Intangible non-current assets (IAS

38) R&D/goodwill (IFRS 3)

Lecture 6

Guoxiang Song
 Learning objectives
• After this session you should be able to:
• Define and explain how to account for
research and development (R&D), goodwill
and other intangible assets.
• Account for impairment.
• Discuss the difference between goodwill and
other intangible assets.
• Apply the rules of IAS 38, IFRS 3 and IAS 36 to
questions.
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 Definition of intangible assets
• Intangible asset: an identifiable non-monetary
asset without physical substance (IAS 38).
• An asset is a resource:
(a) controlled by an entity as a result of past
events; and
(b) from which future economic benefits are
expected to flow to the entity (IAS 38).

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 Monetary assets
• Monetary assets are money held and assets to
be received in fixed or determinable amounts of
money (IAS 38).
• Let’s think for a moment; monetary / non-
monetary ?
1)PPE
2)Debtors
3)Inventory
4)Petty cash

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 Identifiability
(IAS 38)
• An asset is identifiable if it either:
(a) is separable, ie is capable of being separated or
divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or
together with a related contract, identifiable asset
or liability, regardless of whether the entity intends
to do so; or
(b) arises from contractual or other legal rights,
regardless of whether those rights are transferable
or separable from the entity or from other rights
and obligations.

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 IAS 38 does not apply to:
• intangible assets that are within the scope of another
Standard, such as intangible assets held by an entity
for sale; deferred tax assets; leases; assets arising from
employee benefits; goodwill acquired in a business
combination; deferred acquisition costs, and intangible
assets arising from an insurer’s contractual rights under
insurance contracts.
• financial assets;
• exploration and evaluation assets
• expenditure on the development and extraction of
minerals, oil, natural gas and similar non-regenerative
resources.

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 Examples of classes of intangible assets
(IAS 38 )
• brand names;
• mastheads and publishing titles;
• computer software;
• licences and franchises;
• copyrights, patents and other industrial property
rights, service and operating rights;
• recipes, formulae, models, designs and
prototypes;
• intangible assets under development.

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 How to acquire intangible assets:
•“Intangibles can be acquired:
1.by separate purchase
2.as part of a business combination
3.by a government grant
4.by exchange of assets
5.by self-creation (internal generation)”
(IAS Plus: IAS 38)

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 Recognition and measurement
• The recognition of an item as an intangible asset
requires an entity to demonstrate that the item
meets:
(a) the definition of an intangible asset; and
(b) the recognition criteria.
• This requirement applies to costs incurred initially
to acquire or internally generate an intangible
asset and those incurred subsequently to add to,
replace part of, or service it.
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 Recognition criteria
Recognise intangible assets if, and only if:
(a) it is probable that the future economic benefits that are
attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
• The probability of future economic benefits must be based on
reasonable and supportable assumptions that represent
management’s best estimate of the set of economic
conditions that will exist over the useful life of the asset.
• The probability recognition criterion is always considered to
be satisfied for intangible assets that are acquired separately
or in a business combination.
(IAS 38)
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Measurement of a separately acquired
intangible asset
• An intangible asset shall be measured initially at
cost.
• The cost of a separately acquired intangible asset
comprises:
(a) its purchase price, including import duties and
non-refundable purchase taxes, after deducting
trade discounts and rebates; and
(b) any directly attributable cost of preparing the
asset for its intended use.
(IAS 38)

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 Measurement of intangible assets as
part of business combination
• If an intangible asset is acquired in a business combination, the cost of
that intangible asset is its fair value at the acquisition date.
• If an asset acquired in a business combination is separable or arises from
contractual or other legal rights, sufficient information exists to measure
reliably the fair value of the asset.
• An acquirer recognises at the acquisition date, separately from goodwill,
an intangible asset of the acquiree, irrespective of whether the asset had
been recognised by the acquiree before the business combination. This
means that the acquirer recognises as an asset separately from goodwill
an in-process research and development project of the acquiree if the
project meets the definition of an intangible asset (IAS 38)
Examples of intangibles that are identified separately from goodwill on
acquisition: Brand names; Customer lists. (Elliott and Elliott, 2012. p 509)

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 Measurement of government grant
• At fair value or
• At a nominal amount plus any expenditure that is
directly attributable to preparing the asset for its
intended use.
• This may happen when a government transfers or
allocates to an entity 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.
( IAS 38 )

