CHAP 2 PART 3

IMPAIRMENT OF INTANGIBLE ASSETS

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MFRS 138: INTANGIBLE ASSETS
Definition (paragraph 8):
 An intangible asset is an identifiable non-
monetary asset without physical substance

Characteristics of IA (paragraph 10):

 Identifiable
 Control over the resources
 Existence of future economic benefit

Only items that fulfill the above characteristics

can be recognized as IA.

LO 1 Describe the characteristics of intangible assets.

IDENTIFIABLE
To be recognised as an intangible, it has to be separable from
other assets and be identified as a separate asset to
distinguish it from goodwill. The CRITERION FOR
IDENTIFIABILITY of intangibles is met if:
 It is SEPARABLE, that is, capable of being separated or
removed from the entity and sold, licensed, entered or
exchanged, either individually or together with a related
contract, asset or liability; or
 It arises from CONTRACTUAL OR OTHER LEGAL RIGHTS.

e.g. Patents, trademarks and copyrights that arise from

registration with authority bodies, goodwill that arises from
business combination, license granted under legal rights.
Internally generated goodwill and brand that are not
separable from the business as a whole CANNOT be
recognize as IA.
CONTROL
 CONTROL over an intangibles asset is present if the
entity has THE POWER TO OBTAIN FUTURE
ECONOMICS BENEFITS flowing from the underlying
resource and restrict others from having access to
those benefits. Generally, having legal rights that
are enforceable in courts may indicate control.
 Some legal rights such as patents, trademarks and
copyrights can give rise to economic benefits.
 On the other hand, an entity may derive economic
benefits from intangibles such as skilled workers,
market share and customer list but has no control
over them. So they CANNOT be recognized as IA.
FUTURE ECONOMIC BENEFITS
 Future economic benefits may arise from the sale
of products or services, cost savings or renting of
the asset.
 E.g. Patent and copyrights benefits the holder by
preventing others from copying the invention and
creation and commercialize it.
 MFRS 138 requires an entity to assess the
probability of 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.
 RECOGNITION AND
MEASUREMENT OF IA
 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

 An intangible assets is measured initially at cost

(Paragraph 24).
IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS

Impairment of Limited-Life Intangibles

Same as impairment for long-lived assets in Chapter 11.
Illustration 11-15

LO 7 Explain the accounting issues related to intangible-asset impairments.

IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS

Illustration: Lerch, Inc. has a patent on how to extract oil

from shale rock, with a carrying value of $5,000,000 at the
end of 2010. Unfortunately, several recent non-shale-oil
discoveries adversely affected the demand for shale-oil
technology, indicating that the patent is impaired. Lerch
determines the recoverable amount for the patent, based on
value-in-use (because there is no active market for the
patent). Lerch estimates the patent’s value-in-use at
$2,000,000, based on the discounted expected net future
cash flows at its market rate of interest.

LO 7 Explain the accounting issues related to intangible asset impairments.

IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS

Calculate the impairment loss (based on value-in-use).

$3,000,000 Impairment Loss

Illustration 11-15
$5,000,000 $2,000,000

Entry to record the impairment loss:

Impairment Loss 3,000,000
Accumulated amortization- Patent
Unknown 3,000,000
$2,000,000

LO 7 Explain the accounting issues related to intangible asset impairments.

IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS

Reversal of Impairment Loss

Illustration: The carrying value of the patent after impairment is
$2,000,000. Lerch’s amortization is $400,000 ($2000,000 / 5)
over the remaining five years of the patent’s life. The
amortization expense and related carrying amount after the
impairment is shown below:
Illustration 12-8

LO 7 Explain the accounting issues related to intangible asset impairments.

IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS

Reversal of Impairment Loss

Early in 2012, based on improving conditions in the market
for shale-oil technology, Lerch remeasures the recoverable
amount of the patent to be $1,750,000. In this case, Lerch
reverses a portion of the recognized impairment loss.

Accumulated amortization- Patent 150,000

Reversal of Impairment loss 150,000
($1,750,000-$1,600,000)

LO 7 Explain the accounting issues related to intangible asset impairments.

IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS

Impairment of Indefinite-Life Intangibles Other

than Goodwill
 Should be tested for impairment at least annually.
 Impairment test is the same as that for limited-life
intangibles. That is,
► compare the recoverable amount of the intangible
asset with the asset’s carrying value.
► If the recoverable amount is less than the carrying
amount, the company recognizes an impairment.

LO 7 Explain the accounting issues related to intangible asset impairments.

IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS
Illustration: Arcon Radio purchased a broadcast license for
$2,000,000. The license is renewable every 10 years. Arcon
Radio has renewed the license with the GCC twice, at a minimal
cost. Because it expects cash flows to last indefinitely, Arcon
reports the license as an indefinite-life intangible asset. Recently,
the GCC decided to auction these licenses to the highest bidder
instead of renewing them. Based on recent auctions of similar
licenses, Arcon Radio estimates the fair value less costs to sell
(the recoverable amount) of its license to be $1,500,000.
Illustration 12-9

LO 7 Explain the accounting issues related to intangible asset impairments.

IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS
Impairment of Goodwill
 Companies must test goodwill at least annually.
 Impairment test is conducted based on the cash-
generating unit (CGU) to which the goodwill is assigned.
CGU is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the
cash inflows from other assets or group of assets.
 If impairment losses are then identified, they must be
allocated and/or apportioned to the assets of the CGU
as prescribed by MFRS136.
 Because there is rarely a market for cash-generating units,
estimation of the recoverable amount for goodwill
LO 7 Explain
impairments the accounting
is usually based issues related to intangible
on value-in-use asset impairments.
estimates.
IMPAIRMENT LOSS FOR CASH-
GENERATING UNITS (CGU)
The impairment loss is allocated between the assets in
the unit in the following order:

 To remove write off/adjustment amount from assets

 To the goodwill allocated to the CGU
 To all other assets in the CGU on a pro rata basis
 Exclude assets that will be written down to its fair
value less costs to sell (net realisable value) that is
above its carrying value.
 Example:
RM Given the carrying
Goodwill 25,000
amount of Division 1 (a
CGU)- refer the table.
Property 41,000 Recoverable amount of
Machinery 98,000 the unit was
RM218,000. The
Motor vehicles 70,000
property has fair value
Patents 28,000 of RM70,000
Monetary assets 38,000
Determine the amount
300,000 of impairment loss and
allocate it in
accordance with MFRS
136.
 Carrying Impairment Loss Recoverable
Amount Amount
RM RM RM
Goodwill 25,000 (25,000) -
Property 41,000 - 41,000
Machinery 98,000 (28,500) 69,500
Motor vehicles 70,000 (20,357) 49,643
Patents 28,000 (8,143) 19,857
Monetary assets 38,000 - 38,000
Total 300,000 (82,000) 218,000
Working
Machinery 98,000 (98/196)x 57= (28,500) 69,500
Motor vehicles 70,000 (70/196) x 57 = (20,357) 49,643
Patents 28,000 (28/196) x 57= (8,143) 19,857
196,000 (57,000) 139,000
IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS
Illustration: Kohlbuy Corporation has three divisions. It purchased one
division, Pritt Products, four years ago for $2 million. Unfortunately, Pritt
experienced operating losses over the last three quarters. Kohlbuy
management is now reviewing the division (the cash-generating unit), for
purposes of its annual impairment testing. Pritt Division’s net assets,
including the associated goodwill of $900,000 from the purchase:

Illustration 12-10

It was determined that the recoverable amount for Pritt Division is

$1,900,000. LO 7
IMPAIRMENT
IMPAIRMENT OF
OF INTANGIBLE
INTANGIBLE ASSETS
ASSETS

Loss on Impairment 500,000

Goodwill Impairment 500,000
$500,000 Impairment Loss

Illustration 11-15
$2,400,000 $1,900,000

Unknown $1,900,000
LO 7
SUBSEQUENT
SUBSEQUENT MEASUREMENT
MEASUREMENT
AFTER
AFTER RECOGNITION
RECOGNITION

COST MODEL
 An intangible asset that has a finite useful life will be
carried at cost less accumulated amortisation and any
accumulated impairment losses.
 The intangible is amortised systematically over the finite
useful life .
 The asset is assessed for impairment annually.
SUBSEQUENT
SUBSEQUENT MEASUREMENT
MEASUREMENT
AFTER
AFTER RECOGNITION
RECOGNITION
REVALUATION MODEL
 Under the revaluation model, an intangible asset is shown at a
revalued amount which is its fair value at the date of
revaluation less any subsequent accumulated amortisation
and any subsequent impairment losses.
 Fair value of intangible assets is best measured by reference to
an active market.
 For intangible asset with definite useful life, the amortisation
charge is based on the revalued amount over the remaining
definite useful life.
 If the fair value of the intangible asset cannot be determined
the carrying amount of the intangible asset will be the deemed
carrying amount.
 The asset is assessed for impairment annually.
PRESENTATIONS
PRESENTATIONS OF OF INTANGIBLES
INTANGIBLES AND
AND
RELATED
RELATED ITEMS
ITEMS
Presentation of Intangible Assets
Illustration 12-15

LO 10 Indicate the presentation of intangible assets and related items.