Chapter 13

Question 1

How is a intangible asset defined?

Answer 1

An intangible asset is one that is not physical in nature.

Question 2

Which three needs need to be satisfied to meet the definition of intangible asset?

Answer 2

These are identifiability, control and the existence of future economic benefits. Which is necessary to distinguish an intangible asset from goodwill.

Question 3

When is an asset separable?

Answer 3

An asset is separable if the entity could rent, sell, exchange, or transfer the future economic benefits attributable to the asset when it is also possible for the asset to be separate or divided from the entity.

Question 4

When can control be excessed over an asset?

Answer 4

Control is exercised by an entity over an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and can also restrict the access of others to such benefits. The resource itself is not recognizable as an asset unless the criterion of control is met.

Question 5

When determining the costs of assets through acquisition, which four methods are considered?

Answer 5

• separate acquisition.
• Acquisition as part of a business combination.
• Acquisition by way of a government grant
• Acquisition by exchange of assets.

Question 6

Why can goodwill not be an intangible asset?

Answer 6

Goodwill is not the same as other intangible assets. Goodwill is a premium paid over fair value during a transaction and cannot be bought or sold independently.

Question 7

How is research defined?

Answer 7

Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Question 8

What is development?

Answer 8

Development is the application of research findings or other knowledge to a plan or design to produce new or sustainably improved materials, devices, products, processes, systems or services before the start of commercial production or use.

Question 9

What is the board’s solution for the capitalisation of research & development?

Answer 9

Is to forbid the capitalization of all research and development expenditure, except for development phase items which meet specified conditions, in which case they are required (not just permitted) to be capitalized.

Question 10

When is an intangible asset recognised when is arose from development?

Answer 10

• It intends to complete the intangible asset.
• Its ability to use or sell it.
• How the intangible asset will generate probable future economic benefits.
• The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, which may be demonstrated by an appropriate business plan.
• The entity’s ability to measure reliably the expenditure attributable to the intangible asset during its development.

Question 11

What is the cost of an internally generated asset?

Answer 11

The cost of an internally generated intangible asset includes the directly attributable expenditure of preparing the asset for its intended use. Expenditure on training activities, identified inefficiencies and initial operating losses is expensed as it is incurred.

Question 12

Why are expenditures rarely incurred after the initial recognition of a purchased intangible asset?

Answer 12

Is because it’s difficult:
* to attribute such expenditure to a particular intangible asset rather than to the business as a whole and
* (even when that difficulty does not arise) to determine whether such expenditure will enhance, rather than merely maintain, the probable economic benefits that will flow from the asset.

Question 13

When does a subsequent expenditure not be recognised as an expense?

Answer 13

• probable enhancement of the economic benefits that will flow from the asset can be demonstrated and
• the expenditure can be measured and attributed to the asset reliably

Question 14

What are two treatments for the measurement of intangible assets?

Answer 14

The cost model and the revaluation method.

Question 15

What is the cost model?

Answer 15

The cost model, an intangible asset should be carried at cost less any accumulated depreciation and accumulated impairment losses.

Question 16

What is the revaluation method?

Answer 16

An intangible asset can be valued using the revaluation model after initial recognition. The revaluation model is to carry the intangible asset at a revalued amount. The revalued amount should be the fair value of the asset at the date of revaluation less any subsequent accumulated depreciation and (if any) subsequent accumulated impairment losses.

Question 17

When does the revaluation method apply?

Answer 17

The revaluation model applies after the asset has been initially recognized at cost. It is important to note that the cessation of the active market may be an indication of possible impairment of the asset’s value

Question 18

What does IAS 38 require from entities regarding assets life?

Answer 18

requires an entity to assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of, production or similar units representing that useful life.

Question 19

Which factors need to be considered in estimating an intangible asset’s useful life?

Answer 19

• The expected usage of the asset by the entity and whether the asset could be efficiently managed by another management team.
• Typical product life cycles for the asset and public information on estimates of useful lives for similar assets that are used similarly.
• Technical, technological, commercial or other types of obsolescence.
• The stability of the industry in which the asset operates and changes in the market demand for the outputs of the asset.
• Expected actions by competitors or potential competitors.
• The level of maintenance expenditure necessary to obtain the expected future economic benefits from the asset and the entity’s intent and ability to spend such amounts.
• The entity’s period of control over the asset and legal and similar limits on control or use, such as the expiration dates of related leases.
• Whether the asset’s useful life is dependent on that of other assets of the entity.

Question 20

What must be taken into account when determining the useful life of an intangible asset?

Answer 20

In determining the useful life of an intangible asset, the account is taken of the level of future maintenance expenditure required to maintain the asset at the standard of performance assessed at the time of estimating the asset’s useful life and the entity’s ability and intention to reach such level.

Question 21

What are the rules when an intangible asset indefinite?

Answer 21

In determining that an intangible asset has an indefinite useful life IAS 38 explains that consideration cannot taken of planned future expenditure over that required to maintain the asset at the standard performance assessed at the time of estimating the asset’s useful life.

Question 22

What are the rules when an intangible asset is finite?

Answer 22

An intangible asset with a finite useful life is amortized, but an intangible asset with an indefinite useful life is not. If the value of an intangible asset with an indefinite useful life decreases, an impairment needs to be recorded.

Question 23

When has an intangible asset residual value?

Answer 23

• There is a commitment by a third party to purchase the asset at the end of its estimated useful life to the entity (i.e. the period over which it is being depreciated), or
• There is an active market for the asset, such that the asset’s residual value can be determined by reference to that market and it is probable that the market will exist at the end of the asset’s estimated useful life to the entity.

Question 24

When should an intangible asset be derecognized, based on IAS 38?

Answer 24

IAS 38 states that an intangible asset shall be derecognized on disposal or when no future economic benefits are expected from the asset’s use or disposal. Also, it explains that the gain or loss arising from the derecognition of an intangible asset is the difference between the net disposal proceeds and the carrying amount of the asset. The gain or loss is recognized in profit or loss when the asset is derecognized