Ch4 - intangible assets PDF

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CHAPTER 4: INTANGIBLE ASSETSIntangible Assets – an identifiable non-monetary asset without physical substanceQUALIFICATIONS OF AN INTANGIBLE ASSETAn item must meet ALL of the following:A. Identifiability An Item must be identifiable to distinguish it from Goodwill Separable It is capable of being se...

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represent management’s best estimate of the set of economic conditions FMANNERS OF ACQUISITION OF INTANGIBLE ASSETS

CHAPTER 4: INTANGIBLE ASSETS Intangible Assets – an identifiable non-monetary asset without physical substance

1. SEPARATE ACQUISITION COST = PURCHASE PRICE + DIRECTLY ATTRIBUTABLE COSTS

QUALIFICATIONS OF AN INTANGIBLE ASSET An item must meet ALL of the following: A. •

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B. • • •

C. •

Separable It 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, asset, or liability.

3. 4. 5. 6.

Directly Attributable Costs Include Costs of employee benefits

Professional fees arising from bringing the asset to its working condition

Control It has the power to obtain the future economic benefits from the asset and restricts the access of others to those benefits Control normally stems from legal rights or contractual rights Repeated transactions for the same or similar non-contractual customers provide evidence that the entity is able to control future economic benefits from the customer relationships

Trademarks – Indicates the source of a product Service Marks – Indicates the source of a service Collective Marks – Identify the goods/services of members of a group Certification Marks – Certify the geographical origin or other characteristics of a good or service

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ACQUISITION AS PART OF A BUSINESS COMBINATION COST = RECOGNIZED AT FAIR VALUE When an asset acquired in a business combination arises from legal or contractual rights, it is presumed that its fair value can be determined reliably because of availability of sufficient information The separable asset is recognized by the acquirer even if it did not appear in the accounting records of the acquired entity

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In-process Research and Development Project Recognized as an asset by the acquiror (separately from goodwill) If it meets the definition of an intangible asset: 1. It meets the definition of an asset 2. Identifiable Subsequent expenditures incurred by the enterprise on the recognized in-process research and development project shall be dealt with in accordance with the principles discussed in latter portion.

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ACQUISITION BY WAY OF A GOVERNMENT GRANT Two ways: 1. Recognize both the intangible asset and the grant initially at fair value with a credit to Unearned Income from Government Grant

The terms “brands” and “brand name” are often used as synonyms for trademarks and other marks However, these terms are general marketing terms Used to refer to a group of complementary assets

Intangible Asset xxx Unearned Income from Government Grant

Franchise Private entity is the franchisor The franchisor permits the franchisee to use the franchisor’s trademark or process The term of the franchise = indicated in the contract Franchises are renewable License The government permits the franchisee to use public property in the conduct of operations Government is the franchisor

INITIAL RECOGNITION Intangible assets are initially measured at cost The cost depends on the specific manner of acquiring the asset An intangible asset shall be recognized if: 1. It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity 2. The cost of the asset can be measured reliably

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Grant is recognized as income over the period in which the intangible asset is amortized

Franchise – It is a right granted by the franchisor to the franchisee to operate outlets using business concepts, property, trademarks, and trade names owned by the franchisor for a specific period •

Costs of staff training

An asset is acquired through ISSUANCE OF EQUITY SECURITIES: 1. FV of asset acquired 2. FV of securities issued

Protected through: 1. Government agencies 2. Continuous use in commerce 3. Other means •

Exclude Advertising and cost of introducing a new product or service

Costs of conducting business in new locations or with a new class of customer Administration and general overhead

Economic Benefits Arises from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity.

Copyrights Is another intellectual property right or protection granted to an author of literary, musical or artistic work for the publication, distribution, and adaptation of that work. Protection is given to the author: o For a period of 50 years after the author’s death o After which, the work enters the public domain

Exclude Refundable and Creditable Purchase taxes

Non-refundable purchase taxes Deduct: Trade discounts and Rebates

It arises from Contractual or Legal Rights Regardless of whether those rights are transferable or separable from the entity or from other rights and obligations

EXAMPLES OF INTANGIBLE ASSETS 1. Patents It is an exclusive legal right granted by the government for an invention to prevent others from making, using, selling, or distributing an invention without permission from the patentee The protection lasts for a minimum of 20 years 2.

Purchase Price Include Import Duties

Identifiability An Item must be identifiable to distinguish it from Goodwill

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Recognize asset at a nominal account (presumably zero) plus any expenditure that is directly attributable to preparing the asset for its intended use Intangible Asset xxx Cash/Accounts Payable

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ACQUISITION BY EXCHANGES OF ASSETS

With Commercial Substance Without Commercial Substance

- FV of asset received - There is gain or loss Asset received is measured based on: 1. FV of asset given up (+ CP – CR) 2. CV of asset give up (+ CP – CR) - There is no gain or loss

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INTERNALLY GENERATED INTANGIBLE ASSET Determine whether the cost incurred in the Research or Development phase

Research Phase Refers to the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and

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An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that

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understanding Expensed outright

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Research activities include: 1. Activities aimed at obtaining new knowledge 2. The search for evaluation and final selection of, applications of research findings, or other knowledge 3. The search for alternatives for materials, devices, products, processes, systems or services 4. The formulation, design, evaluation, and final selection of possible alternatives for new or improved materials, devices, products, processes, systems, or services

Development phase Refers to 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. Development activities include: 1. Design, construction, and testing of pre-production or pre-use prototypes and model 2. Design of tools, jigs, moulds and dies involving new technology 3. Design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production 4. Design, construction, and testing of a choses alternative for new or improved materials, devices, products, processes, systems or services •

If entity cannot distinguish research from development stage, assume it to be incurred during the Research phase.

