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FAR UK GAAP > Ch 7 - Intangible Assets > Flashcards

Ch 7 - Intangible Assets Flashcards

1
Q

What are intangible assets

A

An asset is an identifiable non-monetary asset without physical substance

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2
Q

Give some examples of tangible assets

A 
Patents and copyrights
Licences
Trademarks 
brand names 
Franchises
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3
Q

What does ‘identifiable’ mean re intangible assets?

A
  • Capable of separate disposal or

- Arising from contractual or other legal rights

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4
Q

Why doesn’t internally generated fall into intangible assets?

A

as it can’t be disposed of individually , which is a requirement of being ‘identifiable’ (part of definition of intangible asset

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5
Q

What is an asset?

A

an asset is a resource

  • Controlled by an entity as a result of past events
  • From which future econ benefits are expected to flow to the entity
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6
Q

What does it mean for an asset to be controlled by an entity?

A

The entity has the power to obtain future economic benefits for itself and restrict the access of other parties to those benefits
This requirement means that people’s knowledge and skills can’t be considered an intangible asset as staff can leave their employment

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7
Q

Why can’t peoples knowledge and skills be considered as intangible assets?

A

as staff can leave their employment and take them with them

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8
Q

What are future economic benefits?

A

Future revenue or future cost savings

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9
Q

When should an asset be recognised?

A

It is probable that future economic benefits will flow to the entity, and
The cost of the asset can be measured reliably
These criteria are given in FRS 102 section 18 and mirror the recognition criteria given in Section 2

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10
Q

What are the types of intangible assets?

A

Separate acquisitions
Internally generated intangibles
Acquisition as part of a business combination

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11
Q

What is an intangible asset from a separate acquisition?

A

f a company purchases an intangible asset, the purchase price is an indication that future economic benefits are probable
The cost can be measured as price paid
Should be recognise at initial cost plus any directly attributable costs
Directly attributable costs include testing and professional fees
Therefore, an intangible asset should be recognised

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12
Q

Give some examples of separate acquisition intangible assets

A 
Brands
Publishing titles
Airport landing slots
Patents & copyrights
Computer software
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13
Q

What are the 3 key areas of internally generated intangibles

A

Research costs/expenditure
Development
Other Internally generated intangibles

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14
Q

Define research

A

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

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15
Q

What is the accounting treatment for research?

A

Research costs don’t meet the recog criteria as research is too distant from commercial production for an inflow of econ benefits to be probable
Therefore, research costs should be written off to the P&L as incurred

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16
Q

Define development

A

Development is 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

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17
Q

What is the accounting treatment for development?

A

In some assets, development expenditure may meet the recognition criteria
FRS 102 Section 18 stipulates that this is only the case if all of the following conditions are met
Completion of the asset is technically feasible
The intention is to complete and use or sell the asset
The asset can be used or sold
The asset will generate future econ benefits
Adequate resource is available to complete the asset
The expenditure on the asset can be measured reliably
If all these condition or met, then the asset MAY be capitalised
If any are NOT met, then the expenditure must be written off as it is incurred
Any that is written off can’t be reinstated as an asset if and when the conditions are all met
Once the above conditions are met, all development costs on the project can be capitalised

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18
Q

What conditions must ALL be met to capitalise a development cost?

A

Completion of the asset is technically feasible
The intention is to complete and use or sell the asset
The asset can be used or sold
The asset will generate future econ benefits
Adequate resource is available to complete the asset
The expenditure on the asset can be measured reliably
If all these condition or met, then the asset MAY be capitalised

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19
Q

What happens if a development cost doesn’t meet all the required conditions?

A

If any are NOT met, then the expenditure must be written off as it is incurred
Any that is written off can’t be reinstated as an asset if and when the conditions are all met

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20
Q

Give examples of development costs that might be capitalised providing it meets all the critera

A

Material used in development

Depreciation on tangible fixed assets used in the development

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21
Q

Would the following be capitalised?
Project D is anticipated to be successful. It has clearly defined parameters. The project expenditure is carefully controlled. The prototype proved successful. The budget shows sales well in excess of total costs. The finance is readily available

A

Completion of the asset is technically feasible - YES, the prototype had been successful
The intention is to complete and use or sell the asset- YES, budgets for sales were drawn up
The asset can be used or sold- YES, sales budgeted
The asset will generate future econ benefits- YES, budget shows sales expected to exceed costs
Adequate resource is available to complete the asset- YES, financing is readily available
The expenditure on the asset can be measured reliably- YES, budget and accurate figures given
Therefore, the expenses may be capitalised

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22
Q

Would the following be capitalised?
Project E commenced during acc period. It was confirmed at the start of Nov that it is anticipated to be successful nd sufficient resources will be available. Of the £250k spent on project E, £78k was incurred after 1 Nov.

