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1、2,Lecture 3,Intangible assets,3,COMMONWEALTH OF AUSTRALIACOPYRIGHT REGULATIONS 1969WARNINGThis material has been copied and communicated to you by or on behalf of Curtin University of Technology pursuant to Part VA of the Copyright Act 1968(the Act)The material in this communication may be subject t
2、o copyright under the Act.Any further copying or communication of this material by you may be the subject of copyright protection under the Act.Do not remove this notice,4,Objectives,Understand the key characteristics of intangible assets.Examine the initial recognition and measurement criteria of i
3、ntangible assets.Accounting for intangibles subsequent to initial recognition.Amortisation of intangibles.,5,Definition of intangible asset,What are intangible assets?An intangible asset is an identifiable non-monetary asset without physical substance.(AASB 38,Para 8)Examples include:Patents governm
4、ent grant to produce/sell invention,20 years.Copyrights right to reproduce recognise development in limited cases.,6,Application of IAS 38,AASB 38(or IAS 138)applies to intangible assets except:Intangible assets that are in the scope of another accounting standard;Financial assets;Exploration and ev
5、aluation assets;andExpenditure on the development and extraction of resources.,7,The nature of intangible assets,What is meant by“identifiability”?Paras 11-12An asset meets the identifiability criterion when it:Is separable i.e.is capable of being divided from the entity and sold,transferred,license
6、d,rented or exchanged,either individually or together with a related contract,identifiable asset or liability;orArises from contractual or other legal rights,regardless of whether those rights are transferrable or separable from the entity or from other rights and obligations.,8,The nature of intang
7、ible assets,Identifiability distinguishes intangible assets from goodwill.The criterion of separability tests whether an entity can divide an asset from other assets and deal with it as an individual asset.In most cases,separable assets are capable of being exchanged by an entity because the entity
8、has a contractual or legal right to make the exchange.However,some contractual legal rights are not readily separable from the entity.e.g.some licences are not separable from an entity.,9,The nature of intangible assets,Why consider intangible assets in a separate standard?Intangible assets:Lack phy
9、sical substance.Asset can be used at the same time for multiple purposes e.g.customer list;Many intangibles are not subject to the diminishing returns characteristic of physical assets;e.g.software program for student enrolments.Intangibles may have network effects;the value increases as use increas
10、es e.g.telephone network.,10,The nature of intangible assets,Intangibles may be more difficult to manage and operate than tangible assets;Property rights are harder to determine;The relationship between the investment and ultimate benefits is hard to track.There is a high degree of uncertainty regar
11、ding the future benefits of intangible assets;Are difficult to trade.There may be no active market for them.e.g.brand names.These characteristics may cause difficulties with measurement,recognition and classification.,11,Importance of intangibles,Why have intangible assets become important?Lev(2001)
12、suggested:Intensified competition induced by globalisation,deregulation the remaining$5 represent intangible assets.,12,Importance of intangibles,13,Recognition of intangible assets,When should intangible assets be recognised?(Para 18-21)The recognition of an intangible asset requires an entity to d
13、emonstrate that the item meets:Definition of an intangible asset(Para 8-17);andRecognition criteria(Para 21-23).,14,Recognition of intangible assets,An intangible asset shall be recognised if,and only if:(a)it is probable that the expected future economic benefits attributed to the asset will flow t
14、o the entity;and(b)the cost of the asset can be measured reliably.the cost of the asset cannot be reliably measured,an intangible asset cannot be recognised because AASB 38 requires initial measurement at cost.(Para 24),15,Measurement of intangibles,Initial Measurement:How should intangible assets b
15、e measured at initial recognition?(Para 24)An intangible asset shall be measured initially at its cost.Separate acquisition:Para 25,26,27The probability recognition criterion is always considered to be satisfied for separately acquired intangible assets(Para 25).The price paid for the asset automati
16、cally takes into account the probability of expected benefits to be received.,16,Measurement of intangibles,The cost of a separately acquired intangible asset comprises:Its purchase price;andAny directly attributable cost of preparing the asset for its intended use Examples of directly attributable
17、costs include:Costs of employee benefitsProfessional feesCosts of testingExamples of expenditure that are not part of cost of intangible asset include:Costs of introducing a new product or serviceCosts of conducting business in a new locationAdministration and overhead costs,17,Business combinations
18、,(ii)Acquisition as part of a business combination:How should intangible assets be measured at initial recognition?(Para 33-35)In accordance with IFRS 3 Business Combinations,where an intangible asset is acquired as part of a business combination,the cost of that asset is its fair value.The probabil
19、ity recognition criterion is always considered to be satisfied for intangible assets acquired in business combinations(Para 33).The reliability recognition criterion is normally met for intangible assets as sufficient information exists to measure reliably the fair value of the asset(Para 35).,18,Me
20、asurement of fair value,How is fair value measured?Para 39,40,411)Quoted market prices in an active market.An active market has all the following(Para 8):Items traded within the market are homogeneous.Willing buyers&sellers are normally found at any time.Prices are available to the public.Active mar
