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IAS 38 Intangible assets
Instituut van de Bedrijfsrevisoren 4 oktober 2010
FACILITATOR
VÉRONIQUE WEETS
Dr. Véronique Weets is a Professor of International Accounting and a faculty member at two Belgian
universities. In that role she is responsible a general IFRS course and a Financial Instruments course.
At regular occasions she participates in Master Programs of UAMS, Programs of Vlerick and the Solvay
Business School. Véronique Weets was also associated with the IFRS Technical desk of Deloitte in
Belgium, where she was involved in client work on matters such as the transition to IFRS and the
subsequent application of IFRS to listed companies. She was also responsible for client trainings as
well as trainings of the professional staff.
As from 2006 Véronique Weets created her own company in which she helps clients with the
application of IFRS on a daily basis through trainings or consultancy. This means that she actively
searches for the practical translation of this principle based framework of accounting in order to
provide realistic solutions to the clients. Therefore, facilitation sessions provided by Véronique Weets
always have a strong theoretical basis that is translated to practical applications that are relevant to
the business environments of the delegates. In addition to this, Véronique Weets is also an author of
a long list of technical accounting literature in English, French and Dutch.
DISCLAIMER
Whilst every effort is made to ensure that the contents of its case studies and other material handed
out during or in connection with courses are accurate and up‐to‐date, we shall not be under any
liability whatsoever for any inaccuracy or misleading information whether arising for negligence or
otherwise and in particular we shall not be liable for any consequential damage or expense of any loss
of profit or any liability to third parties incurred as a result of reliance on such inaccurate or
misleading information.
REFERENCES (OTHER THAN THE OFFICIAL PUBLICATIONS OF THE IASB)
Deloitte, iGAAP 2005 – IFRS Reporting in the UK, CCH
IVSC Discussion Paper, Determination of fair value of intangible assets for IFRS reporting purposes,
July 2007.
KPMG, Insights into IFRS 2005/6 Edition, Thomson.
KPMG, IFRS Accounting in the Telecommunications Industry, 2004
PWC, Manual of Accounting – IFRS for the UK 2007, CCH
PWC, International Financial Reporting Standards (IFRS) ‐ Issues and Solutions for the Pharmaceutical
Industry.
PWC, International Financial Reporting Standards (IFRS) ‐ Issues and Solutions for the Pharmaceutical
Industry (Vol. 2)..
IAS 38 Intangible assets
Instituut van de Bedrijfsrevisoren 4 oktober 2010
OVERVIEW
IAS 38 – Intangible assets
o Definition
o Recognition
o Acquiring intangible assets and determining the initial measurement
Purchased intangible assets
Internally generated intangible assets
Intangible assets acquired in a business combination
Acquisition by way of a government grant
Exchanges of assets
o Subsequent measurement
o Subsequent expenditures
o Retirements and disposals
Related topics
o Annual improvements 2007
o SIC 32 – Web site costs
o IFRIC 12 – Service concession arrangements
o Emission rights
IAS 38 – Intangible assets
1Insituut van de Bedrijfsrevisoren4 oktober 2010
IAS 38 – Intangible assetsVéronique Weets ([email protected])
© Veronique Weets 2010
Overview
Basic Principles Definition
R iti Recognition
Acquiring intangible assets and determining the initial measurement Purchased intangible assets
Internally generated intangible assets
Intangible assets acquired in a business combination
Acquisition by way of a government grant
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Exchanges of assets
Subsequent measurement
Subsequent expenditures
Retirements and disposals
IAS 38 – Intangible assets
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Overview
Related topics
Annual improvements 2007
SIC 32 – Web site costs
IFRIC 12 – Service concession arrangements
Emission rights
© Veronique Weets 20103
Definitions
An asset is a resource
Controlled by an entity as a result of past events; and
From which future economic benefits are expected to flow to the entity
An intangible asset is an identifiable non‐monetary asset without physical substance
Asset is identifiable when it:
is separable i e capable of being separated or divided from an
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is separable, i.e. capable of being separated or divided from an entity and sold, transferred, licensed, rented or exchanged; or
arises from contractual or other legal rights, regardless of whether those rights are transferable or separable
IAS 38 – Intangible assets
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Recognition
To be recognized, an intangible asset must meet
The definition of an intangible asset, especially
Control by the entity
Identifiable attributes of an asset
The recognition criteria
Probable that future economic benefits attributable to the asset will flow to the entity
Cost can be measured reliably
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Acquiring intangible assets
Intangible assets can be acquired through:
Separate acquisition
Internal generation
Acquisition in a business combination
Acquisition by way of a government grant
Exchanges of assets
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IAS 38 – Intangible assets
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Purchased intangible assets
Identifiable attributes: arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from othertransferable or separable from the entity or from other rights (examples: patents, copyrights, franchises, licenses, software)
Control: obtained through contractual or legal rights
Probability future economic benefits: price paid by the entity reflects expected future economic benefits Al id d t b ti fi d
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Always considered to be satisfied
Cost: generally is based on cash paid or FV of consideration given. Includes directly attributable cost of preparing the asset for its intended use.
