. 20,000 – with a remaining useful life of 10 years and a nil residual value
 Car engine: Rs. 10,000 – with a remaining useful life of 2 years and a nil residual value
This old engine (that had originally cost Rs. 12,000) needed to be replaced during 20X1 due to the car
having been driven without oil. The engine was replaced on 1 October 20X1 at a cost of Rs. 15,000. The
new engine has a useful life of 3 years and a nil residual value. The straight line method is used.
Required:
Show the journal entries for year ended December 31, 20X1.

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SOLUTION
Answer-1
Part A
An intangible asset is an identifiable non-monetary asset without physical substance.
Though customer list does not have physical substance and is non-monetary but the expenditure on
developing customer list cannot be distinguished from cost of developing business as a whole therefore it
cannot be recognised as an intangible asset.

Part B
Both the patent and staff skills do not have physical substance. The issue is whether or not they meet the
definition of an asset. The patent and staff skills are a resource in that they can be used to generate sales.
The company controls the future benefits from the software by the legal rights of the patent.
In respect of staff skills, although the company will obtain future benefits from the work performed by the
staff, the company does not have control over their skills as the staff can resign at any time by giving one
month’s notice.
Therefore, the patent must be recognised as an intangible asset but the staff skills cannot be recognised as
an intangible asset.

Part C
The licence to operate the toll road is an intangible asset with a finite useful life. Therefore, the cost of Rs.
10,000,000 is amortised on a systematic basis over its estimated useful life (originally being twenty
years), in line with the pattern in which the asset’s future economic benefits are expected to be consumed
by the entity.
During the eighteenth year, it was estimated that the useful life in cars would be 1,800,000 cars (Yr 18:
800,000 + Yr 19: 600,000 + Yr 20: 400,000). Since the pattern has changed from an even usage, a more
appropriate method of amortisation would be to use the number of cars using the road instead. This
change is accounted for as a change in accounting estimate.
th
Carrying amount at the end of 17 year is 1,500,000 (10,000,000 - 10,000,000 / 20 x 17)
This is then amortized over 1,800,000 cars as follows:
• Year 18: Rs. 666,667 (Rs. 1,500,000 / 1,800,000 x 800,000 cars)
• Year 19: Rs. 500,000 (Rs. 1,500,000 / 1,800,000 x 600,000 cars)
• Year 20: Rs. 333,333 (Rs. 1,500,000 / 1,800,000 x 400,000 cars)
The impairment test should be performed at the end the end of 17th year by comparing the recoverable
amount with carrying amount.

Answer-2
Recognition:
The issue here is whether the cost of the fishing licence should have been expensed or recognised as an
intangible asset.
To be recognised as an intangible asset, the item must meet the definition of an intangible asset and the
recognition criteria.
An intangible asset is defined as an identifiable non-monetary asset without physical substance.
The fishing licence is identifiable as it arises from a legal right to fish in the demarcated area
• As an asset, the intangible asset must be a resource controlled by the entity, from a past event and
must result in an expected inflow of future economic benefits
• Muneer Limited does have control over the fishing licence as no other company may fish for tuna in
the demarcated area during the term of the licence.
• The past event is the acquisition of the license before year-end.
• Future economic benefits should flow through increased revenue from the sale of fish.

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• The fishing licence (although the related documentation has physical form), does not have physical
substance as the most significant aspect is the licensed ability to perform fishing.
Applying the recognition criteria,
• As the fishing license is a separately acquired intangible asset, the probability of future economic
benefits is satisfied.
• The cost is reliably measured as an amount of Rs. 600,000 was paid for the fishing license.
Conclusion: The licence should be capitalized as an intangible asset since it meets the relevant definition
and recognition criteria

Measurement:
• The fishing licence has a finite life and must be amortised.
• The life is determined as the shorter of the actual life and legal life.
• The actual life is not relevant but the licence provides the company with a legal life of four years.
• The residual value is zero.
• The pattern of future economic benefits is not apparent and therefore the straight-line may be used
for amortisation.
• Amortisation of Rs. 150,000 must be expensed during 20X6 [(Rs. 600,000 – 0) / 4 years]
• An impairment test should be performed if there is indication of impairment.
• The carrying amount of the licence will therefore be measured at Rs. 450,000 (Cost: Rs. 600,000 –
Accumulated amortisation: 150,000 - Accumulated impairments: 0).

Disclosure:
• The carrying amount of the licence would be included in the line item ‘intangible assets’ on the face
of the statement of financial position.
• The amortisation expense would be included in the calculation of the profit before tax line item in the
statement of comprehensive income.
• Accounting policies relating to intangible asset would need to be disclosed.
• The detail of opening and closing carrying amount for the licence is included in the intangible asset
note.

Answer-3
There are two conditions for capitalization of the cost of an acquired intangible asset.
(i) Economic benefits are expected to flow to entity and
(ii) Cost can be measured reliably.
As both conditions are met in the given case, so the cost of intangible shall be capitalized.

As at present, management believes the life of asset to be indefinite, no amortisation shall be charged.
However, an entity shall check the asset for impairment annually.

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Answer-4
Entries for Patent
Date Particulars Dr. Cr.
1/1/09 Patent 700,000
Cash 700,000
(Patent acquired)
31/12/09 Amortisation expense (700,000/10 years) 70,000
Accumulated amortization 70,000
(Recording of amortisation of patent)
31/12/10 Amortisation expense (700,000/10 years) 70,000
Accumulated amortization 70,000
(Recording of amortisation of patent)

Entries for Franchise

1/1/11 Franchisez 500,000
Cash 500,000
(Franchise acquired)
31/12/11 Amortisation expense ({700,000-140,000}/5 years) 112,000
Accumulated amortisation 112,000
(Recording of amortisation of patent)
31/12/11 Amortisation expense (500,000/10 years) 50,000
Accumulated amortisation 50,000
(Recording of amortisation of Franchise )

Answer-5
Date Particulars Dr. Cr.
31/12/01 Research expense ( 120,000 x 8/12 ) 80,000
Development cost - asset (120,000 x 4/12 ) 40,000
Bank 120,000
(Recording of development & research expenses)

No need of recording impairment loss as recoverable amount is greater than book value of Rs. 40,000.

31/12/02 Development cost - asset 100,000

Cash 100,000
(Capitalisation of development cost)
31/12/02 Impairment Loss ( 140,000 - 110,000 ) 30,000
Accumulated Impairment Loss 30,000
(Recording of Impairment Loss)
(BV=140,000 – (Recoverable amount=10,000)

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Answer-6
Date Particulars Dr. Cr.
1/1/01 Development cost – asset 400,000
Bank 400,000
(In process research and development phase)
31/12/01
Research expense 200,000
Development expense (480,000 x 5/12) 200,000
Development cost – asset 280,000
Bank 680,000
(Recording of development & research expenses)

Answer-7
Statement number 3, 4 and 5 are correct.

Answer-8
Entry in the books of Kenoly Corporation
Date Particulars Dr. Cr.
31/12/12 Impairment loss (W-1) 90,000
Accumulated impairment 90,000
(Recording of impairment loss of patent)

(W-1) Calculation of impairment loss

Carrying amount 300,000
Less: Recoverable amount
(higher of):
Value in use 210,000
Fair value 110,000
(210,000)
Impairment loss 90,000

Answer-9
Duration of license = 8 years
License cost = 8,300,000
Amortization for 1 year = 8,300,000 / 8
= 1,037,500
Life passed up to 31st December 2007 = 3,112,500/ 1,037,500
= 3 years
Amortisation charged up to 1/1/09 = 1,037,500 x4 years
= 4,150,000
As the company decided to stop the sale of drug therefore the license is impaired on January 01, 2009.
4,150,000 being impairment loss will be charged to statement of comprehensive income in 2009.
Book value (8,300,000 – 4,150,000) 4,150,000
Recoverable amount (0)
Impairment loss 4,150,000

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Answer-10
Entries in the books of Greshwin Corporation
Date Particulars Dr. Cr.
1/4/10 Franchise 120,000
Cash 120,000
(Franchise acquired)
31/12/10 Amortisation expense (120,000/8 years x 9/12) 11,250
Accumulated amortisation 11,250
(Recording of amortisation of franchise rights)
Answer-11
Entry in the books of Winans Corporation
Date Particulars Dr. Cr.
1/9/10 Net assets 620,000
Goodwill (bal.) 80,000
Cash 700,000
(Purchase of business)
Note: Goodwill is not amortised as it has indefinite useful life.

Answer-12
Date Particulars Dr. Cr.
Trade name 68,000
Cash 68,000
(Registration cost of intangible asset)
Amortisation expense (68,000/8 years) 8,500
Accumulated amortization 8,500
(Recording of amortisation of trade name)

Answer-13
At the end of 2005, the production process is recognised as an intangible asset at a cost of Rs. 100
(expenditure incurred since the date when the recognition criteria were met, i.e. 1 December 2005). The
Rs. 900 expenditure incurred before 1 December 2005 is recognized as an expense because the
recognition criteria were not met until 1 December 2005.

At the end of 2006, the cost of the production process is Rs. 2,100 (Rs. 100 expenditure recognised at the
end of 2005 plus Rs. 2,000 expenditure recognised in 2006). The entity recognises an impairment loss of
Rs. 200 to adjust the carrying amount of the process to its recoverable amount of Rs. 1,900.

Answer-14
A)
As the costs associated with the renewal are insignificant, the asset must be amortised over the 8 year
useful life. The entity intends to renew the licence and the government intends to re-issue the licence to
Ace Ltd, and therefore it must be treated as an asset with a 8 year useful life.

B)
As the costs associated with the renewal are significant, and almost equaling the initial cost of the licence,
the asset must be amortised over the 5 year useful life. Although the entity intends to renew the licence,
the renewed licence, when it is acquired, must be treated a separate asset and amortised over a useful life
of 3 years

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Answer-15
Old brand
The capitalisation of the cost of the original brand name is correct. Since the brand was considered to
have an indefinite useful life, it was correct not to amortise the cost.

Similarly, the recoverable amount of old brand should have been calculated at the end of every year,
irrespective of the fact there is an indication of impairment, since it has ‘an indefinite useful life’.

On abandonment of the Yog-Nog brand name, it is correct to write-off the balance of its carrying amount.

New brand
The accounting treatment made is incorrect. IAS 38 specifically disallows the capitalisation of the
internally generated brand name ‘Yogi-Yippi’ on the grounds that it is too difficult to prove that the
recognition criteria have been met (i.e. reliable estimates of the costs of creation are almost impossible
since the costs incurred will be difficult to separate from the general costs of running the business). The
launch costs of Yogi-Yippi should therefore be expensed as marketing costs.

Answer-16
Part a) N-Gee brand

(i) Acquisition of N-Gee brand

In terms of IAS 38, an item must meet all the components of the definition of an intangible asset in order
to be capitalized.
Definition of an asset
• Resource controlled by enterprise from past events
• from which future economic benefits are expected to flow
Definition of an intangible asset
• Identifiable
• non-monetary asset
• without physical substance
The brand, N-Gee has been purchased and is therefore a resource which is controlled due to the fact that
it can restrict the access of others to these benefits. This would be legally enforceable in a court.
The past event is the purchase transaction of the brand, which occurred on 1 April 20X5.
Future economic benefits expected to flow from the purchase will result from sale of N-Gee soft drinks.
Indentifiability is met, as the brand name is capable of being separated and arises from a legal right.
The brand purchased has no physical substance and is considered intangible.
Recognition
However an intangible asset can only be recognised if:
• it is probable that the future benefits that are attributable to the asset will flow to the entity
• and the cost can be reliably measured.
It is probable that the brand should give rise to future economic benefits, which will arise from future
sales of the N-Gee drink.
The cost can be reliably measured as this is known the purchase price paid for the brand was Rs. 2.5
million.
The brand, N-Gee should therefore be recognised as an asset in terms of IAS 38: Intangible Assets.

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ii) Accounting treatment of all N-Gee costs

The amount capitalized should be the purchase price plus any directly attributable expenditure. Therefore
an amount of Rs. 2,675,000 (the purchase price of Rs. 2,500,000, as well as the legal fees incurred of
Rs. 175,000) should be Capitalized.
The brand should be amortised over its estimated useful life of 15 years.
The staff training costs of Rs. 200,000 to produce this new product should be expensed. The definition of
an asset is not met since the trained staff members may not necessarily be under sufficient control of the
entity.

