Intangible Assets
Overview of session
1. Scope and key concepts
2. Recognition
3. Measurement
4. Disclosures
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Intangible Assets
1. Scope and key concepts
Scope
• Intellectual property (“IP”) in general
• 3 broad categories:
– Research and development
– Patents, copyrights, brand names, trade secrets, trade marks,
franchises, concessions, operating right or right of use
– Computer software (developed internally or acquired from a third
party)
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Key definitions
• An intangible asset is an identifiable non-monetary asset without
physical substance held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
• Useful life is the period of time over which an asset is expected to be
used by the entity
• Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding
• 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 prior to the
commencement of commercial production or use
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Scope
•Covers accounting for all Intangible Assets, excluding:
– Goodwill
– Financial assets
– Mineral rights and other similar expenditure
– Those arising in insurance companies through contracts with
policy holders
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Intangible Assets
2. Recognition
Criteria for recognition
No
Not an 3. Capable of generating Defined
intangible future economic benefits?
asset
No Yes
2. Controlled? 4. Probable that future economic
benefits will be generated?
No Yes
Yes No
5. Cost reliably
1. Identifiable? measured?
Yes No
Intangible Yes
Not
resource Recognised recognised
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Identifiable
• An asset is identifiable if it is separable:
– An asset is separable if the enterprise could rent, sell, exchange
or distribute the specific future economic benefits attributable to
the asset without also disposing of future economic benefits that
flow from other assets used in the same revenue earning activity.
• But an enterprise may be able to identify an asset in some
other way:
– For example, if an intangible asset is acquired with a group of
assets, the transaction may involve the transfer of legal rights that
enable an enterprise to identify the intangible asset.
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Control
• The capacity of an enterprise to control the future economic
benefits from an intangible asset would normally stem from
legal rights that are enforceable in a court of law (e.g.
copyrights or a legal duty on employees to maintain
confidentiality).
• In the absence of legal rights, it is more difficult to demonstrate
control. However, legal enforceability of a right is not a
necessary condition for control since an enterprise may be able
to control the future economic benefits in some other way.
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Future economic benefits
• Future economic benefits flowing from an intangible asset may
include revenue from the sale of products or services, cost
savings, or other benefits resulting from the use of the asset by
the enterprise
– For example, the use of intellectual property in a production
process may reduce future production costs rather than increase
future revenues
• Requires the exercise of sound judgement based on verifiable
information
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Measurement of cost
• Cost can be measured:
– Either directly (cost of acquisition of the asset when it is
separately acquired); or
– Indirectly (e.g. by reference to an active market or using
discounted cash flows techniques when the asset is acquired as
part of a business combination)
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Recognition – Internally
generated intangible assets
Internally Internally generated
generated goodwill intangible assets
Research Development
NO! phase phase
Only if strict
NO! criteria met
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Research phase
• Examples of research activities:
– Activities aimed at obtaining new knowledge
– The search for, and evaluation and final selection of, applications
of research findings or other knowledge
– The search for alternatives for materials, devices, products,
processes, systems or services
– The formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
processes, systems or services
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Development phase
• Conditions to be met before capitalisation:
– Technical feasibility of completing the asset(will we b able 2 produce
it)
– “Intention” to complete it and “use/sell the asset”
– Ability to use/sell the asset
– An analysis of whether the asset will generate future economic
benefits
– Availability of resources to complete the asset and to use/sell it AND
– Ability to reliably measure the attributable expenditure
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Cannot capitalise…
Internally
generated Mastheads
brands
Publishing Customer
titles lists
…and similar items
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Date for recognition
• During the year, the date of acquisition or date of entry shall
correspond to the date on which the risks of ownership of the
assets are transferred to the company, which in general
corresponds to the accepted delivery of the asset
• If an item does not meet the definition of an intangible asset,
expenditure to acquire it or generate it internally is recognised
as an expense when incurred.
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Intangible Assets
3. Measurement
Measurement
Company
choice choice
Subsequent Benchmark treatment
costs: expense • continue to carry at cost*
Initial (unless can
measurement: prove
cost enhanced Alternative treatment
economic • carry at re-valued amount*
benefits) by reference to active market
* less amortisation and
impairment provisions
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Cost of internally generated
intangible assets
• Cost = directly attributable expenditure
• Begin when asset first meets recognition criteria
• Cannot back-date to include costs expensed previously
• Specific costs CANNOT be capitalised
– Start-up costs
– Training activities
– Advertising/promotional activities
– Re-locating/re-organising costs
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Measurement -
amortisation
Evidence must
Presumption Rebuttal be persuasive
Disclose
evidence
UEL ≤ 20 years UEL > 20 years & perform annual
impairment test
Amortise over UEL
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Measurement –
disposal
• Disposal
– Gain/loss = Net Disposal Proceeds – Carrying Amount
– Recognise in economic Income and expenditure account
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Intangible Assets
4. Disclosures
Major disclosures
Internally
generated
Disclose
separately
Acquired
Useful lives or Gross opening Reconciliation
Re-valued
amortisation & closing of movements
rates balances intangibles
in year
Also, R&D costs expensed in the period
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