1. MFRS 138 – INTANGIBLE ASSETS

2. Framework for MFRS 138

3. Introduction
MFRS 138 Intangible Assets covers identification, recognition, measurement and presentation of intangibles.
Intangible assets are identifiable non-monetary assets that have no physical substance.
Standard deals generally on intangibles (excluding goodwill) and including internally generated intangibles classified as research and development.

4. Qualities of Intangibles
Intangibles must have the following qualities:
Identifiability,
Control, and
Future economic benefit.
Identifiability
It is separable, i.e. capable of being separated or removed from the entity and sold, licensed, entered or exchanged, either individually or together with related contract, asset or liability; or
Arises from contractual or other legal rights.

5. Control
Control is present if the entity has the power to obtain future economic benefits flowing from the underlying resource and restrict others from having access to those benefits.
Legal rights that are enforceable in courts may indicate control.
An entity may derive economic benefits from skilled workers; market share and customer list but has no control over them.

6. Future Economic Benefit
Future economic benefits may arise from the sale of products or services, cost saving or renting of the asset.
MFRS 138 requires an entity to assess the probability of future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.
In assessing the degree of certainty attached to the flow of future economic benefits greater weight should be given to external evidence.

7. Initial Recognition An intangible is recognised when it meets:
the definition of an intangible asset; and
the recognition criteria which are:
it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
the cost of the asset can be measured reliably.

8. Recognition of Subsequent Expenditure
Most subsequent expenditure are written off because:
Maintenance
the nature of intangible assets is such that there will not be replacement of parts or additions to them.
In addition, it is difficult to attribute the subsequent expenditure to a particular intangible asset rather than the business as a whole.
An intangible asset is recognised as a result of:
Separate acquisition;
Part of a business combination;
Acquisition by way of a government grant;
Exchange of assets; or
Internally generated in limited circumstances

9. Measurement Measurement
An intangible asset is measured initially at cost.
Separate acquisition
Costs comprise:
Purchase price including incidental costs such as taxes less trade discounts and rebates, and
Any directly attributable cost of preparing the asset for intended use.
Examples 1 to 3 of the text book

10. Acquisition as Part Of A Business Combination
In a business combination, the acquirer is to recognise at the date of acquisition all identifiable intangibles of the acquiree, separately from goodwill. These identifiable intangibles could be those that were recognised and those that have not been recognised by the acquiree.
the acquirer should recognise in-process research and development project of the acquiree if it meets the definition of intangible and its fair value can be measured reliably.
These intangible assets will be measured at fair value which is the quoted market prices in an active market.

11. Acquisition by Way of a Government Grant
Intangible assets acquired free of charge, or for a nominal consideration, by way of a government grant, are measured initially at fair value or at cost.
Example 4 of the text book
Exchange of Assets
The cost of the intangible acquired is measured at fair value. If the exchange transaction lacks commercial substance or the fair value of neither the asset neither received nor given up can be measured reliably, the acquired asset will be measured at the carrying amount of the asset given up.

12. Internally Generated Intangible Assets - Goodwill
MFRS 138 prohibits the recognition of internally generated goodwill.
Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be recognised as intangible assets.

13. Research and Development Research
Activities aimed at obtaining new knowledge;
The search for applications of research findings or other knowledge,
The search for product or process alternatives; and
The formulation and design of possible new or improved product or process alternatives.
Accounting treatment
Costs incurred by an entity during the research phase are recognised as expenses in the period they are incurred.

14. Development Costs
Costs incurred during the development phase must be capitalised if they meet all the following criteria:
The entity has the technical feasibility of completing the intangible asset so that it will be available for use or sale;
The entity intends to complete the intangible asset and use it or sell it.
The entity has the ability to use or sell the intangible asset.
The intangible asset will generate future economic benefits.
The entity has adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
The cost incurred during development can be measured reliably.

15. Developments costs that are capitalised are all costs incurred from the date the intangible asset first meets the recognition criteria, including the six criteria mentioned above.
Costs comprise all directly attributable costs necessary to create, produce and prepare the asset for intended use.
Examples of directly attributable costs are:
Costs of materials and services consumed;
Personnel costs: salaries, wages and other employment related costs;
Fees to register a legal right; and
Amortisation of patents and licences that are used to generate the intangible asset.
MFRS 123 Borrowing Costs allows borrowing cost to be capitalised as part of development costs if it meets the criteria for capitalisation.
Example 4 of the text book

16. Subsequent Measurement
Cost model An intangible asset that has a finite useful life will be carried at cost less accumulated amortisation and any accumulated impairment losses. The intangible is amortised systematically over the finite useful life.
Revaluation model
Only allowable if there is fair value in reference to an active market
Revaluation must be made regularly
Intangibles in the same class should be revalued.
Accounting treatment of Surplus/deficit on revaluation ---as for property, plant and equipment.
Revaluation model is not applicable if:
If the intangible was not recognised as an asset previously; or
The initial recognition was at other than cost
Example 6 of the text book

17. Accounting Treatment
The accumulated amortisation on revaluation date can be either:
restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount; or
eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.

18. Revaluation surplus
If the fair value of the asset exceeds its carrying value the surplus is credited to equity unless the surplus is due to a deficit on revaluation; in which case the surplus reverses a revaluation deficit.
Decrease on revaluation
A decrease arising from a revaluation is taken to the income statement. However, the decrease is debited to revaluation reserve to the extent of any credit balance in the revaluation reserve in respect of that asset.
Examples 6 and 7 of the text book

19. Useful Life and Amortisation
Determine if asset has:
Finite life, or
Indefinite life

20. Finite Life
Amortise on a systematic basis; straight-line method to be used unless another method reflects pattern of consumption more reliably.
Residual value is zero unless there is a firm commitment by a 3rd party to buy the asset at the end of the life or there is an active market and it is probable such a market will exist at the end of the asset’s life.
Annual review of useful life and changes are considered as change in accounting estimate.
Amortisation begins when the asset is available for use.
Intangible asset that has a legal life and there are provisions for renewal, the potential renewals are only considered in useful life assessment if renewal costs are not significant.
Examples 8-10 of the text book

21. Indefinite Life
Intangibles with indefinite lives are not amortised but tested for impairment annually or whenever there is an indication of impairment.
Useful life of indefinite life of intangible are reassessed annually.
Change from indefinite life to finite life is accounted for as change in accounting estimate.
A change from indefinite to finite life is an indication of impairment.
Example 11 of the text book

22. EXAMPLE ABC has acquired a broadcasting rights that is renewable every 5 years. The renewal fees is minimal and the company has renewed it twice before and intends to continue renewing the licence indefinitely. The technology in broadcasting is not expected to be replaced. Useful life of the licence can be taken to be indefinite.