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IAS 38 Intangible Assets
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Definition
An intangible asset is an identifiable non-monetary asset without physical substance.
• Key characteristics:
– It is identifiable
– It is an asset
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Identifiability
Asset is identifiable when:
– It is separable
i.e. capable of being separated/ divided from the entity and sold/ transferred/ licensed either individually or together with a related contract/ asset/ liability
OR
– It arises from contractual or other legal rights
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Asset
Must be an asset in terms of the Framework
• Resource controlled by an entity as a result of a past event and from which future economic benefits are expected to flow to the entity
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How do we recognise them on initial recognition?
At cost!
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Recognition and initial measurement
• Intangible assets are acquired as follows:
1. Separate acquisition
2. Government Grant
3. Exchange of Assets
4. Internally Generated
5. Business Combination
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Separate acquisition
Purchased from 3rd Party
• Assumed benefits will flow as purchase price was paid for it
• Include into cost:
– Purchase price/import duties/non-refundable taxes
– Directly attributable costs
• Discount if deferred – discount purchase price
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Government Grant
Entity may receive intangible asset from government either:
• Free of charge; or
• At nominal amount
• Account for intangible and grant at:– Fair value; OR
– Nominal amount + any directly attributable costs
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Exchange of Assets
• Account for intangible at fair value unless:
– Exchange transaction lacks commercial substance
– Fair value of neither the asset received nor the asset given up can be reliably measured
• In such cases, measure at the Carrying Amount of the asset given up
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Internally Generated Assets
• IAS 38 prohibits recognition of internally generated Goodwill
• Also prohibited from recognising assets that the standard deems not capable of being distinguished from development of the business as a whole such as:– Brands
– Customer lists
– Publishing titles
– Similar assets to above
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Internally Generated Assets
• Permitted to recognise assets that meet the definition of development assets
• General principle:
– Research Expenditure – Expense
– Development Expenditure – Capitalise
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Internally Generated Assets
BASICS: Research & Development
• Capitalise when all of the following are met:
– technical feasibility
– intention to complete the intangible asset and use or sell it
– ability to use or sell the intangible asset
– can demonstrate how the intangible asset will generate probable future economic benefits. (ie: 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)
– availability of adequate technical, financial and other resources
– ability to measure reliably the expenditure attributable to the intangible asset during its development
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Internally Generated Assets
• What development costs can be capitalised:
– Expenditure on materials and services used in generating the intangible asset;
– Salaries/wages of personnel engaged DIRECTLY in generating the asset;
– Borrowing costs, if definition of a qualifying asset is met under IAS 23;
– Any other directly attributable expenditure
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Internally Generated Assets
• Excludes the following:
– Selling, administrative and other general overheads unless directly attributable to the preparing of the asset for use;
– Clearly identified inefficiencies and initial operating losses incurred
– Expenditure on staff training to operate the asset
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Business Combinations
FV of Assets & Liabilities
Goodwill
Total consideration
FV of Assets & Liabilities
Goodwill
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Business Combinations
FV of Assets & Liabilities
Goodwill
Total consideration
FV of Assets & Liabilities
Goodwill
Intangible Assets
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Intangible Assets
Must meet the definition of an intangible asset (IAS 38):
• Resource controlled by entity from which future economic benefits are expected to flow to the acquirer
• Without physical substance
• Identifiable
• Separable OR
• When arises from contractual / other legal rights
• Probable that future economic benefits attributable to assets will flow to entity
• FV can be measured reliably
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Intangible Assets
Must meet the definition of an intangible asset (IAS 38):
• Resource controlled by entity from which future economic benefits are expected to flow to the acquirer
• Without physical substance
• Identifiable
• Separable OR
• When arises from contractual / other legal rights
• Probable that future economic benefits attributable to assets will flow to entity (presumed!!)
• FV can be measured reliably
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Types of intangibles
• Market-related intangibles
• Trademarks, trade names
• Internet domain names
• Trade dress (unique colour, shape, packaging)
• Newspaper mastheads
• Non-competition agreements
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Types of intangibles
• Artistic-related intangibles
• Plays / music / books / pictures / video’s
• Contract-based intangibles:
• Licensing/ Royalty agreements
• Favorable lease agreements
• Franchise agreements
• Operating and broadcasting rights
• Air/Water/Mineral rights
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Types of intangibles
• Customer-related intangibles
• Customer lists
• Order backlogs
• Customer contracts / customer relationships
• Non-contractual customer relationships
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Types of intangibles
• Technology-based intangibles
• Patented technology
• Computer software and mast works
• Unpatented technology
• Databases
• Trade secrets (e.g.: formulae, processes)
NOTE: NOT AN EXHAUSTIVE LIST
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SUBSEQUENT ACCOUNTING
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Intangible Assets
2 types of intangibles:
Finite Life Indefinite Life
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Finite Intangible Assets
• Accounting is easy!
• Amortise over useful life
– Start when ready for use
– Residual value assume to be zero unless
• Commitment from 3rd party to purchase at end of useful life
OR
• Active market exists
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Finite Intangible Assets
• As per Property, Plant and Equipment, review the following annually:
– Residual value (only if active market or 3rd party commitment)
– Amortisation period
– Amortisation method
• Any changes -> treat as a change in estimate (IAS 8)
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Indefinite Intangible Assets
• NOTE: Not INFINITE
• Test for impairment annually
• Review useful life annually
• If change in life to finite – begin amortisation