Part b) Internal generation of patent for Flip top can

For an item to be recognised as an asset, it must meet the asset definition and also meet the recognition
criteria:(the cost or value must be reliably measurable; and the inflow of expected future economic
benefits must be probable.)
Expenditure on the research phase of the project should be expensed. For the year end 31 May 20X5, this
will be Rs. 240,000 and will include:
• Rs. 40,000 for market surveys
• Rs. 200,000 for evaluations of designs
The research phase of the project should end on 30/09/20X4, once the design is chosen and engineers
produce a plan which indicates that it is technically possible to produce the Fliptop can.
Expenditures from 01/10/20X4 relating to the development phase may be Capitalized as an intangible
asset if Quenchers can demonstrate that the 6 conditions have been met:

1. The technical feasibility of completing the After the evaluation of a number of prototypes
intangible asset so that it will be available for and designs, Quenchers began development of a
use or sale. pilot plant, and engineers produced a plan which
indicated that it was technically possible to
produce the fliptop can.
2. Its intention to complete the intangible asset Quencher has applied to register the Fliptop can
and use or sell it. as a patent.
3. Its ability to use or sell the intangible asset. Market surveys
4. How the intangible asset will generate probable Detailed market research was carried out by
future economic benefits. Quenchers, prior to 01/10/20X4, which indicates
that the cans will be able to be used and will
generate future economic benefits for the
company as there is a market for the product.
5. The availability of adequate technical, financial Adequate funding was obtained prior to the
and other resources to complete the project beginning, which indicates that the
development and to use or sell the intangible company has the necessary resources to complete
asset. development.
6. Its ability to measure reliably the expenditure The expenditure attributable to the development
attributable to the intangible asset during its of the asset have been able to have been reliably
development. measured.
Development costs amounting to Rs. 1,700,000 should be Capitalized at 31/05/20X5. This includes the
following:
• Rs. 1,100,000 – Design and construction of a pilot plant
• Rs. 600,000 – Testing of a pilot plant
Since the development is not yet completed and therefore has not yet been put into production,
amortization of this intangible asset should not yet begin. As a result, this is classified as an ‘intangible
asset not yet available for use’. This means that impairment testing must be done every year.

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Answer-17
1. Website for external access is an intangible asset because economic benefit in the form of online
orders will accrue to the entity and cost can be measured reliably.
However website for internal use is not an intangible asset because management is not in a position
to estimate economic inflows.
2. Expense incurred on feasibility study of Rs 0.3 million relates to planning phase so it will expensed
when incurred.
3. The development expenditure of Rs. 4 million on internal website will be expensed out as discussed
above. While the development expenditure of Rs. 11 million (which includes Rs. 6 million for credit
card facility and security tools) will be capitalized as a part of cost of external website.
4. The cost of server as well as its operating software amounting to Rs. 5 million (2+3) in total will be
capitalized under IAS-16 and cost for remaining softwares amounting to Rs. 3 million will be
capitalized as an intangible asset.
5. The maintenance, training and advertisement costs amounting to Rs. 2 million, Rs. 0.2 million and
Rs. 0.4 million respectively will be charged to statement of comprehensive income (means will be
expensed as and when incurred).

Answer-18
a) Journal entries – Net replacement method
Date Particulars Dr. Cr.
-------------Rs.----------
31.12.14 Accumulated Depreciation 60
Asset 60
31.12.14 Asset 110
Revaluation surplus 110
(W)
Date Description Asset R. Surplus SOCI(P/L)
31.12.14 WDV (200 - 60) 140
31.12.14 Revaluation surplus (bal.) 110 110 -
31.12.14 Revalued Amount 250 110 -

b) Journal entries – Gross replacement method

Date Particulars Dr. Cr.
-------------Rs.----------
31.12.14 Asset (357 - 200) 157
Accumulated Depreciation (107 - 60) 47
Revaluation surplus (bal.) 110
(W)
Before Factor After
Cost 200 x 250/140 357
Accumulated Depreciation (60) x 250/140 (107)
Book Value 140 250

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Answer-19
Particulars Dr. Cr.
1/10/01 Depreciation (10,000/2 x 9/12) 3,750
Accumulated depreciation - car engine a/c 3,750
(Depreciation of car old car engine)
1/10/01 Cash -
Accumulated depreciation (2,000* + 3,750) 5,750
P/L (bal.) 6,250
Car engine-cost 12,000
(Recording of disposal of old engine)
1/10/01 Car engine-cost 15,000
Cash 15,000
(Recording of new engine)
31/12/01 Depreciation – Car (20,000/10) + (15,000/3) x 3/12 3,250
Accumulated depreciation - car structure a/c 2,000
Accumulated depreciation - car engine a/c 1,250
(Recording of depreciation)
* This Rs. 2,000 is difference between the original cost and book value on 1.1.20X1. This Rs. 2,000
represents opening accumulated depreciation of old engine on 1.1.20X1.

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CHAPTER-3
INTANGIBLE ASSETS
ICAP PAST PAPER QUESTIONS
Question-1
Childcare Pharmaceuticals Ltd dealing in pediatric medicines sends one of their research scientists to
U.K. for advance research program for development of a medicine for children with chest related
diseases. The research went successful and the initial laboratory tests gave positive results of the
medicine. The company intends to market the product and for this purpose a technical feasibility was
prepared which proves that if the medicine is developed, for which all the technical and financial
resources are available; there is a good market for the product. However the company has to design one of
its production lines. The company registered the patent of the medicine, named CHILD-HEALTH.
Following is the detail of cost incurred during the research and development phase of the medicine
CHILD-HEALTH:
Rs. in ‘000’
Cost of research scientist stay in U.K. including fees for attending seminars and lectures 3,500
Fee for preparation of research report 500
Designing cost of the process after feasibility study 4,000
Patent registration cost including attorney fees. etc. 250
Required:
In the light of IAS-38 (Intangible Assets)
a) Compute the amount to be expensed out. (02)
b) Compute the amount to be capitalized as an intangible asset. (02)
{Spring-05, Q#5}

Question-2
The Board of Directors of Hotel Seaview approved a huge fund specifically for carrying out research and
development activities, aimed at expanding the customer base of the hotel. At the time of finalisation of
the annual accounts of the company, the Finance Manager of the company has approached you with the
following problems:
(a) Expenditure on applied research during the year, amounted to Rs. 1,200,000 which is the first
annual installment of the cost of the applied research on a specified project.
(b) Contribution to a research foundation amounted to Rs. 200,000. This contribution was for pure
research, related to the hotel industry.
(c) Research and development expenditure related to a patent granted for the manufacture and sale of
a product amounted to Rs. 500,000.
(d) Cost in the acquisition of specialised knowledge relating to a specified process amounted to
Rs. 80,000.
Required:
You are required to assist the Finance Manager on the accounting treatment of each of the four items,
keeping in view the requirements of IAS. (10)
{Spring-02, Q#1}

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Question-3
English Pharmaceutical Limited (EPL), a listed company, has provided you with the following
information related to the year ended 30 June 2013:
(i) EPL has developed and patented two new vaccines A & B at a cost of Rs. 160 million and
Rs. 120 million respectively. Based on market analysis, it is estimated that Vaccine A would
generate revenue of Rs. 300 million per annum for next five years whereas Vaccine B would
generate annual revenue of Rs. 80 million for an indefinite period. (05)
(ii) Rs. 6 million was paid for a television advertising campaign that will cover a period of 6 months
from 1 May 2013 to 31 October 2013. The directors believe that the campaign would help to
achieve the sales growth target of 8% for the next two years. (02)
(iii) Rs. 5 million were spent on training of technical staff. The training courses were conducted by
leading experts of pharma production and are expected to improve the production quality
significantly and reduce costs. (01)
Required:
In the light of International Financial Reporting Standard, explain how the above expenditure may be
accounted for in EPL‟s financial statements for the year ended 30 June 2013.
{Autumn-13, Q#5}

Question-4
(a) On 01 January 2012, Top Foods Limited (TFL) acquired manufacturing rights of an assorted
range of juices and ice creams from a well-known multinational company for Rs. 50 million.
Following are the relevant clauses of the agreement executed between the two companies:
 The agreement is valid for five years and is renewable for another five years at a nominal
price.
 The manufacturing rights are not transferable and cannot be sub-let.
After erection of its plant, TFL started manufacturing the products on 01 July 2012. Due to
intense competition, the new products were not able to achieve the desired sale in the first six
months of their launching.

Required:
Explain with reasons how TFL should have accounted for the above payment on:
(i) 01 January 2012
(ii) 31 December 2012 (08)

(b) On 01 January 2012, Matchless Enterprises Limited (MEL) acquired research data along with
partially developed product design from a company for Rs. 2 million (Research costs - Rs. 0.5
million, development costs - Rs. 1.5 million).
The product design was handed over to the production department on 01 November 2012.
Subsequent to acquisition, MEL incurred Rs. 0.7 million on research and Rs. 2.5 million on the
development/finalization of the product design. It is expected that this product design would
provide economic benefits to the company for next five years.
Required:
Prepare journal entries to record the above transactions. (04)
{Spring-13, Q#7}

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Question-5
(a) Discuss the criteria that should be used while recognizing intangible assets arising from research
and development work. (05 marks)
(b) Raisin International (RI) is planning to expand its line of products. The related information for the
year ended 31 December 2011 is as follows:
i. Research and development of a new product commenced on 1 January 2011. On 1 October 2011,
the intangible is commercially launched. It is estimated that the product would have a useful life
of 7 years. Details of expenditures incurred are as follows:
Rs. in
million
Research work 4.50
Development work 9.00
Training of production staff 0.50
Cost of trial run 0.80
Total costs 14.80
ii. The right to manufacture a well-established product under a patent for a period of five years was
purchased on 1 March 2011 for Rs. 17 million. The patent has an expected remaining useful life
of 10 years. RI has the option to renew the patent for a further period of five years for a sum of
Rs. 12 million.
iii. RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the month of June
2011. The life of the brand is expected to be 10 years. Currently, there is no active market for this
brand. However, RI is planning to launch an aggressive marketing campaign in February 2012.
iv. In September 2010, RI developed a new production process and capitalized it as an intangible
asset at Rs. 7 million. The new process is expected to have an indefinite useful life. During 2011,
RI incurred further development expenditure of Rs. 3 million on the new process which meets the
recognition criteria for capitalization of an intangible asset.
Required:
In the light of International Financial Reporting Standards, explain how each of the above transaction
should be accounted for in the financial statements of Raisin International for the year ended
31 December 2011. (11 marks)
{Spring-12, Q#4}

Question-6
Opal Limited (OL) commenced research work on a new product on 1 July 2013 and entered the
development phase on 1 July 2014. In this respect, the following expenses were incurred and debited to
capital work in progress.
For the year ended
30 Jun 2015 30 June 2014
Rs. in million
Research and development cost 12.00 8.00
Training of technical staff 0.90
Cost of laboratory equipment *4.00
Cost of trial run 0.60
13.50 12.00
* Purchased on 1 January 2014, having estimated useful life of five years.
Criteria for recognition of the internally generated intangible asset have been met. The commercial
production was started from 1 January 2015. It is estimated that the related product would have a shelf
life of 10 years.

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Required:
Explain accounting treatment of the above in the financial statements for the year ended
30 June 2015 in the light of International Financial Reporting Standards. (07)
{Autumn-15 CAF-07, Q.8}
Question-7
Following information pertains to International Associates Limited (IAL):
(i) Intangible assets as at 30 June 2015 were as follows:
Brands Software License
Useful life (years) 10 5 Indefinite
--------- Rs. in million ---------
Cost 200 80 15
Accumulated amortization / impairment 40 48 -
(ii) Details of expenses incurred on a project to improve IAL‟s existing production process are as
under:
Period Rs. in million
Up to June 2015 20
July 2015 – March 2016 45
Expenses were incurred evenly during the above period. On 30 September 2015, it was
established that the project is commercially viable. The new process became operational with
effect from 1 April 2016 and it is anticipated that it will generate cost savings of Rs. 10 million
per annum for a period of 10 years.
(iii) On 1 August 2015, IAL entered into an agreement to acquire ERP software which would replace
its existing accounting software. The new software became operational on 1 April 2016. IAL
incurred following expenditure in respect of the ERP software:
Description Rs. in million
Purchase price (including 15% sales tax) 115
Training of staff 2
Consultancy charges for implementation of ERP 5
ERP software has an estimated useful life of 15 years. However, IAL expects to use it for a period
of 10 years. The existing accounting software has become redundant and is of no use for the
company.
(iv) During the year ended 30 June 2016, IAL spent Rs. 10 million on development of a new brand.
Useful life of the brand is estimated as ten years.
(v) The license appearing in IAL‟s books was issued by the government for an indefinite period.
However, on 1 January 2016 the Government introduced a legislation under which the existing
license would have to be renewed after ten years.
(vi) IAL uses cost model to value its intangible assets and amortize them on straight-line basis.

