IAS 38: Intangible Assets - riseschool.edu.pk · INTERNATIONAL ACCOUNTING STANDARD 38 INTANGIBLE...

IAS 38: Intangible Assets 3

LO 1 Scope and Definitions

LO 2 Initial Recognition and Measurement

LO 3 Measurement After Initial Recognition

LO 4 Subsequent Expenditure on Intangible assets

LO 5 Disposal

LO 6 Examples of Intangible Assets (as mentioned in ICAP study text)

LO 7 SIC 32: Intangible Assets – Web Site Costs

LO 8 Disclosures

LO 9 Summary

CHAPTER-3 IAS 38: INTANGIBLE ASSETS

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INTERNATIONAL ACCOUNTING STANDARD 38

INTANGIBLE ASSETS

LO1: SCOPE AND DEFINITIONS

Scope

[Para 2,3] IAS 38 applies to all intangible assets, except those that are within the scope of another

standard. For example, IAS 38 does not apply to the following:

1. intangible assets held by an entity for sale in the ordinary course of business (IAS 2: Inventories);

2. deferred tax assets (IAS 12: Income taxes); 3. leases that are within the scope of IFRS 16: Leases; 4. financial assets (IFRS 09); 5. financial assets (Investments) recognised and measured in accordance with IFRS

10: Consolidated financial statements, and IAS 28: Investments in associates and

joint ventures;

6. Goodwill acquired in a business combination (IFRS 3: Business combinations); 7. assets arising from contracts with customers that are recognised in accordance

with IFRS 15: Revenue from contracts with customers.

Definitions

[Para 8] Asset

A resource controlled by the company as a result of past events and from which future

economic benefits are expected to flow.

Intangible asset

An identifiable, non-monetary asset without physical substance.

Active market

An active market is a market in which all the following conditions exist:

(a) the items traded in the market are homogeneous;

(b) willing buyers and sellers can normally be found at any time; and

(c) prices are available to the public.

Commentary

on

Definitions

Control [Para 13]

Control means that a company has the power to obtain the future economic benefits

flowing from the underlying resource and also can restrict the access of others to those

benefits.

Control would usually arise where there are legal rights, for example legal rights over the

use of patents or copyrights. However, legal enforceability is not a necessary condition for

control.

Is staff training or customer list an intangible?

1. Staff training: Staff training creates skills that could be seen as an asset for the employer. However, staff could leave their employment at any

time.

2. Customer lists: There is no control because customers have no obligation to make future purchases.

Future economic benefit [Para 17]

These may include revenues and/or cost savings.

Need to be identifiable [Para 11, 12]

IAS 38 states that to be identifiable an intangible asset:

1. must be separable (means it can be divided from the company, and sold, transferred, licensed, rented or exchanged e.g. patent rights, copyrights and

purchased brands.); or


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2. Must arise from contractual or other legal rights.

Sufi Limited

Sufi Limited incurred Rs.300 000 on a massive marketing campaign to

promote a new product. The accountant wishes to capitalize these costs.

The cost of the advertising campaign is not separable as it cannot be separated

from the entity and sold, transferred, rented or exchanged etc.

Furthermore, the advertising campaign does not arise from contractual or legal

rights.

Thus the cost of the advertising campaign is not identifiable and must be

expensed out.

Without physical substance [Para 8]

Intangibles have no physical substance. So non-physical form increases the difficulty of

identifying the asset.

Example-1

Computer software for a computer controlled machine tool that cannot

operate without that specific software is an integral part of the related

hardware and it is treated as property, plant and equipment. For example,

operating software.

Example-2

Computer software, other than the operating system, is an intangible asset.

For example licences, patents or motion picture films etc.

Example-3

Marfoo Limited acquired a fishing license. The directors insist that it is a

physical asset since it is written on a piece of paper.

Although the fishing license has a physical form (the related legal

documentation), but actually it is just a piece of paper and real thing behind

piece of paper is fishing right which has no physical substance so it is an

intangible under IAS-38.


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Common

examples of

intangibles

Patent

Patent rights entitle their owners, for limited period of time, the monopoly to manufacture

or use a certain product or process.

Trademark

Trademarks are the rights to symbols, names, and other unique properties of a product,

such as packaging, style, and even colour in some instances.

Copyright

Copyrights represent the legal right on both published and unpublished work of an author

to sell, copy, or perform a piece of literary, musical, or art work.

License

Licenses are the contractual rights to use another's property, whether it be a patent,

trademark, copyright, lease or exploration for natural resources.

Franchise

Franchises provide their holders with the right to practice a certain kind of business in a

certain geographical location as sanctioned by the franchiser. Fast-food restaurants, for

example, KFC etc.

Goodwill

Goodwill refers to the price or value above the market value of the tangible assets of a

company. When a company is bought, the price paid will often be higher than the market

value of its facilities, equipment, inventory etc. A company develops this intangible asset

by establishing a strong business track record, credit rating, reputation and name.

LO2: INTIAL RECOGNITION AND MEASUREMENT

Recognition

[Para 21]

An intangible asset must be recognised if (and only if):

1. it is probable that future economic benefits specifically attributable to the asset will flow to the company; and,

2. The cost of the asset can be measured reliably.

Measurement

[Para 24]

An intangible asset must be measure at cost when first recognised.

Means of

acquiring

intangible

assets

A company might obtain control over an intangible resource in a number of ways.

Intangible assets might be:

1. purchased separately; [Para 25] 2. acquired in exchange for another asset; [Para 45] 3. Given to a company by way of a government grant.[Para 44] 4. acquired in a business combination; or[Para 35] 5. internally generated; {Para 51]


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1. Purchased separately/ Separate acquisition

ELEMENTS OF COST: [IAS-16]

The cost of an item of property, plant and equipment comprises: [Para 27]

(a) Its purchase price, import duties and non-refundable purchase taxes after deducting trade discounts and rebates.

(b) Any costs necessary to bring the asset into current location and condition intended by management.

(c) The initial estimate of the costs of dismantling and removing the item and restoring the site. Examples of directly attributable costs are: {Para 28]

(a) Costs of employee benefits arising directly from the construction or acquisition of an item of property, plant and equipment.

(b) Costs of site preparation (c) Initial delivery and handling charges. (d) Installation and assembly cost. (e) Cost of testing whether the asset is functioning properly, after deducting the net proceeds from

selling any items produced (such as samples produced when testing equipment); and

(f) Professional fees or legal advisory [Applicable for IAS-16 and IAS-38]

The recognition of costs ceases when the intangible asset is in the condition necessary for it to be capable

of operating in the manner intended by management.

Deferred payments are included at the cash price equivalent and the difference between this amount and

the payments made are treated as interest. [Para 32]

Not a part of cost of asset [Para 29]

Examples of costs that are not costs of an item of property, plant and equipment are:

(a) Costs of opening a new facility. (b) Cost of introducing a new product or service (including costs of advertising and promotional

activities);

(c) Costs of conducting business in a new location or with a new class of customer (including costs of staff training); and

(d) Administration and other general overhead costs. Following costs are not included in the carrying amount e.g., [Para 30]

(a) Costs paid while an item is yet to be brought into use or is operated at less than full capacity. (b) Initial operating losses while demand for the product’s output builds-up; and (c) Costs of relocating/re-organizing part or all of entity’s operations.

2. Exchange of assets [Para 46, 47]

Sometimes instead of selling we exchange the old asset with the new one. In this case normally we will

receive new asset and will hand over the old asset to the person from whom new asset is bought.

Obviously some cash will also be paid to settle the transaction. In this case following steps will be

performed while passing the journal entry.

Step 1 The old asset will be removed from books by crediting old asset and by debiting

accumulated depreciation a/c.

Step 2 The cash paid to settle the transaction will be credited.

Step 3 The cost of new asset will be debited in books.

Step 4 The balancing figure will be gain or loss.


