Intangible assets-ASPE3064 IAS38

Question 1

What is the definition of an intangible asset?

Answer 1

ASPE 3064 and IAS 38
Non-monetary asset without physical substance that meets the following criteria:

• Identifiability
  ‒ Capable of being separated and divided from the entity and sold, rented, licensed etc. OR
  ‒ Arises from contractual or legal rights (regardless if they can be separated from the entity)
• Control
  ‒ Ability to obtain access to benefits and restrict others to benefits –normally stems from legal right e.g., copy writes, patents,employment contracts
• Future economic benefit

Question 2

Under what circumstances can an intangible asset be
recognized in the financial statements?

Answer 2

• An intangible asset can be recognized (recorded on
  the balance sheet) if it meets:
  ‒ definition of intangible assets (see previous Q&A)
  ‒ Recognition criteria:
• Probable that future benefits will flow to the entity
• The cost of the asset can be measured reliably

Question 3

What specific expenditures cannot be
capitalized as intangible assets?

Answer 3

• Start-up costs
• Training activities
• Advertising and promotion
• Relocating or reorganizing part or all of an entity

Question 4

How are internally generated intangible assets (research and development costs) accounted for?

Answer 4

ASPE 3064
* Costs incurred in research phase must be expensed

• Entity must make an accounting policy choice to either expense or capitalize costs incurred in the development stage. The policy must be applied to all internally generated assets (can’t pick and choose)
• Costs can only be capitalized if the entity can demonstrate the following:

1. Technical feasibility
2. Intention to complete
3. Ability to use or sell
4. How the intangible asset will generate probable future economic benefits
5. Availability of adequate resources to complete the development
6. Ability to measure reliably the expenditures

IAS 38
* Same except that the entity must capitalize costs
incurred in the development stage if the criteria are met
(no choice)

Question 5

Which expenditures can/can’t be included (capitalized) in the cost of an internally generated intangible asset?

Answer 5

• Costs include all directly attributable costs to create, produce and prepare the asset to be capable of operating as intended e.g.
  ‒ materials and services
  ‒ employee salaries, wages and benefits
  ‒ fees to register a legal right
  ‒ amortization of patents and licenses that are used to generate the intangible asset; and
  ‒ interest costs (when the entity’s accounting policy is to capitalize interest costs)
• Examples of expenditures NOT included in the cost:
  ‒ selling, administrative and other general overhead expenditure
  (unless directly attributed to preparing the asset for use)
  ‒ identified inefficiencies and initial operating losses
  ‒ Training staff to operate the asset

Question 6

How are website development costs
accounted for?

Answer 6

ASPE 3064
* Subject to the general criteria for capitalization of
intangible asset i.e., identifiability, control, future benefit and can be reliably measured

SIC 32
* Website development costs can be
capitalized only if:
‒ It meets general requirements for intangible recognition i.e., identifiability, control, future benefit and can be reliably measured
* Key issue is demonstrating future benefit – can do this when website is capable of taking orders but not if website is solely for promoting products
* Look to IAS 38 to assess which specific costs can be capitalized e.g. planning phase is similar to research phase and therefore costs incurred in planning phase are expensed
* Best estimate of useful life should be short

Question 7

How are intangible assets accounted for subsequent to initial
recognition?

Answer 7

ASPE 3064

• Historical cost model
  (historical cost less amortization for finite life
  intangibles)
• See Q&A below for discussion of impairment testing

IAS 38

• Choice between the cost model and the revaluation
  model (must use same method for all assets in a particular
  class)
• In order for the revaluation method to be used an active
  market must exist which is uncommon for intangibles
  therefore the revaluation method is rarely used (may apply to
  certain types of licenses such as taxi or fishing that are frequently bought and sold)

Question 8

What factors are considered in determining the useful life of an intangible asset (including whether it is finite or indefinite)?

Answer 8

• the expected usage of the asset by the entity
• typical product life cycles for the asset
• public information on estimates of useful lives of similar assets that are used in a similar way
• 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 products or services output from the asset
• expected actions by competitors or potential competitors
• the level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity’s ability and intention to reach such a level
• the period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases
• whether the useful life of the asset is dependent on the useful life of other