Required
Prepare a note on „intangible assets‟ for inclusion in IAL‟s financial statements for the year ended 30 June
2016 in accordance with International Financial Reporting Standards. (16)
{Autumn-16, Q#5}

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Question-8
Apple Limited (AL) is in the process of finalizing its consolidated financial statements for the year ended
30 June 2018. Following information pertains to the Group's intangible assets:
(i) As on 30 June 2017, revalued amount of AL‟s license and related revaluation surplus were
Rs. 450 million and Rs. 30 million respectively.
(ii) On 1 July 2017 AL acquired entire shareholding of Mango Limited (ML) for Rs. 1,950
million. Fair values of net assets appearing in ML‟s books on acquisition date are given
below:
Rs. in million
Software (Rs. 100 million each) 200
Other net assets 1,545

In respect of acquisition of ML, following information is also available:

 Till acquisition date, ML had incurred research & development cost of Rs. 80 million
on product 'ABC'. ML had not recognised this as an asset because criteria for
recognition of the internally generated intangible asset was met on 1 July 2017. On this
date, AL estimated that the fair value of research and development work on ABC was
Rs. 95 million.
 On acquisition date, fair value of ML's customer list was assessed at Rs. 20 million.
(iii) ML incurred following expenditures on this project from 1 July 2017 till ABC‟s launching
date i.e. 1 May 2018.
Rs. in million
Market research 5
Product design 12
Cost of pilot plant (not for commercial production) 48
Refinement of product before commercial production 6
Training of production staff 8
Testing of pre-production 4
Production and launching of product 105
188
(iv) As on 1 July 2017, the fair value of AL's own customer list was assessed at Rs. 35 million.
(v) As on 1 July 2017, remaining useful life of all intangible assets except goodwill was 10 years.
(vi) On 31 March 2018, ML sold one of its software for Rs. 110 million.
(vii) Group follows the revaluation model for license whereas cost model is used for other
intangible assets.
(viii) As on 30 June 2018:
 fair value of licence was assessed at Rs. 350 million.
 goodwill of ML has been impaired by 20%.
Required:
Prepare a note on intangible assets, for inclusion in AL's consolidated financial statements for the year
ended 30 June 2018 in accordance with the requirements of IFRSs. (14)
(‘Total’ column is not required) {Autumn 2018, Q#4}

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Question-9
Zinc Limited (ZL), a broadcasting company, uses revaluation model for subsequent measurement of its
intangible assets, wherever possible. Following information pertains to ZL‟s intangible assets:

(i) On 1 January 2018, ZL bought an incomplete research and development project from Bee Tech at its
fair value of Rs. 90 million. The purchase price was analysed as follows:
Rs. in million
Research 30
Development 60
Subsequent expenditures incurred on this project are as follows:
Rs. in million
Further research to identify possible markets 10
Development 48
Recognition criteria for capitalization of development was met on 1 March 2018. All costs are
incurred evenly from 1 January 2018 till project completion date i.e. 31 August 2018. It is expected
that newly developed technology will provide economic benefits to ZL for the next 10 years.

On 31 December 2018, ZL received an offer of Rs. 170 million for its developed technology.

(ii) On 31 December 2018, ZL launched its new website for online streaming of TV shows, movies and
web series. The website‟s content is also used to advertise and promote ZL‟s products. The website
was developed internally and met the criteria for recognition as an intangible asset. Directly
attributable costs incurred for the website are as follows:
Rs. in million
Undertaking feasibility studies 3
Evaluating alternative products 1
Acquisition of web servers 16
Acquisition cost of operating system of web servers 7
Registration of domain names 2
Stress testing to ensure that website operates in the intended manner 3
Designing the appearance of web pages 5
Development cost of new content related to:
 online streaming 11
 advertising and promoting ZL‟s products 8
Advertising of the website 6

(iii) During 2018, the licensing authority intimated that broadcasting license of one of ZL‟s channels will
not be further renewed.
ZL had obtained this license for indefinite period on 1 January 2012 by paying Rs. 150 million,
subject to renewal fee of Rs. 0.3 million at every five years. Upto last year, this license was expected
to contribute to ZL‟s cash inflows for indefinite period.
As on 31 December 2018, the recoverable amount of this license was assessed as Rs. 105 million.

Required:
In accordance with the requirements of IFRSs, prepare a note on intangible assets, for inclusion in ZL‟s
financial statements for the year ended 31 December 2018 in respect of the above intangible assets.
(‘Total’ column is not required) (15)
{Autumn 2019, Q.8}

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Questions-10
Qabil Limited (QL) is in process of finalizing its financial statements for the year ended 31 December
2019. Following information pertains to QL‟s intangible assets:
(i) Intangible assets as at 31 December 2018 were as follows:
Product ERP
design software
---- Rs. in million ----
Cost 750 200
Accumulated amortization / impairment 75 80
------- Years -------
Useful life 10 8

(ii) Cost incurred on development of product design was capitalised in 2018. The competition for the
product is increasing. QL has estimated the following net cash inflows from the product:
Year 2020 2021 2022 2023 2024 2025 & onwards
Net cash inflows
190 170 140 100 80 Nil
(Rs. in million)
Pre-tax and post-tax discount rates are 12% and 10% respectively.

(iii) On 1 January 2019, QL entered into an agreement to replace existing ERP software with a new
ERP software at a cost of Rs. 360 million. According to the agreement, 40% payment was made
on signing of the contract while the remaining amount will be paid on 31 May 2019.
The entire cost of project was financed through a running finance from Honehaar Bank at mark-
up of 15% per annum. The software became operational on 1 November 2019. QL expects to use
it for a period of 9 years.
The existing ERP software will be continued till 31 December 2020.

(iv) On 1 January 2019, QL acquired a licence for Rs. 600 million for a period of 5 years. QL made
an initial payment of Rs. 100 million and the remaining amount will be paid in two equal
instalments on 1 January 2020 and 2021. Cash price equivalent of the license is Rs. 520 million.
On expiry of 5 years, the license is renewable for further five years at an insignificant cost of Rs.
15 million. QL intends to renew the license and sell it at the end of 8th year.
In the absence of any active market, QL has estimated that residual value of the license would be
Rs. 80 million and Rs. 60 million at the end of 8th year and 10th year respectively.

Required:
Prepare a note on „Intangible assets‟ for inclusion in QL‟s financial statements for the year ended 31
December 2019 in accordance with the requirements of IFRSs.
{September 2020 Q.6 }
(15)

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Question-11
On 1 July 2016, Sunshine Limited (SL) acquired four licenses namely A, B, C and D for a period of ten
years. The following information is available in respect of these licenses:
(i)
A B C D
Cost of license (Rs. in million) 200 230 90 60
Expected period of cash generation from acquisition 12 years indefinite 6 years 12 years
date
Active market value at 30 June 2017 = 170 300 65 No active
(Rs. in million) market
Renewal cost (Rs. in million) 65 85 2 1
(ii) The renewal would allow SL to use the licenses for another five years.
(iii) SL uses the revaluation model for subsequent measurement of its intangible assets.
(iv) An independent valuer has estimated the value of license „D‟ at Rs. 130 million.
Required:
Determine the amounts that should be recognised in respect of the licenses in the statement of financial
position and statement of profit or loss for the year ended 30 June 2017. (10)
{Autumn 2017, Q#3}
Question-12
Focus Limited is engaged in manufacturing multimedia projectors. The company spends heavily on
research and development to introduce improvements in the existing products.

A free lance researcher Mr. Talent sent a conceptual paper to the company on development of a new type
of projector which will significantly enhance the life and quality of the product.

An agreement was reached between Mr. Talent and the company whereby Mr. Talent agreed to conduct
and supervise the research and development process at a lump sum remuneration of Rs. 8 million.
However, in case the research was unsuccessful, he agreed to reduce his remuneration to a time based
salary of Rs. 2,000 per hour.
The process of research commenced from July 2006 and the following costs were incurred upto June 30,
2007.
Rs. In million
i. Tools purchased 2.000
ii. Furnishing of the new laboratory 0.800
iii. Salaries paid to research associates 1.620
iv. Cost of conducting tests in U.K. on a device which was ultimately used in the
final product 0.400
v. Remuneration paid to Mr. Talent on successful completion of research 4.500
vi. Cost of manufacturing the samples before commencement of commercial
production 0.240
vii. Material imported for commercial production 1.700
viii. Final payment to Mr. Talent 3.500
ix. Product launching expenses 1.200
Required:
Discuss the accounting treatment of each of the above costs incurred by the company in the light of
International Accounting Standard 38 „Intangible Assets‟. (15)
{Autumn-7, Q#6}

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Question-13
You are required to identify following items pertaining to Research and Development Activities and
briefly elaborate the treatment of every item in the Financial Statements in light of IAS 38.
(i) Personnel Cost
(ii) Purchase of Intangibles (05)
{Autumn-3, Q#2}
Question-14
Zouq Inc. is a multinational company. As part of its vision to expand its business in South Asia, it
purchased majority shares in a locally incorporated company, Momin Limited.
Following are the brief details of the acquisition:
Date of acquisition January 1, 2007
% of shares acquired by Zouq Inc. 90%
Total paid up capital of Momin Limited (Rs. 10 each) 500,000,000
Purchase price per share Rs. 30
Net assets of Momin Limited (as per 2006 audited financial statements) 650,000,000
Fair value of net assets (other than intangible assets) of Momin Limited 1,100,000,000
Momin Limited has an established line of products under the brand name of “Badar”. On behalf of Zouq
Inc., a firm of specialists has valued the brand name at Rs. 100 million with an estimated useful life of 10
years at January 1, 2007. It is expected that the benefits will be spread equally over the brand‟s useful life.
An impairment test of goodwill and brand was carried out on December 31, 2007 which indicated an
impairment of Rs. 50 million in the value of goodwill. Impairment test carried out on December 31, 2008
indicated a decrease of Rs. 13.5 million in the carrying value of the brand.
Required:
a) What are the requirements of International Accounting Standards relating to amortization of
intangible assets having finite life?
b) Prepare the ledger accounts of the Goodwill and the Brand, showing initial recognition and all
subsequent adjustments. (15)
{Spring-9, Q#1}
{ICAP Question Bank, Q#9.5}
Question-15
Dove Limited (DL) commenced development of a new product on 1 January 2020. In this regard,
following expenditures have been incurred:
Description Incurred in Rs. in million
Evaluation of possible alternatives January 2020 2
Pre-production prototypes February and March 2020 17
Pilot plant April to July 2020 40
Fee to register legal rights August 2020 15
Cost of manufacturing samples August to October 2020 *32
Brand building cost October to December 2020 16
*NRV of Rs. 20 million
DL has also incurred directly attributable salaries and overheads of Rs. 5 million and Rs. 1.5 million
respectively in each month over the development period of new product.
The recognition criteria for capitalization of internally generated intangible asset was met on 1 April 2020
and commercial production of the product was commenced from 1 November 2020.
Required:
Compute the cost of the new product for initial measurement. Also discuss the reason(s) for ignoring any
of the above expenditures in the computation.

[March 2021, Q.3, (08)]

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Question-16
Ajwa Limited (AL) is engaged in the business of manufacturing and trading of consumer goods. On
1 July 2021, AL launched its own website for online sale of its products. The website was developed
internally which met the criteria for recognition as an intangible asset on 1 May 2021. Directly
attributable costs incurred for the website are as follows:
* Incurred in 2021 Rs. in million
Defining hardware and software specifications January to March 0.5
Salaries and general overheads January to June 6.0
Development of the content May to June 7.0
Registering website with search engines June 1.0
Annual fees for website hosting June 0.6
Employees training costs June to July 1.5
Discount offers for logging on the website July to August 2.0
*All costs were incurred evenly throughout the mentioned period.
Required:
Compute the cost of the website for initial measurement. Also discuss the reason(s) for not inclusion of
any of the above costs in the computation.
[September 2021, Q.3, (07)]
Question-17
The following transactions pertain to Amused Limited (AL):
(i) In 2020, AL started development of a new product. The recognition criteria for capitalization
of internally generated intangible asset was met on 1 January 2021. On this date, AL started
development of a plant which completed in 3 months. It is pilot plant for testing the new
product and is not of a scale economically feasible for commercial production. AL incurred
cost of Rs. 3 million and Rs. 7 million on design and construction of plant respectively. AL
expects to operate the plant for two years till end of development phase. During 2021, AL
incurred Rs. 5 million in operating the pilot plant.
(ii) On 1 March 2021, AL acquired a patent with indefinite life in exchange of its old equipment
and cash consideration of Rs. 25 million. The fair values of the patent and equipment were
assessed at Rs. 57 million and Rs. 35 million respectively. On the date of exchange, the
equipment had a carrying value of Rs. 30 million. AL believes that its future cash flows will
change as a result of this exchange. AL incurred cost of Rs. 2 million for transferring the title
of the patent to its name.
(iii) On 1 June 2021, the government granted a license to AL free of cost to import raw material
upto 10 tons from international market for its intended use. The license is non-transferable.
There are no further conditions attached by the government. The fair value of the license is
Rs. 50 million.
Required:
Explain how each of the above transactions should be accounted for in the financial statements of AL for
the year ended 31 December 2021, in accordance with the requirements of IFRSs. (09)
{March 2022, Q.4}

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Question-18
The following transactions pertain to Sphere Limited (SL) for the year ended 30 June 2022:
(i) On 1 July 2021, SL acquired a license against cash consideration of Rs. 50 million. SL incurred
cost of Rs. 3 million which includes refundable taxes of Rs. 1 million for transferring the title to
its name.
The license is valid for five years but is renewable every five years at a significant cost of Rs. 40
million. SL intends to renew the license only once and then sell the license at the end of ten years.
SL estimates that residual value of the license would be Rs. 12 million and Rs. 9 million at the
end of five years and ten years respectively.
(ii) On 1 July 2021, SL decided to develop a website for advertising and promotion of its products.
SL believes that website would enhance the brand value of the products and would also be used
for providing general information about SL to the public.
On 1 September 2021, SL internally initiated development of the website which was completed
on 31 January 2022. Directly attributable costs incurred by SL for developing website were as
follows:
 Rs. 2 million for planning the website in September 2021.
 Rs. 7 million for acquisition of the web servers in October 2021.
 Rs. 3 million for content development equally in November and December 2021.
 Rs. 1 million for annual website hosting fees (valid till 31 January 2023) paid in January
2022.
Required:
Discuss how the above transactions should be dealt with in the SL‟s books for the year ended 30 June
2022, in accordance with the IFRSs. (08)
(September 2022, Q.2)

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Question-19
Draft financial statements of Tulip Limited (TL) for the year ended 31 December 2017 show the
following amounts:
Rs. in million
Total assets 2,700
Total liabilities 1,620
Net profit for the year 398
While reviewing the draft financial statements, following matters have been noted:
(i) TL commenced development of a new product on 1 January 2017. Following directly attributable
costs have been incurred upto the launching date of 1 October 2017 and have been capitalized as
intangible asset:
Rs. in million
Staff salary 30
Equipment (having useful life of 5 years) 360
Consumables 90
Consultant fee 212
Total 692

The recognition criteria for capitalization of internally generated intangible assets were met on 1
March 2017. All costs have been incurred evenly during the period except equipment which was
purchased specifically for this product on 1 January 2017.

