Revise lecture 10 1

Intangible assets 2

Definition An intangible asset is an identifiable non- monetary asset without physical substance. To meet the definition the asset must be identifiable, i.e. separable from the rest of the business or arising from legal rights. 3

Intangible assets Recognition To be recognised in the financial statements an intangible asset must Meet the definition of an intangible asset, and Meet the recognition criteria of the framework: – It is probable that future economic benefits attributable to the asset will flow to the entity. – The cost of the asset can be measured reliably. 4

Internally-generated intangibles The following internally-generated items may never be recognised: 1.Goodwill 2.Brands 3.Mastheads 4.Publishing titles 5.Customer lists 5

Intangibles Purchased and internally- generated intangibles 6

Purchased intangibles If an intangible asset is acquired in a business combination, the fair value of that asset at the date of acquisition is taken. The determination of that fair value is easy if an active market exists, otherwise it may be necessary to take the price the entity would have paid in an arm’s length transaction. Any intangible which cannot be measured reliably in an acquisition has to be included in goodwill. 7

Brands 8

Internally-generated intangibles Brands: 1.The accounting treatment of brands has been a matter of controversy for some years. 2. IAS 38 intangible assets has now ended the controversy by stating that internally- generated brands and similar assets may never be recognised 9

Measurement of intangible assets Measurement after initial recognition There is a choice between 1.The cost model 2.The revaluation model 10

Amortisation 11

Amortisation An intangible asset with a finite useful life must be amortised over that life, normally using the straight-line method with a zero residual value 12

Amortisation An intangible asset with an indefinite useful life: Should not be amortised. Should be tested for impairment annually, and more often if there is an actual indication of possible impairment. 13

Goodwill 14

Goodwill The nature of goodwill Goodwill is the difference between the value of a business as a whole and the aggregate of the fair values of its separable net assets. Separable net assets are those assets (and liabilities) which can be identifiable and sold off separately without necessarily disposing of the business as a whole. They include identifiable intangibles such as patents, licences and trade marks. 15

Goodwill Fair value is the amount at which an asset or liability could be exchanged in an arm’s length transaction between informed and willing parties, other than in a forced or liquidation sale. 16

Goodwill Goodwill may exist because of any combination of a number of possible factors: 1.Reputation for quality or service 2.Technical expertise 3.Possession of favourable contracts 4.Good management and staff 17

Goodwill Purchased and non-purchased goodwill Purchased goodwill: 1.Arises when one business acquires another as a going concern 2.Includes goodwill arising on the consolidation of a subsidiary or associated company 3.Will be recognised in the financial statements as its value at a particular point in time is certain 18

Goodwill Non-purchased goodwill: 1.Is also known as inherent goodwill 2.Has no identifiable value 3.Is not recognised in the fianncial statement 19

IFRS 3 revised business combinations (Goodwill) 20

IFRS 3 Goodwill is defined in IFRS 3 as an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identifiable and separately recognised. 21

IFRS 3 Purchased goodwill is recognised within the FS because at a specific point in time there was a market transaction by which it can be measured. The purchase has established the fair value for the business as a whole which can be compared with the fair value of the separable net assets of the acquiree. The difference is purchased goodwill. 22

IFRS 3 Goodwill exists in any successful business. However, if the business has never changed hands, this goodwill should not be recognised in the financial statements because no event has occurred to identify its value. It can only be subjectively estimate. This is described as inherent goodwill or non- purchased goodwill. 23

IFRS 3 Accounting for goodwill Non-purchased goodwill should not be recognised in the financial statement. It certainly exists, but fails to satisfy the recognition criteria in the framework, since it is not capable of being measured reliably. 24

IFRS 3 Purchases goodwill is dealt with in two accounting standards, according to how it arose. Goodwill arising on the purchase of a subsidiary is covered by IFRS 3 revised, while all other goodwill is covered by IAS 38. When the purchased consideration is less than the value of the acquired identifiable net assets this is known as a bargain purchase (negative goodwill) and should be recognised as a credit in the IS and not taken to the SFP. 25

Question What are the main characteristics of goodwill which distinguish it from other intangible assets? 26

Answer It is a balancing figure. Goodwill itself is not a valued but a comparison is made between the fair value of the whole business and the fair value of the separable net assets of the business. It cannot be valued on its own. Goodwill cannot be disposed of as a separate asset. 27

Answer The factor contributing to the value of goodwill cannot be valued, e.g. how can one value the benefit of an experienced workforce? The value of goodwill is volatile. It can only be given a numerical value at the time of acquisition of the whole world. 28