1. HKAS 38 Intangible Assets
Date: December 23, 2008

2. Contents Definition Recognition and Measurement Subsequent measurement
Useful life
Impairment
Retirement and disposal

3. Definition An intangible assets is
Identifiably : an identifiable non-monetary asset without physical substance
Control : a resources controlled by an entity as a result of past events
Future economic benefit : future economic benefits are expected to flow to the entity

4. Identifiable= Separable or contractual
Definition
1) Identifiably Criterion
is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability or
arises from contractual or other legal rights
Identifiable= Separable or contractual

5. Definition
2) Control
An enterprise controls an asset if it has power to obtain future economic benefits flowing from the underlying resource and also can restrict the access others to those benefits
Its capacity to control such future economic benefits would normally stem from legal rights that are enforceable in court of law

6. Definition 3) Future economic benefits
Revenue from the sales of products or services
Cost saving
Other benefits resulting from the use of the assets by the entity

7. Recognition and initial measurement
Intangible assets should be recognized if:
Future economic benefits will flow to the enterprise
Cost can be measured reliably
Initial measurement
An intangible asset shall be measured initially at cost

8. Recognition and initial measurement
Generally, 6 ways to create intangible assets
Separable acquisition (by purchase)
Acquisition as part of business combination
Acquisition by government grant
Exchange of assets
Internally generated goodwill
Internally generated intangible asset

9. 1. Separate acquisition
If acquired by purchase, cost can be measured reliably
Cost comprise: - purchase cost - import duties - all other direct expenditure of preparing the assets for its intended use
Example of direct attributable costs
Professional fee arising directly from bringing the asset to its working condition
Cost of testing whether the asset is functioning properly
Example of expenditure that are not part of the cost of IA
Advertising and promotional costs
Administration and other general overhead costs

10. 2. Acquisition as part of business combination
Recognized at its fair value that is either the quoted market prices or price of most recent similar transaction
If meet recognition criteria, acquirer should recognize it even if it is not originally recognized by the acquiree (e.g. in-process R&D project that were ineligible for recognition in the acquiree's books if it is generally internally)
If in-process research and development project has a fair value, it means the market expects there is probable future economic benefit flow from this asset. So the “probability” criteria is always met. No need to access the future commercial feasibility, technical competence and future recoverable amount, etc.
Intangible assets should be recognized separately from goodwill in a business combination.

11. 2. Acquisition as part of business combination
The fair value of intangible assets acquire in the business combination can normally be measured with sufficient reliability to be recognized separately from goodwill.
The only rare circumstances in which it might not be possible to measure reliably the fair value of an intangible asset acquired in a business combination
When the intangible asset arises from legal or other contractual rights or
Either is no separable or is separable but there is no history or evidence of exchange transactions for the same or similar assets
-> it should be subsumed (grouped) into goodwill

12. 2. Acquisition as part of business combination
In initially measuring the fair value of an intangible asset
1) Active Market
- current bid price
- the price of the most recent similar transaction
2) No active market
- fair value is the amount that the entity would have paid fro the asset, at the acquisition date, in an arm’s length transaction between the knowledgeable and willing parties, on the basis of the best information available

13. 3.Acquisition by government grant
E.g. Airport landing rights, licenses to operate radio/TV stations, right to assess other restricted resources
Recognized initially at fair value
Alternatively, recognize the assets at nominal value + any expenditure directly attibutable to preparing the assets

14. 4. Exchange of assets
The cost of such intangible asset is measured at fair value unless
The exchange transaction lacks commercial substance or
The fair value of neither the assets received nor the asset given up is reliably measurable
If the fair value cannot be measured reliably:
Cost of the new asset is the carrying amount of asset given up.
No gain or loss resulted.

15. 5. Internally generated goodwill
It should not be recognized as asset as it is not an identifiable resource controlled by the enterprise that can measured reliably at cost.

16. 6. Internally generated intangible assets – Research & Development
Research phase
Development phase
No intangible asset should be recognized
Recognize as asset only if 1) Technically feasible of completing the IA 2) Ability to complete 3) Intention to complete 4) Availability of adequate technical, financial and other resources 5) Has existing market 6) Able to measure the expenditure
Cost incurred expensed to I/S

17. 6. Internally generated intangible assets – Research & Development
If an enterprise cannot distinguish the research phase from the development phase
-> treats the expenditure on that project as if it were incurred in the research phase only
-> cost incurred expensed to I/S
However, even the recognition are met,
internally generated brands, mastheads, publishing titles, customer lists and items similar substance shall not be recognized as intangible assets (specially disallowed in HKAS 38)

18. Measurement after recognition
An enterprise shall choose either
Cost model : carried at cost less any accumulated amortization and any accumulated impairment losses
Revaluation model : carried at revalued amount (fair value) less any subsequent accumulated amortization and any subsequent accumulated impairment losses

19. Measurement after recognition
Revaluation model
Fair value – determined by reference to an active market
Active market
the items traded in the market are homogeneous
willing buyers and sellers can normally be found at any time, and
prices are available to the public
Frequency of revaluations
Revaluation shall be made with such regularity that at the balance sheet date the carrying amount does not differ materially from its fair value

20. Measurement after recognition
Revaluation model
If there is revaluation surplus:
Dr. Intangible assets Cr. Revaluation reserve
However the increase shall be credited I/S to the extent that it reverses a revaluation decrease of the same asset previously charged to I/S
If an IA’s carrying amt is decreased as a result of revaluation:
Dr. Loss on revaluation (I/S) Cr. Intangible assets
However the decrease shall be debited to revaluation reserve to the extent of that any credit balance in the revaluation surplus in respect of that asset

21. Measurement after recognition
Revaluation effect on accumulated amortization
Restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after the revaluation equals its revalued amount
Eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset

22. Amortization required Amortization not required
Useful life
Finite
The length of, or number of production or similar unit constituting, that useful life
Amortization required
Indefinite
Based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity
Amortization not required

23. Useful life The useful life
shall not exceed the period of the contractual or other legal rights
but may be shorter depending on the period over which the enterprise expects to use the asset
If the contractual or other legal rights can be renewed, the useful lift of the intangible asset shall include the renewal period only if - there is evidence to support renewal by the enterprise without significant costs

24. Amortization (IA with finite useful life)
Amortization method should reflect pattern in which the asset’s economic benefits are consumed.
Straight line method
Diminishing balance
Unit of production
Residual value of intangible asset
Assumed to be zero unless there is - a commitment by a third party to purchase the asset - an active market exist at the end of asset’s economic life where residual value can be determined
If intangible asset is carried at cost, residual value is set at selling price of similar assets at time of asset acquisition
If intangible asset is carried at revalued amount, residual value is re-estimated at date of revaluation

25. Impairment loss
Applying HKAS 36 Impairment of Assets  An entity shall assess at each reporting date whether there is any indication that an asset may be impaired  If any such indication exists, the enterprise shall estimate the recoverable amount of the asset
Carried cost is the higher of the recoverable amount at disposal or value in use
For intangible assets with finite useful life  only review for impairment if there is indication of impairment
For intangible assets with infinite useful life  determine the recoverable amount annually

26. Retirement and disposal
An intangible asset shall be derecognized
on disposal or
when no future economic benefits are expected from its use or disposal
The gain or loss arising from the de-recognition shall be the difference between the net disposal proceed, and the carrying amount of the asset and it shall be recognized in the I/S.

27. Thanks you !