Processing, Reporting and

Auditing Financial Accounts

Intangible Assets & Impairment

IAS 38, IAS 36 and IFRS 3

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 Intangible Assets - IAS 38
 3 Criteria
 Identifiable
 Separable (capable of being separated and sold,
transferred, licensed, rented, or exchanged, either
individually or as part of a package) or
 Arises from contractual or other legal rights
 Control over a resource
 Means the company should have the power to
obtain future economic benefits
 Usually derived from a legal right
 Note IFAC definition of “intangible” includes
Human Capital
 Existence of future economic benefits
 This is expected over a period of years
 Intangibles are always Non-Current Assets 2
 Examples
 Examples of possible intangible assets
include:
 computer software
 patents
 copyrights
 motion picture films
 customer lists
 mortgage servicing rights
 licenses
 import quotas
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 Examples
 Intangibles can be acquired:
 by separate purchase
 as part of a business combination
 by a government grant
 by exchange of assets
 by self-creation (internal
generation)
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 Recognition
 Recognition criteria.
 IAS 38 requires an enterprise to
recognise an intangible asset, whether
purchased or self-created (at cost) if,
and only if
 it is probable that the future economic
benefits that are attributable to the
asset will flow to the enterprise
 the cost of the asset can be measured
reliably.
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 Measurement
 When an item is recognised as
intangible it is measured initially at
cost.
 Purchased intangibles
 Can add directly attributable costs
 Once intangible is in a condition
where it can be used
 All costs treated as operating
expenses 6
 Failure to meet the criteria
 If an intangible item does not
meet both the definition of and
the criteria for recognition as an
intangible asset then
 IAS 38 requires the expenditure
on this item to be recognised as
an expense when it is incurred
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 Amortisation
 Intangibles are non-current assets
 Therefore should be amortised
 2 models of carrying amounts
 A model must be chosen for each
class of intangible asset
 Cost model or
 Revaluation model
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 2 models
 Cost model
 Carrying amount =
 Cost
 Less accumulated amortisation
 Less accumulated impairment losses
 Revaluation model
 After initial recognition at cost
 Carrying amount =
 Fair value at date of (regular) revaluation
 Less accumulated amortisation since
revaluation
 Less accumulated impairment losses since
revaluation 9
 Fair Value
 Fair value can only be determined by
reference to an active market
 Such active markets are expected to be
uncommon for intangible assets
 Examples might be
 Milk quotas
 Freely traded taxi licences
 Where no active market exists – use
cost model
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 Accounting
 Under the revaluation model
 revaluation increases are credited
directly to "revaluation surplus" within
equity except to the extent that it
reverses a revaluation decrease
previously recognised in the income
statement
 If the revalued intangible has a finite
life and is, therefore, being amortised
the revalued amount is amortised
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Classification of Intangible Assets
Based on Useful Life
 Intangible assets are classified as
 Indefinite life:
 No foreseeable limit to the period
over which the asset is expected to
generate net cash inflows for the
entity.
 Finite life:
 A limited period of benefit to the
entity.
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 Measurement Subsequent to
Acquisition: Intangible Assets with
Finite Lives
 The cost less residual value of an intangible
asset with a finite useful life should be
amortised over that life
 The amortisation method should reflect the
pattern of benefits
 If the pattern cannot be determined reliably,
amortise by the straight line method
 The amortisation charge is recognised in profit
or loss unless another IFRS requires that it be
included in the cost of another asset.
 The amortisation period should be reviewed at
least annually
 The asset should also be assessed for
impairment in accordance with IAS 36
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 Measurement Subsequent to
Acquisition: Intangible Assets with
Indefinite Lives
 An intangible asset with an indefinite useful
life should not be amortised
 Its useful life should be reviewed each
reporting 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 should
be accounted for as a change in an
accounting estimate
 The asset should also be assessed for
impairment in accordance with IAS 36 14
 Research & Development
(R&D)
 Research
 Original and planned investigation
undertaken with the prospect of gaining
new scientific or technical knowledge
and understanding
 Development
 Application of research findings to a
plan or design for production of new or
substantially improved materials,
devices etc before the start of
commercial production or use 15
 Basic rules are
 Charge all research cost to expense
 Development costs are capitalised only
 after technical and commercial feasibility
of the asset for sale or use have been
established
 Therefore the enterprise must intend and
be able to complete the intangible asset
and
 either use it or sell it and
 be able to demonstrate how the asset will
generate future economic benefits 16
 Basic rules are
 If an enterprise cannot distinguish the
research phase of an internal project to
create an intangible asset from the
development phase
 the enterprise treats the expenditure for
that project as if it were incurred in the
research phase only
 If an asset is recognised as intangible
 It is shown in BS as development costs
capitalised
 It will be amortised from time it is
available for use
 Over period of expected economic benefit17
 Internally-generated
 Internally-generated intangible
assets
 May capitalise
 Costs of materials
 Labour costs
 Fees to register legal rights