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 Internally generated goodwill
• Internally generated goodwill shall not be recognised
as an asset.
• In some cases, expenditure is incurred to generate
future economic benefits, but it does not result in the
creation of an intangible asset that meets the
recognition criteria. Such expenditure is often
described as contributing to internally generated
goodwill.
• It is not an identifiable resource (ie it is not separable
nor does it arise from contractual or other legal rights)
controlled by the entity that can be measured reliably
at cost.
(IAS 38)

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 Internally generated intangible assets
Here the entity needs to distinguish between:
• Research: original and planned investigation undertaken
with the prospect of gaining new scientific or technical
knowledge and understanding.
• Development: 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.
If the entity cannot make the distinction; then everything is
seen as Research (IAS 38).
Examples of R&D, see Elliott and Elliott (2012) page 494:
19.3.1 and 19.3.2

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 Accounting for research
•EXPENSE – Straight to the statement of
comprehensive income.
•This is BECAUSE the entity cannot prove that
future economic benefits will be generated.

(IAS 38)

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 Intangible assets arising from the development phase will 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.
(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.
• Internally generated brands, mastheads, publishing titles, customer lists
and items similar in substance shall not be recognised as intangible assets.
(IAS 38)

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 Cost of an internally generated intangible asset
• The cost of an internally generated intangible asset is the sum
of expenditure incurred from the date when the intangible
asset first meets the recognition criteria (IAS 38).
• IAS 38 prohibits reinstatement of expenditure previously
recognised as an expense.
• Expenditure on an intangible item shall be recognised as an
expense when it is incurred unless:
(a) it forms part of the cost of an intangible asset that meets the
recognition criteria; or
(b) the item is acquired in a business combination and cannot be
recognised as an intangible asset. If this is the case, it forms part
of the amount recognised as goodwill at the acquisition date (IAS
38).
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 Examples: How to account for costs of an
internally generated intangible asset
• An entity is developing a new production process. During 20X5,
expenditure incurred was CU1,000(*), of which CU900 was incurred
before 1 December 20X5 and CU100 was incurred between 1 December
20X5 and 31 December 20X5. The entity is able to demonstrate that, at 1
December 20X5, the production process met the criteria for recognition as
an intangible asset. The recoverable amount of the know-how embodied
in the process (including future cash outflows to complete the process
before it is available for use) is estimated to be CU500.
• During 20X6, expenditure incurred is CU2,000. At the end of 20X6, the
recoverable amount of the know-how embodied in the process (including
future cash outflows to complete the process before it is available for use)
is estimated to be CU1,900.
(*) Monetary amounts are denominated in ‘currency units (CU)’
(IAS 38 “Example illustrating paragraph 65”)

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 Answers for the examples
• At the end of 20X5, the production process is recognised as an intangible
asset at a cost of CU100 (expenditure incurred since the date when the
recognition criteria were met, ie 1 December 20X5). The CU900
expenditure incurred before 1 December 20X5 is recognised as an expense
because the recognition criteria were not met until 1 December 20X5. This
expenditure does not form part of the cost of the production process
recognised in the statement of financial position.

• At the end of 20X6, the cost of the production process is CU2,100 (CU100
expenditure recognised at the end of 20X5 plus CU2,000 expenditure
recognised in 20X6). The entity recognises an impairment loss of CU200 to
adjust the carrying amount of the process before impairment loss
(CU2,100) to its recoverable amount (CU1,900). This impairment loss will
be reversed in a subsequent period if the requirements for the reversal of
an impairment loss in IAS 36 are met.

(IAS 38 “Example illustrating paragraph 65”)

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 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).
IAS plus: IAS 38

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 Charge to expense
• internally generated goodwill [IAS 38.48]
• start-up, pre-opening, and pre-operating costs
[IAS 38.69]
• training cost [IAS 38.69]
• advertising and promotional cost, including
mail order catalogues [IAS 38.69]
• relocation costs [IAS 38.69]
(IAS Plus: IAS 38)

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 Measurement after recognition
• An entity shall choose either the cost model or
the revaluation model as its accounting policy. If
an intangible asset is accounted for using the
revaluation model, all the other assets in its class
shall also be accounted for using the same model,
unless there is no active market for those assets.
• A class of intangible assets is a grouping of assets
of a similar nature and use in an entity’s
operations.

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 The cost model

Carrying value
= cost – accumulated amortisation –
accumulated impairment losses

(IAS 38)

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 The revaluation model
Carrying value
= last revaluation– subsequent accumulated amortisation – subsequent
accumulated impairment losses
Revaluation: based on fair value measured by reference to an ACTIVE market
Regularity of revaluation: often enough that carrying value at reporting date does
not differ significantly from fair value (IAS 38).