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Scenarios

1. If Fair value of Both Assets or Fair value of only Old Asset is given than:

Cost of new Asset = Fair value of old asset ± Cash

However if “fair value of the acquired asset is more clearly evident” than its fair value will be

considered as cost.”

2. If Fair value of Only New Asset is given than:

Cost of new Asset = Fair value of new Asset

3. If Fair value of both assets is NOT given OR Transaction lacks Commercial substance (Means no Cash Flow change expected after exchange e.g. Truck for Truck)

Cost of new Asset = Book value of old asset ± Cash

Example

Old Asset Cost 200

Old Asset Accumulated Depreciation (80)

WDV 120

Other Information

1. Fair value of Old Asset 130 2. Fair value of New Asset 150 3. Cash Paid 12

Required:

Calculate the cost of new Asset under following Scenarios.

Scenario # 1 If Fair value of both assets is given.

Scenario # 2 If Fair value of only new asset is given.

Scenario # 3 If Fair value of both assets is not given.

Solution

1. Cost of new Asset = 130 + 12 142 2. Cost of new Asset 150 3. Cost of new Asset = 120 + 12 132

3. Intangibles Granted by government [Para 44]

A government transfers or allocates intangible assets such as airport landing rights, licences to operate

radio or television stations, import licences or quotas or rights to access other restricted resources.

An intangible asset may be acquired free of charge, or for nominal consideration, by way of a government

grant.

IAS 20: Accounting for Government Grants and Disclosure of Government Assistance, allows the

intangible asset and the grant to be recorded at fair value initially or at a nominal amount plus any

expenditure that is directly attributable to preparing the asset for its intended use.

Example

Government granted the entity an intangible asset. We paid a nominal amount of Rs. 2,000. However fair

value of intangible is Rs. 50,000.

Required:

Pass the Journal entry.

Solution:


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There are 2 options:

Record at Nominal Amount:

Dr. Cr.

Intangible 2,000

Cash 2,000

OR

Record at Fair Value:

Dr. Cr.

Intangible 50,000

Deferred Income 48,000

Cash 2,000

4. Acquired in a business combination [Para 33]

If an intangible asset is acquired in a business combination, its cost is the fair value at the acquisition

date.

If cost cannot be measured reliably then the asset will be subsumed within goodwill.

Example

Company X buys 100% of Company Y.

Company Y owns a famous brand that it launched several years ago.

Analysis

The brand is not recognised in Company Y’s financial statements (IAS 38 prohibits the recognition of

internally generated brands).

From the Company X group viewpoint the brand is a purchased asset. So it will be recorded at its fair

value.


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5. Internally generated

An internally-generated intangible asset is created by a company through its own efforts.

Recognition prohibited [Para 63]

IAS 38 prohibits the recognition of the following internally-generated intangible items:

1. goodwill

2. brands

3. Mastheads (Note: a masthead is a recognisable title, usually in a distinctive typographical form, appearing at the top of an item. An example is a newspaper masthead on the front page of a daily

newspaper)

4. publishing titles

5. Customer lists.

It is prohibited because the costs of producing these items cannot be distinguished separately from the

costs of developing and operating the business as a whole.

Note that any of these items would be recognised if they were purchased separately.

Research and development (on intangibles other than above 5)

1. Research Phase

Definition

Research is original and planned investigation undertaken with the prospect of gaining new scientific or

technical knowledge and understanding.

Accounting treatment [Para 54]

No intangible asset arising from research (or from the research phase of an internal project) shall be

recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised

as an expense when it is incurred.

Examples of research activities are: [Para 56]

(a) activities aimed at obtaining new knowledge;

(b) the search for, evaluation and final selection of, applications of research findings or other

knowledge;

(c) the search for alternatives for materials, devices, products, processes, systems or services; and

(d) the formulation, design, evaluation and final selection of possible alternatives for new or

improved materials, devices, products, processes, systems or services.

2. Development Phase

Definition

Development is 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.

Accounting treatment [Para 57]

An intangible asset arising from development (or from the development phase of an internal project)

shall be recognised if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or

sale.


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(b) its intention to complete the intangible asset and use or sell it.

(c) its ability to use or sell the intangible asset.

(d) how the intangible asset will generate probable future economic benefits. Among other things, the

entity can demonstrate the existence of a market for the output of the intangible asset or the

intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

(e) the availability of adequate technical, financial and other resources to complete the development

and to use or sell the intangible asset.

(f) its ability to measure reliably the expenditure attributable to the intangible asset during its

development.

Examples of development activities are: [Para 59]

(a) the design, construction and testing of pre-production or pre-use prototypes and models;

(b) the design of tools, jigs, moulds and dies involving new technology;

(c) the design, construction and operation of a pilot plant that is not of a scale economically

feasible for commercial production; and

(d) the design, construction and testing of a chosen alternative for new or improved

materials, devices, products, processes, systems or services.

Cost of An Internally Generated Intangible Asset [Para 66]

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to

create, produce, and prepare the asset to be capable of operating in the manner intended by management.

Examples of directly attributable costs are:

(a) costs of materials and services used or consumed in generating the intangible asset;

(b) costs of employee benefits (as defined in IAS 19) arising from the generation of the intangible

asset;

(c) fees to register a legal right; and

(d) amortisation of patents and licences that are used to generate the intangible asset.

Points to remember

1. Once expenditure (for research and development) has been written off as an expense, it cannot subsequently be reinstated as an intangible asset. Similarly expenditure recognised as an expense

in previous annual financial statements may not be capitalised. [Para 71]

2. IAS 23 also applies for internally generated intangible (Means if internally generated intangible takes substantial period of time for development than borrowing cost incurred on loan obtained

for project will be capitalized.) [Para 66]

3. If the research phase cannot be distinguished from the development phase the expenditure will be treated as research expense. [Para 53]

Buying in process research and development

In-process research and development is recorded as an asset if it meets the definition of an asset and it

is identifiable. (Note for students: Here research is capitalized as well)

Subsequent (further) expenditure on such a project is accounted for in the usual way by applying the IAS

38. (Note for students: It means research will be expensed, however if development meet conditions it

will be capitalized).


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Journal entries

Entry for acquisition of intangibles:

Particulars Dr. Cr.

Patent/ Franchise/ Other intangible xxx

Cash xxx

(Intangibles/ patent/ acquired)

Entry for research expense:

Particulars Dr. Cr.

Research expense xxx

Cash xxx

(Recording of research expense)

Entry for development expenditure not meeting criteria:

Particulars Dr. Cr.

Development expense xxx

Cash xxx

(Recording of development expense)

Entry for development expenditure meeting criteria:

Particulars Dr. Cr.

Development asset xxx

Cash xxx

(Recording of development asset)

Entry for purchase of “in process research and development”:

Particulars Dr. Cr.

Research and Development asset xxx

Cash xxx

(Recording of purchase of in process R & D asset)

Entry for transfer of development asset to intangible asset:

Particulars Dr. Cr.

Intangible xxx

Development asset xxx

(Transfer of development asset to intangible asset)

Entry for amortization expense:

Particulars Dr. Cr.

Amortization expense xxx

Accumulated amortization xxx

(Recording of amortization expense)

Entry for impairment loss expense:

Particulars Dr. Cr.

Impairment loss expense xxx

Accumulated impairment loss xxx

(Recording of impairment loss expense)


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Comprehensive Example:

Ahmed & Co. provided the following information on intangible assets:

a) A patent was purchased from the Qasim Company for Rs. 60,000 on January 1, 2010. b) During 2010, a formula was purchased from the Ali Company for Rs. 80,000. c) Company incurred a research cost of Rs. 20,000 in year 2010. d) Company entered into a research and development project and development cost incurred is

Rs. 50,000.The development cost incurred does not meet the conditions specified in IAS-38.

e) Company incurred development cost of Rs. 78,000 which meets the criteria for recognition as mentioned in IAS-38.

f) Company bought an incomplete research and development project from another company for Rs.89,000.

g) An intangible costing Rs. 700,000 is to be amortised over 10 years. h) Goodwill of Rs. 200,000 already appearing in company’s books is to be impaired by 10%.