TL estimated that useful life of this new product will be 10 years. However, TL had not charged any
amortization in 2017. (06)

(ii) After preparation of draft financial statements, a claim of Rs. 20 million was lodged by a customer
for supplying defective units of a product in 2017. According to TL's lawyers, the chance that claim
would succeed is 80%.

At year-end, 800 units of this product were included in TL‟s inventory at a cost of Rs. 150,000 per
unit. All these units have the same defects. Normal selling price of each unit is Rs. 200,000.

TL has already committed to sell 300 units to Jamal Enterprises at a price of Rs. 220,000 per unit.
TL has estimated that Rs. 80,000 per unit would be incurred to remove the above defect. Further,
each defective unit can be sold for Rs. 130,000 in current condition. (04)

Required:
Determine the revised amounts of total assets, total liabilities and net profit, after incorporating the impact
of above adjustment(s), if any.
{Spring 2018, Q.5}

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Question-20
The following information pertains to the intangible assets of Hadero Limited (HL):
(i) On 1 May 2022, HL acquired an eight year license at a cost of Rs.174 million. HL plans to use
the license for six years. Licenses are traded in an active market. As on 31 December 2022, the
fair value of a new license valid for eight years is Rs.192 million, while older licenses sell at a fair
value of new license value less Rs.2 million for each month the license has already been used.
The residual value at the end of useful life is Rs. 48 million.
(ii) On 1 July 2022, HL acquired operation management software at a cost of Rs.410 million. HL also
incurred a cost of Rs.20 million for consulting charges to select and evaluate the appropriate
software in alignment with HL‟s needs.
HL expects that indefinite life can be achieved if HL incurs future expenditures to enhance its
performance standards by integrating „artificial intelligence‟ into this software. Without such
expenditures, the software is projected to become technologically obsolete in five years.
After the acquisition of the new software, the existing software would henceforth serve limited
purposes. The existing software was acquired for Rs.240 million. and as on
31 December 2021, Rs.126 million had been amortized, based on a useful life of ten years.
On 31 December 2022, HL has estimated the value in use of the existing software to be Rs.58
million. This valuation has been computed using cash flows projected over the revised remaining
useful life of two years.
(iii) During the year 2022, it was discovered that the entire cost of Rs.1,050 million incurred on
product development‟ has been recorded as intangible asset without considering the following
pertinent facts:
 The product development was commenced on 1 August 2021. Up till the launch date of
1 October 2022, the following directly attributable costs were incurred:
Rs. in million
Staff salary 150
Equipment (having useful life of five years) 420
Consumables 160
Consultant fee 320
Total 1,050

 The recognition criteria for capitalization of internally generated intangible assets was met
on 1 February 2022. All costs have been incurred evenly during the period except the
equipment which was purchased specifically for this product development on 1 September
2021. The useful life of the developed product is estimated at eight years.
(iv) HL uses the revaluation model for the subsequent measurement of its intangible assets, wherever
possible, and accounts for revaluation using the net replacement value method. Depreciation and
amortization are charged using the straight line basis.
Required:
Prepare the notes on „Intangible assets‟ and „Correction of error‟ for inclusion in HL‟s financial
statements for the year ended 31 December 2022, in accordance with the requirements of IFRSs.
(19)
(September 2023, Q.9)

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SOLUTION
Answer-1
(a) Amount to be expensed out:
Rs.”000”
Cost of research scientist stay in U.K including fee etc. 3,500
Fee for research report 500

(b) Amount to be capitalized:

Rs.”000‟
Designing cost of process after feasibility study 4,000
Patent registration cost including attorney fee etc. 250

Answer-2
The Finance Manager,
Hotel Sea view
Dear Sir,
My view in respect of matters regarding research and development expenditure is given below in the light
of IAS-38:
a) The amount of research cost is charged as an expense in the period in which it is incurred. So
Rs. 1,200,000 should be charged to profit and loss account.
b) Contribution to research foundation amounting to Rs. 200,000 is for pure research. So, it should also
be charged in the profit and loss account.
c) Research and development related to a patent granted for manufacture and sale of a product should be
charged as an expense in the period in which it was incurred, however the development cost may be
capitalized if the enterprise can fulfill the following conditions:
i. Product is technically feasible
ii. Its intention is to complete and use or sell it.
iii. It has ability to use or sell it.
iv. There exists future market for the product or its intennal usefulness.
v. Cost attributable to intangible asset can be measure reliably.
d) Cost incurred in acquisition of specialized knowledge is research cost. Therefore this expenditure
amounting to Rs. 80,000 should be charged to profit and account.

If you need more information, please contact.

Yours truly

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Answer-3
(i) Costs of developing the new vaccines should be capitalized as: "intangible assets" because:
 It is probable that future economic benefits i.e. sale of Rs. 300 million per annum for next five
years and sales of Rs. 80 million per annum for indefinite period, are attributable to the vaccines
and will flow to the EPL.
 The cost of the asset can be measured reliably i.e. Rs. 160 million and Rs. 120 million for A & B
respectively.
Vaccine A should be amortized over its commercial life i.e. five years.
Since there is an indefinite usefu1life of Vaccine B, it should not be amortized. Instead, EPL should
test the intangible asset for impairment by comparing its recoverable amount with its carrying
amount.
(ii) Advertising and promotional costs should be recognised as an expense when incurred.
However, the advertising expense amounting to Rs. 4 million (6million x 4months ÷ 6months) should
be recognized as prepayment.
(iii) Although well trained staff adds value to a business, lAS 38 prohibits the capitalisation of
training costs.

Answer-4
(a)
(i) 01 January 2012 (Initial recognition)
IAS-38 allows the recognition of an identifiable non-monetary assets without physical substance
as intangible assets, subject to fulfillment of the following conditions:
 It is probable that expected future economic benefits that are attributable to the asset will
flow to the entity.
 The cost of the assets can be measured reliably.
Since rights acquired by TFL meet the above conditions, it should recognize the right as
intangible asset which should initially be measured at cost.
(ii) 31 December 2012 (Subsequent to initial recognition)
i. IAS-38 permits an entity to adopt the cost or revaluation model as its accounting policy.
ii. The revaluation model can only be adopted if intangible assets are traded in an active
market. As the rights cannot be sold, the revaluation model cannot be used.
iii. The cost model requires intangible assets to be carried at cost less accumulated
amortization and accumulated impairment losses.
iv. Amortization shall begin from 01 January, 2012 when it is available for use.
v. Residual value of intangible assets with finite useful life shall be assumed to be zero.
vi. IAS-38 includes renewal period in useful life if there is evidence to support renewal
without significant cost. Therefore, amortization should be made systematically over the
useful life of intangible assets i.e. 10 years.
vii. An impairment review shall be undertaken at year-end because the failure to achieve the
desired sales is an indication that the new products may not generate required economic
benefits and therefore, the value of the intangible may be impaired.

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(b)
Description Dr. Cr.
Intangible asset 2,000,000
Bank 2,000,000
(Record the purchase of in-process research and development)
Intangible asset 2,500,000
Research expense 700,000
Bank 3,200,000
(Record the subsequent expenditure on an in process research
and development)
Amortisation expense 150,000
Accumulated amortisation 150,000
(2,000,000 + 2,500,000) = 4,500,000/5 x 2/12

Answer-5
(a) Following are the criteria that should be used while recognizing intangible assets from research
and development work.
(i) No intangible asset arising from research shall be recognized.
(ii) An intangible arising from development shall be recognized if, and only if, an entity can
demonstrate all of the following :
 The technical feasibility of completing the intangible asset so that it will be available
for use or sale.
 Its intention to complete the intangible asset and use or sell it.
 Its ability to use or sell the intangible asset.
 How the intangible asset will generate probable future economic benefits. Among
other things, the entity can 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.
 The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
 Its ability to measure reliably the expenditure attributable to the intangible asset
during its development.
(b)
i) Since the product met all the criteria for the development of the product, it should be recognized
as an intangible in the statement of financial position (SOFP) of the company.
However, RI should capitalize the development work and trial run cost i.e. Rs. 9.80 million (Rs. 9
million + 0.80 million) as intangible asset. IAS-38 does not allow capitalization of cost relating to
the research work and training of staff.
Since the product has a useful life of 7 years, the amortization expense amounting to Rs. 0.35
million (Rs. 9.80 million ÷ 7 years × 3/12) should be recorded in the statement of comprehensive
income (SOCI).

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ii) This purchasing of right to manufacture should be recognized as an intangible in the SOFP
because:
 it is for an established product which would generate future economic benefits.
 cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortized over its useful life. The useful life will be
shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years). The amortization to be
recorded in SOCI is Rs. 2.83 million (Rs. 17 million ÷ 5 × 10/12).
iii) The acquired brand should be recognized as an intangible in the SOFP because acquisition price
is a reliable measure of its value. The amortization to be recorded in SOCI is Rs. 0.12 million (Rs.
2 million ÷ 10 years x 7/12).
iv) The carrying value of the intangible asset should be increased by Rs. 3 million in the SOFP.
Since there is an indefinite useful life of the intangible assets, it should not be amortized. Instead,
RI should test the intangible asset for impairment by comparing its recoverable amount with its
carrying amount.

Answer-6
Opal Limited
Accounting treatment for research and development expenses
Development cost recognition as intangible asset:
Since the new product met all the criteria for the development of a product, an intangible asset
should be recognized at Rs.13 million (12+0.4+0.6) as detailed under:
o Cost of Rs.12 million incurred during the development phase that is 1 July 2014 to
31 December 2014.
o Depreciation of Rs.0.4 million (4.0/5 x 6/12) on laboratory equipment for the development
phase of six months from 1 July 2014 to 31 December- 2014.
o Cost of trial run amounted to Rs. 0.6 million
Amortization of intangible asset:
Since the product has a shelf life of 10 years, the amortization expense amounting to
Rs.0.65 million (13/10 x 6/12) should be charged to profit and loss account for the period of six
months i.e. 1 January to 30 June 2015.
Laboratory equipment cost recognition as tangible asset:
Laboratory equipment cost should be capitalized as a tangible asset as it is having useful life of
more than one year and to be depreciated over its useful life of five years.
Research and other costs:
(i) IAS-38 does not allow capitalization of costs pertaining to research work. Therefore,
these costs should be charged to profit and loss account in the period in which they
incurred. However, research cost of Rs. 8 million, and depreciation for the research phase
of Rs. 0.4 million (4/5 x 0.5) pertained to last year, therefore, comparative figures for the
year ended 30 June 2014 should be restated and retained earnings be adjusted for these
amounts.
(ii) Cost for training of staff is also not allowed for capitalization and should be charged to
profit and loss account for the year ended 30 June 2015.
(iii) Depreciation of Rs. 0.4 million on laboratory equipments for the period from the
commencement of the commercial production i.e. 1 January to 30 June 2015 should be
charged to profit and loss account for the year- ended 30 June 2015.

