Financial Accounting II

Lecture 08
 Intangible Assets
Companies Ordinance 1984
 Classification
Fourth Schedule
• Classification of intangible assets:
 Goodwill
 Patent, Copyrights, Trademarks and
Designs
 Others (to be specified)
 Disclosure Requirements
Fourth Schedule
• Original cost or the amount of
valuation
• Additions thereto and deductions
there from since the previous
balance sheet date
 Disclosure Requirements
Fourth Schedule
• Aggregate amount written off, or
provided or retained, up to the
date of the balance sheet, by way
of provision for depreciation or
amortization or diminution in
value.
 Intangible Assets
International Accounting Standard 38
An intangible asset is an identifiable Non-
Monetary Asset without physical
substance held for use in production or
supply of goods or services, for rentals to
others, or for administrative purposes.
 Intangible Resources

• Scientific or technical knowledge

(computer software)
• Design and implementation of new
processes
• Licenses (Fishing licenses,
Import / Export quotas)
 Intangible Resources

• Intellectual property (patents,

copyrights, motion picture films)
• Market knowledge (customer lists,
customer or supplier relationships,
market share)
• Trademarks
 Criteria for Recognition

• Identifiably
• Control over a resource
• Existence of future economic
benefits
 Intangible Resources
• If an intangible resource does not
meet the definition of intangible
asset, then any expenditure
incurred to acquire or internally
generate it will be recorded as
current period expense.
 Recognition
• An intangible asset should be recognized
if and only if,
 Future economic benefits that are
attributable to the asset will flow to the
enterprise
 The cost of the asset can be measured
reliably
 Initial Measurement
• An intangible asset should be measured
initially at cost.
 Separate Acquisition
• The cost of the intangible asset comprises
its purchase price, including any duties
and non-refundable taxes and any directly
attributable expenditure on preparing the
asset for its intended use.
 Acquisition as Part of a Business
Combination
• If an intangible asset is acquired in a
business combination, the cost of the
asset is based on its fair value on the date
of acquisition.
 Acquisition by Way of a Govt Grant
• In some cases an intangible asset may be
created free of charge, or at a nominal
value as a result of a government grant.
 Acquisition by Way of a Govt Grant
• Examples include:
 Airport landing rights
 Licenses to operate radio / TV
channels
 Import licenses or quotas
 Access to other restricted territories
 Acquisition by Way of a Govt Grant
• An enterprise may choose to recognize
both the intangible asset and the
government grant at fair value initially,
 Acquisition by Way of a Govt Grant
• If the enterprise chooses not to recognize
the asset at its fair value they may
recognize the asset at the nominal amount
paid plus any expenditure incurred for
preparing the asset for its intended use.
 Exchange of Assets
Dissimilar Assets
• In case of exchange with a Dissimilar
Asset, the value of the item acquired is the
fair market value of the item surrendered
adjusted for any cash of cash equivalent
transferred.
 Exchange of Assets
Similar Assets
• In case of exchange with a Similar Asset,
the value of the item acquired is the
carrying amount of the item surrendered
adjusted for any cash or cash equivalent
transferred.
 Internally Generated Goodwill
• Internally generated goodwill should not
be recognized as an asset.
Internally Generated Intangible Assets
• To assess whether an internally generated
asset meets the criteria for recognition, an
enterprise classifies the generation of
asset into following phases:
 Research phase
 Development phase
 Research Phase
• No intangible asset arising from research
(or from research phase of an internal
project) should be recognized.
• Expenditure on research (or from research
phase of an internal project) should be
recognized as an expense when incurred.
 Development Phase
• An intangible asset arising from development
(or from development phase of an internal
project) should be recognized, if and only if, an
enterprise 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 asset and use or
sell it,
 Its ability to use or sell the asset.
 Development Phase
 How the intangible asset will generate
probable future benefits,
 The availability of technical, financial
and other resources to complete the
asset.
 Ability to measure the expenditure
attributable to the intangible asset
during development reliably.
 Subsequent Expenditure
• Subsequent expenditure on an intangible
asset after its purchase or its completion
should be recognized as an expense
when it is incurred, unless:
 It is probable that this expenditure will
enable the asset to generate future
economic benefits in excess of its
originally assessed standards.
 This expenditure can be measured and
attributed to the asset reliably.
 Amortisation Period
• The depreciable amount of an intangible
asset should be allocated on a systematic
basis over the best estimate of its useful
life.
• The maximum useful life allowed is 20
years.
 Measurement Subsequent to
Initial Recognition
• Subsequent to initial measurement an
intangible asset is carried at:
 Cost less accumulated amortization
and any accumulated impairment loss.
OR Alternatively
 At a revalued amount, being its fair
value at the date of revaluation less
any subsequent accumulated
amortization and any subsequent
impairment loss.