1. Chapter 6 - INTANGIBLE ASSETS (IAS38 AND IFRS3)
ACTG 6580
Chapter 6 - INTANGIBLE ASSETS (IAS38 AND IFRS3)

2. Definition of Intangible Asset
IAS38 defines an intangible asset as "an identifiable, non-monetary asset without physical substance".
An asset is identifiable when it arises from legal rights or when it is "separable".
An asset is separable if it "is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged".
Monetary assets are defined as "money held and assets to be received in fixed or determinable amounts of money".

3. Initial Recognition and Measurement of Intangible Assets
An item is recognised as an intangible asset only if it meets the definition of an intangible asset and:
(a) it is probable that the future economic benefits attributable to the item will flow to the entity, and
(b) the cost of the item can be measured reliably.
Intangible assets should be measured initially at their cost.

4. Acquisition of intangibles Internally created intangibles
US GAAP
IFRS
Internally generated assets other than goodwill, brands, mastheads, publishing titles, newspapers and customer lists may be recognized as assets if certain additional criteria are met. These additional criteria will be discussed in research and development.
Similar

5. Types of intangibles US GAAP IFRS Market-related intangible assets.
Similar
Customer-related intangible assets.
Similar
Artistic-related intangible assets — these ownership rights are protected by copyrights.
Similar
Contract-related intangible assets — a common form is a franchise.
Similar
Technology-related intangible assets.
Similar

6. Subsequent measurement of intangible assets
After initial recognition, intangible assets may be measured using either:
The cost model; items are carried at cost less any accumulated amortisation and less any accumulated impairment losses.
The revaluation model; items are carried at fair value at the date of revaluation, less any subsequent accumulated amortisation and less any subsequent accumulated impairment losses.
If the revaluation model is used it must be applied to entire classes of intangible assets.

7. Periodic valuation Carrying value
US GAAP
Revaluation is not permitted.
IFRS
Revaluation to the fair value of intangible assets other than goodwill is an allowable alternative treatment:
Because this requires reference to an active market for the specific type of intangible, it is relatively uncommon in practice.
Increases in value should be credited to the account “revaluation surplus.” Revaluation surplus is an account that is included in accumulated OCI. Increases in value are not recorded in the revaluation surplus account if the increase reverses a loss that was previously expensed; that portion may be credited to an unrealized gain account which will flow through net income.
Any decrease in value should be included as an unrealized loss in income unless it reverses the revaluation surplus relating to the same asset; that portion can be debited to revaluation surplus (OCI).

8. Periodic valuation Carrying value
IFRS
Revaluation (continued):
If the revalued basis of an asset exceeds the cost basis, there will be an increase in the annual amortization. To the extent there is an increase in amortization expense, per IAS 38, paragraph 87, an entity may reverse the portion of reserve surplus related to this increase by debiting revaluation surplus and crediting retained earnings. Alternatively, this transfer may be completed upon disposal of the asset.
When an asset is disposed of, any remaining revaluation surplus related to that asset can be transferred to retained earnings.

9. Periodic valuation Carrying value
IFRS
Revaluation (continued):
If an intangible asset is revalued, an entity can account for the accumulated amortization at the date of revaluation by:
Amortization elimination method: the accumulated amortization can be eliminated against the intangible asset itself.
Proportionate restatement method: the accumulated amortization can be 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. The proportionate restatement method is rarely used in practice, thus no example is provided.

10. Amortisation
IAS38 requires that the depreciable amount of an intangible asset with a finite useful life should be amortised over that useful life.
Depreciable amount is "the cost of the asset, or other amount substituted for cost, less its residual value".
The residual value of an intangible asset with a finite useful life is assumed to be zero, unless a third party is committed to buy the asset at the end of its useful life, or there is an active market for the asset and its residual value can be determined by reference to that market.

11. Amortisation methods
The amortisation method chosen in relation to an intangible asset should match the usage pattern of that asset.
Available amortisation methods include:
the straight-line method
the diminishing balance method
If the asset's usage pattern cannot be estimated reliably, the straight-line method should be used.

12. Review of residual value, useful life and amortisation method
The residual value and useful life of an intangible asset should be reviewed at least at the end of each financial year.
If expectations differ from previous estimates, these should be accounted for as a change in an accounting estimate in accordance with IAS8.
Similarly, the amortisation method used in relation to an intangible asset should be reviewed at least at the end of each financial year. Any change in method should be accounted for as a change in an accounting estimate in accordance with IAS8.

13. Intangible assets with indefinite useful lives
Intangible assets with indefinite useful lives are not amortised.
The useful life of such an asset should be reviewed in every accounting period.
If circumstances now indicate that the asset's useful life has become finite, it should be amortised over the remainder of that life. This change is accounted for as a change in an accounting estimate in accordance with the requirements of IAS8.

14. Goodwill
Goodwill arises from factors such as an entity's good reputation and strong customer relationships.
IAS38 forbids internally generated goodwill to be recognised as an asset.
Goodwill which is purchased in a business combination is dealt with by IFRS3 Business Combinations.

15. IFRS3 Business Combinations
Goodwill is defined as "an asset representing the future economic benefits arising from … assets acquired in a business combination that are not individually identified and separately recognised".
A business combination occurs when an entity acquires control of a business.
Goodwill acquired in a business combination is recognised as an asset and measured initially at cost.
The cost of the goodwill is equal to the excess of the cost of the business combination over the net fair value of the identifiable assets and liabilities which have been acquired.

