1. Intangibles - The Main Influences
Goodwill
IFRS 3 (business combinations)
IAS 36 (impairment)
IAS 38 (intangibles)
Other intangibles
IFRS 13 (fair value)

2. Goodwill
The difference between the value of a business and the fair value of its separable assets and liabilities
Separable asses are those which can be sold separately and thus include intangibles such as patents
Goodwill may be positive or negative

3. Why does goodwill exist?
There are many items of benefit to a business which are not included in assets
Well-known brand name
A good reputation
Strong customer base
The business may have a highly skilled workforce

4. How is goodwill valued? Master valuation method
Value the business as a whole
using earnings or
dividend model
Goodwill is the difference between the total value and the fair value of the separable net assets

5. How is goodwill valued? Super profits method
Identify profits which can be regarded as over and above a normal return
Capitalise at an appropriate rate that will reflect the level of risk

6. The nature of goodwill Inherent goodwill Purchased goodwill
will not be brought into the accounts
Purchased goodwill
must be accounted for

7. Accounting for goodwill
Fixed asset
Deduction from shareholders’ funds (the dangling debit)
Immediate write-off

8. Goodwill as a fixed asset
Retained indefinitely unless a permanent reduction in value becomes apparent
Amortised to income statement over its expected economic life
Amortised to reserves over its expected economic life

9. Goodwill deducted from shareholders’ funds
Known as “the dangling debit”
Retained indefinitely unless a permanent reduction in value becomes apparent
Amortised to income statement over its expected economic life
Amortised to reserves over its expected economic life

10. Goodwill immediate write-off ?
Write-off to income statement
Write-off to reserves

11. Goodwill and intangible assets
Positive goodwill
To be classified under intangible assets
ie. should be ‘capitalised’
To undergo annual impairment test IAS 36
Negative goodwill
To be taken in full to the profit or loss as income of the reporting period during which the transaction occurred

12. Goodwill acquired in a business combination IFRS 3
Classify (capitalise) under
non-amortisable intangible assets
The goodwill must undergo an impairment test at the end of each year IAS 36

13. Goodwill and intangible assets
Purchased goodwill is part of a larger asset for which management remains accountable
Intangible assets
those that can be readily identified and separately measured (e.g. trade marks and patents)
those that are essentially similar to goodwill (e.g. brands)

14. Internally generated (inherent) goodwill
Should never be capitalised

15. Positive purchased goodwill
Capitalise as an intangible fixed asset
Amortise to income statement over its economic life, normally not more than 20 years
impairment test after one year
further impairment tests if loss in value is suspected
immediate write-off of value losses
If goodwill has an indefinite life it should not be amortised
impairment test at the end of each year

16. Negative purchased goodwill
The gain (bargain purchase) should be recognized in the profit or loss of the acquirer
Credit the bargain purchase in full in the profit or loss of the current reporting period during which the transaction occurred

17. Intangible fixed assets
Capitalise at cost if purchased separately from the purchase of a business
Capitalise at fair value if purchased as part of the purchase of a business and it can be separately valued
Include as part of goodwill if purchased as part of the purchase of a business and it cannot be separately valued
Amortise to income statement over its economic life
Internally developed intangible fixed asset may be capitalised only if it has a readily ascertainable market value

18. IAS 36 Impairment and IAS 38
Assets will need to be grouped as income-generating units and fair value determined by discounting expected (future) cash flows
If there is a decline in value of an income-generating unit then the assets within that unit should be written down starting with goodwill and intangibles

19. IAS 36 and IAS 38 Research and Development
Covers expenditure ranging from the broad concept of “general research” to the specific application of “development” of a product that can be produced and marketed
Important accounting concepts
accruals
prudence
prudence will prevail if there is a conflict

20. Definitions Pure research Applied research Development
original investigation to gain new scientific or technical knowledge
not primarily directed towards any specific application
Applied research
directed towards a specific application
Development
the use of new scientific or technical knowledge to produce a new or improved product

21. IAS 36 and IAS 38 do not apply to:
Expenditure relating to locating or exploiting mineral deposits
Expenditure relating to locating or exploiting oil deposits
Expenditure reimbursable by third parties

22. Costs to be included in research and development expenditure
Payroll costs
Material costs
Equipment depreciation
Overhead expenses
Amortisation of patents
Other related costs

23. Accounting treatment Pure research Applied research Development
write-off to income statement in the year in which the expenditure is incurred
Applied research
Development
may be capitalised (IAS 38 should be capitalised)
may be written-off to income statement in the year in which the expenditure is incurred (but no for IAS 38)

24. Capitalisation of development expenditure
Must be a clearly defined project
Expenditure must be separately identifiable
Project must be technically feasible
Must be commercially viable
Costs must be more than covered by related revenues
Adequate resources must be available to complete the project

25. Amortisation of development expenditure
Commence in the period in which commercial production begins
Amortise on the basis of
revenues earned
use of the product
time
Review deferred expenditure at each balance sheet date
write-off irrecoverable expenditure
do not write-back expenditure that has previously been written-off

26. The choice of policy regarding development expenditure
Experience in forecasting techniques
Does the expenditure fluctuate each year?
Standard policy in the industry
Amount of expenditure relative to the company’s total expenditure
Importance of commercial secrecy
Does the company want to boost its balance sheet?

