Chapter 9

Intangible Assets
 Learning Outcomes

At the end of the topic students should be able to:

1. Identify and explain the key characteristics of

an intangible asset
2. Explain and apply the recognition criterion
3. Explain and apply the requirements for initial
measurement
4. Explain the disclosure requirements
The Nature of Intangible Assets

IAS 38/MFRS 138 para 8 defines intangibles:

 “An identifiable non-monetary asset without physical
substance”

Three key characteristics of intangibles:

1. Non monetary
2. Identifiable
3. They lack physical substance
 The Nature of Intangible
Assets: Identifiability

For an intangible to be identifiable one of the

following two criteria must be met:
1. It is separable from the entity, capable of being
transferred (MFRS 138, para. 12)
Customers lists
Non-contractual customer relationships

2. It arises from a contractual or some other legal

right (MFRS 138, para. 12)
Trademarks
Franchise agreements
 The Nature of Intangible Assets:
Lack of Physical Substance

When they should be recognised:

 Should one wait for a point of discovery?
 Does an asset exist when the investment is made?
 Is there an asset at the point employee training occurs?

How they should be measured:

 Where is the market?
 Can the specific benefits be isolated?
 Are the property rights over the expected benefits fuzzy?
 Why are Intangibles
Important?

Intangibles have been increasing in importance due to:

 Intensified business competition
 The advent of information technologies

The above factors have resulted in a fundamental

corporate change

Significant increase in:

 Innovation related intangibles
 Human Resource related intangibles
 Organisational intangibles
Recognition & Initial Measurement

Intangibles may be acquired in the following ways:

 By separate acquisition- i.e. customer lists
 As part of a business combination- i.e. goodwill
 By way of a government grant- license to operate TV
station
 By exchanges with another intangible
 They may be internally generated- R&D expenditure
i.e. prototype
 Identifying Intangible Assets

An asset is defined in the Conceptual Framework

as a resource controlled by the entity.

 Control usually stems from legal or other rights

and can be difficult to establish.

 Highly trained staff do not qualify as intangibles

due to the lack of control the entity has over the
staff
 Ifat all, such benefits may be recognised as part of
goodwill (dealt with in MFRS 3)
Recognition & Initial Measurement:
Separate Acquisition

IAS 38/MFRS 138 considers that the probability

recognition criteria is always considered to be satisfied
for separately acquired intangibles, and,
Cost can usually be measured reliably, although there
may be issues where the acquirer is giving up non-
monetary assets rather than cash
 Example 1- Recognition
(Adapted: Kieso, D. E., Weygandt, J. J., and, Warfield (2014)

Green Market Inc. acquires the customer list of a large newspaper for
RM6,000,000 on 1 Jan 2015. The company expects to benefit from the
information evenly over a three-year period.

Question: Should the customer list acquired by Green Market Inc be

recognised as an intangible asset?

Answer: The customer list acquired by Green Market Inc. is an

example of separately acquired intangibles. IAS 38/MFRS 138
considers that the probability recognition criteria is always considered
to be satisfied for (para.25) separately acquired intangibles, and that
the cost can be usually be measured reliably (para. 26). Hence, this
item can be recognised as an asset in Green Market Inc.’s financial
statement.
 Intangible Asset Issues
Measurement/Valuation
Purchased Intangibles:
 Recorded at cost.
 Includes all costs necessary to make the intangible asset
ready for its intended use.
 Typical costs include:
► Purchase price.
► Legal fees.
► Other incidental expenses.
 Intangible Asset Issues
Measurement/Valuation
Internally Created Intangibles:
 Companies expense all research phase costs and some
development phase costs.
 Certain development costs are capitalized once economic
viability criteria are met.
 IFRS identifies several specific criteria that must be met
before development costs are capitalized.
 Types of Intangibles

Six Major Categories:

(1) Marketing-related. (4) Contract-related.

(2) Customer-related. (5) Technology-related.
(3) Artistic-related. (6) Goodwill.
 Types of Intangibles
Marketing-Related Intangible Assets
 Examples:
► Trademarks or trade names, newspaper
mastheads, Internet domain names, and non-
competition agreements.
 In the United States trademark or trade name has
legal protection for indefinite number of 10 year renewal
periods.
 Capitalize acquisition costs.
 Types of Intangibles
Customer-Related Intangible Assets
 Examples:
► Customer lists, order or production backlogs, and both
contractual and non-contractual customer
relationships.
 Capitalize acquisition costs.
 Types of Intangibles

Illustration: Green Market Inc. acquires the customer list of a

large newspaper for RM6,000,000 on January 1, 2015. Green
Market expects to benefit from the information evenly over a
three-year period. Record the purchase of the customer list.

Jan. 1 Customer List 6,000,000

Cash 6,000,000
 Types of Intangibles
Artistic-Related Intangible Assets
 Examples:
► Plays, literary works, musical works, pictures,
photographs, and video and audiovisual material.
 Copyright granted for the life of the creator plus 70 years.
 Capitalize costs of acquiring and defending.

and Mickey
Mouse
 Types of Intangibles
Contract-Related Intangible Assets
 Examples:
► Franchise and licensing agreements, construction
permits, broadcast rights, and service or supply
contracts.
 Franchise (or license) with a limited life should be amortized
to expense over the life of the franchise.
 Franchise with an indefinite life should be carried at cost
and not amortized.
 Types of Intangibles
Technology-Related Intangible Assets

 Examples:
► Patented technology and trade secrets granted by a
governmental body.
 Patent gives holder exclusive use for a period of 20 years.
 Capitalize costs of purchasing a patent.
 Expense any R&D costs in developing a patent.
 Types of Intangibles
Illustration: Harcott Co. incurs RM180,000 in legal costs on
January 1, 2015, to successfully defend a patent. The patent’s
useful life is 20 years. Harcott records the legal fees as follows.