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Answer-7
International Associates limited
Notes to the Financial Statements
For the year ended 30 June, 2016
Intangible Assets
Brands Software License Development Total
(W-4) (W-2) (W-3) (W-1)
--------------------------Rs. in „million‟--------------------------
Cost
Opening 200 80 15 - 295
Additions - 120 - 30 150
Disposals - (80) - - (80)
Closing 200 120 15 30 365
Accumulated Amortisation/Impairment
Opening 40 48 - - 88
Amortisation 20 15 0.75 0.75 36.5
Disposals - (60) - - (60)
Closing (60) (3) (0.75) (0.75) (64.5)
WDV (30/6/06) 140 117 14.25 29.25 300.5

Useful life 10 10 10 10
Amortisation Straight line Straight line Straight line Straight line
method
(W-1) Production process (adj. ii)
Development expenditure to be capitalized ((45/9) x 6) 30
Amortisation expense ((30/10) x 3/12) 0.75
(W-2) Software (adj. iii)
ERP
Cost of asset (115+5) (It is assumed that sales tax is non-refundable) 120
Amortisation expense ((120/10) x 3/12) 3

Old software
Amortisation expense ((80/5) x 9/12) 12

Total amortization (12+3) 15

Disposal Entry for old software which has become redundant:
Dr. Cr.
Acc. Amortization (48+12) 60
P/L(Bal.) 20
Software 80
(W-3): License (adj. v)
Amortisation expense ((15/10) x 6/12) 0.75

(W-4): Brands
Amortisation expense (200/10) 20

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Answer-8
Apple Limited
Notes to the Consolidated Financial Statement
For the year ended June 30, 2018
Intangibles Rs. in million
License Software Res. & Customer Goodwill
Dev. List

--------------------------Rs. in „million‟--------------------------
Cost
Opening 450 - - - -
Additions
- Business Acq. - 200 95 20 90 (W-1)
- Others - - 70 (W-2) - -
Transferred (45) - - - -
Revaluation loss (W-5) (55) - - - -
Disposals - (100) - - -
Closing 350 100 165 20 90
Accumulated Depreciation
Opening - - - - -
Amortisation 45 17.5 2.8 2 -
(W-5) (W-4) (W-3) (W-7)
Transferred (45) - - - -
Disposals - (7.5) - - -
Closing - (10) (2.8) (2) -
Accumulated Impairment
Opening - - - - -
impairment loss - - - - 18 (W-6)
Closing - - - - (18)
WDV as on 30/6/18 350 90 162.2 18 72

Useful life 10 10 10 10 N/A

Amortisation method Straight line Straight Straight Straight N/A
line line line
Measurement Model Revaluation Cost Cost Cost N/A

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 1,950 Fair value net assets (200 + 1,545) 1,745
Revaluation Surplus - R & D 95
Revaluation Surplus - Customer List 20
1,860
Goodwill (bal.) 90

(W-2)
Research and development (12 +48+6+4) 70

(W-3)
Amortisation on R & D Product (95+70) = 165/10 x 2/12 2.8

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(W-4) Amortisation on Software

- on additions (100/10) 10
- on disposals (100/10 x 9/12) 7.5
17.5
(W-5) Calculation of revaluation surplus and Amortisation of License
Date Description License R. Surplus SOCI(P/L)
1/7/017 Opening 450 30
30/6/18 Amortisation (450/10):(30/10) (45) (3)
30/6/18 WDV 405 27
30/6/18 Revaluation loss (bal.) (55) (27) (28)
30/6/18 Revalued amount 350 - (28)
(W-6)
Impairment loss of Goodwill (90 x 20%) 18
(W-7)
Amortisation of Customer list (20/10) 2

Note: In adjustment (iv) AL Customer list F.V is ignored because internally generated Customer list
cannot be recorded as an intangible asset. It is important to mention here that ML Customer list is
recorded as an intangible asset because it is purchased Customer list. (Meeting recognition criteria as per
IAS -38)

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Answer-9
Note for Students:
1. Rs. 170 million in adjustment (i) is ignored as it cannot be revalued because there is no active market.
2. Acquisition cost of Web server of Rs. 16 million in adjustment (ii) is ignored as it falls under IAS-16.
3. In adjustment (iii) the license was renewed in 2017 and licensing authority intimated in 2018 that
license cannot be renewed so remaining life is 4 years only.

Zinc Limited (ZL)

Notes to the Financial Statement
For the year ended 31 December 2018
9. Intangibles
Research & Website License
Development
--------------------------Rs. in „million‟-------------------
Cost
Opening - - 150
Additions
- Separate acquisition [90: (2+3+5+11): - ] 90 21 -
- Development (48 x 6/8) 36 - -
Closing 126 21 150
Less: Accumulated Amortisation
Opening - - -
Amortisation [((90+36) =126/10 x 4/12): - :(150÷4) 4.2 - 37.5
Closing (4.2) - (37.5)
Less: Accumulated Impairment loss
Opening -
Impairment loss (W-1) 7.5
Closing (7.5)
WDV as on 31/12/18 121.8 21 105

Useful life 10 N/A 4

Amortisation method Straight line N/A Straight line

(W-1) Calculation of Impairment Loss

License
Carrying amount as on 31/12/18 (150 - 37.5) 112.5
Recoverable amount (105)
Impairment loss 7.5

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Answer-10
Qabil Limited
Notes to the Financial Statement
For the year ended 31 December 2019
9. Intangibles
Product ERP License
design software
--------------------Rs. in „million‟---------------
Cost
Opening 750 200 -
Additions:
- Separate acquisition (W-1) - 391.5 520
Closing 750 591.5 520
Less: Accumulated Depreciation
Opening 75 80 -
Amortisation (W-2): (W-3): (W-4) 112.5 67.25 65
Closing (187.5) (147.25) (65)
Less: Accumulated Impairment loss
Opening - - -
Impairment loss (W-6) 48.5 - -
Closing (48.5) - -
WDV as on 31/12/19 514 444.25 455

Measurement basis Cost Cost Cost

Model Model Model
Useful life (in years) 6 years 2 - 9 years 8 years
Amortisation method Straight Straight Straight
line line line

(W-1) Cost of ERP Software

Rs. in „million
Purchase price 360
Borrowing cost:
On advance [(360 × 40%) = 144 × 15% × 10/12] 18
On remaining payment [(360 × 60%) = 216 × 15% × 5/12] 13.5
391.5
(W-2) Amortisation on Product design
Amortisation (750 - 75) = 675/6* 112.5
*Remaining life standing on 01.01.19 from 2019 to 2024 is 6 years. No benefits are expected from 2025
and onwards so these years are ignored while calculating life.

(W-3) Amortisation on ERP Software

On opening (200-80)= 120/2 (Remaining life standing on 1.1.19 is 2 years i.e. 2019 and 2020) 60
on Additions (391.5/9 x 2/12) 7.25
67.25

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(W-4) Amortisation of License

Amortisation [(520 - 0) / 8] 65

Note:
As renewal cost is insignificant so we will add up the renewal period while calculating the legal life. So
the legal life is 10 (5 + 5) years. However management intends to use it for 8 years only so 8 being shorter
will be used in amortization calculation.
Residual value given is ignored because there is no active market available.

(W-5) Value-in-use of product design

Value-in-use = 190 (1.12)-1 + 170 (1.12)-2 + 140 (1.12)-3 + 100 (1.12)-4 + 80 (1.12)-5 = 514

(W-6) Impairment loss

31.12.19 Carrying amount [750 - 75 - 112.5 (W-2)] 562.5
31.12.19 Recoverable amount (W-5) Value-in-use is taken as recoverable amount) (514)
Impairment loss 48.5

Answer-11
Sunshine Limited
Year ended 30 June 2017
Amount to be recognised in SOFP Rs in mill.
Intangibles – Licenses (170 + 300 + 65 + 55 ) 590
Revaluation Surplus 93
Amount to be recognised in profit and loss
Amortization (20 + 23 + 15 + 5) 63
Revaluation loss (10 + 10) 20

(W-1) License A
Date Description Asset R. Surplus SOCI(P/L)
/(loss)
1/7/16 Cost 200
30/06/17 Amortisation (200/10) (20)
30/06/17 WDV 180
30/06/17 Revaluation surplus/(loss) (bal.) (10) (10)
30/06/17 Revalued amount 170 (10)
(W-2) License B
Date Description Asset R. Surplus SOCI(P/L)
/(loss)
1/7/16 Cost 230
30/06/17 Amortisation (230/10): (23)
30/06/17 WDV 207
30/06/17 Revaluation surplus/(loss) (bal.) 93 93
30/06/17 Revalued amount 300 93

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(W-3) License C
Date Description Asset R. Surplus SOCI(P/L)
/(loss)
1/7/16 Cost 90
30/06/17 Amortisation (90/6) (15)
30/06/17 WDV 75
30/06/17 Revaluation surplus/(loss) (bal.) (10) (10)
30/06/17 Revalued amount 65 (10)
(W-4) License D
Date Description Asset R. Surplus SOCI(P/L)
/(loss)
1/7/16 Cost 60
30/06/17 Amortisation (60/12) (5)
30/06/17 WDV 55

(W-5)Legal life and useful life

Legal life 10 10 15* 15*
Useful life 12 Indefinite 6 12
Lower of above 10 10 6 12
*As renewal cost is insignificant so renewal period is considered while calculating legal life.

Answer-12
i. Tools are purchased normally in “Development Phase” so these will be capitalized.
ii. Cost of furnishing new laboratory is a purchase of fixed asset (tangible asset) and shall be
depreciated.
Depreciation related to research phase will be expensed out and depreciation related to
development phase shall be capitalized.
iii. Salaries paid to research associates shall be charged to profit and loss account because it is
incurred in research phase.
iv. Cost of conducting tests is ultimately done in final products so it should be capitalized.
v. Remuneration paid to Mr. Talat on successful completion of research will be expensed out as all
expense incurred in research phase are charged to income statement.
vi. Cost of manufacturing the samples is the part of development phase so shall be capitalized.
vii. Material imported for commercial production shall be initially included in stock and then it will
charged to “Cost of goods sold” in the year of sale.
viii. Final payment to Mr.Talat shall be capitalized as it is given after completion of project i.e paid in
development phase.
ix. Product launching expense is a selling expense so shall be charged to profit and loss.
Note: Assuming each activity performed in development phase fulfills all conditions of capitalization as
per IAS-38.

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Answer-13
i. Personnel cost:
If personnel is involved in the construction of an intangible asset (which fulfill the specified
condition) then its costs will be capitalized, otherwise it will be charged to the profit & loss Account.

ii. Purchase of intangible:

Purchased intangibles are capitalized because these are separately acquired and fulfill all of the
conditions for recognition because:
 These will generate probable future economic benefits to the enterprise and
 their costs are reliably measured

Answer-14
(a) (i) The depreciable amount of an intangible asset with a finite useful life shall be allocated on a
systematic basis over its useful life.
(ii) Amortization shall begin when the asset is available for use
(iii) Amortization shall cease at the earlier of the date that the asset is classified as held for sale and
the date that the asset is derecognised.
(iv) The amortization method used shall reflect the pattern in which the asset's future economic
benefits are expected to be consumed by the entity.
(v) The amortization charge for each period shall be recognised in statement of profit or loss.
b) Note for students: As per the requirement of question ledger accounts of goodwill and brand are
required, therefore accumulated amortisation and accumulated impairment accounts are not
prepared and these amounts are directly credited in asset accounts.
Dr. Goodwill Cr.
1.1.07 Cost of Investment 270 31.12.07 Impairment loss 50
31.12.07 c/d 220
1.1.08 b/d 220
31.12.08 c/d 220

Dr. Brand account at book value Cr.

1.1.07 Purchase of brand 100 31.12.07 Amortisation (100/10) 10
31.12.07 c/d (bal.) 90
1.1.08 b/d 90 31.12.08 Amortisation (100/10) 10
31.12.08 Impairment loss 13.5
31.12.08 c/d 66.5

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment (50 million shares x 90% 1,350 Fair value net assets 1,100
x Rs. 30/share)
NCI (Prop. share) (1,200 x 10%) 120 Revaluation surplus - Recognition of brand 100
1,200
Goodwill (bal.) 270

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Entries for impairment and amortisation for understanding only

Date Particulars Dr. Cr.

31.12.07 Impairment loss 50
Goodwill 50
(Good will impaired)
31.12.07 Amortization 10
Brand 10
(Recording of amortisation)
31.12.08 Amortization 10
Brand 10
(Recording of amortisation)
31.12.08 Impairment loss 13.5
Brand 13.5
(Recording of impairment loss)

Answer-15
Dove Limited (DL)
Amount to be capitalized:
Rs. In Million
Pilot plant 40
Fee to register legal rights 15
Cost of manufacturing samples (32 - 20) 12
Directly attributable salaries (5 x 7M) 35
Directly attributable Overheads (1.5 x 7M) 10.5
112.5

Reasons for ignoring cost:

Description Rs. in million Reasons
Evaluation of possible 2 This is part of research and therefore
alternatives should not be capitalized.
Pre-production prototypes 17 Since this cost was incurred before
meeting of recognition criteria, this
should be charged to P & L.
Brand building 16 This is selling cost and therefore
should not be capitalized.
Salaries and overheads 19.5 Since salaries and overheads from
[5 x 3M + 1.5 x 3M] January 2020 to March 2020 were
incurred before meeting of recognition
criteria, this should be charged to P/L
a/c.