Required:

Pass journal entries in the books of Ahmed & Co.

Answer:

Entries in the books of Ahmed & Co Rs.

a)

Particulars Dr. Cr.

Patent 60,000

Cash 60,000

(Patent acquired)

b)

Particulars Dr. Cr.

Formula 80,000

Cash 80,000

(Formula acquired)

c)

Particulars Dr. Cr.

Research expense 20,000

Cash 20,000

(Recording of research expense)

d)

Particulars Dr. Cr.

Development expense 50,000

Cash 50,000

(Recording of development expense)

e)

Particulars Dr. Cr.

Development asset 78,000

Cash 78,000

(Recording of development asset)

f)

Particulars Dr. Cr.

Research and Development asset 89,000

Cash 89,000

(Recording of purchase of in process R & D asset)


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g)

Particulars Dr. Cr.

Amortization expense (700,000/10) 70,000

Accumulated amortization 70,000

(Recording of amortization expense)

h)

Particulars Dr. Cr.

Impairment loss expense (200,000 × 10%) 20,000

Accumulated impairment loss 20,000

(Recording of impairment loss expense)

LO3: MEASUREMENT AFTER INITIAL RECOGNITION

Choice of

policy

IAS 38 allows a business to choose one of two measurement models as its accounting

policy for property, intangible assets after acquisition. [Para 72]

The same model should be applied to all assets in the same class.

The 2 measurement models for intangible assets after acquisition are:

1. Cost model and 2. Revaluation model

Class of assets [Para 119]

A class of intangible assets is a grouping of assets of a similar nature and use in an entity’s

operations. Examples of separate classes may include:

1. brand names;

2. mastheads and publishing titles;

3. computer software;

4. licences and franchises;

5. copyrights, patents and other industrial property rights, service and

6. operating rights;

7. recipes, formulae, models, designs and prototypes; and

8. Intangible assets under development.

Cost model

[Para 74]

An intangible asset is carried at its cost less any accumulated amortisation and any

accumulated impairment losses after initial recognition.


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Revaluation

model

An intangible asset is carried at its fair value any accumulated amortisation and any

accumulated impairment losses after initial recognition. [Para 75]

Active market [Para 78, 81, 82]

Revaluation model is only allowed if the fair value can be determined by reference to an

active market in that type of intangible asset. (Active markets for intangible assets are

rare. Very few companies revalue intangible assets in practice.)

An active market for an intangible asset might disappear. If the fair value of a revalued

intangible asset can no longer be measured by reference to an active market than it will be

carried at latest revalued amount less any subsequent accumulated amortisation and

impairment losses.

Frequency of revaluations [para 79]

Revaluations must be made with sufficient regularity so that the carrying amount does not

differ materially from its fair value at the reporting date.

The frequency of revaluations should depend on the volatility in the value of the assets

concerned. When the value of assets is subject to significant changes (high volatility),

annual revaluations may be necessary.

However, such frequent revaluations are unnecessary for items subject to only

insignificant changes in fair value. In such cases it may be necessary to revalue the item

only every three or five years.

Two ways of passing journal entries [Para 80]

When an intangible asset is revalued, any accumulated amortisation at the date of the

revaluation is treated in one of the following ways:

Method 1 (Gross replacement method)

Restate accumulated amortisation proportionately with the change in the gross carrying

amount of the asset.

Method 2 (Net replacement method)

❑ Step 1: Transfer the accumulated amortisation to the asset account.

❑ Step 2: Change the balance on the asset account to the revalued amount.

Treatment of Revaluation surplus [Para 87]

Option 1: Transfer revaluation surplus on yearly basis to retained earnings with the

amount of incremental amortization (it will be the difference between depreciation based

on the revalued carrying amount and depreciation based on original cost) and on disposal

transfer remaining balance to retained earnings.

Option 2: Do not Transfer revaluation surplus on yearly basis to retained earnings and on

disposal transfer full amount to retained earnings.


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Amortisation

and

impairment

A company must assess whether the useful life of an intangible asset is: [Para 88]

1. finite or 2. indefinite (An intangible asset is assessed as having an indefinite useful

life when there is no foreseeable limit to the period over which the asset is

expected to generate net cash inflows.)

Intangibles with a finite useful life [Para 97]

1. The depreciable amount is allocated on a systematic basis over its useful life. 2. Amortisation begins when the asset is available for use. 3. Amortisation ends at the date the asset is derecognised. 4. The amortisation method used must reflect the pattern in which the asset's future

economic benefits are expected to be consumed by the entity. If that pattern

cannot be determined reliably, the straight-line method must be used.

5. The residual value of an intangible asset must be assumed to be zero unless: a) there is a commitment by a third party to purchase the asset at the end of

its useful life; or

b) there is an active market for the asset (and the residual value can be determined by reference to that market and It is probable that such a

market will exist at the end of the asset's useful life.)

6. The amortisation period and the amortisation method must be reviewed at least at each financial year-end.

Intangibles with an indefinite useful life [Para 107, 108]

1. Where the useful life is assessed as indefinite:

a) the intangible asset should not be amortised; but

b) Impairment reviews should be carried out annually (and even more frequently if there are any indications of impairment).

2. The useful life of an intangible asset that is not being amortised must be reviewed each 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 is

accounted for as a change in an accounting estimate in accordance with IAS 8.

This means that the carrying amount at the date of the change is amortised over

the estimated useful life from that date.

LO4: SUBSEQUENT EXPENDITURE ON INTANGIBLE ASSETS

Subsequent expenditure is only capitalised if it can be measured and attributed to an asset and enhances

the value of the asset.

Due to following reasons normally subsequent expenditure is not capitalized: [Para 20]

a) The nature of intangible assets is such that, in many cases, there are no additions to such an asset or replacements of part of it.

b) Most subsequent expenditure is likely to maintain the expected future economic benefits rather than meet the definition of an intangible asset and the recognition criteria.

c) Also it is often difficult to attribute subsequent expenditure directly to a particular intangible asset rather than to the business as a whole.

Maintenance expenditure is expensed out in profit or loss account.

LO5: DISPOSAL

[Para 112]


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The rules for de-recognition of intangible assets (accounting for their ‘disposal’) are the same as for

property, plant and equipment under IAS 16. There is a gain or loss on disposal equal to the difference

between the net disposal proceeds and the carrying value of the asset at the time of disposal.

If a part of an intangible asset is being disposed off and replaced, we derecognize the carrying amount of

that part and recognize the cost of the replacement part. However, if the carrying amount of the replaced

part cannot be determined, we are allowed to use the cost of the replacement part as an indication of what

the cost of the replaced part was when it was originally acquired or internally generated.

LO6: EXAMPLES OF INTANGIBLE ASSETS (AS MENTIONED IN ICAP STUDY TEXT)

The following are all items that would meet the definition of an intangible asset if acquired in a business

combination.

• Market related intangibles

o Trademarks, trade names, service marks, collective marks and certification marks;

o Internet domain names;

o Newspaper mastheads; and

o Non-competition agreements

• Customer related intangibles

o Customer lists;

o Order or production backlog;

o Customer contracts and the related customer relationships; and

• Artistic related intangibles

o Plays, operas and ballets;

o Books, magazines, newspapers and other literary works;

o Musical works (compositions, song lyrics and advertising jingles);

o Pictures and photographs; and

o Video and audio visual material:

o Music videos; and

o Television programmes

• Contract based intangibles

o Licensing and royalty agreements;

o Construction permits;

o Franchise agreements

o Operating and broadcasting rights;

o Use rights such as drilling, water, air, mineral, timber-cutting and route authorities;

• Technology based intangibles

o Patented and unpatented technology;

o Computer software and databases; and

o Trade secrets (secret formulas, processes, recipes)


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LO7: SIC 32: INTANGIBLE ASSETS – WEB SITE COSTS

An entity may incur expenditure on the development and operation of its own web site for:

Types Purpose of site

1. external access

• To promote and advertise own product and services (Pepsi website)

• Provide electronic services

• Sell products and services (Daaraz.pk and TCS courier service site)

2. internal access

• Store company policies

• Store customer details

• Search relevant information

The issues are:

• whether the web site is an internally generated intangible asset; and

• the appropriate accounting treatment of such expenditure.