Jan. 1 Patent 180,000

Cash 180,000
 Types of Intangibles
Goodwill
Conceptually, represents the future economic benefits arising
from the other assets acquired in a business combination that
are not individually identified and separately recognized.
Only recorded when an entire business is purchased.

Goodwill is measured as the excess of ...

cost of the purchase over the FMV of the identifiable net
assets purchased.

Internally created goodwill should not be capitalized.

 Recording Goodwill
Illustration: Multi-Diversified, Inc. decides that it needs a parts
division to supplement its existing tractor distributorship. The
president of Multi-Diversified is interested in buying São Paulo,
Brazil. The illustration presents the statement of financial position
of Tractorling Company.
Illustration 12-4
 Recording Goodwill
Illustration: Multi-Diversified investigates Tractorling’s underlying
assets to determine their fair values.
Illustration 12-5

Tractorling Company decides to accept Multi-Diversified’s offer of

$400,000. What is the value of the goodwill, if any?
 Recording Goodwill
Illustration: Determination of Goodwill.

Illustration 12-6
 Recording Goodwill
Illustration: Multi-Diversified records this transaction as
follows.

Property, Plant, and Equipment 205,000

Patents 18,000
Inventories 122,000
Receivables 35,000
Cash 25,000
Goodwill 50,000
Liabilities 55,000
Cash 400,000
 Recognition & Initial Measurement:
Internally Generated Intangibles (R&D)

 All expenditure incurred during research phase (i.e. salary of research

staff) of internal projects should be written off as an expense (MFRS
138, para. 54).
 Meanwhile, for development costs (i.e. construction of prototypes) to
be capitalised, the entity must meet all of the following criteria (IFRS
38/MFRS 138):
Technical feasibility
Intention to complete and sell
Ability to use or sell
Existence of a market
Availability of resources
Ability to measure costs reliably
Research and Development
Costs
 Research costs must be expensed as incurred.
 Development costs may or may not be expensed as
incurred.
 Capitalization begins when the project is far enough along
in the process such that the
economic benefits of the R&D
project will flow to the company
(the project is economically
viable).
 Research and Development
Costs
Identifying R & D Activities
Illustration 12-13

Research
Research Activities
Activities Examples
Examples
Original
Original and
and planned
planned investigation
investigation Laboratory
Laboratory research
research aimed
aimed at
at discovery
discovery of
of
undertaken
undertaken with
with the
the prospect
prospect of
of gaining
gaining new
new knowledge; searching for applications of
knowledge; searching for applications of
new
new scientific
scientific or
or technical
technical knowledge
knowledge new
new research
research findings.
findings.
and
and understanding.
understanding.

Development
Development Activities
Activities Examples
Examples
Application
Application of
of research
research findings
findings or
or other
other Conceptual
Conceptual formulation
formulation and
and design
design of
of
knowledge to a plan or design for
knowledge to a plan or design for thethe possible product or process alternatives;
possible product or process alternatives;
production
production of
of new
new or
or substantially
substantially construction
construction of
of prototypes
prototypes and
and
improved
improved materials,
materials, devices,
devices, products,
products, operation
operation of
of pilot
pilot plants.
plants.
processes,
processes, systems,
systems, oror services
services
before
before the
the start
start of
of commercial
commercial
production or use.
production or use.

LO 8 Identify the conceptual issues related to research and development costs.

 Research and Development
Costs
Accounting for R & D Activities
Costs Associated with R&D Activities:
 Materials, Equipment, and Facilities
 Personnel
 Purchased Intangibles
 Contract Services
 Indirect Costs
 Example
(Source: Kieso, D. E., Weygandt, J. J., and, Warfield (2014)

Capitalized Costs/Prototype 75,000  

Research and Development Expense 430,000  

Cash   505,000
 Research and Development
Costs
Other Costs Similar to R & D Costs
 Start-up costs for a new operation.
► should expensed as incurred.
 Initial operating losses.
► Should not be capitalized.
 Advertising costs.
► Should expensed as incurred.

If R&D–related intangibles (often referred to as in-process R&D) are also acquired in

a business combination, they are also recognized and measured at fair value.
 Example
(Source: Kieso, D. E., Weygandt, J. J., and, Warfield (2014)
 Example (cont.)

 These costs are referred to as start-up costs, or more specifically

organizational costs in this case. The accounting for start up costs is
straightforward—expense these costs as incurred. The profession
recognizes that these costs are incurred with the expectation that
future revenues will occur or increased efficiencies will result.
However, to determine the amount and timing of future benefits is
so difficult that a conservative approach—expensing these costs as
incurred—is required.
 Presentation & Disclosure
(Source: Kieso, D. E., Weygandt, J. J., and, Warfield (2014))
 Presentation & Disclosure
(Source: Kieso, D. E., Weygandt, J. J., and, Warfield (2014))
 Disclosures

 Disclosures for each class of intangibles and

for internally generated intangibles to be
distinguished from other intangibles

 Key paragraphs:
 IAS 38 para 118, 119, 122, 124 & 126