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Answer-16
Ajwa Limited (AL)
Amount to be capitalized:
Cost of website: Rs. In Million
Salaries and general overheads Rs. 6 mill. /6 month x 2 month 2.0
Development of the content 7.0
9.0
Reasons for ignoring cost:
Description Rs. in million Reasons
Defining hardware and software 0.5 This activity relates to planning phase (which is
specifications similar in nature to research phase) so should be
expensed out.
Salaries and general overheads 6.0 Salaries and general overheads from January 2021
to April 2021 should be expensed out as incurred
before meeting recognition criteria.
Registering websites with search 1.0 It is an expense of operational phase so should be
engines expensed out
Annual fees for hosting website 0.6 This is operating expense which is of recurring
nature so should be expensed out.
Employees training costs 1.5 This is not eligible cost for capitalization so should
be expensed out.
Discounts offers for logging on 2.0 This is promotional activity and relates to post
the website development so should be expensed out.

Answer-17
(i) Cost incurred on pilot plant should be recorded as intangible as it falls under development activities.
As criteria for capitalizing development cost has been met, all cost (i.e. designing, constructing and
operating) incurred on pilot plant should be capitalized as an intangible. Amortization will begin
once development activity ends and commercial production starts over the life of product.
(ii) This exchange has a commercial substance and future cash flows are expected to change as a result
of this exchange. Therefore, the exchange should be recognized at fair value. As fair value of both
assets exchanged is given, the exchange should be recorded at the fair value of equipment given.
So, the patent should be recorded at Rs. 60 million i.e. sum of fair value of equipment given up (Rs.
35 million) and cash consideration(Rs.25 million). Further, cost of transferring title of Rs. 2 million
should be added to cost of patent. No amortization will be charged on patent due to indefinite life.
However, the patent will be tested for impairment annually.
(iii) Grant of license by government should be treated as government grant. The license can be recorded
as intangible asset at its fair value of Rs.50 million. Government grant so recognized should be
amortized to P&L over the life of license. Alternatively, intangible asset can be recorded at a
nominal amount. AL should select an accounting policy in this regard and apply it consistently.

Answer-18
(i) The license should be recognised as intangible asset at initial cost of Rs. 52 million (50+2). The
transfer fee being directly attributable cost should be included while refundable tax of
Rs. 1 million should not be included in cost.
The useful life of license will be restricted to the original five years as the renewal cost of Rs. 40
million is significant which should be considered separate intangible at the time of renewal. The
residual value of license at the end of five years is zero because there is no commitment by 3rd
party to purchase the license and there is no active market for the license. The amortization for
the year should be Rs. 10.4 million (52/5).
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(ii) As per IAS 38, Rs. 5 million (2+3) for planning and content development should be expensed out
because website is developed primarily for promoting and advertising SL’s products and services
and SL will not be able to demonstrate how it will generate probable future economic benefits.
Rs. 7 million incurred for acquisition of the web servers should be capitalized under property,
plant and equipment and depreciated over useful life.
Website hosting fee amounting to Rs. 0.42 million (1 x 5/12) should be charged to profit and loss
during the year and Rs. 0.58 (1-0.42) million will be recorded as prepayment.

Answer-19
Rs. in “million”
Total Total Profit
Assets Liability
As per Question 2,700 1,620 398

Reversal of intangible [692 – (300 – 8)] (400) - -

Recording of expense - - (104)
Increase in equipment (360 – 72) 288 - -
Amortization on intangibles - (8)
(112) - (112)
Recording of Provision - 20 (20)
Recording of NRV loss (13) - (13)
(13) 20 (33)
2,575 1,640 253
(W-1)
Dr. Cr.
Original Entries
Intangible (*332 x 7/9) + (72 x 7/12) 300
Expense (332 x 2/9) + (72 x 5/12) 104
Equipment 360
Cash 692
Accumulated Depreciation (360/5) 72
(Recording of Original Entry )
Amortisation (300/10 x 3/12) 8
Accumulated Amortisation 8
(Recording of Amortisation expense)
Wrong entry
Intangible 692
Cash 692
(Recording of Wrong entry)
*332 = 30 + 90 + 212

(W-2) Recording of Provision

Expense 20
Provision for court case 20

Recording of Inventory loss

Cost of Sales (3 + 10) 13
Inventory 13

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1. 300 Units which arc to be sold to Jamal

Rs. in million
Cost (150,000 x 300 units) 45
Net realisable value (22 0,000 - 80,000) x 300Units (42)
NRV loss 3
Note: Rs. 130,000 is ignored here because we have firm sales contract.
2. 500 Units (Remaining)
Cost (500 x Rs. 150,000) 75
Net realisable value (Higher of)
- If we remove Defect (200,000 - 80,000) x 500 60
- If we don’t remove defect (130,000 x 500) 65 (65)
NRV loss 10

Answer-20
Hatero Limited (HL)
Notes to the Financial Statement
For the year ended 31 December 2022
9. Intangibles
License Software Product
Development
----------------Rs. in „million‟-------------------
Cost
Opening - 240 -
Additions
- Separate acquisition 174 410 -
- Development (W-4) - - 416
Transfer (14) - -
Revaluation (W-1) 16 - -
Closing 176 650 416
Less: Accumulated Amortization
Opening - 126 -
Amortization (W-1):(W-2):(W-5) 14 79 13
Transfer (14) - -
Closing (0) (205) (13)
Less: Accumulated Impairment loss
Opening - - -
Impairment loss (W-3) - 18 -
Closing (0) (18) (0)
WDV as on 31/12/18 176 427 403
1.1
Useful life 6 years 3-5 years 8 years
Amortization method Straight line Straight Straight line
line
Measurement basis Revaluation Cost Cost
1.2 The last revaluation of license was performed on 31/12/22. The revalued amount was determined with
reference to active market for such licenses.

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10. Correction of error:

During the year, it was identified that the amount capitalized as product development in 2021 was
incorrect. The effect of correction of this error is as below:
Effect on financial position: 2021
Rs.in million
Decrease in intangible assets (W-6) 645
Increase in property plant and (W-6) (420 - 28) 392
equipment
Decrease in Retained Earnings (225 + 28) 253
Effect on statement of profit and loss
Increase in research expense (W-6) 225
Increase in depreciation of equipment (W-6) 28

(W-1)

Date Description Asset R/S

1/5/22 Cost 174
31/12/22 Depreciation (174 - 48)/6 x 8/12 (14)
31/12/22 B.V 160
31/12/22 Revaluation surplus 16 16
31/12/22 Revalued amount 192 - (2 x 8 months) 176 16

(W-2) Amortization on software

New Software (410/5 x 6/12) 41
Old Software (240 – 126)/3 38
79
(W-3) Calculation of impairment loss
Carrying amount as on 31/12/22 [(240 – 126) = 114 - 38(W-2)] 76
Recoverable Amount (58)
Impairment loss 18

(W-4) Cost of Product Development

Cost other than equipment (150 + 160 + 320) x 8/14 360
Depreciation on equipment (420/5) x 8/12 56
416

(W-5)
Amortization on Product development (416/8 x 3/12) 13

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(W-6)
Journal entries Dr. Cr.
ORIGINAL:
Research expense 225
Cash 225
(150 + 160 + 320) x 5/14
Property, Plant and Equipment 420
Cash 420
Depreciation expense 28
Property, Plant and Equipment 28
(420/5 x 4/12)
ENTRY BY ACCOUNTANT:
Intangible asset 645
Cash 645
(225+420)

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CHAPTER-3
INTANGIBLE ASSETS
ICAP SUDY TEXT
Question-1
The following information relates to the financial statements of Fazal for the year to 31 March 2015.
The IT division has begun a training course for all managers in a new programming language at a cost of
Rs. 200,000. The consultants running the training course have quantified the present value of the training
benefits over the next two years to be Rs. 400,000. The project cost has been included in the statement of
financial position as a current asset. The accounting policy note identifies that the costs will be written off
over the next two years to match the benefits.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate). (3)

Question-2
During 2015 Henry has the following research and development projects in progress.
Project A was completed at the end of 2014. Development expenditure brought forward at the beginning
of 2015 was Rs. 412,500 on this project. Savings in production costs arising from this project are first
expected to arise in 2015. In 2015 savings are expected to be Rs. 100,000, followed by savings of
Rs. 300,000 in 2016 and Rs. 200,000 in 2017.
Project B commenced on 1 April 2015. Costs incurred during the year were Rs. 56,000. In addition to
these costs a machine was purchased on 1 April 2015 for Rs. 30,000 for use on the project. This machine
has a useful life of five years. At the end of 2015 there were still some uncertainties surrounding the
completion of the project.
Project C had been started in 2014. In 2014 the costs relating to this project of Rs. 36,700 had been
written off, as at the end of 2014 there were still some uncertainties surrounding the completion of the
project. Those uncertainties have now been resolved and a further Rs. 45,000 costs incurred during the
year.
Required
Show how the above would appear in the financial statements (including notes to the financial statements)
of Henry as of 31 December 2015.

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Question-3
Toby entered into the following transactions during the year ended 31 December 2015. The directors of
Toby wish to capitalise all assets wherever possible.
(1) On 1 January Toby acquired the net assets of George for Rs. 105,000. The assets acquired had the
following book and fair values.
Book value Fair value
Rs. Rs.
Goodwill 5,000 5,000
Patents 15,000 20,000
Non-current assets 40,000 50,000
Other sundry net assets 30,000 25,000
90,000 100,000
The patent expires at the end of 2022. The goodwill arising from the above had a recoverable
value at the end of 2015 of Rs. 7,000.
(2) On 1 April Toby acquired a brand from a competitor for Rs. 50,000. The directors of Toby have
assessed the useful life of the brand as five years.
(3) During the year Toby spent Rs. 40,000 on developing a new brand name. The development was
completed on 30 June. The useful life of this brand has been assessed as eight years.
(4) The directors of Toby believe that there is total goodwill of Rs. 2 million within Toby and that
this has an indefinite useful life.
Required
Prepare the note to the financial statements for intangible assets as at 31 December 2015.

Question-4
Ateeq Ltd acquires new technology that will significantly reduce its energy costs for manufacturing.
Costs incurred include:
Amount in Rs.
Cost of new technology 1,500,000
Trade discount 200,000
Training course for staff in new technology 70,000
Initial testing of new technology 20,000
Losses incurred while other parts of plant shutdown during testing and training 30,000
Required:
Calculate total cost to be capitalised.

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Question-5
On 30 June 2004, Habib Limited (HL) discovered that it had been manufacturing a product illegally since
this product happened to be a patented product for which it did not have the necessary rights. HL
immediately shut down its factory and hired a firm of lawyers to act on its behalf in the acquisition of the
necessary rights to manufacture this patented product.
a) Legal fees of Rs. 50,000 were incurred during July 2004.
b) The legal process was finalized on 31 July 2004, HL was then required to pay Rs. 800,000 to
purchase the rights, including Rs. 80,000 in refundable Taxes.
c) During the July factory shut-down
i. Overhead costs of Rs. 40,000 were incurred;
ii. Significant market share was lost with the result that HL’s total sales over August and
September was Rs. 20,000 but its expenses were Rs. 50,000, resulting in loss of Rs. 30,000.
d) To increase market share, HL spent an extra Rs. 25,000 aggressively marketing their product. This
marketing campaign was successful, resulting in sales returning to profitable levels in October.
Required:
Calculate total cost to be capitalised.

Question-6
Saqib Limited began researching and developing an intangible asset. The following is a summary of the
costs that the R&D Department incurred each year:
2011: Rs. 180,000
2012: Rs. 100,000
2013: Rs. 80,000
Additional information:
a) The costs listed above were incurred evenly throughout each year.
b) Included in the costs incurred in 2011 are administrative costs of Rs. 60,000 that are not considered
to be directly attributed to the research and development process. The first two months of the year
were dedicated to research. Then development began from 1 March 2011 but all 6 recognition
criteria for capitalization of development costs were only met on 1 April 2011.
c) Included in the costs incurred in 2012 are administrative costs of Rs. 20,000 that are considered to
be directly attributed to the research and development process.
d) Included in the costs incurred in 2013 are training costs of Rs. 30,000 that are considered to be
directly attributed to the research and development process.
Required:
Prepare the journal entries to record the above transactions.
Question-7
During the year ended 31 December 2017, following transactions were made by Zebra Limited (ZL):
On 1 April 2017 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of which Rs.
50 million was paid immediately. The balance amount is payable on 1 April 2019. A mega social media
and print media campaign was launched to promote the channel at a cost of Rs. 10 million. The
transmission of the channel started on 1 August 2017.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since the
renewal cost is significant, the management intends to renew the license only once and sell it at the end of
8 years.
In the absence of any active market, the management has estimated that residual value of the license
would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended 31
December 2017.

