1. Intangible Assets (IAS 38)
Doctorate of Business Administration
Intangible Assets (IAS 38)
By:
Associate Professor Dr. GholamReza Zandi

2. Topics to cover Intangible Assets Recognition and Measurement
Research & Development
Goodwill
Impairments and Amortization

3. Intangible Assets
The market capitalization of a company is usually greater than the carrying amount of the net assets in its statement of financial position.
This can relate partly to the fact that some assets are not carried at their fair value
Or due to the fact that other items, such as level of staff morale, managerial expertise, customer loyalty and brand value, have tended not to be recognised as assets.

4. Intangible Assets Lack of physical substance
They exist without financial transaction
Separately purchased, included in goodwill and with a finite life
Capitalise as part of goodwill.
Separately purchased and capable of reliable measurement
Capitalise separately from goodwill and amortise.

5. Intangible Assets Intangible assets – internally developed CapitalizeIF
Readily ascertainable market value

6. Intangible Assets – Indefinite Useful Economic Life
Annual impairment review
Improve transparency
Improve comparability

7. IAS 38 IAS 38 applies to all intangible assets:
Intangible assets of Goodwill, Patents, Employee Benefits
Intangible assets arising from insurance contracts issued by insurance companies.

8. Definition of IA According to IAS 38:
An intangible assets is an identifiable non-monetary assets arises from contractual or other legal rights, and is capable of being separated from the entity and sold or licensed.
Examples: brand names, licenses and franchises, copyrights, patents.

9. Recognition An intangible asset should be recognised if, and only if:
It is probable that the assets’ expected future economic benefits will flow to the entity; and
Its cost can be measured reliably.

10. Recognition
If an intangible item does not meet the definition of an intangible asset, or does not comply with the recognition criteria, it should not be capitalised as an intangible asset.
IAS 30 prohibits the reinstatement of an intangible asset that was initially charged to expense.

11. Intangible Assets Acquired Separately
If the item meets the definition of an intangible, its costs can be measured reliably, it should be recognised as an intangible asset.

12. Intangible Assets Acquired as Part of a Business Combination
Harods Ltd acquired 100% of the equity share capital of HKL Ltd on 1/1/2010 at a cost of RM2.4 million. The fair value of the identifiable net assets of HKL Ltd at that date amounted to RM 1.9 million, which included RM250,000 in respect of product patents.

13. Intangible Assets Acquired as Part of a Business Combination
The acquisition of HKL Ltd should be recorded as follows in Harods Ltd’s consolidated financial statements:
Dr Net tangible assets RM1,650,000
Patents ,000
Goodwill ,000
Cr Bank ,400,000

14. R&D Scorecard
The 2008 R&D scoreboard published by the Department of Innovation, Universities and Skills showed the scale of R&D expenditure:
£274 billion was invested globally in 2007–2008 by most active 1,400 companies most active in R&D which was an increase of 9.5% on the previous year.
Almost 80% of global R&D occurred in five countries: USA, Japan, Germany, France and the UK.
Global R&D intensity, measured as R&D expenditure as a proportion of sales, had remained broadly similar to the previous year at 3.3%.
The 88 UK companies in this group increased their R&D spend at a faster rate (10.3%) with 20% of the total taking place in the pharmaceuticals and aerospace sectors.

15. Research Defined Obtaining new knowledge Search for alternatives
Materials
Products
Processes
Evaluation of alternatives

16. IAS 38 – Accounting Treatment for R&D
R&D Expenses will be treated as:
Expense in the year in which it is incurred
Not to be carried forward in statement of financial position.

17. IAS 38 Intangible Assets Development defined
Application of research findings to a plan for production of new or substantially improved
products
processes
systems
Prior to commencement of commercial production.

18. Development Costs Comprise
Directly attributable costs
materials
labour
fees such as patents.
Allocatable on a reasonable and consistent basis
Necessary and identifiable overheads
depreciation
insurance premiums, rent.