• An active market is a market in which transactions for the asset or liability take
place with sufficient frequency and volume to provide pricing information on
an ongoing basis (IFRS 13).
• In such a market, 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.
(IAS 38 Technical summary)

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 If the revaluation model is used

• and if only part of the asset was capitalised

because the asset only met recognition
criteria part way, or
• the asset was obtained via a government
grant and recognised at nominal value,
• then the whole asset can be fair valued under
the revaluation method.
(IAS 38)

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 Active market may not exist
• Not usually existing for intangible assets due
to its unique nature: brands, newspaper
mastheads, music and film publishing rights,
patents or trademarks.
• But sometimes existing for freely transferable
taxi licences, fishing licences or production
quotas.

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 Double entry on revaluation increase
• Dr Intangible asset (Asset)
• Cr Revaluation surplus (Equity reserve) - OCI
However, the increase shall be recognised in PnL
to the extent that it reverses a revaluation loss
of the same asset previously recognised in PnL .

(IAS 38)

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 Double entry on revaluation decrease

• When the asset is revalued downwards:

• Dr Revaluation loss (Expense) - PnL
• Cr Intangible asset (Asset)
• However, the decrease shall be recognised in
other comprehensive income to the extent of any
credit balance in the revaluation surplus in
respect of that asset.

(IAS 38)

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The accounting for an intangible asset
is based on its useful life
• An intangible asset with a finite useful life is amortised,
and
• An intangible asset with an indefinite useful life is not.
• If finite, the length of, or number of production or
similar units constitutes that useful life.
• An intangible asset shall be regarded by the entity as
having an indefinite useful life when, based on an
analysis of all of the relevant factors, there is no
foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity.
(IAS 38)

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 The length of useful life for
amortisation
• The useful life of an intangible asset that arises from
contractual or other legal rights shall not exceed the
period of the contractual or other legal rights, but may
be shorter depending on the period over which the
entity expects to use the asset.
• If the contractual or other legal rights are conveyed for
a limited term that can be renewed, the useful life of
the intangible asset shall include the renewal period(s)
only if there is evidence to support renewal by the
entity without significant cost.
(IAS 38)

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 Amortisation period
• The depreciable amount of an intangible asset with a finite useful
life shall be allocated on a systematic basis over its useful life.
• Depreciable amount is the cost of an asset, or other amount
substituted for cost, less its residual value.
• The residual value of an intangible asset is the estimated amount
that an entity would currently obtain from disposal of the asset,
after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its
useful life.
• Amortisation shall begin when the asset is available for use, ie
when it is in the location and condition necessary for it to be
capable of operating in the manner intended by management.
• Amortisation shall cease at the earlier of the date that the asset is
classified as held for sale (or included in a disposal group that is
classified as held for sale) in accordance with IFRS 5 and the date
that the asset is derecognised.
(IAS 38)

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 Amortisation method
• A variety of amortisation methods: the straight-line method, the
diminishing balance method and the unit of production method.
• The amortisation method used shall 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
shall be used.
• The amortisation charge for each period shall be recognised in profit or
loss unless this or another Standard permits or requires it to be included
in the carrying amount of another asset.
• The amortisation period and the amortisation method for an intangible
asset with a finite useful life shall be reviewed at least at each financial
year-end.

(IAS 38)

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 An intangible asset with an indefinite useful life
• An intangible asset with an indefinite useful life shall not be
amortised.
• In accordance with IAS 36, an entity is required to test an intangible
asset with an indefinite useful life for impairment by comparing its
recoverable amount with its carrying amount
(a) annually, and
(b) whenever there is an indication that the intangible asset may be
impaired.
• The useful life of an intangible asset that is not being amortised
shall be reviewed each period to determine whether events and
circumstances continue to support an indefinite useful life
assessment for that asset.

