1. Valuation of Intangible Assets

2. Definition Intangible Assets Identifiable Non-monetary assets Without physical substance Held for use in the production or supply of goods of service

3. Problems in the accounting Some are self-developed cost can’t measure easily and objectively Some have definite lives So for those haven’t definite lives not capable of lives not capable of being amortized being amortized Difficult to identify revenues Subjective Not easy to determine Not easy to determine expired cost and match expired cost and match the revenues earned in the revenues earned in that period that period

4. Criteria to recognize Probable future economic benefits that are attributable to the assets will flow to the enterprise Probable future economic benefits that are attributable to the assets will flow to the enterprise + cost measured reliably cost measured reliably

5. Expenditure on intangible assets Initially recognized as an expenses in previous annual Financial statement Should not be recognized as part of the cost Should recognize as expenses

6. Step to recognize the in tangible assets Initial recognition Benchmark Allowed Treatment alternative Treatment Treatment

7. Benchmark treatment After initial recognition( initially at cost) Cost – accumulated amortization- any accumulated impairment loss

8. Allowed alternative treatment Carried at a revalued amount Carried at a revalued amount Fair value(x cost)-accumulated amortization- accumulated impairment loss Problem: Active market should exist Revaluation should be made regularly

9. Intangible Assets Goodwill Goodwill Research and Development Research and Development Patents Patents Copyright Copyright Franchises Franchises Trademarks Trademarks

10. Goodwill Value of business as a whole–aggregate of the fair value of its separable net assets Value of business as a whole–aggregate of the fair value of its separable net assets Inherent Goodwill Inherent Goodwill Types Purchased Goodwill Types Purchased Goodwill Can’t carried at revalued amount Can’t carried at revalued amount Negative Goodwill can exist and recognize it by three steps Negative Goodwill can exist and recognize it by three steps

11. Accounting for Research and Development Research: original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding Research: original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding Can’t recognized prudence concept Can’t recognized prudence concept

12. Development The application of research findings to a plan or design for the production of new and substantially improvement The application of research findings to a plan or design for the production of new and substantially improvement Should be recognized if fulfill the six development phase Should be recognized if fulfill the six development phase If we unsure the future revenue If we unsure the future revenue write off to P&L write off to P&L

13. Investment Long term investment Long term investment long term purpose depend on management intension Cost –provision for any diminution in value Short Term Investment Short Term Investment Measure at fair value

14. Past Paper analysis 02- Ⅱ -6 Item(2) In the past two years,MSE ltd conducted considerable research on new technology as follows: Year Research Cost Amortization period Year Research Cost Amortization period $ 2000 14 400 000 3 years 2000 14 400 000 3 years 2001 34 400 000 2 years 2001 34 400 000 2 years The production Manager suggested the from this years onwards, the research costs should be written off immediately. The Accounting Manager disagreed because the current year’s profit would then be seriously reduced

15. Answer Should be write off immediately against the respective year P&L Should be write off immediately against the respective year P&L But the research cost in 2000 had been treated as an intangible asset-----prior year adjustment---so written off the remaining amount14400000*2/3against retained profit But the research cost in 2000 had been treated as an intangible asset-----prior year adjustment---so written off the remaining amount14400000*2/3against retained profit

16. 02- Ⅱ -4 (3) The company acquired a trademark at a cost of 7.000.000 on 1 January 2001.Legal fees of $130,000 were incurred for registering the trademark.During the year, two additional expenses were incurred:(1)550,000 spent on extending the use of the trademark to Singapore,and(2) 1,000,000 spent on advertising the products under the trademark.The trademark has a legal life of 15 years and is expected to contribute to the company’s revenue for 12 years Requirement (a) In accordance with the generally accepted accounting principles, prepare a list showing the revised values for the items as at 31 December 2001 (b) Briefly explain the treatment with reason

17. Answer The correct value of the trademark The correct value of the trademark (7000+130+550)*11/12=7040 (7000+130+550)*11/12=7040 Capitalize the cost of acquisition, legal fees and the extension of the use of trademark Capitalize the cost of acquisition, legal fees and the extension of the use of trademark ------because those cost are needed for bringing the assets into present location and position ------because those cost are needed for bringing the assets into present location and position And the trademark should be written off over 12 years (economical useful life )instead of 15 years (legal life) And the trademark should be written off over 12 years (economical useful life )instead of 15 years (legal life) Advertising expenses P&L Advertising expenses P&L

18. 2002- Ⅱ -4 (4) The company established two shops in a foreign country on 1 January 1999.The net asset value of each shop was HK$2,000,000 as at 31 December 2001. In December 2001, the foreign government informed Adolph Ltd that one of the branches would be nationalized in June 2002 and agreed to pay 500,000 as compensation Requirement (a) In accordance with the generally accepted accounting principles, prepare a list showing the revised values for the items as at 31 December 2001 (b) Briefly explain the treatment with reason

19. Answer The value of the investment The value of the investment2000,000+500,000=2500,000 Nationalized shop---recognize as net realizable value Nationalized shop---recognize as net realizable value $500,000---Purdence concept $500,000---Purdence concept The remaining shop---recognize as $2,000,000 The remaining shop---recognize as $2,000,000 because the Going concern because the Going concern

20. 98- Ⅱ -4 (2) ABC Co concluded marketing research in early 1997.Based on the findings the company developed a new marketing strategy which included an advertising campaign cater for the needs of the customers. The cost of the marketing research and advertising campaign amounted to $1,000,000 and $2,000,000 respectively. The company director, Mr. Peter Lee,believed that the marketing research and advertising campaign were so successful that they would increase both the company’s sales and profits for coming two years. Mr. Peter Lee decided to recognize the research and advertising expenditure as an asset and amortize it over its useful life. (2) ABC Co concluded marketing research in early 1997.Based on the findings the company developed a new marketing strategy which included an advertising campaign cater for the needs of the customers. The cost of the marketing research and advertising campaign amounted to $1,000,000 and $2,000,000 respectively. The company director, Mr. Peter Lee,believed that the marketing research and advertising campaign were so successful that they would increase both the company’s sales and profits for coming two years. Mr. Peter Lee decided to recognize the research and advertising expenditure as an asset and amortize it over its useful life. Comment on Mr. Peter Lee’s decision.

21. Answer Is revenue expenditure Is revenue expenditure Because of the prudence concept Because of the prudence concept Only when the assets is sure the economic benefit will attributable to the asset Only when the assets is sure the economic benefit will attributable to the asset

22. Question 1 Can we recognize the inherent goodwill? 1 Can we recognize the inherent goodwill? 2 The short term investment is recognize at market value or at cost? 2 The short term investment is recognize at market value or at cost? 3 why we can’t capitalized the research cost? 3 why we can’t capitalized the research cost?