19. IAS 38 – Development Recognition Criteria
Technical feasibility
Intention to complete and use or sell
Generate future economic benefits
Existence of market for asset or output
Availability of adequate resources to complete
Technical
Financial
Reliable measurement of costs possible
Expense if not recoverable from future revenue.

20. Activities that are neither Research or Development
SSAP 13 (but not IAS 38) identifies activities related to research and development, but is not classified for the purposes of the standard, e.g.
Engineering follow-through in an early phase of commercial production
Quality control during commercial production, including routine testing
Troubleshooting in connection with breakdowns during production
Routine efforts to improve the qualities of an existing product.

21. Goodwill
The main requirements of IFRS 3 Business Combinations and IAS 38 Intangible Assets are
Purchased goodwill and intangible assets should be capitalised as assets.
Internally generated goodwill should not be capitalised.
Internally developed intangible assets should be capitalised only where it is probable that future economic benefits attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably.
Capitalised assets are subject to amortisation and/impairment review.

22. The cost of Purchased Goodwill
IFRS 3 Business Combinations states:
Goodwill is the difference between the cost of acquisition and the acquirer’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities acquired at the date of the exchange transaction.

23. Accounting Treatment of Goodwill
Purchased goodwill is recognised in the statement of financial position as an asset
Amortisation prohibited
Annual impairment reviews
Inherent goodwill not normally recognised in the accounts.

24. Brand accounting
Typically not amortised but subject to impairment review.

25. Website Costs
An entity may incur internal expenditure on the development and operation of its own website.
SIC Interpretation 32 outlines the accounting treatment for website development:
Planning (feasibility studies)
Application and infrastructure development
Graphical design development
Content development

26. Website Costs
Different stages apply different recognition on whether to expense or capitalised the expenditure.

27. Website Costs
Once development is completed, the operating stage begins.
Expenditure incurred during planning stage should be recognised as intangible assets only, if:
It is probable that the expected future economic benefits attributable to the asset will flow to the entity and,
The cost of the asset can be reliably measured,
It complies with the qualifying conditions for the capitalisation of development costs under R&D.

28. Internally Generated Brands, Mastheads, Title, Customer Lists
These items and similar in substance, should not be recognised as assets.
Difficult to measure reliably.

29. Computer Software It is treated as property, plant and equipment.
Regarded as part of the machine.
Only when it is NOT regarded as an integral part of the related hardware, it is treated as an intangible asset.

30. Measurement of IA Initially measured at cost.
Costs is the amount paid to acquire the asset.
But the following costs should be charged to expense when incurred:
Start-up, pre-opening, pre-operating costs
Training costs
Advertising and promotion costs
Relocation and reorganisation costs
Internally generated goodwill

31. Measurement Subsequent to Acquisition
Cost model
An IA should be carried at its cost, less any amortisation and impairment losses.
Revaluation model
IA may be carried at a revalued amount(based on FV) less any subsequent amortisation and impairment losses, only of FV can be determined by reference to an active market.

32. Useful Lives and Amortisation
Finite life
Cost less residual value should be amortised over the useful life of the IA
Indefinite life
Should not be amortised
Reviewed annually to determine if events and circumstances continue to support an indefinite useful life for the asset.

33. Derecognition On disposal
When an entity does not expect future benefits from its use or disposal
The gains or loss on derecognition of an IA is computed as the net disposal proceeds less the carrying amount. Recognise immediately in profit or loss.

34. Disclosure Useful life or amortisation rate Amortisation model
Gross carrying amount
Accumulated amortisation and impairment losses
Line items in which amortisation included
And many more….

35. Impairment of assets What is? Applies to:
Land, buildings, machinery and equipment,
Investment property at cost
Intangible assets, goodwill
Investment in subsidiaries, associates and JV at cost
Assets carried at revalued under IAS 16, IAS 38.

36. Identifying Asset to be Impaired
At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired

37. Indications of Impairment: External Sources
MV declines
Negative changes in technology, markets, economy or laws
Increase in market interest rates
Net assets of the company higher than market capitalisation

38. Indications of impairment: Internal Sources
Obsolescence
Asset is idle or held for disposal

39. The End
End of Chapter 1.