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 Impairment
(IAS 36)
• An impairment loss is the amount by which the carrying
amount of an asset or a cash-generating unit exceeds its
recoverable amount.
• The recoverable amount of an asset or a cash-generating unit
is the higher of its fair value less costs of disposal and its value
in use.
• An entity shall:
(a) assess at the end of each reporting period whether there is
any indication that an asset may be impaired.
(b) test an intangible asset with an indefinite useful life or an
intangible asset not yet available for use for impairment
annually
(c) test goodwill acquired in a business combination for
impairment annually
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 Amortization and impairment (IAS 36)
• After the recognition of an impairment loss, the depreciation (amortisation)
charge for the asset shall be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value (if any), on a systematic basis over
its remaining useful life.
• An entity shall assess at the end of each reporting period whether there is any
indication that an impairment loss recognised in prior periods for an asset other
than goodwill may no longer exist or may have decreased.
• An impairment loss recognised in prior periods for an asset other than goodwill
shall be reversed if, and only if, there has been a change in the estimates used to
determine the asset’s recoverable amount since the last impairment loss was
recognised. If this is the case, the carrying amount of the asset shall be increased
to its recoverable amount which should not exceed the previous carrying amount
without impairment loss. That increase is a reversal of an impairment loss.
• The change in the estimates reflects an increase in the estimated service potential
of an asset, either from use or from sale, since the date when an entity last
recoginzed an impairment loss for that asset.
• After a reversal of an impairment loss is recognised, the depreciation
(amortisation) charge for the asset shall be adjusted in future periods to allocate
the asset’s revised carrying amount, less its residual value (if any), on a systematic
basis over its remaining useful life.
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 Disclosure
• Whether the useful lives are indefinite or finite and, if
finite, the useful lives or the amortisation rates used;
• The amortisation methods used for intangible assets with
finite useful lives;
• The gross carrying amount and any accumulated
amortisation (aggregated with accumulated impairment
losses) at the beginning and end of the period;
• The line item(s) of the statement of comprehensive income
in which any amortisation of intangible assets is included;
• A reconciliation of the carrying amount at the beginning
and end of the period
• Other disclosure requirements
(Elliott and Elliott, 2012: p505; IAS 38)

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 Goodwill
(IFRS 3)
• An asset representing the future economic
benefits arising from other assets acquired in
a business combination that are not
individually identified and separately
recognised.
• A business combination: A transaction or
other event in which an acquirer obtains
control of one or more businesses.

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 The acquisition method
• A business combination must be accounted for by
applying the acquisition method, unless it is a
combination involving entities or businesses under
common control.
• One of the parties to a business combination can
always be identified as the acquirer, being the entity
that obtains control of the other business (the
acquiree).
• Formations of a joint venture or the acquisition of an
asset or a group of assets that does not constitute a
business are not business combinations.

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 The requirements of the acquisition method
• Applying the acquisition method requires:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognising and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree; and
(d) recognising and measuring goodwill or a gain from a bargain purchase.
• The acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisition-date fair values.
• Any non-controlling interest in an acquiree is measured at fair value or as
the non-controlling interest’s proportionate share of the acquiree’s net
identifiable assets.
• The consideration transferred in a business combination (including any
contingent consideration) is measured at fair value.

(IFRS 3)

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 Recognising and measuring goodwill
• The acquirer shall recognise goodwill as of the acquisition date measured
as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with this IFRS, which
generally requires acquisition-date fair value;
(ii) the amount of any non-controlling interest in the acquiree measured in
accordance with this IFRS; and
(iii) in a business combination achieved in stages, the acquisition-date fair
value of the acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired
and the liabilities assumed measured in accordance with this IFRS.
• If the difference above is negative, the resulting gain is recognised as a
bargain purchase in profit or loss. The gain shall be attributed to the
acquirer.

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 Accounting for goodwill
• From the beginning of the first annual period in which this IFRS is applied,
an entity shall discontinue amortising goodwill arising from the prior
business combination and shall test goodwill for impairment in
accordance with IAS 36.
• The acquirer measures goodwill at the amount recognised at the
acquisition date less any accumulated impairment losses.
• An entity that accounted for the prior business combination by applying
the purchase method may have recognised a deferred credit for an excess
of its interest in the net fair value of the acquiree’s identifiable assets and
liabilities over the cost of that interest (sometimes called negative
goodwill). If so, the entity shall derecognise the carrying amount of that
deferred credit at the beginning of the first annual period in which this
IFRS is applied with a corresponding adjustment to the opening balance of
retained earnings at that date.

(IFRS 3)

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 Tutorial questions
• Tutorial question 1
• Tutorial question 2: Elliott and Elliott (2012)
Question 7 (page 523/524)
• Tutorial question 3: Elliott and Elliott (2012)
Question 3 (page 520/521)
• Tutorial question 4: Elliott and Elliott (2012)
Question 2 (page 519/520)

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