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SOLUTIONS

Answer-1
An entity may have a team of skilled staff and may be able to identify incremental staff skills leading to
future economic benefits from training. The entity may also expect that the staff will continue to make
their skills available to the entity.
However, an entity usually has insufficient control over the expected future economic benefits arising
from a team of skilled staff and from training for these items to meet the definition of an intangible asset.
Therefore, IAS 38 specifically states that training costs should not be capitalised. Hence the treatment
adopted by Fazal is not correct and the training costs should be charged to P&L.

Answer-2
HENRY
Statement of Financial Statement (Extracts only)
As on 31 December, 2015
2015
Assets
Non-current assets
Property, plant and equipment (N-1) 25,500
Intangibles (N-2) 388,750

HENRY
Statement of Comprehensive Income (Extracts only)
For the year ended 31 December, 2015
2015
Depreciation expense (N-1) 4,500
Amortisation expense (W-3) 68,750
Development expense 56,000

HENRY
Notes to the Financial Statements (Extracts only)
For the year ended 31 December, 2015

(N-1) Property, plant and Equipment

Rs.
Cost
Opening 0
Additions 30,000
Closing 30,000
Accumulated depreciation
Opening 0
Depreciation (30,000/5 years x 9/12) 4,500
Closing (4,500)

Net book value 31.12.15 25,500

Net book value 31.12.14 0

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(N-2) Intangibles
Cost
Opening 412,500
Additions 45,000
Closing 457,500
Accumulated amortization
Opening 0
Amortisation (W-3) 68,750
Closing (68,750)

Net book value 31.12.15 388,750

Net book value 31.12.14 412,500

(W-3) Amortisation
Amortisation 412,500 x 100,000 68,750
(Project A) (100,000 + 300,000 +200,000)

No amortisation is charged on project C as it is still not completed.

Note:
Project B cost cannot be capitalised because there are uncertainties surrounding the completion of project.

Further Project C costs incurred in 2014 cannot be capitalised now in 2015 because these have already
been expensed out in 2014.

Answer-3
TOBY
Statement of Financial Position (Extracts only)
As on 31 December, 2015
2015
Assets
Non-current assets
Intangibles (N-1) 67,000

TOBY
Statement of Comprehensive Income (Extracts only)
For the year ended 31 December, 2015
2015
Amortisation expense 10,000
Impairment loss 3,000
Development expenditure (Brand) 40,000

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TOBY
Notes to the Financial Statement (Extracts only)
For the year ended 31 December, 2015

(N-1) Intangible assets

Goodwill Patents Brands Total
Cost
Opening 0 0 0 0
Additions (W-1) 10,000 20,000 50,000 80,000
Closing 10,000 20,000 50,000 80,000

Accumulated amortisation/impairment
Opening 0
Impairment (10,000 - 7,000) 3,000 3,000
Amortisation (20,000/8) : (50,000/5) x 9/12 2,500 7,500 10,000
(3,000) (2,500) (7,500) (13,000)

Net book value 31.12.15 7,000 17,500 42,500 67,000

Useful life N/A 8 5

Amortisation method N/A Straight Straight
line line

(W-1) Calculation of Goodwill

Consideration paid 105,000
Less: Fair value of assets (20,000 + 50,000 + 25,000) (95,000)
Total Good will 10,000

IAS-38 specifically prohibits the recognition of internally generated brands and goodwill, therefore
adjustment no. 3 and 4 is ignored.

Answer-4
The cost that can be capitalised is: Rs.
Cost of a new technology 1,500,000
Less discount (200,000)
Plus initial testing 20,000
1,320,000

Answer-5
Rs. In “000”
Legal costs Note-1 50,000
Purchase price Note-2 (800,000-80,000) 720,000
Overhead costs Note-3 -
Operating loss Note-4 -
Advertising campaign Note-5 -
770,000

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Note-1 This is a directly attributable cost. Directly attributable costs must be capitalized
Note-2 The purchase price should be capitalized, but this must exclude refundable taxes.
Note-3 This is an incidental cost not necessary to the acquisition of the rights (the shut-down was only
necessary because HL had been operating illegally)
Note-4 The operating loss incurred is not a part of cost of intangible.
Note-5 Advertising costs are listed in IAS 38 as one of the costs that may never be capitalized as an
intangible asset.

Answer-6
Entries
Date Particulars Dr. Cr.
2011 Administration Expense 60,000
Research Expense (180,000 - 60,000) x 2/12 20,000
Development Expense (180,000 - 60,000) x 1/12 10,000
Development cost (Asset) (180,000 - 60,000) x 9/12 90,000
Bank 180,000

2012 Development cost (Asset) 100,000

Bank 100,000

2013 Training Expense 30,000

Development cost (Asset) 50,000
Bank 80,000

Notes:
1. Administration costs are capitalized if they are considered directly attributable (see 2012), otherwise
they are expensed (see 2011)
2. Training costs are always expensed even if they are considered to be directly attributable (see 2013).
3. Research costs are always expensed

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Answer-7

Note: Although management intends to renew the license but cost of renewal is significant. Therefore,
this will not be included in cost of intangible.
Explanation Particulars Dr. Cr.
Since a part of the payment for the 1 April 2017
license has been deferred beyond
normal credit terms so the Intangible asset – License 80
license will be initially recognised Cash 50
at cash price equivalent of Rs. 80 Payable 30
million i.e. Rs. 50 million plus (Recording of acquisition of intangible asset)
Rs. 30 million (i.e. present value of
Rs. 36.3 million discounted at 10%
for 2 years.)
The advertisement cost of Rs. 10
million incurred on launching of the Advertisement expense 10
channel cannot be included in Cash 10
the cost of the license and will be (Recording of advertisement cost)
charged to Profit and loss account.

The residual value of the license

will be assumed to be zero since 31 December 2017
there is no active market for the
license and there is no commitment
by 3rd party to purchase the license Amortization expense [(80 – 0) × 1/5 ×9/12] 12
at the end of useful life. Accumulated amortization 12
The amortization for the year will (Calculation of amortization)
be Rs. 12 million [(80 – 0) × 1/5
×9/12] calculated from 1 April 2017
when the license was available for
use.
Unwinding of interest expense of
Rs. 2.25 million shall be recorded Interest Expense (3× 9/12) 2.25
by increasing the liability of payable Payable 2.25
for license with same amount. (Unwinding of discount)

(W-1) Present value of amount payable (similar to calculation of PV of dismantling cost in IAS-37)
Rs. in million
Cost 30 (36.3 x 1.1-2 )
Interest expense 3 (Bal.)
Closing 33 (36.3 x 1.1-1 )

Note: Intangible is amortised when it is available for use

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CHAPTER-3
IAS 38: INTANGIBLE ASSETS
MULTIPLE CHOICE QUESTIONS
01. Power Limited has spent Rs. 200,000 researching new cleaning chemicals in the year ended 31
December 2020. They have also spent Rs. 400,000 developing a new cleaning product which
will not go into commercial production until next year. The development project meets the
criteria laid down in IAS 38 Intangible Assets.
How should these costs be treated in the financial statements of Power Limited for the year
ended 31 December 2020?
(a) Rs. 600,000 should be capitalised as an intangible asset on the statement of financial
position.
(b) Rs. 400,000 should be capitalised as an intangible asset and should be amortised;
Rs.200,000 should be written off to the statement of profit or loss.
(c) Rs. 400,000 should be capitalised as an intangible asset and should not be amortised;
Rs. 200,000 should be written off to the statement of profit or loss.
(d) Rs. 600,000 should be written off to the statement of profit or loss

02. Which TWO of the following items below could potentially be classified as intangible assets?
(a) purchased brand name
(b) training of staff
(c) internally generated brand
(d) licences and quotas

03. Star Limited has provided the following information as at 31 December 2016:
(i) Project A – Rs. 500,000 has been spent on the research phase of this project during the
year.
(ii) Project B – Rs. 800,000 had been spent on this project in the previous year and Rs.
200,000 this year. The project was capitalised in the previous year however, it has been
decided to abandon this project at the end of the year.
(iii) Project C – Rs. 1,000,000 was spent on this project this year. The project meets the
criteria of IAS 38 and is to be capitalised.
Which of the following adjustments will be made in the financial statements as at 31
December 2016?
(a) Reduce profit by Rs. 700,000 and increase non-current assets by Rs. 1,000,000
(b) Reduce profit by Rs. 1,500,000 and increase non-current assets by Rs. 1,000,000
(c) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,800,000
(d) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,000,000
04. Which of the following statements concerning the accounting treatment of research and
development expenditure are true, according to IAS 38 Intangible Assets?
(i) Research is original and planned investigation undertaken with the prospect of gaining
new knowledge and understanding.
(ii) Development is the application of research findings.
(iii) Depreciation of plant used specifically on developing a new product can be capitalised
as part of development costs.
(iv) Expenditure once treated as an expense cannot be reinstated as an asset.
(a) (i), (ii) and (iii)
(b) (i), (ii) and (iv)
(c) (ii), (iii) and (iv)
(d) All of the above

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05. Which of the following should be included in a company’s statement of financial position as an
intangible asset under IAS 38 Intangible Assets?
(a) Internally developed brands
(b) Internally generated goodwill
(c) Expenditure on completed research
(d) Payments made on the successful registration of a patent.

06. Which TWO of the following criteria must be met before development expenditure is capitalised
according to IAS 38 Intangible Assets?
(a) the technical feasibility of completing the intangible asset
(b) future revenue is expected
(c) the intention to complete and use or sell the intangible asset
(d) there is no need for reliable measurement of expenditure

07. Which of the following shall be capitalised as intangible asset in financial statements?
(a) Rs. 400,000 developing a new process which will bring in no revenue but is expected
to bring significant cost savings
(b) Rs. 400,000 developing a new product. During development a competitor launched a
rival product and now the entity is hesitant to commit further funds to the process
(c) Rs. 400,000 spent on marketing a new product which has led to increased sales of Rs.
800,000
(d) Rs. 400,000 spent on designing a new corporate logo for the business

08. Which of the following CANNOT be recognised as an intangible non-current asset in Ghalib
Limited (GL)’s consolidated statement of financial position at 30 September 2021?
(a) GL spent Rs. 132 million developing a new type of product. In June 2021
management worried that it would be too expensive to fund. The finances to complete
the project came from a cash injection from a benefactor received in November 2021.
(b) GL purchased a subsidiary during the year. During the fair value exercise, it was found
that the subsidiary had a brand name with an estimated value of Rs. 50 million but had
not been recognised by the subsidiary as it was internally generated.
(c) GL purchased a brand name from a competitor on 1 November 2020, for Rs. 65
million.
(d) GL spent Rs. 21 million during the year on the development of a new product, after
management concluded it would be viable in November 2020. The product is being
launched on the market on 1 December 2021 and is expected to be profitable.

09. Which of the following could be classified as development expenditure in Mars Limited’s
statement of financial position as at 31 March 2020 according to IAS 38 Intangible Assets?
(a) Rs. 120,000 spent on developing a prototype and testing a new type of propulsion
system. The project needs further work on it as the system is currently not viable.
(b) A payment of Rs. 50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques.
(c) Rs. 35,000 developing an electric bicycle. This is near completion and the product will
be launched soon. As this project is first of its kind it is expected to make a loss.
(d) Rs. 65,000 developing a special type of new packaging for a new energy-efficient
light bulb. The packaging is expected to reduce Mars Limited distribution costs by Rs.
35,000 a year.

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10. Which TWO of the following factors are reasons why key staff cannot be capitalised as an
intangible asset by an entity?
(a) They do not provide expected future economic benefits
(b) They cannot be controlled by an entity
(c) Their value cannot be measured reliably
(d) They are not separable from the business as a whole

11. Which of the following items should be recognised as intangible assets?

(i) Patent for new drug
(ii) Licence for new vaccine
(iii) Specialist training courses
(a) (i) and (ii)
(b) (ii) and(iii)
(c) (i) and (iii)
(d) (i) only

12. Home Limited (HL) has acquired a subsidiary Stairs Limited (SL) in the current year. SL has a
brand which has been reliably valued by HL at Rs. 500,000, and a customer list which HL has
been unable to value.
Which of these describes how HL should treat these intangible assets of SL in their consolidated
Financial Statements?
(a) They should be included in goodwill.
(b) The brand should be capitalised as a separate intangible asset, whereas the customer
list should be included within goodwill.
(c) Both the brand and the customer list should be capitalised as separate intangible
assets.
(d) The customer list should be capitalised as a separate intangible asset, whereas the
brand should be included within goodwill.