Consensus (conclusion)

An entity’s own web site is an internally generated intangible asset if:

➢ It is probable that future economic benefits will flow to the entity, and ➢ Cost can be measured reliably

Exception

If a web site is developed solely (or primarily) for promoting and advertising its own products and

services then all expenditure on developing such a web site should be recognised as an expense when

incurred.

Useful life

The best estimate of a web site’s useful life should be short.

SIC 32 does not apply

SIC 32 does not apply to expenditure on

• Purchasing, developing and operating hardware (e.g. web servers, production servers, staging servers and internet connections) but IAS 16 applies.

• an internet service provider hosting the entity’s web site. (This expenditure is recognised as an expense as and when the services are received).

• the development or operation of a web site for sale to another entity in the ordinary course of business (e.g IAS 2 and IFRS 15)

• the lease that is accounted for in accordance with IFRS 16


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ACCOUNTING TREATMENT OF STAGES IN THE DEVELOPMENT OF A WEB SITE

CREATED FOR EXTERNAL OR INTERNAL ACCESS

Broad

categorization

Stage Activities Accounting

Treatment

Research Planning

1. Feasibility studies

2. Defining hardware and software specifications

3. Evaluating alternative products and suppliers

4. Selecting preferences

Expense when

incurred

Development *Application

and

infrastructure

development

1. Obtaining a domain name

2. Developing operating software (e.g. operating system and server

software)

3. Developing code for the application 4. Installing developed applications

on the web server

5. Stress testing

These will be

capitalized however

if recording criteria

of IAS 38 is not met

than it will be

expensed.

Expenditure incurred

in development

phase for

advertisement

purpose is expensed

for example

professional fee paid

to expert for taking

digital pictures of

entity’s products.

*Graphical

design

development

1. Designing the appearance of web pages

*Content

development

1. Creating, purchasing, preparing and uploading information on the web

site before the completion of the

web site’s development.

Operation

(The operating

stage begins

once

development of

web site has

been completed)

An entity

maintains and

enhances the

applications.

1. Updating graphics and revising content

2. Adding new functions, features and content

3. Registering the web site with search engines

4. Backing up data

5. Reviewing security access

6. Analysing usage of the web site

Expense when

incurred,

unless it meets the

IAS38 criteria for the

capitalisation of

subsequent

expenditure

(this will only occur

in rare

circumstances).

Other 1. Selling, administrative and other general overhead expenditure

unless it can be directly attributed

to preparing the web site for use

2. Inefficiencies and initial operating losses incurred

3. Training employees to operate web site.

Expense when

incurred

* These will be expensed when the purpose of creating a web site is solely promotion of the business

(marketing purpose).


17

LO8: DISCLOSURES [Para 118]

Disclosure

requirements

Most of the disclosure requirements are the same as for tangible non-current assets in

IAS 16. The only additional disclosure requirements are set out below.

a) Whether the useful lives of the assets are finite or indefinite. b) If the useful lives are finite, the useful lives or amortisation rates used. c) If the useful lives are indefinite, the carrying amount of the asset and the reasons

supporting the assessment that the asset has an indefinite useful life.

d) For any intangible asset that is individually material to the financial statements, the following

disclosure is required:

• a description

• its carrying amount

• The remaining amortisation period. e) The total amount of research and development expenditure written off (as an

expense) during the period must also be disclosed.

Accounting

policies

Intangible assets might be among the largest numbers in the statement of financial

position.

There are several areas that are important to explain to users of financial statements.

Amortisation policy

The depreciable amount of an intangible asset must be written off over its useful life.

Formulating a policy in this area involves estimating the useful lives of different

categories of intangible assets.

Under the guidance in IAS 38 the estimated residual values of an asset would usually be

zero and the straight line method would usually be used.

Other explanations

This is not so much about choosing a policy as explaining situations to users:

• Development expenditure: Does the company have any?

• Intangible assets acquired in business combinations in the period.

• Whether the company has intangible assets assessed as having an indefinite useful life.

Below is a typical note which covers many of the possible areas of accounting policy for intangible assets.

Accounting Policy- Intangible assets

The intangible assets of the group comprise patents, licences and computer software.

The group accounts for all intangible assets at historical cost less accumulated amortisation and

accumulated impairment losses.

Computer software

Development costs that are directly attributable to the design and testing of identifiable and unique

software products controlled by the group are recognised as intangible assets when the following criteria

are met:

a. it is technically feasible to complete the software product so that it will be available for use; b. management intends to complete the software product and use or sell it; c. there is an ability to use or sell the software product; d. it can be demonstrated how the software product will generate probable future economic benefits; e. adequate technical, financial and other resources to complete the development and to use or sell the

software product are available; and

f. the expenditure attributable to the software product during its development can be reliably measured.


18

Directly attributable costs that are capitalised as part of the software product include the software

development employee costs and an appropriate portion of relevant overheads.

Development expenditures that do not meet these criteria are recognised as an expense as incurred. Costs

associated with maintaining computer software programmes are recognised as an expense as incurred.

Useful lives

Amortisation is calculated using the straight-line method to allocate their cost or revalued amounts to

their residual values over their estimated useful lives, as follows:

• Patents: 25 to 30 years

• Licenses 5 to15 years

• Computer software 3 years

All intangible assets are estimated as having a zero residual value

LO9: SUMMARY

Already covered in Lecture Notes


19

CHAPTER-3

INTANGIBLE ASSETS

PRACTICE QUESTIONS Question-18 (SIC-32)

During the year 2007, SKY Limited developed two inter-linked websites in house.

• One of them is for external users and provides information about the company’s products, operations and financials. It can also be used for electronic order processing and accepting

payments through credit cards.

• The second website is for internal use like intra-net, providing and sharing company’s policies, customer details, employees’ information, etc.

Both the websites were launched on September 30, 2007 and are now fully operational. The company has

received a few online orders which it believes will increase over time. On the other hand, use of internal

website has resulted in minor reduction in costs of communication and certain other administrative costs.

The management is optimistic that its utility will increase significantly. However, it is not in a position to

estimate the amount of economic inflows that this website can generate.

During the year ended December 31, 2007, the company incurred the following expenditure in the

development of websites:

(i) An amount of Rs. 0.3 million was incurred on undertaking a feasibility study and defining hardware/software specifications for the websites.

(ii) Rs. 4 million were incurred on the development of internal website while an expenditure of Rs. 11 million has been made on development of external website. The expenditure on external website

includes an amount of Rs. 6 million paid for linking it with the credit card clearing facilities and

installation of security tools.

(iii) The company acquired two dedicated servers and one backup server costing Rs. 3 million in total. Operating software for the server was acquired for Rs. 2.0 million whereas software related to data

processing and front-end development costed Rs. 3 million. The management is of the view that

these costs would not have been incurred if the website project had not been initiated.

(iv) With effect from October 1, 2007 the company has signed a one year contract for website maintenance at a cost of Rs. 2.0 million.

(v) Two IT personnel were trained to operate the websites, at a cost of Rs. 0.2 million. (vi) Rs. 0.4 million were incurred on the promotion of its external website. The company believes that

this advertising will boost the company’s online sales.