27. IAS 38 Intangible Assets Choice should be removed
if expenditure meets development criteria then it should be capitalised
if expenditure does not meet development criteria then it should not be capitalised

28. IAS 36 Impairment of Assets and Goodwill and IFRS 3 and 13
Fixed assets and goodwill should be reviewed for impairment if there is some indication that impairment has occurred
If possible individual assets should be tested for impairment
Impairment testing is based upon expected cash flows therefore it may not be possible to test an individual asset

29. Impairment of Fixed Assets and Goodwill
Groups of assets may need to be identified
Asset groups are known as
income-generating units (IGU) or
cash generating units (CGU)
Impairment is measured by comparing the carrying value of the asset or IGU with its recoverable amount

30. Impairment of Fixed Assets and Goodwill
Impairment losses are normally recognised in the income statement
Impairment losses arising on a previously revalued fixed asset are included in the Statement of Total Recognised Gains and Losses (STRGL) until the carrying value falls below depreciated historical cost

31. Impairment of Fixed Assets and Goodwill
Recoverable amount is the higher of
net realisable value (NRV) and
value in use (VIU)
VIU depends upon the recognition of future cash flows which should be discounted to a present value using the rate of return which the market would expect from an equally risky investment

32. What Might Cause Impairment ?
A current period operating loss (relating to the IGU) combined with past period operating losses or expected future operating losses or cash outflows
A significant decline in a fixed asset's market value in the period
Evidence of obsolescence or physical damage to a fixed asset

33. What Might Cause Impairment ?
A significant adverse change in the business or market in which the IGU is operating
A significant adverse change in statutory or other regulatory environment
A significant adverse change in any indicator of value used to measure the fair value of a fixed asset on acquisition

34. What Might Cause Impairment ?
A commitment by management to undertake a significant reorganisation
A major loss of key employees
A significant increase in market interest rates or other market rates of return that are likely to materially affect the IGU's recoverable amount

35. Impairment of Fixed Assets and Goodwill
Events which might cause impairment could also have an effect on the economic life of the IGU and this should also be reviewed

36. Impairment of Fixed Assets and Goodwill
Where impairment is apparent the losses should be applied first to any goodwill in the IGU, then to any capitalised intangible assets and finally to the tangible assets
Where appropriate past impairments may be reversed (except goodwill)

37. Impairment and Risk
May be taken into account through the discount rate used
May be taken into account through an adjustment to the cash flows which may involve some element of probability analysis
Tax will also affect the discount rate or cash flows

38. Goodwill valuation methods
Master valuation methods
Value the business as a whole
using earnings or
dividend model
Super profits method
Identify profits which can be regarded as over and above a normal return

39.  Master valuation method Based on dividend model Dt G = - NAV (1+i)t
Goodwill Dt =
Expected future dividends i =
Investors’ required rate of return
NAV =
Value of the net assets

40. Master valuation method
Based on dividend model
D0(1+g) G = -
NAV
(i-g) G =
Goodwill D0 =
Current dividend i =
Investors’ required rate of return g =
Expected dividend growth rate
NAV =
Value of the net assets

41. Master valuation method
Based on dividend model ra D0
(E-D0) + rc G -
NAV = rc G =
Goodwill D0 =
Current dividend ra =
Expected rate of return on marginal investments rc =
Market capitalisation rate E =
Current earnings
NAV =
Value of the net assets

42. Master valuation method
Based on earnings model Em G = -
NAV k G =
Goodwill Em =
Maintainable earnings k =
Market capitalisation rate
NAV =
Value of the net assets

43. Master valuation method
Based on earnings models G = Em 
P/E -
NAV G =
Goodwill Em =
Maintainable earnings
P/E =
An appropriate P/E ratio
NAV =
Value of the net assets

44. Super profits method Et-rA G = j G = Goodwill Et = Expected earnings
Normal return on the investment in net tangible assets j =
Capitalisation rate for super profits

45.  Super profits method (Et-En) G = (1+j)t G = Goodwill Et =
Expected earnings En =
Normal earnings j =
Capitalisation rate for super profits

46.  Super profits method (1+rg)(Et-En) G = (1+j)t G = Goodwill rg =
Earnings growth rate Et =
Expected earnings En =
Normal earnings j =
Capitalisation rate for super profits