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 As an example
 Computer Software
 Purchased: capitalise
 Operating system for hardware: include in
hardware cost
 Internally developed (whether for use or sale):
charge to expense until technological
feasibility, probable future benefits, intent and
ability to use or sell the software, resources to
complete the software, and ability to measure
cost.
 Amortisation: over useful life, based on pattern
of benefits (straight-line is the default)
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 Another example
 Inventions Ltd a company making microwave/radar
equipment wants to capitalise the following
 Calibration equipment made by company ($600,000)
used in calibrating lab equipment
 Microwave detection equipment ($1.5m) has been
made but found to be too large for aircraft.
Company believes further $0.5m development would
make a viable saleable product
 In flight tracking system ($1.25m) has been trialled
and planned production is for summer. Have
advanced orders for 2 units & commercial viability is
high.

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 What are NOT intangibles
 Brands
 Mastheads
 Publishing titles
 Customer lists and
 Items similar in substance that
are internally generated

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 Goodwill and IFRS 3
 Goodwill is the difference between
 Purchase value of a business and
 Fair value of separable net assets
 Inherent (internally-generated)
goodwill cannot be an intangible asset
 Purchased Goodwill is and is the
expectation of future economic benefits
for the purchaser

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Conditions applying to recognition of
Goodwill as an intangible
 Goodwill is recognised by the acquirer as an asset from
the acquisition date and
 is initially measured as the excess of the cost of the
business combination over the acquirer's share of the
net fair values of the acquiree's identifiable assets,
liabilities and contingent liabilities
 IFRS 3 prohibits the amortisation of goodwill
 Instead goodwill must be tested for impairment at least
annually in accordance with IAS 36 Impairment of
Assets
 Negative goodwill
 If the acquirer's interest in the net fair value of the
acquired identifiable net assets exceeds the cost of the
business combination
 that excess must be recognised immediately in the
income statement as a gain
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Impairment of Assets- IAS 36
 Purpose of IAS 36

 To ensure that assets are carried at

no more than their recoverable
amount, and to define how
recoverable amount is calculated

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 Definitions
 Impairment
 an asset is impaired when its carrying
amount exceeds its recoverable amount.
 Carrying amount
 the amount at which an asset is
recognised in the balance sheet after
deducting accumulated depreciation and
accumulated impairment losses
 Recoverable amount
 the higher of an asset's fair value less
costs to sell and its value in use 25
 Definitions
 Fair value
 the amount obtainable from the sale of
an asset in a bargained transaction
between knowledgeable, willing parties.
 Value in use
 the discounted present value of
estimated future cash flows expected to
arise from:
 the continuing use of an asset, and from
 its disposal at the end of its useful life
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 Cash-Generating Units
 Recoverable amount should be determined for
the individual asset, if possible
 If it is not possible to determine the
recoverable amount (fair value less cost to sell
and value in use) for the individual asset
 then determine recoverable amount for the
asset's cash-generating unit
 Which is the smallest identifiable group of
assets
 that generates cash inflows from continuing
use, and
 that are largely independent of the cash
inflows from other assets or groups of assets
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 Indications of Impairment
 External sources:
 market value declines
 negative changes in technology, markets,
economy, or laws
 increases in market interest rates
 company stock price is below book value
 Internal sources:
 obsolescence or physical damage
 asset is part of a restructuring or held for
disposal
 worse economic performance than expected
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 Impairment Testing
 When an asset is tested for
impairment
 Its recoverable amount needs to
be determined
 This = the higher of..
 Value in Use and
 Fair Value less costs to sell

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 Fair Value Less Costs to Sell
 If there is a binding sale agreement, use
the price under that agreement less
costs of disposal
 If there is an active market for that type
of asset, use market price less costs of
disposal
 If there is no active market, use the
best estimate of the asset's selling price
less costs of disposal
 Costs of disposal are the direct added
costs only (not existing costs or
overhead)
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 Value in Use
 Should reflect
 an estimate of the future cash
flows the entity expects to
derive from the asset in an
arm's length transaction

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