Required:

Comment on the accounting treatment of each of the above mentioned costs in the light of relevant

International Accounting Standards. (12)

Question-19 [Example of revaluation]

1. A company provided you the following details as on 31 December 2014 before revaluation: Rupees

Balance in Asset a/c 200

Balance in Accumulated Dep a/c 60

2. Asset is revalued at Rs. 250 on 31 December 2014. Required:

Pass journal entries for revaluation on 31 December 2014 using:

a) Net replacement method b) Gross replacement method


20

SOLUTION

Answer-18

1. Website for external access is an intangible asset because economic benefit in the form of online orders will accrue to the entity and cost can be measured reliably.

However website for internal use is not an intangible asset because management is not in a position

to estimate economic inflows.

2. Expense incurred on feasibility study of Rs 0.3 million relates to planning phase so it will expensed when incurred.

3. The development expenditure of Rs. 4 million on internal website will be expensed out as discussed above. While the development expenditure of Rs. 11 million (which includes Rs. 6 million for credit

card facility and security tools) will be capitalized as a part of cost of external website.

4. The cost of server as well as its operating software amounting to Rs. 5 million (2+3) in total will be capitalized under IAS-16 and cost for remaining softwares amounting to Rs. 3 million will be

capitalized as an intangible asset.

5. The maintenance, training and advertisement costs amounting to Rs. 2 million, Rs. 0.2 million and Rs. 0.4 million respectively will be charged to statement of comprehensive income (means will be

expensed as and when incurred).

Answer-19

a) Journal entries – Net replacement method

Date Particulars Dr. Cr.

-------------Rs.----------

31.12.14 Accumulated Depreciation 60

Asset 60

31.12.14 Asset 110

Revaluation surplus 110

(W)

Date Description Asset R. Surplus SOCI(P/L)

31.12.14 WDV (200 - 60) 140

31.12.14 Revaluation surplus (bal.) 110 110 -

31.12.14 Revalued Amount 250 110 -

b) Journal entries – Gross replacement method


-------------Rs.----------

31.12.14 Asset (357 - 200) 157

Accumulated Depreciation (107 - 60) 47

Revaluation surplus (bal.) 110

(W)

Before Factor After

Cost 200 x 250/140 357

Accumulated Depreciation (60) x 250/140 (107)

Book Value 140 250


21

CHAPTER-3

INTANGIBLE ASSETS

ICAP PAST PAPER QUESTIONS

Question-3

English Pharmaceutical Limited (EPL), a listed company, has provided you with the following

information related to the year ended 30 June 2013:

(i) EPL has developed and patented two new vaccines A & B at a cost of Rs. 160 million and

Rs. 120 million respectively. Based on market analysis, it is estimated that Vaccine A would

generate revenue of Rs. 300 million per annum for next five years whereas Vaccine B would

generate annual revenue of Rs. 80 million for an indefinite period. (05)

(ii) Rs. 6 million was paid for a television advertising campaign that will cover a period of 6 months

from 1 May 2013 to 31 October 2013. The directors believe that the campaign would help to

achieve the sales growth target of 8% for the next two years. (02)

(iii) Rs. 5 million were spent on training of technical staff. The training courses were conducted by

leading experts of pharma production and are expected to improve the production quality

significantly and reduce costs. (01)

Required:

In the light of International Financial Reporting Standard, explain how the above expenditure may be

accounted for in EPL’s financial statements for the year ended 30 June 2013.

{Autumn-13, Q#5}

Question-4

(a) On 01 January 2012, Top Foods Limited (TFL) acquired manufacturing rights of an assorted

range of juices and ice creams from a well-known multinational company for Rs. 50 million.

Following are the relevant clauses of the agreement executed between the two companies:

• The agreement is valid for five years and is renewable for another five years at a nominal price.

• The manufacturing rights are not transferable and cannot be sub-let. After erection of its plant, TFL started manufacturing the products on 01 July 2012. Due to

intense competition, the new products were not able to achieve the desired sale in the first six

months of their launching.

Required:

Explain with reasons how TFL should have accounted for the above payment on:

(i) 01 January 2012 (ii) 31 December 2012 (08)

(b) On 01 January 2012, Matchless Enterprises Limited (MEL) acquired research data along with

partially developed product design from a company for Rs. 2 million (Research costs - Rs. 0.5

million, development costs - Rs. 1.5 million).

The product design was handed over to the production department on 01 November 2012.

Subsequent to acquisition, MEL incurred Rs. 0.7 million on research and Rs. 2.5 million on the

development/finalization of the product design. It is expected that this product design would

provide economic benefits to the company for next five years.

Required:

Prepare journal entries to record the above transactions. (04)

{Spring-13, Q#7}


22

Question-5

(a) Discuss the criteria that should be used while recognizing intangible assets arising from research

and development work. (05 marks)

(b) Raisin International (RI) is planning to expand its line of products. The related information for the

year ended 31 December 2011 is as follows:

i. Research and development of a new product commenced on 1 January 2011. On 1 October 2011, the intangible is commercially launched. It is estimated that the product would have a useful life

of 7 years. Details of expenditures incurred are as follows:

Rs. in

million

Research work 4.50

Development work 9.00

Training of production staff 0.50

Cost of trial run 0.80

Total costs 14.80

ii. The right to manufacture a well-established product under a patent for a period of five years was purchased on 1 March 2011 for Rs. 17 million. The patent has an expected remaining useful life

of 10 years. RI has the option to renew the patent for a further period of five years for a sum of

Rs. 12 million.

iii. RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the month of June 2011. The life of the brand is expected to be 10 years. Currently, there is no active market for this

brand. However, RI is planning to launch an aggressive marketing campaign in February 2012.

iv. In September 2010, RI developed a new production process and capitalized it as an intangible asset at Rs. 7 million. The new process is expected to have an indefinite useful life. During 2011,

RI incurred further development expenditure of Rs. 3 million on the new process which meets the

recognition criteria for capitalization of an intangible asset.

Required:

In the light of International Financial Reporting Standards, explain how each of the above transaction

should be accounted for in the financial statements of Raisin International for the year ended

31 December 2011. (11 marks)

{Spring-12, Q#4}

Question-6

Opal Limited (OL) commenced research work on a new product on 1 July 2013 and entered the

development phase on 1 July 2014. In this respect, the following expenses were incurred and debited to

capital work in progress.

For the year ended

30 Jun 2015 30 June 2014

Rs. in million

Research and development cost 12.00 8.00

Training of technical staff 0.90

Cost of laboratory equipment *4.00

Cost of trial run 0.60

13.50 12.00

* Purchased on 1 January 2014, having estimated useful life of five years.

Criteria for recognition of the internally generated intangible asset have been met. The commercial

production was started from 1 January 2015. It is estimated that the related product would have a shelf

life of 10 years.


23

Required:

Explain accounting treatment of the above in the financial statements for the year ended

30 June 2015 in the light of International Financial Reporting Standards. (07)

{Autumn-15 CAF-07, Q.8}

Question-8

Apple Limited (AL) is in the process of finalizing its consolidated financial statements for the year ended

30 June 2018. Following information pertains to the Group's intangible assets:

(i) As on 30 June 2017, revalued amount of AL’s license and related revaluation surplus were Rs. 450 million and Rs. 30 million respectively.

(ii) On 1 July 2017 AL acquired entire shareholding of Mango Limited (ML) for Rs. 1,950 million. Fair values of net assets appearing in ML’s books on acquisition date are given

below:

Rs. in million

Software (Rs. 100 million each) 200

Other net assets 1,545

In respect of acquisition of ML, following information is also available:

• Till acquisition date, ML had incurred research & development cost of Rs. 80 million on product 'ABC'. ML had not recognised this as an asset because criteria for

recognition of the internally generated intangible asset was met on 1 July 2017. On this

date, AL estimated that the fair value of research and development work on ABC was

Rs. 95 million.

• On acquisition date, fair value of ML's customer list was assessed at Rs. 20 million. (iii) ML incurred following expenditures on this project from 1 July 2017 till ABC’s launching

date i.e. 1 May 2018.

