M2: Assets (IAS38 Intangible Assets) Flashcards
(21 cards)
What is an intangible asset?
An intangible asset is defined as “an identifiable, non-monetary asset without physical substance”
What does the framework say about the definition of an asset and the recognition criteria, and how does this relate to intangible assets?
The definition of an asset in the Conceptual Framework includes the fact that the resource must be controlled and that this control results in future economic benefits flowing into the entity.
The control is usually in the form of legal rights.
Explain what ‘identifiable’ means in recognising an intangible asset?
Must either be SEPARABLE or Arise from contractual/legal rights
Must be able to be separated from the company and sold, transferred, licensed, rented or exchanged.
What is the type of asset called with its not separable, non-monetary and without physical substance?
GOODWILL..
Has to be separable to be intangible asset.
What does without physical substance mean in recognising an intangible asset?
The asset cannot be: Seen, Felt, Touched.
What does non-monetary mean?
It cannot be money or a receivable.
If the asset is separable, and is monetary/non-monetary what type of asset is this?
If the asset did not arise from contractual or legal rights what asset is this?
If asset is separable and monetary its a FINANCIAL ASSET or CASH
If the asset is separable and non-monetary its INTANGIBLE ASSET
If the asset is NOT separable and does not arise contractual/legal rights its GOODWILL.
What are the two things that must be present to recognise an intangible in the SoFP?
1) It must be PROBABLE that the expected future economic benefits that are attributed to the asset will flow to the entity.
2) The cost must be reliably measured.
What are the different method to acquire intangible asset?
Bought separately
Part of a business combination
Internally generated
Research & Development
What do the rules say about initial measurement of Intangible assets for the acquisition methods below?
- Purchased separately
- Part of a business combination
- Internally generated
- Research and development
Bought separately - COST plus DIRECTLY ATTRIBUTABLE COSTS
Part of business combination - FAIR VALUE as long as can be measured reliably. If not, its goodwill
Internally generated - Split into research and development and follow approach below. If the business CANNOT split into these two; EXPENSE.
Research and development - EXPENSE the research part of gaining knowledge, CAPITALISE the development of this research ONLY if the following conditions (PIRATE) are met:
1) How the asset will generate PROBABLE future economic benefits
2) INTENTION to complete and use or sell the asset
3) Availability of adequate TECHNICAL, financial and other Resources to complete the development and to use or sell the asset
4) ABILITY to use or sell the asset
5) The TECHNICAL feasibility of completing the intangible asset so that it will be available to use or sell
6) Ability to reliably measure the EXPENDITURE related to the development of the asset
Which internally generated intangibles are NEVER capitalised in the business, UNLESS IT HAS BEEN ACQUIRED BY A DIFFERENT COMPANY?
Publishing titles
Brands
Customer lists
Mastheads (Magazine/Newspaper title)
Other similar items
What is the acronym to remember the recognition criteria for Development?
PIRATE
1) How the asset will generate PROBABLE future economic benefits
2) INTENTION to complete and use or sell the asset
3) Availability of adequate technical, finance and other RESOURCES to complete the development and to use or sell the asset
4) ABILITY to use or sell the asset
5) the TECHNICAL feasibility of completing the intangible asset so that it will be available to use or sell
6) Ability to reliably measure the EXPENDITURE related to the development of the asset
How would it be possible for an unethical accountant to manipulate the intangible asset balance?
Through intentional and incorrect capitalisation of costs
Intentionally capitalise on administrative expenses or training costs
What are the 3 CRITICAL STEPS TO consider when deciding if an item is an intangible asset and how to measure it initially?
1) Does it meet the definition of an intangible asset?
2) Are the expected future economic benefits probable?
3) How was the intangible asset acquired? Thus, how do we measure it for that method
Why are football player transactions allowed to be capitalised but general employees not?
Because employees can leave at any time however football player transfers means initial transfer fee can be capitalised as an asset in the SoFP and be amortised across the length of the contract with residual value of 0.
The carrying amount gets updated if there is a contract extension or injury.
Do you think it is appropriate to revalue intangibles? Is there an active market to assist with determining their fair value?
For some intangibles there may be an active market to assist in determining fair value but most intangibles do not. Thus most intangibles are measured at COST.
How do we calculate the cost of using an intangible asset (amortisation)?
1) Determine the USEFUL LIFE (Finite or infinite): If finite, amortise over this life. if infinite, do not amortise and review this infinite assumption yearly. Perform an impairment test.
2) Amortisation method: Amortise from date asset is ready, choose either straight line or reducing balance depending on the asset.
3) ASSUME RESIDUAL VALUE TO BE NIL UNLESS third part is committed to purchase at the end of the useful life or active market where a Residual value can be determined and this will still exist at the end of the useful life.
How could an unethical account manipulate intangible asset balance by the useful life of an intangible asset?
Possible for an unethical accountant to manipulate the intangible asset balance by treating the asset as having an indefinite useful life or ignoring a change in useful life discovered on review.
For example, in the situation where an accountant becomes aware of a change in useful life (ie it is no longer indefinite), the correct accounting treatment would be to commence amortisation of the asset. This would result in reduced net assets (lower intangible assets) and reduced profit for the year (higher amortisation charge).
When and how do I record the disposal of an intangible asset?
When: An intangible asset should be de-recognised on disposal or when no future economic benefits are expected from its use
Disposal - Same as PPE. Carrying amount v Proceeds = Gain/Loss to SPL
What should be disclosed with intangible assets in a set of financial statements?
- Whether the useful lives are finite or infinite
For infinite useful lives, the details should be disclosed
*The amortisation methods and rates used
*The amount of research and development expenditure charged as an expense during the year
*Details of any individual intangible asset that is material to the financial statements
*Details of any revaluations performed if the business holds any intangible assets at fair value
