Chapter 3: Intangible

Assets
Group Presentation by Group 4
Abdul Hakim Azahar
Muhamad Nur Aiman Omran
Mahdini Noor Hijazi
Abdul Azim Abdul Razak
Nurul Huda Afiqah Othman
Siti Ainul Farzana Mohd Zain
Nur Aina Nisa Azman
 Definition
• An asset can be considered as an intangible asset when it fulfils the
definition and recognition criteria

• An identifiable non-monetary asset without physical form. It can be

acquired or generated internally

i. Identifiable
Separable from the entity. It can be
sold , licensed and or exchanged
with a related contract.
Rises from Legal Rights.
Recognition:
ii. Controllable
The entity has the power to obtain
future economic benefits flowing
from the underlying resource and
restrict others from having access
to those benefits.
iii. Able to Generate Economic
Benefits
May arise from sale of product or
services, cost savings or renting the
asset.
Forms of Intangible Assets
Technology Related
• Computer Software
• Patent
• Data Bases

Market Related
• Trademark
• Brands
• Internet Domain Name

Contract Based
• Franchise
• License
 INTANGIBLE ASSETS CAN BE ACQUIRED
THROUGH:

Business Separate Government Exchange of By Self-

Combination Purchase Grant Asset Creation
INITIAL RECOGNITION IN GENERAL
• Expenditure for an intangible item is recognised as an expense, unless
the item meets the definition of an intangible asset, and : it is
probable that there will be future economic benefits from the asset;
and the cost of the asset can be reliably measured.
• In short: If it met the criteria it must be capitalized as an intangible
asset. If it doesn’t match the criteria, it will be considered as an
expense.
• Example: Research Phase – Expense
Development Phase – Capitalized as Intangible Asset
Example 3.1
TIMELINE
 Journal Entry FYE 2019

For Intangible Asset For R&D Expenses

Dr. Intangible Asset 395,000 Dr. Research and 470,000
Development Expense
Cr. Bank 395,000 Cr. Bank 470,000
 Acquisition as Part of Business
Combination
Initial Recognition
UPON BUSINESS RECOGNITION
-at the date of acquisition
An assets – identifiable if it is :
1. Separable
2. Arises from contractual
3. Other legal rights
Intangibles that have not been
recognized by acquiree may become
identifiable by the acquiree at the
date of acquisition
Initial Measurement
Assets to be recognized FAIR VALUE
Identifiable intangibles that: At the acquisition date
have been recognized & not been
The Fair Value will be quoted at
recognized (by the acquiree)
market price in an active market
If no active market exists – the
amount that the entity would pay for
the assets at the acquisition (in an
arm length transaction – on the basis
of the best information available
The current price is the best measurement
IF the current price is not available: the price of the most recent
similar transaction (may provide a basis to estimate fair value.)
Example 3.2
 Solution:
Assets shall be recognized on 31 August as it is the date of acquisition

Coconut Oil quota Government License Brand

2,000,000 x 0.3 Based on discounted cash flow valuation of directors : RM2 million
= RM600,000 RM1,000,000 Based on similar assets : RM 1,500,000
Intangible Accounting Treatment Reasons
Assets
Coconut oil Capitalized – at -Identifiable intangible assets from business combination
quota RM600,000 -Measured at FV of 2,000,000 liter x 30 cents per litre
-30 cents is the market price
Government Capitalized – at FV of -Identifiable intangible assets from business combination
License RM1 milion -Measured at FV of RM 1 milion derived from discounted cash flow
method
Brand Capitalized – at FV of -Identifiable intangible assets from business combination
RM1.5 milion -Measured at FV of 1.5 milion
-based on the market price of similar asset rather than the
valuation of directors
Journal Entry
31 August 2018
Dr Intangible Asset 3,100,000
Cr Bank 3,100,000
Acquisition by Way of Government Grants
Government Grants
• In simple meaning is an action by government designed to provide an
economic benefits specific to an entity or range of entities
• Intangible assets acquired free of charge or for a nominal
consideration, by way of a government grant, are measured initially at
cost or fair value

Example:
• Timber Concession – normally regulated by government and not
allowed to be transfer to third party. It is the legal right to perform
timbering activity that is enjoy by the entity establishes an
identifiable intangible assets. (License Rights)
Initial Measurement:
• MFRS 120, accounting for government grants & disclosure of government
assistance is applicable
• It measures initially at cost or fair value :-
• If at fair value, reference is typically made to the quoted market price in an active
market or other relevant determination of fair value
• If at costs, the company has to recognize all costs incurred in preparing the assets
for their intended use
Example 3.3
In 2017, Rapid Bhd submitted a tender to the government of Malaysia for a tramway project in Johor
Bahru’s city centre. At the end of 2017, the company was granted the license to operate the tramway
for 15 years, beginning 1 January 2019. On 1 January 2019, Rapid Bhd had to incur legal and other
administrative fees of RM110,000 in relation to license. Other than that, there were no other costs
involved in securing the tender. The fair value of a similar license on 1 January 2019 is RM1 million.

Required: Advise Rapid Bhd on the accounting treatment of the license to operate the tramway.