Rs. in million

Market research 5

Product design 12

Cost of pilot plant (not for commercial production) 48

Refinement of product before commercial production 6

Training of production staff 8

Testing of pre-production 4

Production and launching of product 105

188

(iv) As on 1 July 2017, the fair value of AL's own customer list was assessed at Rs. 35 million. (v) As on 1 July 2017, remaining useful life of all intangible assets except goodwill was 10 years. (vi) On 31 March 2018, ML sold one of its software for Rs. 110 million. (vii) Group follows the revaluation model for license whereas cost model is used for other

intangible assets.

(viii) As on 30 June 2018:

• fair value of licence was assessed at Rs. 350 million.

• goodwill of ML has been impaired by 20%. Required:

Prepare a note on intangible assets, for inclusion in AL's consolidated financial statements for the year

ended 30 June 2018 in accordance with the requirements of IFRSs. (14)

(‘Total’ column is not required) {Autumn 2018, Q#4}


24

Question-9

Zinc Limited (ZL), a broadcasting company, uses revaluation model for subsequent measurement of its

intangible assets, wherever possible. Following information pertains to ZL’s intangible assets:

(i) On 1 January 2018, ZL bought an incomplete research and development project from Bee Tech at its fair value of Rs. 90 million. The purchase price was analysed as follows:

Rs. in million

Research 30

Development 60

Subsequent expenditures incurred on this project are as follows:

Rs. in million

Further research to identify possible markets 10

Development 48

Recognition criteria for capitalization of development was met on 1 March 2018. All costs are

incurred evenly from 1 January 2018 till project completion date i.e. 31 August 2018. It is expected

that newly developed technology will provide economic benefits to ZL for the next 10 years.

On 31 December 2018, ZL received an offer of Rs. 170 million for its developed technology.

(ii) On 31 December 2018, ZL launched its new website for online streaming of TV shows, movies and web series. The website’s content is also used to advertise and promote ZL’s products. The website

was developed internally and met the criteria for recognition as an intangible asset. Directly

attributable costs incurred for the website are as follows:

Rs. in million

Undertaking feasibility studies 3

Evaluating alternative products 1

Acquisition of web servers 16

Acquisition cost of operating system of web servers 7

Registration of domain names 2

Stress testing to ensure that website operates in the intended manner 3

Designing the appearance of web pages 5

Development cost of new content related to:

• online streaming 11

• advertising and promoting ZL’s products 8

Advertising of the website 6

(iii) During 2018, the licensing authority intimated that broadcasting license of one of ZL’s channels will not be further renewed.

ZL had obtained this license for indefinite period on 1 January 2012 by paying Rs. 150 million,

subject to renewal fee of Rs. 0.3 million at every five years. Upto last year, this license was expected

to contribute to ZL’s cash inflows for indefinite period.

As on 31 December 2018, the recoverable amount of this license was assessed as Rs. 105 million.

Required:

In accordance with the requirements of IFRSs, prepare a note on intangible assets, for inclusion in ZL’s

financial statements for the year ended 31 December 2018 in respect of the above intangible assets.

(‘Total’ column is not required) (15)

{Autumn 2019, Q.8}


25

SOLUTION

Answer-3

(i) Costs of developing the new vaccines should be capitalized as: "intangible assets" because:

• It is probable that future economic benefits i.e. sale of Rs. 300 million per annum for next five years and sales of Rs. 80 million per annum for indefinite period, are attributable to the vaccines

and will flow to the EPL.

• The cost of the asset can be measured reliably i.e. Rs. 160 million and Rs. 120 million for A & B respectively.

Vaccine A should be amortized over its commercial life i.e. five years.

Since there is an indefinite usefu1life of Vaccine B, it should not be amortized. Instead, EPL should

test the intangible asset for impairment by comparing its recoverable amount with its carrying

amount.

(ii) Advertising and promotional costs should be recognised as an expense when incurred.

However, the advertising expense amounting to Rs. 4 million (6million x 4months ÷ 6months) should be recognized as prepayment.

(iii) Although well trained staff adds value to a business, lAS 38 prohibits the capitalisation of

training costs.

Answer-4

(a)

(i) 01 January 2012 (Initial recognition)

IAS-38 allows the recognition of an identifiable non-monetary assets without physical substance

as intangible assets, subject to fulfillment of the following conditions:

• It is probable that expected future economic benefits that are attributable to the asset will flow to the entity.

• The cost of the assets can be measured reliably. Since rights acquired by TFL meet the above conditions, it should recognize the right as

intangible asset which should initially be measured at cost.

(ii) 31 December 2012 (Subsequent to initial recognition)

i. IAS-38 permits an entity to adopt the cost or revaluation model as its accounting policy. ii. The revaluation model can only be adopted if intangible assets are traded in an active

market. As the rights cannot be sold, the revaluation model cannot be used.

iii. The cost model requires intangible assets to be carried at cost less accumulated amortization and accumulated impairment losses.

iv. Amortization shall begin from 01 January, 2012 when it is available for use. v. Residual value of intangible assets with finite useful life shall be assumed to be zero.

vi. IAS-38 includes renewal period in useful life if there is evidence to support renewal without significant cost. Therefore, amortization should be made systematically over the

useful life of intangible assets i.e. 10 years.

vii. An impairment review shall be undertaken at year-end because the failure to achieve the desired sales is an indication that the new products may not generate required economic

benefits and therefore, the value of the intangible may be impaired.

(b)

Description Dr. Cr.

Intangible asset

Bank

(Record the purchase of in-process research and development)

2,000,000

2,000,000


26

Intangible asset

Research expense

Bank

(Record the subsequent expenditure on an in process research

and development)

2,500,000

700,000

3,200,000

Amortisation expense

Accumulated amortisation

(2,000,000 + 2,500,000) = 4,500,000/5 x 2/12

150,000

150,000

Answer-5

(a) Following are the criteria that should be used while recognizing intangible assets from research

and development work.

(i) No intangible asset arising from research shall be recognized.

(ii) An intangible arising from development shall be recognized if, and only if, an entity can

demonstrate all of the following :

• The technical feasibility of completing the intangible asset so that it will be available for use or sale.

• Its intention to complete the intangible asset and use or sell it.

• Its ability to use or sell the intangible asset.

• How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the

intangible asset or the intangible asset itself or, if it is to be used internally, the

usefulness of the intangible asset.

• The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

• Its ability to measure reliably the expenditure attributable to the intangible asset during its development.

(b)

i) Since the product met all the criteria for the development of the product, it should be recognized

as an intangible in the statement of financial position (SOFP) of the company.

However, RI should capitalize the development work and trial run cost i.e. Rs. 9.80 million (Rs. 9

million + 0.80 million) as intangible asset. IAS-38 does not allow capitalization of cost relating to

the research work and training of staff.

Since the product has a useful life of 7 years, the amortization expense amounting to Rs. 0.35

million (Rs. 9.80 million ÷ 7 years × 3/12) should be recorded in the statement of comprehensive

income (SOCI).

ii) This purchasing of right to manufacture should be recognized as an intangible in the SOFP

because:

• it is for an established product which would generate future economic benefits.

• cost of the patent can be measured reliably.

Since there is a finite life, the patent must be amortized over its useful life. The useful life will be

shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years). The amortization to be

recorded in SOCI is Rs. 2.83 million (Rs. 17 million ÷ 5 × 10/12).

iii) The acquired brand should be recognized as an intangible in the SOFP because acquisition price

is a reliable measure of its value. The amortization to be recorded in SOCI is Rs. 0.12 million (Rs.

2 million ÷ 10 years x 7/12).


27

iv) The carrying value of the intangible asset should be increased by Rs. 3 million in the SOFP.

Since there is an indefinite useful life of the intangible assets, it should not be amortized. Instead,

RI should test the intangible asset for impairment by comparing its recoverable amount with its

carrying amount.

