Lec 7 Flashcards
(23 cards)
Definition of intangible assets
Intangible assets is an:
Identifiable: seperate from the co(can be transferred)
Non monetary assets (eg r&d patents, copyrights and software)
With no physical substance (eg brand imp age > Porsche)
That is controlled as a result of past events (purchase or self creation) and from which future economic benefits (cf included) are expected
Initial recognition
Acquired intangible assets
Cost = purchase price + non refundable duties (eg legal fees) - discounts + cost involved in getting set ready for use (eg training)
If not purchase price available > FV
Ex: customer list (amortised yearly) brand name
Internally generated: are generally not recognised
Except for development (not research) expenditures of economic benefits are expected to flow to the Co
Except for software when it’s readily available and cost is measurable
Unfortunately many things that generate value are not accounted
Customer list, brands, publishing titles
Porsche can never recognise brand value( built over years) but VW guys Porsche in 2012..
Example IA accounting: Initial recognition if software purchased (acquires externally):
Acquisition > software to banks
Example IA accounting: initial recognition: of software is developed internally
- Account for expenses: wages, materials > banks
- Capitalise development expenses (at the end of the accounting cycle): software in progress to works carried out for intangible assets (revenue)
- When finishing assets: software > software in process
Subsequent measurement : 2 models
Cost model : cost - acc amortisation - accounting impairment loss
Revaluation model: only if FV determines in active markets
FV - Accounting amortisation - acc impairment loss
Active markets are rare due to nature of intangibles but can exist (eg taxi licences)
For subsequent measurement need to distinguish:
Finite usufruk life IA
Indefinite
Subsequent measurement life
Limited useful life: (eg software licences) are yearly amortised
Useful life (on a time or production basis)
Amortisation (when asset is ready for use):
Straight line or activity: no. Of output
residual value: only if 3rd party committed to buy and is active market
Indefinite useful life (eg brands):
No amortisation
Reviews for impairments on each reporting date
Subsequent measurement- Value Changes
Value chnages - cost model; Non existent
Value changes - revaluation model:
Carrying amount increases
No decreases before revaluation surplus (+equity)
Decreases before: Income (+NI) to offset previous losses + remaining to revaluation surplus (+E)
Carrying amount decreases:
No increases before; Income (-NI)
Increases before: revaluation surplus (-E) to offer previous increases + remaining to income (-NI)
Derecognition
When the asset is removed from the service, either sold or disposed, the accounts need to reflect this change. There are three adjustments:
- The asset must be closed
- The accum dep account for the asset must also be closed (removes)
- Any gain or loss on retirement needs to be recognised
Derecognition example:
Example of finite useful life: I sell a patent at the end of year 4 for 500. I paid 1000 four years ago. Annual dep = 200
Example of indefinite useful life: I sell my webpage to a competitor for 2000. This year I valued at 2500
For finite life:
500 cash
800 accum dep. to. Patent 1000
Gain on sale of patent 300
b)
Cash 2000
Loss on sale of webpage 500 To Webpage 2500
Goodwill
Goodwill is an unidentifiable intangible asset which arises when one company acquires another company
Company a (acquirer) has controlling interest in the other company B(target) Company a acquires > 50% stake in company B
Represents the future economic benefits (eg existing customer base, efficient management, reliable suppliers) of the target > an asset
Goodwill is recognised only when a budiness combination (IFRS3) takes place
Cannot be purchased or sold separately
Internally generated vs purchased goodwill
Purchase goodwill
Is the difference between the cost of acquisition and the fair value of the targets identifiable net assets
Only purchased goodwill can be recognised:
Purchased goodwill can be measured (more) reliably based on price paid
How would you measure internally generated goodwill - it’s too subjective
goodwill eqn
Goodwill purchase price - ( FV (sssets) - FV ( continent liabilities)
Goodwill purchased example:
A purchased 100% stake in B. A paid 150m in cabs and transferred to bs owners apart of its land fair valued at 20m., book value is 18m. Fair value of bs asses is 230 m including 200m of PPE and 1 m in cash and 29m of financial assets at FVTPL. Fair value of bs liabilities is 100m. Compute the goodwill and journalise this combination for a.
Goodwill = purchase price - (FV(assets) - FV(contingent liabilities)
Therefore purchase price is 150+20=170
Fv of assets is 230
Fv of liabilities 100
170 - (230-100) = 40m
Impairment of goodwill
Goodwill acquired in a business combination is amortised
Goodwill is tested for impairment annually (IAS36) or more frequently if circumstances indicate need for it
An impairment loss on goodwill cannot be reserved in subsequent periods
If recoverable amount > carrying value > no revaluation made
Recoverable amount is he higher between (FV- Cost to sell) vs value in use ( future cf expected from the asset)
IAS38: r&d
R&d accounts for a large % of costs
Accounting problems: will the expenditure provide future benefits?
Simplifying assumption:
Research stage - original investigation > expense
Development stage - activities with specific commercial substance can be capitalised
Examples of research v development activities
Research activities - planned investigation to gain new scientific knowledge or understand
Eg lab research aimed at discovery of new knowledge
Development activities- application if research findings or other knowledge to a plan or design for the production of new or substantially improved mat, devices, processes etc before the start of commercial production or use
Eg conceptual formulation and design
Of possible product or process alternatives; construction of prototypes and operation of pilot plants
Types of r&d costs
Materials equipment and facilities
Personnel
Fees to register a legal rights
Others
Subsequent measurement- R&D
Valuation at cost less amortisation (for intangibles with definite life)
Regular test for impairment: if the amount of capitalised development costs > recoverable amount > impairment loss
Revaluation is not allowed
Example on accounting treatment of R&D
- 50990 obtaining a general understanding of wind low dynamics
- 39000 on understanding what local cyclists expect from a racing bicycle
- 90000 on testing and refining a certain shape of bicycle
- 190,000 on developing and testing a full
Prototype of aerodynamic racing bicycle to be called speedster
- Research > expense
- Research > expense
- Development > asset
- Development > asset
Impairment
Assets are reviewed for indicators of impairments
External sources for impairment indication:
Assets market value declined significantly
Significant adverse changes in technological, economic or legal environment
Market interest rate increased during the period > affect discount rates in calculating an assets value in use
Internal sources for impairment indication:
Evidence of obscolence or physical damage to an asset
Significant adverse changes to the extent to which an asset is used
Evidence that economic performance of asset is worse than expected
Impairment
If impairment indicators are present - impairment test
Impairment loss= asset carrying amount - recoverable amount
Impairment loss can be reversed
Carrying amount > compared to > recoverable amount > higher of fv less costs to sell or value in use
Impairment for CGU
Impairment for cash generating unit when a single asset needs to be grouped to produce cash flows
Impairment loss is attributable to each asset in proportion to its weight to the CGU
Oil company with different oil extraction facilities in several countries. Since there is an active market for oil extracted in each cohntryX the assets assigned to the oil extraction facilities are a seperate CGU per each company
So any decrease in the worlds oil consumption (eg electric car) > impairments of CGU’s
Another example of CGU Identification
Air nostrum signs licences with the Dutch gov by which it can operate 3 international routes (very profitable) at the expense of 5 national routes (loss making)
Should we impair the 5 national routes because they have a negative value is use (negative CF)
All 8 individual licences must be seen as a CGU. One goes with the others as far as Air noatrum can not abandon national routes alone