Solution:

On 1 January 2020, the company can choose to record the license granted by the government
either at cost RM110,000 or at its fair value of RM1 million.
Accounting Treatment :

On 31 December 2019, the company need to:

a) Record the amortization for the license at the value on 1 January 2020 divided by 15 years
b) The recognition of the revenue for the year (IF FAIR VALUE METHOD IS CHOSEN)
 Amortization
Definition : A technique to lower the book value of intangible asset.

Different of Amortization vs Depreciation

Amortization Depreciation
Cover for intangible asset – non physical Cover for tangible asset – physical asset
asset
Consistent – useful life Inconsistent – cost value

FORMULA :

Cost of intangible asset

_____________________

Useful life
Example 3.5
Step 1: Calculate the net book value
1 July 2017 31/12/2017 31/12/2018 31/12/2019

Purchase software @ Amortization : Amortization : Amortization :

Cost RM800,000 RM20,000 RM40,000 RM40,000

Formula: Cost – Acc. Amortization = Net book value

= 800,000 – 20,000 - 40,000 – 40,000 *no journal entry needed

= 700,000 as it already recorded in
the book.
Step 2 : Calculate revise amortization
1 July 2017 31/12/2017 31/12/2018 31/12/2019 31/12/2020

Change useful life

Purchase software @ Amortization : Amortization : Amortization : Amortization :

Cost RM800,000 RM20,000 RM40,000 RM40,000 RM??

Formula: Cost – Acc. Amortization = Net book value Formula: NBV / New useful life

= 800,000 – 20,000 - 40,000 – 40,000 = 700,000 / 10 years

= 700,000 = 70,000
*Journal entry in
recording amortization
from period ended
31/12/2020
Journal entry :
31/12/2020:
Dr Amortization 70,000
Cr Accumulated amortization 70,000
(Amortization charges for the year ended)
DERECOGNITION
ON DISPOSAL – WHICH IS SALE

NO FURTHER FUTURE ECONOMICS BENEFITS ARE EXPECTED

When to derecognize on asset?

- It is when the assets was sold, exchanged or abandoned by the entity.

  Balance sheet Income statement

Asset is sold  Asset is removed from balance  A loss or gain equal to carrying value less sale proceeds is
sheet. reported on income statement.

Asset is exchanged  The old asset is removed from  A loss or gain is reported in income statement equal to
balance sheet. difference between on carrying value of old asset and fair
 The new asset added to balance value asset also carrying value of old asset and fair value of
sheet at fair value. new asset, if reliable estimated.

Asset is abandoned  Assets is removed from balance  A loss or gain is reported in income statement equal to the
sheet. carrying value of the asset.
THE CALCULATION OF DERECOGNITION ON DISPOSAL AND THERE IS NO FUTURE ECONOMIC BENEFEITS

 Net disposal proceeds – and simply consideration received from disposal less and in cost of disposal.
 Carrying amount – we should deduct any carrying amount of intangible assets from net disposal proceeds.
  Derecognition = net disposal proceeds – carrying amount

EXAMPLE 3.6: DERECOGNITION OF INTANGIBLE ASSETS

SOLUTION OF EXAMPLE 3.6
1 January 2018  Debit  Credit
Dr Cash 35,000  
Acc. Amortization 45,000
Cr Franchise   75,000
Gain on disposal – SOPL 5,000
 

 The company needs to record the disposal of the franchise on 1 January 2018. There is a gain
of RM5,000, which comes from the difference in the selling price RM35,000 and the
carrying amount of RM30,000 which is 75,000-(75,000/5*3).
DISCLOSURE
 MFRS 138 requires entities to disclose

For Each Class of Intangible For Each Class of Asset That Has Been
Assets Revalued
i. Useful lives of amortisation rates i. Effective date of revaluation.
ii. Amortisation method ii. Carrying amount if the revalued intangible
iii. The gross carrying amount, the assets
accumulated amount and the iii. Carrying amount if the cost model
accumulated impairment amount at the valuation has been adopted
beginning and at the end of the period
iv. Movement on the revaluation surplus
iv. Reconciliation of the amount as at the
v. Method applied in estimating the fair
beginning and at the end of the period
value.
v. Carrying amount of internally generated
intangible assets
Other Disclosure
i. Reason why an intangible asset is believed to have and indefinite life
ii. Fair value initially recognised, carrying amount and accounting treatment for subsequent
measurements for intangible assets acquired under government grants and initially recognised
at fair value
iii. Details of any individually material intangible assets
iv. Carrying amounts of intangible asset whose titles are restricted or have been pledged as a
security.
v. Amount of contractual commitments to acquire intangible assets.

Intangible asset with Intangible asset material to Intangible asset acquired

indefinite useful life financial statement with government grant at FV

• Carrying amount • Description, carrying amount • Initial fair value

• Reason for indefinite and amortisation and • Carrying amount
useful life assessment remaining amortisation • Cost or revaluation model
• Significant factors period used
assessed.
Summary
• Intangible assets that give control over an identifiable resource with future
economic benefits are recognised at cost of fair value
• Research is not an intangible assets and is expensed
• Intangible assets measured using either the cost of revaluation model
• Intangible assets with indefinite useful life lives are not amortised
• Internally generated intangible assets are expensed as incurred
• Intangible assets are reviewed annually for impairment and changes in useful
economic life
 Pre-recorded Presentation
• https://www.youtube.com/watch?v=Y5wblOeVLMY