13. IAS 38 gives examples of activities that would be regarded as research and therefore not eligible
for recognition as an intangible asset.
Which one of the following would be an example of research costs?
(a) The design and construction of chosen alternative products or processes
(b) The design of pre-production prototypes and models
(c) The design of possible new or improved product or process alternatives
(d) The design, construction and operation of a pilot plant

14. Which of the following statements relating to intangible assets is true?

(a) All intangible assets must be carried at amortised cost or at an impaired amount, they
cannot be revalued upwards.
(b) The development of a new process which is not expected to increase sales revenues
may still be recognised as an intangible asset.
(c) Expenditure on the prototype of a new engine cannot be classified as an intangible
asset because the prototype has physical substance.

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15. Hali Limited is developing a new product and expects to be able to capitalise the costs. Which
one of the following would preclude capitalisation of the costs?
(a) Development of the product is not yet complete.
(b) No patent has yet been registered in respect of the product.
(c) No sales contracts have yet been signed in relation to the product.
(d) It has not been possible to reliably allocate costs to development of the product.

16. During the year to 31 December 2018 Faiz Limited (FL) incurred Rs. 200,000 of development
costs for a new product. In addition, FL spent Rs. 60,000 on 1 January 2018 on machinery
specifically used to help develop the new product and Rs. 40,000 on building the brand identity.
Commercial production is expected to start during 2019.
The machinery is expected to last 4 years with no residual value.
What value should be included within Intangible Assets in respect of the above in FL’s
Statement of Financial Position as at 31 December 2018?

Rs. ___________

17. A company had Rs. 20 million of capitalised development expenditure at cost brought forward
at 1 October 2017 in respect of products currently in production and a new project began on the
same date.
The research stage of the new project lasted until 31 December 2017 and incurred Rs. 1.4
million of costs. From that date the project incurred development costs of Rs. 800,000 per
month.
On 1 April 2018 the directors became confident that the project would be successful and yield a
profit well in excess of costs. The project was still in development at 30 September 2018.
Capitalised development expenditure is amortised at 20% per annum using the straight-line
method.
What amount will be charged to profit or loss for the year ended 30 September 2018 in respect
of research and development costs?

Rs. ___________

18. At 30 September 2019 Shakir Limited (SL)'s trial balance showed a brand at cost of Rs. 30
million, less accumulated amortisation brought forward at 1 October 2018 of Rs. 9 million.
Amortisation is based on a ten-year useful life.
An impairment review on 1 April 2019 concluded that the brand had a value in use of Rs. 12
million and a remaining useful life of three years. However, on the same date SL received an
offer to purchase the brand for Rs. 15 million.
What should be the carrying amount of the brand in the statement of financial position of SL as
at 30 September 2019?

Rs. ___________

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19. Down Limited (DL) owns a pharmaceutical business with a year-end of 30 September 2014. DL
commenced the development stage of a new drug on 1 January 2014.
Rs. 40,000 per month was incurred until the project was completed on 30 June 2014, when the
drug went into immediate production. The directors became confident of the project’s success
on 1 March 2014. The drug has an estimated life span of five years and time apportionment is
used by DL where applicable.
What amount will DL charge to profit or loss for development costs, including any amortisation,
for the year ended 30 September 2014?

Rs. ___________

20. Apollo Limited (AL) carries out research and development. In the year ended 30 June 2015 AL
incurred total costs in relation to project M of Rs. 750,000, spending the same amount each
month up to 30 April 2015, when the project was completed. The product produced by the
project went on sale from 31 May 2015.
The project had been confirmed as feasible on 1 January 2015, and the product produced by the
project was expected to have a useful life of five years.
What is the carrying amount of the development expenditure asset as at 30 June 2015?

Rs. ___________

21. An entity purchased patent for its product A in 2014 for 20 years. In 2019, the entity purchased
patent of a competing product for 20 years to eliminate competition for product A. However, the
entity does not intend to manufacture the competing product. The cost of purchasing second
patent for competing product should be:
(a) expensed out in 2019
(b) capitalized and amortized over 20 years
(c) capitalized and amortized over 15 years
(d) capitalized and only assessed for impairment at year end
(March 2020, Q.4(v), 01marks)

22. Computer hardware and related operating system, which is an integral part of the computer
hardware, are treated under:
(a) IAS 16 as a combined asset
(b) IAS 38 as a combined asset
(c) IAS 16 for computer hardware and IAS 38 for operating system
(d) IAS 16 or IAS 38 at the option of the entity
(March 2020, Q.4(vi), 01marks)

23. An entity acquired a patent for a period of ten years at cost of Rs. 90 million. The patent can be
further renewed for another five years at renewal cost of Rs. 1 million. The entity estimated that
expected period of cash inflows is twelve years from acquisition date.
The useful life of patent in years is:
(a) Five (b) Ten
(c) Twelve (d) Fifteen (01)
(September 2021, Q4(vii) 01 Marks)

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24. A company exchanged an intangible asset having fair value and carrying value of Rs. 15 million
and Rs. 13.6 million respectively with a new intangible asset having a fair value of Rs. 18 million.
An amount of Rs. 3.2 million was also paid in cash. If this transaction lacks commercial
substance, the cost of intangible asset acquired would be measured at:
(a) Rs. 15.0 million (b) Rs. 16.8 million
(c) Rs. 18.0 million (d) Rs. 18.2 million (01)
(March 2023, Q.6)
25. Which TWO of the following costs related to development of a website may be capitalized?
(a) Defining hardware and software specifications
(b) Stress testing
(c) Evaluating alternative products and suppliers
(d) Graphical design development (01)
(March 2023, Q.6)

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SOLUTIONS
01. (c)  Rs. 200,000 research will be expensed
 Rs. 400,000 development will be capitalized.
02. (a) & (d) “Training” will be expensed.
“Internally generated brand” is not an intangible.
03. (b)
Impact on P/L
Effect Rs.
Project A Research will be expensed 500,000
Project B As project is abandoned so whole amount of 1,000,000
expense relating to previous and current year
will now be expensed.
Project C -
1,500,000
Impact on non-current Assets
Effect Rs.
Project A -
Project B -
Project C Increase intangible 1,000,000
1,000,000
04. (d) All True
05. (d) Cost of registration of patent will be capitalized the same way we do it in IAS-16.
06. (a) & (c) Refer para 57 of IAS-38 in my book.
07. (a) a) It is true because cost saving also is an economic benefit.
b) It is abandoned so it will be expensed.
c) Marketing expense is an advertisement so it will be expensed
d) Logo is just like an advertisement so it will be expensed
08. (a) a) Funds saal kay bad milay hain is liey 30.Sep.2021 ko 6 criteria meet nahi ho
raha is lia no asset.
b) Agar subsidiary ne record nahi kia to bhi hum to CSOFP main record kar
sakty hain.
c) Brand purchased hay is liye intangible hai
d) Hamaray sal main he viable ho gaya hay is liye intangible hay
09. (d) a) cannot be capitalised because it does not meet 6 criteria as it is not viable.
b) is research and cannot be capitalised.
c) cannot be capitalised because it does not meet 6 criteria as it is making a loss.
10. (b) & (c) a) False Employee benefit to deta hai
b) True Han us ko control nahi kar sakty wo ja sakta hay
c) True Har employee kitna faida dy ga alag alag pata nahi hai
d) False In ko business say separate kia ja sakta hai e.g. nokri sy nikaal
dein

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CHAPTER-3 IAS 38: INTANGIBLE ASSETS

11. (a) (iii) Training expense hai isliye expense out.

12. (b) a) False Brand reliably measureable hai is liye goodwill main shamil
nahi ho ga
b) True Customer list ko value nahi kar saktay is lye automatically wo
goodwill main jaey gi
c) False
d) False Customer list ko value nahi kar saktay kiun kay sawal main ye
likha hai
13. (c) Refer para 56 of IAS-38 of my book
14. (b) a) False In ko revalue kia ja sakta hai
b) True Han ye intangible ho sakta hai agar cost reduce karay
c) False Prototype ka physical substance nahi hota ye to intangible
hay.
15. (d) Sawal urdu main ye hay in 4 options main say konsi esi wja hay kay development ko
capitalize na karain:
(a) Agar development incomplete hay to bhi capitalize ho sakti hay
(b) Patent nahi bhe register hoa to bhi development capitalize hoti rahay gi
(c) Sales contract nahi bhi mila to bhi developmet capitalize ho gi
(d) Haaaaaannnn – agar cost reliably measure nahi ho rahi to phir devlpment
capitalize nahi ho gi. Ye para 57 ka 6th point hay.
16. Rs. Rs.
215,000 Development Cost 200,000
Machine Depreciation to be capitalized (60,000/4) 15,000
215,000
Rs. 40,000 is an internally generated brand so it is ignored.
17. Rs. Amount to be recorded in expenses
7,800,000 Rs.
New project
Research (1 Oct 2017 – 31 Dec 2017) 1,400,000
Development Expense (1 Jan 2018 – 31 Mar 2018) (800,000 x 3) 2,400,000
Old project
Amortisation of old project b/f from previous year 4,000,000
(20,000,000 x 20%)
7,800,000
Note: 1. Expenditure from April to September will be capitalized.
2. No amortisation is charged on new project as it is still under development.

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18. Rs. Firstly we will calculate book value on 1.4.19 i.e. at the mid of year
12,500,000 Cost 30
Less: Accumulated Amortization on 1.4.19 ( 9+ ) (10.5)
Book value on 1.4.19 19.5
Now we will calculate Impairment loss on 1.4.19
Book value on 1.4.19 19.5
Recoverable amount (1.4.19) (Higher of:)
 Value in use = 12 (15)
 Fair value = 15
Impairment loss 4.5
So book value after impairment is Rs. 15 which will now be amortised over its
remaining life
Now we will calculate book value on 30.9.19
Book value after impairment (1.4.19) 15
Less: Amortization from 1.4.19 to 30.9.19 ( ) (2.5)
12.5
19. Rs. 88,000 Amount to be recorded in expenses
Rs.
Development Expense (Jan 2014 – 1 March 2014) (40,000 x 2) 80,000
Amortization (July 2014 – Sep2014) ( ) 8,000
88,000
* Cost of intangible (March 2014 – June 2014) (40,000 x 4) = 160,000
20. Rs.290,000 Cost per month (1.7.14 - 30.4.15) = Rs. 75,000 per month
Rs.
Asset (Jan 2015 – April 2015) (75,000 x 4 months) 300,000
Less: Accumulated Amortization ( ) (10,000)
290,000
Note: It will be amortised from the date it is available for use.
21. (c) The entity does not intend to manufacture the competing product, thus the economic
benefits of patent (through elimination of competition for product A) will flow to the
entity till the production of product A i.e. 15 years from 2019. Therefore, the patent
will be capitalized and amortized over 15 years.
22. (a)
23. (c) Note: Question is asking useful life and not the period over which asset is amortised.
24. (b) As transaction lacks commercial substance so book value plus cash paid will be
taken as cost (13.6 + 3.2 = 16.8)
25. (b), (d)

301
 Separable or
identifiable
Legal or contractual right
Intangible non-monetary

and without physical substance

Increase sale
Future economic benefits are probable
Or reduce costs
Initial Recognition If
and Cost can be measured reliably

Purchase price, import duties, non-refundable purchase taxes after

Costs
deducting trade discounts and rebates, directly attributable cost
Capitalised
(costs of employee benefits, professional fees, testing cost)
Acquired intangibles advertising and promotional activities, costs of conducting
business in a new location or with a new class of customer
Not a part of cost
(staff training), Administration and other general overhead
costs

Costs in
Expense the costs mentioned in para 56
Research phase

Costs in Meeting conditions in Para 57 Capitalised

Development phase Not meeting conditions in Para 57 Expensed

costs of materials and services

costs of employee benefits

fees to register a legal right

Costs to be capitalised
if development meet criteria amortisation and depreciation of assets used to
(Para 66) generate intangible
Internally generated
selling, administrative and other general overhead that
can be attributed for preparing intangible

Costs mentioned in para 59 (if development met criteria)

selling, administrative and other general overhead that

cannot be attributed for preparing intangible
Costs always to
be expensed inefficiencies and initial operating losses
(Para 67)
Staff training
IAS-38
Internally generated Goodwill, Brand, Mastheads, Publishing Title and
Not Capitalised
customer list

Nominal amount
Acquired as Government grant Recorded at
Or Fair value

Acquired in business combination Recorded at fair value

Acquired through exchange Refer book for details

Website costs Refer SIC-32

Purchased goodwill

An asset which meets the development conditions

Do not amortise but test for impairment
but yet not completed
Amortisation/
Intangible having indefinite life
Impairment
Amortise and test for impairment if indicator exist Other than above 3

Legal life (Add extension period in original legal life if renewal is at

minimal cost)
Amortisation details Shorter of:
Useful life (Expected period of cash generation)

There is commitment by third party

Residual value The residual value shall be considered as zero unless
or There is an active market for sale

Initial Measurement At cost

Measurement Cost Model
Subsequent Measurement
or Revaluation model (If active market exist)