16. Negative goodwill
Negative goodwill would seem to arise if the cost of a business combination is less than the net fair value of the identifiable assets and liabilities acquired. This situation could arise for two main reasons:
errors in determining the cost of the business combination or determining the fair values of the identifiable assets and liabilities acquired
a "bargain purchase" has occurred.
The cost of the business combination and the fair values of the identifiable assets and liabilities should be reassessed. Any negative goodwill which remains after this reassessment should be treated as income and included in the acquirer’s profit or loss.

17. Subsequent measurement of goodwill
Goodwill acquired in a business combination should not be amortised.
Instead, such goodwill should be measured at its cost less any accumulated impairment losses.
Broadly, impairment occurs when an asset's value falls below its carrying amount (see IAS36). Goodwill should be tested for impairment annually.

18. Internally Generated Intangible Assets
Internal generation of an intangible asset is split into a research phase and a development phase.
Research is defined as "original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding".
Development is defined as "the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use".

19. IAS38 Treatment of Research and Development costs
All research expenditure must be written off as an expense when it is incurred.
An intangible asset which arises from the development phase of an internal project must be recognised if certain criteria are satisfied:
technical feasibility of completion
availability of resources to complete
intention to complete and ability to use/sell the asset
probability of future economic benefits
ability to measure expenditure reliably.

20. Research and development example
Example 1 – Internet Imaging Inc. (Triple I), is working on a project to create a database of picture images which it intends to sell over the internet. Triple I has identified the following stages and costs incurred in its project:
Research stage
This stage included identifying the system requirements, searching for an appropriate database and other system materials and images to purchase, gaining the technical knowledge necessary to collect and transfer the images and overall project feasibility. Costs incurred were $50,000 during the period of January 1, 2010 through March 31, On April 1, 2010, Triple I determined that it would complete the intended project. Additional research costs of $75,000 were incurred during the period of April 1, 2010 through June 30, 2010.
Development stage
This stage included performing market analysis to identify potential demand, acquiring system materials and images to populate the database; designing the website; and testing a system prototype. During the period of May 1, 2010 through August 31, 2010, Triple I incurred development costs of $100,000. On August 31, 2010, Triple I determined that its project was technically feasible. During the period of September 1, 2010 through October 31, 2010, Triple I incurred development costs of $50,000. On October 31, 2010, Triple I received its results from its market study and determined that the project was economically feasible. Additional development costs of $200,000 were incurred during the period of November 1, 2010 through December 31, 2010.
Production stage
Triple I will launch its imaging database on the internet on January 1, 2011.

21. Research and development example
Example 1 continued:
Complete the diagram below by inputting the research and development costs for 2010 in the appropriate periods based on the information above.
Based on the diagram, determine which research and development costs Triple I can capitalize related to this project during 2010 using US GAAP and IFRS?
Research phase
Development phase $
January 1, 2010
March 31, 2010
April 1, 2010
May 1, 2010
June 30, 2010
August 31, 2010
Sept. 1, 2010
October 31, 2010
November 1, 2010
December 31, 2010
Research Initiated
Decision to complete the project
Development initiated
Research completed
Technical feasibility reached
Economic feasibility reached
Development completed

22. Research and development example
Example 1 solution:
Using US GAAP, Triple I cannot capitalize any research and development costs. Using IFRS, Triple I cannot capitalize any research costs, similar to US GAAP; however, Triple I may capitalize development costs when technical and economic feasibility of a project can be demonstrated in accordance with specific criteria. Some of the stated criteria include: demonstrating technical feasibility, intent to complete the asset and ability to sell the asset in the future, as well as others. As shown in the diagram below, Triple I met these criteria on October 31, 2010; therefore, the $200,000 incurred from November 1, 2010 through December 31, 2010, prior to the product launch on January 1, 2011, may be capitalized.
Research phase
Development phase
$50,000
$75,000
$100,000
$200,000
January 1, 2010
March 31, 2010
April 1, 2010
May 1, 2010
June 30, 2010
August 31, 2010
Sept. 1, 2010
October 31, 20X0
Nov. 1, 2010
December 31, 2010
Research Initiated
Decision to complete the project
Development initiated
Research completed
Technical feasibility reached
Economic feasibility reached
Development completed

23. Main disclosure requirements of IAS38
For each class of intangible asset, distinguishing between internally generated assets and others:
whether the useful lives are indefinite or finite
if finite, the useful lives or amortisation rates used
the amortisation methods used
the gross carrying amount and accumulated amortisation at the beginning and end of the accounting period
the line item in the statement of comprehensive income in which amortisation is included
a reconciliation of the carrying amount at the beginning and end of the period, showing additions, disposals, revaluation increases and decreases, amortisation, impairment losses and any other movements.

24. Main disclosure requirements of IFRS3
The main disclosure requirements of IFRS3 in relation to goodwill are:
a reconciliation of the carrying amount of goodwill at the beginning and end of the period, showing additions, disposals, impairment losses and any other movements;
the amount of any negative goodwill which has been included in profit or loss and the line item in the statement of comprehensive income in which this is included.