CH 4. NCA - Intangible Assets

Question 1

What are Intangible Assets?

and

When are they recognised?

Answer 1

An intangible asset is defined as:

‘an identifiable non-monetary asset without physical substance’

​The asset must be recognised when:

• Asset is controlled by the entity as a result of a past event
• Expected to generate future economic benefits for the entity
• The cost can be measured reliably.
• ​The asset is identifiable:
  
  • Arises from contractual/Legal Rights
  • is separable (able to separate and sell from other assets)

e.g

• Goodwill acquired in a business combination
• Computer software
• Patents
• Copyrights
• Motion picture films
• Customer list
• Mortgage servicing rights
• Licences
• Import quotas
• Franchises
• Customer and supplier relationships
• Marketing rights.

Question 2

How are intangible assets initially Measured?

Answer 2

Measuring and Intangible asset depends on how it is acquired.

There are 5 Ways to acquire an intangible asset:

• 1. Separate Acquisition - ^{(Licence or Intellectual property)}
  
  • Costs to purchase the assets
• 2. Acquired as a part of a business combination -
  
  • ​Fair Value ^{(IFRS 13 Business Combinations)}
• 3. Internally Generated - Goodwill
  
  • ​Never Recognised
• 4. Internally Generated - Intangible Assets (R&D)
  
  • Research Phase expensed
  • Development Phase must meet “P.I.R.A.T.E”
• 5. Acquired by Government Grant
  
  • Asset & Grant at F.V
  • Nominal Amount + Expenditure directly attributable for use

Question 3

How do you measure an Internally generated intangible asset?

Goodwill, Marketing and R&D

Answer 3

2 Main types of internally generated assets:-

1. - Goodwill, Marketing, I.P rights internally generated - are never recognised/Capitalised. (ethical issue, difficult to measure and can be taken advantage of by management)

2. - Research & Development - Split in 2 areas:​

• ​Research Phase -‘original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’
  
  • Research costs are expensed at all times
• Development Phase. - the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use’
  
  • ​Development Expenditure is Capitalised, from the moment the intangible asset meets ALL the following criteria: (P.I.R.A.T.E)
    
    • Probable future economic benefit
    • Intention to complete and use/sell an asset
    • Resources available to complete the asset for use or sale
    • Ability to use or sell
    • Technically feasible of completing the asset
    • Expenditure can be measured reliably

Question 4

How are intangible assets subsequently measured after recognition?

Answer 4

2 Models:

• Amortisation

or

• Revaluation: (IFRS 13) ^{<span>Very unlikely as there won’t usually be an active market.</span>}
• If it is used the following RULES MUST be applied:
  
  • F.V reliably measured with reference to active market
  • Entire Class must be revalued at the same time
    
    • If an asset in the class can not be revalued, use the cost model
  • Regulery revalued so that carrying amount does not differ from F.V

Question 5

How should an intangible asset be Amortised?

Answer 5

The intangible asset should be

- Assets with Finite useful life is amortised over its useful life (Normal cost model)

• *- Begins when the asset available for use
• Residual Value assumed to be £0 - Nil
• UEL and Amortisation method reviewed annually**
• Assets with an Indefinite useful life should not be amortised ^{but IAS36 requires an annual test for impairment.}

Question 6

What are the Disclosure Requirements of IAS 38? (Intangibles)

Answer 6

• The amortisation methods used
• For intangible assets assessed as having an indefinite useful life, the reasons supporting that assessment
• The date of any revaluations, if applicable, as well as the methods and assumptions used
• A reconciliation of the carrying amount of intangibles at the beginning and end of the reporting period
• The amount of research and development expenditure expensed in the period

Question 7

4.4.6.1 Stakeholder perspective

Answer 7

To be completed