21、kets are rare for intangible assets.2)Recent transactions where no active market exists.3)Valuation techniques such as NPV and known rates such as royalty rates.,19,Internally generated goodwill,When do internally generated assets qualify for recognition?Internally generated goodwill shall not be re
22、cognised as an asset(Para 49).The reason is that internally generated goodwill is not identifiable i.e.not separable&does not arise from legal/contractual rights and its cost cannot be reliably determined.Under AASB 138,recognition requires that identifiable intangible assets as well as goodwill mus
23、t initially be measured at cost,not fair value.Goodwill can be recognised only when it is acquired as part of a business combination and measured in accordance with IFRS 3 Business Combinations.,20,Recognition/measurement of internally generated intangibles,Difficult to know whether internally gener
24、ated Intangibles(IGIs)qualify for recognition:Is there an identifiable asset.Determining the cost of the asset reliably.To determine if IGIs meet the recognition criteria,generation of assets are classified into:Research phase;andDevelopment phaseThe reason for this is that recognition of IGIs depen
25、ds on the point of time when costs are to be capitalised.,21,Recognition/measurement of internally generated intangibles,Research is original and planned investigation undertaken with the purpose of gaining new scientific or technical knowledge and understanding(Para 8).Development is the applicatio
26、n of new research findings or other knowledge to a plan or design for the production of new or substantially improved materials,devices,processes,systems or services before the start of commercial production or use(Para 8).Research phase:no intangible asset from research is recognised.Research expen
27、diture is expensed.,22,Recognition/measurement of internally generated intangibles,Development phase:An intangible asset is recognised if the entity can demonstrate all of these conditions(Para 57):Technical feasibility of completing the intangible asset os that it will be available for use or sale;
28、Its intention to complete the intangible asset and use/sell it;Its ability to use/sell the intangible asset;How the intangible asset will generate probable future economic benefits;Availability of technical,financial resources to complete development and to use/sell the intangible asset;Ability to m
29、easure reliably the expenditure attributable to intangible asset during development.,23,Non-recognition of internally generated intangibles,IGIs cannot be recognised initially at fair value even if fair value can be reliably measured.Active markets are unlikely to exist for IGIs.However,for intangib
30、le assets recognised in business combination,it is assumed that fair value can be measured without the existence of active markets.Internally generated brands,mastheads,publishing titles,customer lists are not recognised as intangible assets(Para 63).Such assets can be recognised when acquired in a
31、business combination.The reason is that these items cannot be distinguished from the cost of developing the business as a whole(Para 64).,24,Measurement subsequent to initial recognition,How are intangible assets measured after initial recognition?Para 72,75,81,82After initial recognition at cost,an
32、 entity must choose for each class of intangible assets whether to measure the assets using the cost model or the revaluation model.Cost Model:An intangible asset shall be carried at its cost less accumulated amortisation and any accumulated impairment losses.Revaluation Model:An intangible asset sh
33、all be carried at its revalued amount,being its fair value at the date of revaluation less subsequent amortisation and any accumulated impairment losses.,25,Measurement subsequent to initial recognition,If intangible assets(e.g.brands,newspaper mastheads,patents,trademarks)cannot be revalued because
34、 there is no active market for the asset,the asset shall be carried at its cost less any accumulated amortisation and impairment losses(Para 78).Revaluation of intangible assets:Increase:CR Revaluation reserve except for a reversal of a revaluation decrease in which case CR Revaluation revenueDecrea
35、se:DR Revaluation expense except for a reversal of a revaluation increase in which case DR revaluation reserve,26,Amortisation of intangible assets,How are intangible assets amortised?Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life.For
36、intangible assets with finite useful lives,amortisation methods can include straight line,reducing balance,units of production methods.An intangible asset with an indefinite useful life shall not be amortised.These assets are tested for impairment on an annual basis.In order for an intangible asset(
37、e.g.trademark)to have an indefinite life,an entity is required to outlay funds on an annual basis to maintain trademark.,27,Amortisation of intangible assets,Useful life of an intangible asset can be influenced by these factors:(Para 90)Expected use of the assetProduct lifecycles for the assetTechno
38、logical and commercial obsolescenceNature of the industryCompetitive actionPeriod of control over the assetIn general,assets whose lives depend on contractual or legal lives are amortised over those lives or shorter periods(Para 94).,28,Disclosure of intangible assets,IAS 38 requires disclosures for
39、 each class of intangibles,and for internally generated intangibles to be distinguished from other intangibles.Disclosures include:Amortisation charge in the income statementRevaluationsImpairment losses,29,Summary,Identifiability and lack of physical substance are two key characteristics of intangi
40、ble assets.Intangible assets must meet the recognition criteria as for PPE.Initial measurement is at cost;subsequent measurement depends on how the asset arose.Certain intangibles are recognised if acquired in a business combination,but cannot be recognised if internally generated.Subsequent to initial measurement,intangible assets may be measured using the cost or revaluation model.Amortisation of intangibles depends on useful life.Intangibles with an indefinite useful life are not subject to amortisation.,