Internally generated goodwill
Is not recognised as an asset
Not an identifiable resource (is not separable nor does it arise )from a legal right)
Not controlled by the entity
Cannot be measured reliably
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IAS 38 – Intangible assets
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Internally generated intangibles
Difficult to assess whether these assets qualify for recognition
Identifying whether and when there is an identifiable asset that will generate expected future benefits; and
Determining the cost reliably
Sometimes can not be distinguished from the cost of maintaining or enhancing the entity’s internally generated goodwill or of running day‐to‐day operations
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Internally generated intangibles
Internally generated brands, mastheads, publishing titles, customer lists, goodwill, etc. should not be recognized as
blintangible assets
fail to meet the recognition criteria of
reliable measurement of cost
identity separate from other resources, and
control by the reporting enterprise
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IAS 38 – Intangible assets
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Internally generated intangibles
Specific guidance on qualification as asset:
identifying the point of time when probable future economic benefits occur; and
reliable determination of cost of the asset
Classify the generation of the asset into:
research phase; and
development phase
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development phase
Internally generated intangibles
Research phase
Examples
Activities aimed at obtaining new knowledge
Search for, evaluation, and final selection of applications of research findings
Search for and formulation of alternatives for new and improved systems
No intangible asset is recognized
Expense costs as incurred
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Expense costs as incurred
IAS 38 – Intangible assets
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Internally generated intangibles
Development phase
Examples of development activities
Design and testing of preproduction models
Design of tools, jigs, molds, and dies
Design of a pilot plant which is not otherwise commercially feasible
Design and testing of a preferred alternative for new and improved systems
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Internally generated intangibles
Development phase – Capitalization is required if the entity is able to demonstrate:
Technical feasibility of completing the IA
Intention to complete the IA and use or sell it
Ability to use or sell the IA
How economic benefits will be generated
Availability of adequate resources to complete the IA and to use or sell it; and
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;
Ability to measure the expenditure attributable to the IA during its development reliably
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IAS 38 – Intangible assets
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Internally generated intangibles
Demonstrating criteria – examples and issues:
Increase future cash flows on own or in combination with other assets
Financing witnessed by business plan / lenders willingness to finance it
Time recording system to capture costs of staff
Evaluation at each reporting date
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Internally generated intangibles
Cost of an internally generated intangible asset = sum of expenditure incurred from the date when the recognition
criteria is first metcriteria is first met Cost of materials and services used or consumed in generating the intangible asset;
Costs of employee benefits arising from the generation of the intangible asset;
Fees to register a legal right; and
Amortization of patents and licenses that are used to generate the intangible asset
B i t i d ith IAS 23
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Borrowing costs in accordance with IAS 23
Cannot reinstate expenditure previously expensed
Comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management
IAS 38 – Intangible assets
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Internally generated intangibles
Examples of items to be expensed Non‐attributable selling, administrative and other general overhead expenditureoverhead expenditure
Establishment costs e.g. legal costs incurred to establishing a legal entity
Expenditure to open a new facility or business
Expenditures for starting new operations or launching new products or processes (i.e. pre‐operating costs)
Identified inefficiencies and initial operating losses
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p g
Training staff to operate the asset
Advertizing and promotional activities
Relocating or reorganizing part or all of an entity
Intangible assets acquired in a business combination
Probable economic benefits
Reflected in the fair value
Assumed in a business combination
If an asset is separable or arises from contractual or other legal rights, sufficient information exists to measure the fair value of the asset
Rebuttable presumption that finite life intangibles acquired in a BC have a reliable FV
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a BC have a reliable FV
IAS 38 – Intangible assets
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Intangible assets acquired in a business combination
Purchased “in‐process R&D”
Capitalize if it meets the definition of an intangible and can be reliably measured; even if the criteria for “internally developed” R&D under IAS 38 have not been met
Subsequent development expenditure must be capitalized if it meets development cost criteria
Goodwill
Internally generated – expense (IAS 38)
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Acquired in business combination
must not amortize but test for impairment (IFRS 3)
Intangible assets acquired in a business combination
Recognize, separately from goodwill, the identifiable intangible assets acquired in a business combination
Meeting separability or contractual‐legal criterion
If the terms of a contract giving rise to a reacquired right are favorable or unfavorable, the acquirer shall recognize a settlement gain or loss
Items that are not identifiable
Assembled workforce
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Assembled workforce
Potential contract that the acquiree is negotiating at the acquisition date
IAS 38 – Intangible assets