Answer-6

Opal Limited

Accounting treatment for research and development expenses

Development cost recognition as intangible asset:

Since the new product met all the criteria for the development of a product, an intangible asset

should be recognized at Rs.13 million (12+0.4+0.6) as detailed under:

o Cost of Rs.12 million incurred during the development phase that is 1 July 2014 to 31 December 2014.

o Depreciation of Rs.0.4 million (4.0/5 x 0.5) on laboratory equipment for the development phase of six months from 1 July 2014 to 31 December- 2014.

o Cost of trial run amounted to Rs. 0.6 million Amortization of intangible asset:

Since the product has a shelf life of 10 years, the amortization expense amounting to

Rs.0.65 million (13/10 x 6/12) should be charged to profit and loss account for the period of six

months i.e. 1 January to 30 June 2015.

Laboratory equipment cost recognition as tangible asset:

Laboratory equipment cost should be capitalized as a tangible asset as it is having useful life of

more than one year and to be depreciated over its useful life of five years.

Research and other costs:

(i) IAS-38 does not allow capitalization of costs pertaining to research work. Therefore,

these costs should be charged to profit and loss account in the period in which they

incurred. However, research cost of Rs. 8 million, and depreciation for the research phase

of Rs. 0.4 million (4/5 x 0.5) pertained to last year, therefore, comparative figures for the

year ended 30 June 2014 should be restated and retained earnings be adjusted for these

amounts.

(ii) Cost for training of staff is also not allowed for capitalization and should be charged to

profit and loss account for the year ended 30 June 2015.

(iii) Depreciation of Rs. 0.4 million on laboratory equipments for the period from the

commencement of the commercial production i.e. 1 January to 30 June 2015 should be

charged to profit and loss account for the year- ended 30 June 2015.


28

Answer-8

Apple Limited

Notes to the Consolidated Financial Statement

For the year ended June 30, 2018

Intangibles Rs. in million

License Software Res. &

Dev.

Customer

List

Goodwill

--------------------------Rs. in ‘million’--------------------------

Cost

Opening 450 - - - -

Additions

- Business Acq. - 200 95 20 90 (W-1) - Others - - 70 (W-2) - -

Transferred (45) - - - -

Revaluation loss (W-5) (55) - - - -

Disposals - (100) - - -

Closing 350 100 165 20 90

Accumulated Depreciation

Opening - - - - -

Amortisation 45

(W-5)

17.5

(W-4)

2.8

(W-3)

2

(W-7)

-

Transferred (45) - - - -

Disposals - (7.5) - - -

Closing - (10) (2.8) (2) -

Accumulated Impairment

Opening - - - - -

impairment loss - - - - 18 (W-6)

Closing - - - - (18)

WDV as on 30/6/18 350 90 162.2 18 72

Useful life 10 10 10 10 N/A

Amortisation method Straight line Straight

line

Straight

line

Straight

line

N/A

Measurement Model Revaluation Cost Cost Cost N/A

(W-1) Calculation of Goodwill

Consideration Paid/ Investment 1,950

Less: F.V of net assets

ML’s Software’s 200

Other net Assets 1,545

Research and Development 95

Customer List 20

(1,860)

Goodwill on acquisition 90

(W-2)

Research and development (12 +48+6+4) 70

(W-3)

Amortisation on R & D Product (95+70) = 165/10 x 2/12 2.8


29

(W-4) Amortisation on Software

- on additions (100/10) 10 - on disposals (100/10 x 9/12) 7.5

17.5

(W-5) Calculation of revaluation surplus and Amortisation of License

Date Description License R. Surplus SOCI(P/L)

1/7/017 Opening 450 30

30/6/18 Amortisation (450/10):(30/10) (45) (3)

30/6/18 WDV 405 27

30/6/18 Revaluation loss (bal.) (55) (27) (28)

30/6/18 Revalued amount 350 - (28)

(W-6)

Impairment loss of Goodwill (90 x 20%) 18

(W-7)

Amortisation of Customer list (20/10) 2

Note: In adjustment (iv) AL Customer list F.V is ignored because internally generated Customer list

cannot be recorded as an intangible asset. It is important to mention here that ML Customer list is

recorded as an intangible asset because it is purchased Customer list. (Meeting recognition criteria as per

IAS -38)

Answer-9

Note for Students:

1. Rs. 170 million in adjustment (i) is ignored as it cannot be revalued because there is no active market. 2. Acquisition cost of Web server of Rs. 16 million in adjustment (ii) is ignored as it falls under IAS-16. 3. In adjustment (iii) the license was renewed in 2017 and licensing authority intimated in 2018 that

license cannot be renewed so remaining life is 4 years only.

Zinc Limited (ZL)

Notes to the Financial Statement

For the year ended 31 December 2018

9. Intangibles

Research &

Development

Website License

--------------------------Rs. in ‘million’-------------------

Cost

Opening - - 150

Additions

- Separate acquisition [90: (2+3+5+11): - ] 90 21 - - Development (48 x 6/8) 36 - -

Closing 126 21 150

Less: Accumulated Depreciation

Opening - - -

Amortisation [((90+36) =126/10 x 4/12): - :(150÷4) 4.2 - 37.5

Closing (4.2) - (37.5)

Less: Accumulated Impairment loss

Opening -

Impairment loss (W-1) 7.5

Closing (7.5)

WDV as on 31/12/18 121.8 21 105


30

Useful life 10 N/A 4

Amortisation method Straight line N/A Straight line

(W-1) Calculation of Impairment Loss

License

Carrying amount as on 31/12/18 (150 - 37.5) 112.5

Recoverable amount (105)

Impairment loss 7.5


31

CHAPTER-3

INTANGIBLE ASSETS

ICAP QUESTION BANK

Question-5

On 30 June 2004, Habib Limited (HL) discovered that it had been manufacturing a product illegally since

this product happened to be a patented product for which it did not have the necessary rights. HL

immediately shut down its factory and hired a firm of lawyers to act on its behalf in the acquisition of the

necessary rights to manufacture this patented product.

a) Legal fees of Rs. 50,000 were incurred during July 2004. b) The legal process was finalized on 31 July 2004, HL was then required to pay Rs. 800,000 to

purchase the rights, including Rs. 80,000 in refundable Taxes.

c) During the July factory shut-down i. Overhead costs of Rs. 40,000 were incurred;

ii. Significant market share was lost with the result that HL’s total sales over August and September was Rs. 20,000 but its expenses were Rs. 50,000, resulting in loss of Rs. 30,000.

d) To increase market share, HL spent an extra Rs. 25,000 aggressively marketing their product. This

marketing campaign was successful, resulting in sales returning to profitable levels in October.

Required:

Calculate total cost to be capitalised.

Question-6

Saqib Limited began researching and developing an intangible asset. The following is a summary of the

costs that the R&D Department incurred each year:

2011: Rs. 180,000

2012: Rs. 100,000

2013: Rs. 80,000

Additional information:

a) The costs listed above were incurred evenly throughout each year.

b) Included in the costs incurred in 2011 are administrative costs of Rs. 60,000 that are not considered

to be directly attributed to the research and development process. The first two months of the year

were dedicated to research. Then development began from 1 March 2011 but all 6 recognition

criteria for capitalization of development costs were only met on 1 April 2011.

c) Included in the costs incurred in 2012 are administrative costs of Rs. 20,000 that are considered to

be directly attributed to the research and development process.

d) Included in the costs incurred in 2013 are training costs of Rs. 30,000 that are considered to be

directly attributed to the research and development process.

Required:

Prepare the journal entries to record the above transactions.


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SOLUTIONS

Answer-5

Rs. In “000”

Legal costs Note-1 50,000

Purchase price Note-2 (800,000-80,000) 720,000

Overhead costs Note-3 -

Operating loss Note-4 -

Advertising campaign Note-5 -

770,000

Note-1 This is a directly attributable cost. Directly attributable costs must be capitalized

Note-2 The purchase price should be capitalized, but this must exclude refundable taxes.

