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Intangible AssetsMark Fielding-Pritchard

2015

Two Main Characteristics:

Characteristics

(1) Lack of physical existence.

(2) They are not financial instruments.

Normally classified as long-term asset.

Common types of intangibles:Patents

Copyrights

Franchises or licenses

Trademarks or trade names

Goodwill

Intangible Assets Issues

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Purchased Intangibles:

Recorded at cost.

If purchased in exchange of stock, the fair value of the consideration given or received which is evident, should be recognized.

Includes all costs necessary to make the intangible asset ready for its intended use.

Intangible Assets Issues

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Internally Created Intangibles:

Expense as incurred

Only capitalize direct costs incurred in developing the intangible, such as legal costs.

Intangible Assets Issues

Determine The Useful Life• Expected Use

• Useful Life of relative assets

• Legal Regulatory Conceptual Framework

• Limiting useful life

• Law supporting renewal or extension

• Effect of obsolesce, demand, competition.Level of Maintenance cost

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Amortization of IntangiblesLimited-Life Intangibles:• Amortize to (Cost Less Residual Value)• Assume zero Residual value unless it has value to another company

after its useful life• Reflect the pattern in which the company consumes the asset (if

Determined)• Credit asset account or accumulated amortization.

Intangible Assets Issues

Indefinite-Life Intangibles:• No foreseeable limit on time the asset is expected to provide cash

flows. • No amortization.

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Six Major Categories:

1) Marketing-related.

2) Customer-related.

3) Artistic-related.

4) Contract-related.

5) Technology-related.

6) Goodwill.

Types of Intangibles

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Frequently results in something that a company patents or copyrights such as:

new product, process, idea,

formula, composition, orliterary work.

Because of difficulties related to identifying costs with particular activities and determining the future benefits, all R & D costs are expensed when incurred.

Research & Development Costs IAS 38

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Identifying R & D ActivitiesResearch Activities

Planned search or critical investigation aimed at discovery of new knowledge.

ExamplesLaboratory research aimed at discovery of new knowledge; searching for applications of new research findings.

Development Activities

Translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.

Examples

Conceptual formulation and design of possible product or process alternatives; construction of prototypes and operation of pilot plants.

Research & Development Costs

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Research & Development Research expenses are written off as they arise through the

statement of financial performance Research assets are capitalised and the depreciation written off

through the statement of financial performance as usual Development expenses must be capitalised in the statement of

financial position Development assets are capitalised but depreciation is allocated

to development expenses in the statement of financial position Development asset will be depreciation form start of commercial

activity over useful life

2015

Personnel: cost of personnel engaged in research is recorded as expense.

cost of personnel engaged in development is recorded as an asset Purchased intangibles: recognize and measure at fair value then

account for in accordance with their nature.

Example : i) Cost of successfully defending patent.

ii) Legal fees to obtain patent.

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Research & Development Costs

Contract services: Expense if research, capitalize if development the cost of services performed by others.

Example: i) Research cost incurred under contract with another company.

Indirect costs: same principle.

Example: i) material, labor and overhead costs of product development.

ii) Commissions of sales staff marketing new products.

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Research & Development Costs

Other Costs Similar to R & D Costs• Start-up costs for a new operation: Incurred for one time

activities to start a new operation.

• Initial operating losses: Some contend that the initial operating losses which incurred in the start up should be capitalized as they are not avoidable.

• Advertising costs: Company must expense advertising cost as incurred but company can record it as an asset if any tangible asset used.

Research & Development Costs

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Balance sheet

• Intangible assets shown as a separate item.

Income statement

• Report amortization expense and impairment losses in continuing operations.

• Total R&D costs charged to expense must be disclosed.

Presentation of Intangibles

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Parentis Q206

5 points Initially research, expense everything After 30 June 2009 it becomes development Costs after 30/06/09 capitalised Begin depreciation from 31/12 Can only capitalise costs incurred ie not $1.6m

2015