Accounting for Intangible Assets

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Examples:

Goodwill- internally generated and acquired

Trade mark and brand names- internally generated and acquired

Patents

Copyright

Franchise

Licenses

Customer loyalty

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Intangible Assets

Identifiable Un-identifiable

LKAS 38 Other LKAS/SLFRS (e.g. SLFRS 10)

Intangible Assets are identifiable non-monetary assets without physical substance.(LKAS 38)

Key Characteristics of Intangible Assets:◦ Identifiability

◦ Control over resource

◦ Existence of future economic benefits

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Requires to be identifiable to distinguish from goodwill.

• An asset is identifiable if it either:◦ Separable – i.e. capable of being separated or divided

from the entity and sold, transferred, licensed, rented orexchanged, either individually or together with a relatedcontract, identifiable asset or liability, regardless ofwhether the entity intends to do so or

◦ Arises from contractual or other legal rights,regardless of whether those rights are transferable orseparable from the entity or from other rights andobligations.

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Recognition of an item as an intangible assetrequires an entity to demonstrate that the itemsmeets:◦ The definition of an intangible asset

◦ The recognition criteria

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An intangible asset shall be recognized if andonly if:◦ It is probable that the future economic benefits that are

attributable to the asset will flow to the entity; and

◦ The cost of the asset can be measured reliably.

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At cost

◦ Separate acquisition

◦ Acquisition as part of business combination

◦ Internally generated intangible assets

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Cost comprises of :◦ Purchase price including import duties and non-

refundable purchase taxes after deducting tradediscounts and rebates.

◦ Any directly attributable cost of preparing the assetfor its intended use.

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Cost of the intangible asset is its fair valueat the date of acquisition.

An acquirer recognizes an intangible assetthat meets the recognition criteria even ifthat had not been recognized in the F/S ofthe acquiree.

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If separable or arises from contractual or other legalrights, sufficient information exists to measure the fairvalue reliably.

If separable from goodwill but only together with atangible or intangible asset. Recognizes the group ofassets as a single asset if fair values of individualassets in the group are not reliably measurable.

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Sometimes difficult to assess whetherinternally generated intangible assetsqualifies for recognition because of theproblems in:◦ identify whether and when, there is an identifiable

asset that will generate expected future economicbenefits; and

◦ determine the cost of the asset reliably.

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Research Phase

Should be recognized as an expense when it is incurred.

Development Phase

Should be recognized as an asset if certain conditions are satisfied.

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If an enterprise can demonstrate all of the following:

◦ Technical feasibility

◦ Intention to complete and use or sell it

◦ Ability to use or sell the intangible asset

◦ How the intangible asset will generate probablefuture economic benefits

◦ The availability of adequate resources

◦ The ability to measure reliably expenditureattributable to the intangible asset during itsdevelopment

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Prohibits the recognition as assets - internally generated:

goodwill,

brands,

mastheads,

publishing titles,

customer lists and

items of similar in substance as they cannot be distinguished from the cost of developing the business as a whole.

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Expenditure on an intangible asset that wasinitially recognized as an expense shall not berecognized as part of the cost of an intangibleasset at a latter date.

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▪ Choose either cost model or revaluationmodel as the accounting policy.▪ Cost Model : Cost less any accumulated

amortization and any accumulated impairmentlosses.

▪ Revaluation Model : Fair value at the date ofrevaluation less any subsequent accumulatedamortization and any subsequent accumulatedimpairment losses.

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The fair value should be determined by referenceto an active market.

Frequency of revaluation depends on thevolatility of the fair values of the intangibleassets being revaluated.

If an intangible asset in a class of revaluedintangible assets cannot be revalued due toabsence of an active market, it should be carriedout at cost less accumulated amortisation andaccumulated impairment losses.

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If the fair value of a revalued asset can nolonger be determined by reference to an activemarket, then its carrying value shall be itsrevalued amount at the date of last revaluationby reference to the active market less anyaccumulated amortization and accumulatedimpairment losses.

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Either:

◦ Restate proportionately with the change in the grosscarrying value of the asset so that carrying value afterrevaluation equals its revaluation amount.

◦ Eliminate against the gross carrying value of the assetand the net value is restated to the revalued amountof the asset.

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Increase – Recognize in other comprehensiveincome and accumulated in equity under the headingrevaluation surplus. However, is recognized in profitor loss to the extent it reverses a revaluationdecrease of the same asset previously recognized inprofit or loss.

Decrease – Recognize in profit or loss. However, itrecognized in other comprehensive income to theextent of any credit balance in the revaluationsurplus in respect of that asset.

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Finite

An intangible asset with an finite life is amortized.

Indefinite

An intangible with an indefinite life is not amortized and subject to

impairment testing.

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Depreciable amount should allocate on asystematic basis over its useful life.

Amortization should begin when asset isavailable for use.

Amortization method should reflect thepattern in which the asset’s economic benefitsare consumed by the entity. If that patterncannot be determined reliably, use straightline method.

Amortization charge should be recognized inP/L unless it is included in the carrying valueof another asset.

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Should review at least at each financial year- end.

If the expected useful life is different from previousestimates, amortization period should be changed.

If there is a significant change in the expectedpattern of consumption of economic benefits fromthe asset, amortization method should be changed.

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(a)The useful lives or the amortization rates used;

(b) The amortization method used;

(c) The gross carrying amount and the accumulated amortization (aggregated with accumulated impairment losses) at the beginning and end of the period;

(d) The line item(s) of the income statement in which the amortization of intangible assets is included;

(e) A reconciliation of the carrying amount at the beginning and end of the period

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Definition and Recognition Criteria

MeasurementAt Recognition – cost After Recognition – cost or revaluation

Various issues in accounting for intangibleassets in relation to their identification,recognition and measurement.

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