Examples of development and other costs that are capitalized as part of the costs of an internally generated intangible asset: a. Costs of materials and services consumed in generating the intangible asset b. Costs of employee benefits arising from the generation of the intangible asset c. Fees to register a legal right d. Amortization of patents and licenses that are used to generate the intangible asset

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Cost Model Intangible asset is carried at Cost less Accumulated Amortization and Accumulated Impairment Losses Revaluation Model A class of intangible assets with an active market is carried at revalued amount, being the fair value at the date of revaluation, less AA and AIL. ➢ If there is no active market – the asset shall be carried using the Cost Model •

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Indefinite Useful Life One that is assessed to be providing the enterprise with net cash flows over a period with no foreseeable limit Intangible asset is NOT subject to amortization, but required to test for impairment losses annually. ➢ When asset does not have indefinite useful life anymore, the Carrying Amount is amortized over the determined expected useful life INTERNALLY GENERATED SOFTWARE All costs incurred in the development of a software program are research and development costs. Research Commercial and technological feasibility is NOT YET established and recognition criteria is NOT YET MET Period Cost

**See example on p.226 for illustration

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Expenditures previously recorded as expense cannot be recognized as part of the cost of the intangible asset at a later part Expenditures that are incurred to provide economic benefits to an enterprise are recorded as expenses and not as intangible assets Examples: 1. Expenditures on research 2. Start-up activities 3. Training activities 4. Advertising and promotional activities 5. Costs of relocation and reorganization of an entity

Internally Generated Goodwill and Internally Generated brands, mastheads, publishing titles, customer lists, etc. Not recognized as an asset in the accounts because it is not an identifiable resource controlled by the entity that can be measured reliably at cost EXPENDITURES AFTER INITIAL RECOGNITION Expensed outright, unless they provide economic benefits in excess of the originally assessed standard of performance Subsequent expenditures are capitalized only when they result to any one or combination of the following: a. Extension of useful life b. Increase in net cash inflow from the use of the asset either by increasing revenue or decreasing operating costs c. Improvement of the quality of the output **See example on p.228 for illustration

MEASUREMENT AFTER INITIAL RECOGNITION Entity shall choose either the cost model or the revaluation model as its accounting policy

The items within a class of intangible assets must be revalued simultaneously to avoid selective measurement of intangible assets using mixture of costs and values at different dates Revaluation shall be made with regularity so that the carrying amount does not differ materially from the FV at the reporting date Change of Amortization Method – considered as Change in Accounting Estimates, thus, applied prospectively

INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES AND ASSETS NOT YET AVAILABLE FOR USE

The following are not components of the cost of an internally generated intangible asset: a. Selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use b. Identified inefficiencies and initial operating losses incurred before an asset achieves planned performance c. Expenditure on training staff to operate the asset

EXPENDITURES THAT ARE RECOGNIZED AS EXPENSES Expenditure on an intangible item shall be recognized as an expense when incurred, except: 1. It forms part of the cost of an intangible asset that meets the recognition criteria 2. Item is acquired in a business combination and cannot be recognized as an identifiable and separate intangible asset. Expenditure forms part of the amount attributable to Goodwill at the acquisition date

The measurement model is applied to ALL the assets in an entire class

Development

Commercial Production

AFTER establishment of commercial and technological feasibility (and other capitalization criteria are met) Intangible Asset (Capitalization criteria are met)

Product Cost (Commercial Production starts)

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Function of Expense method Costs charged to inventory will be expensed as part of cost of goods sold in a statement of comprehensive income based on copies of software sold

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Nature of Expense method Change in costs of inventories from beginning to end of the period is considered in determining the amount of expense relating to inventory

Internal Development of Software is… For in-house use

Expensed (Reason: It is difficult to demonstrate how the program would generate future economic benefits to the enterprise)

Licensed or rented to others

Intangible Asset

Purchased Software is… For entity’s own use ➢ Integral Part ➢ Not an Integral Part For sale on a routine basis or there is reproduction for sale

Property, Plant, and Equipment Intangible Asset

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Inventory

The capitalized cost of software that is intended to be marketed shall be recognized as expense based on expected pattern of economic benefits derived from such costs

WEBSITE DEVELOPMENT COSTS Benefits from website development costs do not meet the recognition criteria for an asset, as the benefits derived are not considered probable, specifically for a website that has been developed for the purposes of promoting and advertising an entity’s products and services. Costs of developing a website are recorded as expenses GOODWILL Results from several factors such as high employee morale, superior management team, advantageous geographical location,...