Note-3 This is an incidental cost not necessary to the acquisition of the rights (the shut-down was only

necessary because HL had been operating illegally)

Note-4 The operating loss incurred is not a part of cost of intangible.

Note-5 Advertising costs are listed in IAS 38 as one of the costs that may never be capitalized as an

intangible asset.

Answer-6

Entries


2011 Administration Expense 60,000

Research Expense (180,000 - 60,000) x 2/12 20,000

Development Expense (180,000 - 60,000) x 1/12 10,000

Development cost (Asset) (180,000 - 60,000) x 9/12 90,000

Bank 180,000

2012 Development cost (Asset) 100,000

Bank 100,000

2013 Training Expense 30,000

Development cost (Asset) 50,000

Bank 80,000

Notes:

1. Administration costs are capitalized if they are considered directly attributable (see 2012), otherwise they are expensed (see 2011)

2. Training costs are always expensed even if they are considered to be directly attributable (see 2013). 3. Research costs are always expensed


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CHAPTER-3

IAS 38: INTANGIBLE ASSETS

MULTIPLE CHOICE QUESTIONS

01. Power Limited has spent Rs. 200,000 researching new cleaning chemicals in the year ended 31

December 2020. They have also spent Rs. 400,000 developing a new cleaning product which

will not go into commercial production until next year. The development project meets the

criteria laid down in IAS 38 Intangible Assets.

How should these costs be treated in the financial statements of Power Limited for the year

ended 31 December 2020?

(a) Rs. 600,000 should be capitalised as an intangible asset on the statement of financial

position.

(b) Rs. 400,000 should be capitalised as an intangible asset and should be amortised;

Rs.200,000 should be written off to the statement of profit or loss.

(c) Rs. 400,000 should be capitalised as an intangible asset and should not be amortised;

Rs. 200,000 should be written off to the statement of profit or loss.

(d) Rs. 600,000 should be written off to the statement of profit or loss

02. Which TWO of the following items below could potentially be classified as intangible assets?

(a) purchased brand name

(b) training of staff

(c) internally generated brand

(d) licences and quotas

03. Star Limited has provided the following information as at 31 December 2016:

(i) Project A – Rs. 500,000 has been spent on the research phase of this project during the year.

(ii) Project B – Rs. 800,000 had been spent on this project in the previous year and Rs. 200,000 this year. The project was capitalised in the previous year however, it has been

decided to abandon this project at the end of the year.

(iii) Project C – Rs. 1,000,000 was spent on this project this year. The project meets the criteria of IAS 38 and is to be capitalised.

Which of the following adjustments will be made in the financial statements as at 31

December 2016?

(a) Reduce profit by Rs. 700,000 and increase non-current assets by Rs. 1,000,000

(b) Reduce profit by Rs. 1,500,000 and increase non-current assets by Rs. 1,000,000

(c) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,800,000

(d) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,000,000

04. Which of the following statements concerning the accounting treatment of research and

development expenditure are true, according to IAS 38 Intangible Assets?

(i) Research is original and planned investigation undertaken with the prospect of gaining new knowledge and understanding.

(ii) Development is the application of research findings. (iii) Depreciation of plant used specifically on developing a new product can be capitalised

as part of development costs.

(iv) Expenditure once treated as an expense cannot be reinstated as an asset. (a) (i), (ii) and (iii)

(b) (i), (ii) and (iv)

(c) (ii), (iii) and (iv)

(d) All of the above


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05. Which of the following should be included in a company’s statement of financial position as an

intangible asset under IAS 38 Intangible Assets?

(a) Internally developed brands

(b) Internally generated goodwill

(c) Expenditure on completed research

(d) Payments made on the successful registration of a patent.

06. Which TWO of the following criteria must be met before development expenditure is capitalised

according to IAS 38 Intangible Assets?

(a) the technical feasibility of completing the intangible asset

(b) future revenue is expected

(c) the intention to complete and use or sell the intangible asset

(d) there is no need for reliable measurement of expenditure

07. Which of the following shall be capitalised as intangible asset in financial statements?

(a) Rs. 400,000 developing a new process which will bring in no revenue but is expected

to bring significant cost savings

(b) Rs. 400,000 developing a new product. During development a competitor launched a

rival product and now the entity is hesitant to commit further funds to the process

(c) Rs. 400,000 spent on marketing a new product which has led to increased sales of Rs.

800,000

(d) Rs. 400,000 spent on designing a new corporate logo for the business

08. Which of the following CANNOT be recognised as an intangible non-current asset in Ghalib

Limited (GL)’s consolidated statement of financial position at 30 September 2021?

(a) GL spent Rs. 132 million developing a new type of product. In June 2021

management worried that it would be too expensive to fund. The finances to complete

the project came from a cash injection from a benefactor received in November 2021.

(b) GL purchased a subsidiary during the year. During the fair value exercise, it was found

that the subsidiary had a brand name with an estimated value of Rs. 50 million but had

not been recognised by the subsidiary as it was internally generated.

(c) GL purchased a brand name from a competitor on 1 November 2020, for Rs. 65

million.

(d) GL spent Rs. 21 million during the year on the development of a new product, after

management concluded it would be viable in November 2020. The product is being

launched on the market on 1 December 2021 and is expected to be profitable.

09. Which of the following could be classified as development expenditure in Mars Limited’s

statement of financial position as at 31 March 2020 according to IAS 38 Intangible Assets?

(a) Rs. 120,000 spent on developing a prototype and testing a new type of propulsion

system. The project needs further work on it as the system is currently not viable.

(b) A payment of Rs. 50,000 to a local university’s engineering faculty to research new

environmentally friendly building techniques.

(c) Rs. 35,000 developing an electric bicycle. This is near completion and the product will

be launched soon. As this project is first of its kind it is expected to make a loss.

(d) Rs. 65,000 developing a special type of new packaging for a new energy-efficient

light bulb. The packaging is expected to reduce Mars Limited distribution costs by Rs.

35,000 a year.


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10. Which TWO of the following factors are reasons why key staff cannot be capitalised as an

intangible asset by an entity?

(a) They do not provide expected future economic benefits

(b) They cannot be controlled by an entity

(c) Their value cannot be measured reliably

(d) They are not separable from the business as a whole

11. Which of the following items should be recognised as intangible assets?

(i) Patent for new drug (ii) Licence for new vaccine (iii) Specialist training courses

(a) (i) and (ii)

(b) (ii) and(iii)

(c) (i) and (iii)

(d) (i) only

12. Home Limited (HL) has acquired a subsidiary Stairs Limited (SL) in the current year. SL has a

brand which has been reliably valued by HL at Rs. 500,000, and a customer list which HL has

been unable to value.

Which of these describes how HL should treat these intangible assets of SL in their consolidated

Financial Statements?

(a) They should be included in goodwill.

(b) The brand should be capitalised as a separate intangible asset, whereas the customer

list should be included within goodwill.

(c) Both the brand and the customer list should be capitalised as separate intangible

assets.

(d) The customer list should be capitalised as a separate intangible asset, whereas the

brand should be included within goodwill.

13. IAS 38 gives examples of activities that would be regarded as research and therefore not eligible

for recognition as an intangible asset.

Which one of the following would be an example of research costs?

(a) The design and construction of chosen alternative products or processes

(b) The design of pre-production prototypes and models

(c) The design of possible new or improved product or process alternatives

(d) The design, construction and operation of a pilot plant

14. Which of the following statements relating to intangible assets is true?

(a) All intangible assets must be carried at amortised cost or at an impaired amount, they

cannot be revalued upwards.

(b) The development of a new process which is not expected to increase sales revenues

may still be recognised as an intangible asset.

(c) Expenditure on the prototype of a new engine cannot be classified as an intangible

asset because the prototype has physical substance.

(d) Impairment losses for a cash generating unit are first applied to goodwill

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