1. Processing, Reporting and Auditing Financial Accounts
Intangible Assets & Impairment
IAS 38, IAS 36 and IFRS 3

2. Intangible Assets - IAS 38
3 Criteria
Identifiable
Separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or as part of a package) or
Arises from contractual or other legal rights
Control over a resource
Means the company should have the power to obtain future economic benefits
Usually derived from a legal right
Note IFAC definition of “intangible” includes Human Capital
Existence of future economic benefits
This is expected over a period of years
Intangibles are always Non-Current Assets

3. Examples Examples of possible intangible assets include:
computer software
patents
copyrights
motion picture films
customer lists
mortgage servicing rights
licenses
import quotas

4. Examples Intangibles can be acquired: by separate purchase
as part of a business combination
by a government grant
by exchange of assets
by self-creation (internal generation)

5. Recognition Recognition criteria.
IAS 38 requires an enterprise to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if
it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise
the cost of the asset can be measured reliably.

6. Measurement
When an item is recognised as intangible it is measured initially at cost.
Purchased intangibles
Can add directly attributable costs
Once intangible is in a condition where it can be used
All costs treated as operating expenses

7. Failure to meet the criteria
If an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset then
IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred

8. Amortisation Intangibles are non-current assets
Therefore should be amortised
2 models of carrying amounts
A model must be chosen for each class of intangible asset
Cost model or
Revaluation model

9. 2 models Cost model Carrying amount = Cost
Less accumulated amortisation
Less accumulated impairment losses
Revaluation model
After initial recognition at cost
Fair value at date of (regular) revaluation
Less accumulated amortisation since revaluation
Less accumulated impairment losses since revaluation

10. Fair Value
Fair value can only be determined by reference to an active market
Such active markets are expected to be uncommon for intangible assets
Examples might be
Milk quotas
Freely traded taxi licences
Where no active market exists – use cost model

11. Accounting Under the revaluation model
revaluation increases are credited directly to "revaluation surplus" within equity except to the extent that it reverses a revaluation decrease previously recognised in the income statement
If the revalued intangible has a finite life and is, therefore, being amortised the revalued amount is amortised

12. Classification of Intangible Assets Based on Useful Life
Intangible assets are classified as
Indefinite life:
No foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
Finite life:
A limited period of benefit to the entity.

13. Measurement Subsequent to Acquisition: Intangible Assets with Finite Lives
The cost less residual value of an intangible asset with a finite useful life should be amortised over that life
The amortisation method should reflect the pattern of benefits
If the pattern cannot be determined reliably, amortise by the straight line method
The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of another asset.
The amortisation period should be reviewed at least annually
The asset should also be assessed for impairment in accordance with IAS 36

14. Measurement Subsequent to Acquisition: Intangible Assets with Indefinite Lives
An intangible asset with an indefinite useful life should not be amortised
Its useful life should be reviewed each reporting period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset
If they do not, the change in the useful life assessment from indefinite to finite should be accounted for as a change in an accounting estimate
The asset should also be assessed for impairment in accordance with IAS 36

15. Research & Development (R&D)
Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
Development
Application of research findings to a plan or design for production of new or substantially improved materials, devices etc before the start of commercial production or use

16. Basic rules are Charge all research cost to expense
Development costs are capitalised only
after technical and commercial feasibility of the asset for sale or use have been established
Therefore the enterprise must intend and be able to complete the intangible asset and
either use it or sell it and
be able to demonstrate how the asset will generate future economic benefits

17. Basic rules are
If an enterprise cannot distinguish the research phase of an internal project to create an intangible asset from the development phase
the enterprise treats the expenditure for that project as if it were incurred in the research phase only
If an asset is recognised as intangible
It is shown in BS as development costs capitalised
It will be amortised from time it is available for use
Over period of expected economic benefit

18. Internally-generated
Internally-generated intangible assets
May capitalise
Costs of materials
Labour costs
Fees to register legal rights

19. As an example Computer Software Purchased: capitalise
Operating system for hardware: include in hardware cost
Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost.
Amortisation: over useful life, based on pattern of benefits (straight-line is the default)

20. Another example
Inventions Ltd a company making microwave/radar equipment wants to capitalise the following
Calibration equipment made by company ($600,000) used in calibrating lab equipment
Microwave detection equipment ($1.5m) has been made but found to be too large for aircraft. Company believes further $0.5m development would make a viable saleable product
In flight tracking system ($1.25m) has been trialled and planned production is for summer. Have advanced orders for 2 units & commercial viability is high.

21. What are NOT intangibles
Brands
Mastheads
Publishing titles
Customer lists and
Items similar in substance that are internally generated

22. Goodwill and IFRS 3 Goodwill is the difference between
Purchase value of a business and
Fair value of separable net assets
Inherent (internally-generated) goodwill cannot be an intangible asset
Purchased Goodwill is and is the expectation of future economic benefits for the purchaser

23. Conditions applying to recognition of Goodwill as an intangible
Goodwill is recognised by the acquirer as an asset from the acquisition date and
is initially measured as the excess of the cost of the business combination over the acquirer's share of the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities
IFRS 3 prohibits the amortisation of goodwill
Instead goodwill must be tested for impairment at least annually in accordance with IAS 36 Impairment of Assets
Negative goodwill
If the acquirer's interest in the net fair value of the acquired identifiable net assets exceeds the cost of the business combination
that excess must be recognised immediately in the income statement as a gain

24. Impairment of Assets- IAS 36
Purpose of IAS 36
To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is calculated

25. Definitions Impairment
an asset is impaired when its carrying amount exceeds its recoverable amount.
Carrying amount
the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses
Recoverable amount
the higher of an asset's fair value less costs to sell and its value in use

26. Definitions Fair value
the amount obtainable from the sale of an asset in a bargained transaction between knowledgeable, willing parties.
Value in use
the discounted present value of estimated future cash flows expected to arise from:
the continuing use of an asset, and from
its disposal at the end of its useful life

27. Cash-Generating Units
Recoverable amount should be determined for the individual asset, if possible
If it is not possible to determine the recoverable amount (fair value less cost to sell and value in use) for the individual asset
then determine recoverable amount for the asset's cash-generating unit
Which is the smallest identifiable group of assets
that generates cash inflows from continuing use, and
that are largely independent of the cash inflows from other assets or groups of assets

28. Indications of Impairment
External sources:
market value declines
negative changes in technology, markets, economy, or laws
increases in market interest rates
company stock price is below book value
Internal sources:
obsolescence or physical damage
asset is part of a restructuring or held for disposal
worse economic performance than expected

29. Impairment Testing When an asset is tested for impairment
Its recoverable amount needs to be determined
This = the higher of..
Value in Use and
Fair Value less costs to sell

30. Fair Value Less Costs to Sell
If there is a binding sale agreement, use the price under that agreement less costs of disposal
If there is an active market for that type of asset, use market price less costs of disposal
If there is no active market, use the best estimate of the asset's selling price less costs of disposal
Costs of disposal are the direct added costs only (not existing costs or overhead)

31. Value in Use Should reflect
an estimate of the future cash flows the entity expects to derive from the asset in an arm's length transaction