A

Completion of the asset is technically feasible, YES, at 1 Nov it looks successful
The intention is to complete and use or sell the asset, YES assumed
The asset can be used or sold, YES, assumed
The asset will generate future econ benefits- YES, assumed they wouldn’t keep researching if not
Adequate resource is available to complete the asset- YES, it was anticipated to be successful, but ONLY after 1 Nov 20X8
The expenditure on the asset can be measured reliably, accurate costs are given
Therefore, the costs can be capitalised AFTER the 1 Nov 20X8 as this is when the criteria became met, so the £78,000 after 1 Nov 20X8 can be capitalised

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23
Q

Would the following be capitalised?

Project F has invested £340k in a development project, but the tests are inconclusive at present

A

These expenses must be written off to the P&L as not all the conditions outlined by FRS 102 Section 18 have been met, since tests were inconclusive at the y/e
This is simply research, rather than development

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24
Q

Give an example of ‘other internally generated intangibles’

A

internally generated brands

25
What is the accounting treatment for internally generated intangibles?
May not be capitalised because costs can’t be identified separately from the cost of developing the business as a whole EVEN if it does meet the other 3 criteria Therefore must write off expenditure to P&L as it is incurred It is for this reason, that Bill Gates believes that 97% of the value of Microsoft is not recorded in its BS
26
Why does Bill gates believe that 97% of the value of Microsoft isn't recorded in the BS?
As brand value may not be capitalised because costs can’t be identified separately from the cost of developing the business as a whole EVEN if it does meet the other 3 criteria
27
What kind of intangible assets can a firm acquire in a business combination?
Intangible assets recognised on the acquired company’s SFP | Intangible assets not recognised by the acquired company
28
How are intangibles recognised in consolidated statement initially after a business combination?
At FV
29
Can the following be recognised as an intangible asset? 5 year licence acquired to manufacture specialised paint at a cost of £100,000 at the beginning of the year. Production commenced immediately
5 year license can be recognised as an intangible asset as meets all 4 criteria It is identifiable i.e. it can be bought and sold It is controlled by the entity i.e. with it they are allowed to make the paint- they can’t without it Economic benefits are expected to flow They will use the licence to make paint, which they will sell to generate revenue Costs can be measured reliably At the £100,000 price at which the licence was bought
30
Can the following be recognised as an intangible asset? £90k on an advertising campaign during the first month. Subsequent sales have shown a significant improvement and it is expected this will continue for 3 years
Advertising cannot be recognised as an intangible asset and should be expensed. This is because it is not possible to identify the future economic benefits that are attributable to only this campaign
31
What is the initial measurement of an intangible?
Where an intangible asset meets the recognition criteria, it should be measured initially at cost plus directly attributable costs E.g. legal fees
32
Give an example of directly attributable costs that are included in initial measurement of an intangible?
Legal fees
33
After initial measurement at cost, how should an intangible asset subsequently be measured?
Cost model Cost less accumulated amortisation and impairment losses Revaluation model Revalued amount less accumulated amortisation and impairment losses FRS 102 Section 18 is very strict on whether you can use this It is not always an option
34
How do you use to cost model to calc intangible subsequent measurement?
Cost less accumulated amortisation and impairment loss
35
How do you use to revaluation model to calc intangible subsequent measurement?
Revalued amount less accumulated amortisation and impairment losses FRS 102 Section 18 is very strict on whether you can use this It is not always an option
36
Can the revaluation model always be used?
No, FRS 102 Section 18 is very strict on whether you can use this It is not always an option
37
When can intangible assets be revalued?
may only be revalued if the fair value can be determined by reference to an active market
38
Define an active market
A market in which - Items are homogenous (identical) - buyers and sellers can be found at anytime - Prices are available to the public
39
Are most intangibles homogenous?
The nature of most intangible assets means that they are not homogenous Markets of identical items will only exist for assets such as some licences or quotas
40
Give an example of homogenous intangibles
Licences | Quotas
41
