Intangible Assets http://www.cc.cec/budg/

5. Specific implications and next steps Overview of session 1. Scope and key concepts 2. Recognition 3. Measurement 4. Disclosures 5. Specific implications and next steps 6. Questions

Intangible Assets 1. Scope and key concepts

Scope Intellectual property (“IP”) in general 3 broad categories: Research and development Patents, copyrights, brand names, trade secrets, trade marks, franchises, concessions, operating right or right of use Computer software (developed internally or acquired from a third party)

Key definitions An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes Useful life is the period of time over which an asset is expected to be used by the entity Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding 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 prior to the commencement of commercial production or use

Scope Fall back on IAS 38 since no specific IPSAS Covers accounting for all Intangible Assets, excluding: Goodwill Financial assets Mineral rights and other similar expenditure Those arising in insurance companies through contracts with policy holders

Intangible Assets 2. Recognition

Criteria for recognition No Defined 3. Capable of generating future economic benefits? Not an intangible asset No 2. Controlled? Yes 4. Probable that future economic benefits will be generated? Yes No No Yes 5. Cost reliably measured? 1. Identifiable? Explain by reference to an example – e.g. computer software Yes No Intangible resource Not recognised Recognised Yes

Identifiable An asset is identifiable if it is separable: An asset is separable if the enterprise could rent, sell, exchange or distribute the specific future economic benefits attributable to the asset without also disposing of future economic benefits that flow from other assets used in the same revenue earning activity. But an enterprise may be able to identify an asset in some other way: For example, if an intangible asset is acquired with a group of assets, the transaction may involve the transfer of legal rights that enable an enterprise to identify the intangible asset.

Control The capacity of an enterprise to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law (e.g. copyrights or a legal duty on employees to maintain confidentiality). In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control since an enterprise may be able to control the future economic benefits in some other way. Control of future economic benefits results from either the power to obtain them or the ability to restrict access of others.

Future economic benefits Future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the enterprise For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues Requires the exercise of sound judgement based on verifiable information

Measurement of cost Cost can be measured: Either directly (cost of acquisition of the asset when it is separately acquired); or Indirectly (e.g. by reference to an active market or using discounted cash flows techniques when the asset is acquired as part of a business combination)

Recognition – Internally generated intangible assets Internally generated goodwill Internally generated intangible assets NO! Research phase Development phase NO! Only if strict criteria met

Research phase Examples of research activities: Activities aimed at obtaining new knowledge The search for, and evaluation and final selection of, applications of research findings or other knowledge The search for alternatives for materials, devices, products, processes, systems or services The formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services

Development phase Conditions to be met before capitalisation: Technical feasibility of completing the asset Intention to complete it and use/sell the asset Ability to use/sell the asset An analysis of whether the asset will generate future economic benefits Availability of resources to complete the asset and to use/sell it AND Ability to reliably measure the attributable expenditure

Internally generated brands Cannot capitalise… Internally generated brands Mastheads Customer lists Publishing titles …and similar items

Date for recognition During the year, the date of acquisition or date of entry shall correspond to the date on which the risks of ownership of the assets are transferred to the E.C., which in general corresponds to the accepted delivery of the asset If an item does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is recognised as an expense when incurred.

Intangible Assets 3. Measurement

continue to carry at cost* Measurement The E.C.s’ choice Benchmark treatment continue to carry at cost* Subsequent costs: expense (unless can prove enhanced economic benefits) Initial measurement: cost Alternative treatment carry at re-valued amount* by reference to active market Impairment testing if indicators are present that suggest that the carrying amount of an intangible asset may exceed its recoverable amount. * less amortisation and impairment provisions

Cost of internally generated intangible assets Cost = directly attributable expenditure Begin when asset first meets recognition criteria Cannot back-date to include costs expensed previously Specific costs CANNOT be capitalised Start-up costs Training activities Advertising/promotional activities Re-locating/re-organising costs

Measurement - amortisation Presumption Rebuttal Evidence must be persuasive Disclose evidence & perform annual impairment test UEL ≤ 20 years UEL > 20 years Amortise over UEL

Measurement – disposal Gain/loss = Net Disposal Proceeds – Carrying Amount Recognise in economic outturn account

Intangible Assets 4. Disclosures

Major disclosures Internally generated Acquired Disclose separately Useful lives or amortisation rates Gross opening & closing balances Reconciliation of movements in year Re-valued intangibles Also, R&D costs expensed in the period

5. Specific implications and next steps Intangible Assets 5. Specific implications and next steps

Proposed E.C. general accounting policies Computer software Software are stated at historical cost less depreciation. Costs associated with maintaining computer software programmes are recognized as an expense as incurred. Expenditure, which enhances or extends the performance of computer software programmes beyond their original specifications is recognized as a capital improvement and added to the original cost of the software. Computer software recognized as assets are amortized using the straight-line method over their useful lives, not exceeding a period of 4 years. Research and development Research expenditure is recognized as an expense as incurred. Costs incurred on development projects are recognized as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditures are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Development costs that have been capitalized are amortized from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, not exceeding five years. Other intangible assets Expenditure to acquire patents, trademarks and licenses is capitalized and amortized using the straight-line method over their useful lives, but not exceeding 20 years.

Compliance issues Issue As per former regulation As per IPSAS Accounting rules EC transition period 5 years Internally developed software Expensed Capitalise if identifiable, controlled, future economic benefits and measurable cost expensed Development costs Assets under construction N/A To be disclosed as a separate category within intangible assets Amortisation rules Full year from the date when the asset is available for use Pro-rata temporis from the date when the asset is available for use

Intangible Assets 6. Questions http://www.cc.cec/budg/