If an intangible asset is revalued, what must then be done?
All other assets of its class must also be revalued
42
How do you account for revaluation of intangible assets?
follows exactly the same treatment as for revaluation of tangible fixed assets
43
When must an intangible asset be amortised?
When it has a finite life use
44
What must be done with a finite intangible asset?
Amortise the asset over its useful life Start with when the set is available for the use If a reliable estimate can’t be made, the life should not exceed 10 years However, this is rebuttable
45
When do you start to amortise an asset?
When the asset is available for use
46
Whats the maximum expected useful life of an intangible asset if a reliable estimate can't be made
10 years | However, this is rebuttable
47
When is development expenditure deemed to be available for use?
when commercial production of the product being developed begins
48
What should amortisation reflect?
The pattern of use of the asset
49
What should the residual value be?
Zero unless A third party has agreed to buy the asset at the end of the UEL There is an active second-hand market which can be used to measure a residual value Or other methods can be used if it more closely matches the amortisation to the benefits generated by the intangible
50
When would the residual value of an intangible asset not be zero?
A third party has agreed to buy the asset at the end of the UEL There is an active second-hand market which can be used to measure a residual value Or other methods can be used if it more closely matches the amortisation to the benefits generated by the intangible
51
If a company has capitalised development expenditure of £600k relating to the development of Brand X. it is expected demand for the product will stay at a high level for the next 3 years. Annual sales of 400k, 300k and 200k units respectively are expected over the period. Brand X sells for £10 How should the development expenditure be amortised?
There are 2 possibilities: Write-off in equal instalments over the 3 year period = £600,000 / 3 years = £200,000 per year Write off in relation to total sales expected (total 900,000 units) Year 1: 400,000/900,000 x 600,000 = £266,667 Year 2: 300,000/900,000 x 600,000 = £200,000 Year 3: 200,000/900,000 x 600,000 = £133,333
52
How should a prof/loss on the disposal of an intangible asset be recorded in the P&L?
Proceeds Less NBV = prof/loss Unless the asset was held under the revaluation model and a revaluation reserve exists, on disposal this should be re-classified to the profit and loss account reserve
53
What are the disclosure requirements for intangible assets?
Disclosure requirements are as for FRS 102 Section 17 PPE except that, in addition, the following must be made If the asset has a finite or indefinite useful life For assets with indefinite lives, their NBV and why they have an indefinite life Individual assets if they are material Amount of R&D expensed during the period
54
What are the additional disclosures required for intangible assets?
If the asset has a finite or indefinite useful life For assets with indefinite lives, their NBV and why they have an indefinite life Individual assets if they are material Amount of R&D expensed during the period
55
Describe the intangible assets reconciliation required in the disclosures
Along the top: use the titles of the intangibles given to you in the exam as column headings- there are not the same ‘standard classes’ with intangibles as there are for TFA ``` Down the side Cost at beginning additions disposals Cost at y.e ``` Amortisation/impairment at start Charge for year Disposal Amortisation/impairment at y.e NBV at start At year end
56
What are the main differences between UK GAAP and IFRS relating to development costs?
IAS 38 Intangible Assets requires development costs meeting the criteria to be capitalised (doesn’t get the choice unlike with FRS 102) FRS 102 Section 18 allows a choice between capitalisation and expensing the development costs as incurred
57
What are the main differences between UK GAAP and IFRS relating to useful lives of intangible assets?
IAS38 Intangible Assets allows intangibles with indefinite useful lives These assets won’t be amortised but should be tested annually for impairment If at any point a useful life can be ascertained the asset should be amortised over the remainder of that life FRS 102 has a rebuttable presumption that no intangible asset will have a useful life exceeding 10 years
58
What are the main differences between FRS 105 micro-entities and FRS 102?
For FRS 105 Internally generated intangible assets are not recognised as assets but are instead expensed to profit or loss This includes development activities There is no option to revalue intangible assets Intangible assets acquired in a business combination are not recognised separately from goodwill

FAR UK GAAP (18 decks)

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