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Intangible assets acquired in a business combination
Measurement: fair value at acquisition date Include uncertainty
S ti t th ith th t ( t d k f i Sometimes together with other asset (eg: trademark for spring water together with spring)
Hierarchy Quoted market prices in an active market
Amount that an entity would have paid for it in an arm’s length transaction between knowledgeable and willing parties, on the basis of best information available
T h i
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Techniques Applying multiples reflecting current market transatcions to indicators that drive the profitability of the assets or to the royalty stream that could be obtained from licensing the intangible asset to another party (« relief from royalty approach »)
Discounting estimated future net cash flows
© Veronique Weets 2010
Intangible assets acquired in a business combination
Measurement at fair value
Sales comparison approach: market transactions method
Income capitalization approach
Relief from royalty method (royalty saving method);
Premium profits method (incremental income method);
Multi‐period excess earnings method
Cost approach: replacement cost method
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IAS 38 – Intangible assets
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Acquisition by way of a government grant
Examples: airport landing rights, licences to operate radio or television stations, import licences or quotas or rights
h dto access other restricted resources
IAS 20 – Accounting for government grants and disclosures of government assistance
Recognise the intangible asset and the grant initially at
Fair value Fair value
Nominal amount plus any expenditure that is directly attributable to preparing the asset for its intended use.
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Exchanges of assets
The cost of an intangible asset acquired in exchange for a non‐monetary asset or assets, or a combination of
d d fmonetary and non‐monetary asset is measured at fair value unless
The exchange transaction lacks commercial substance or
The fair value of neither the asset received nor the asset given up is reliably measurable
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IAS 38 – Intangible assets
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Subsequent measurement Cost model Carry at cost less accumulated amortization and impairment lossesp
Revaluation model IA is carried at FV at date of revaluation less any subsequent accumulated amortization and impairment losses
FV is determined by reference to an active market in that type of intangible (if no active market, the asset should not be revalued)
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not be revalued) Deriving FV by discounting future projected cash flows is deemed too unreliable
Revaluations should be performed regularly
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Subsequent measurement
Revaluation model Active markets are not expected to exist for assets such as patents and trademarkspatents and trademarks
An active market is a market in which all of the following conditions exist:
the items traded in the market are homogeneous
willing buyers and sellers can normally be found at any time; and
prices are available to the public
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prices are available to the public
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IAS 38 – Intangible assets
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Subsequent measurement
Amortization period The depreciable amount of an intangible asset with a finite useful life is allocated on a systematic basis over its useful lifelife is allocated on a systematic basis over its useful life
Useful life is likely to be short for intangible assets that are susceptible to technological obsolescence E.g. computer software
The useful life of an intangible asset shall include renewal periods of contractual or other legal rights if there is evidence to support renewal by the entity without significant cost, for example Experience of renewal and/or consent of third party (if necessary)
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Conditions to obtain renewal are met
Cost is not significant when compared with the future economic benefits
Useful life of a reacquired right in a business combination is the remaining contractual period of the contract (do not include renewal periods)
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Subsequent measurement To consider when determining the useful life The expected usage of the asset by the entity and whether the asset
could be managed efficiently by another management team Typical product life cycles for the asset and public information on
estimates on useful lifes of similar assets that are used in a similar way; Technical, technological, commercial or other types of obsolescence The stability of the industry in which the asset operates and changes in
the market demand for the products or services output from the asset; Expected actions by competitors or potential competitors; The level of maintenance expenditure required to obtain the expected
future economic benefits from the asset and the entity’s ability and intention to reach such a level;
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intention to reach such a level; The period of control over the asset and legal or similar limits on the use
of the asset, such as the expiry dates of related leases; and Whether the useful life of the asset is dependent on the useful life of
other assets of the entity
IAS 38 – Intangible assets
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Subsequent measurement
Residual value of an intangible asset is assumed to be zero unless
There is a commitment by a third party to purchase the asset at the end of its useful life; or
There is an active market for the asset and
The residual value can be determined by reference to that market; and
It is probable that such a market will exist at the end of the asset’s useful life
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useful life.
Subsequent measurement
Amortization
Begins when asset is available for use;
When it is in the location and the condition necessary for it to be capable of operating in the manner intended by management
Ceases at the earlier of the date that
The asset is classified as held for sale (IFRS 5) and
The date that the asset is derecognized.
The amortization method used reflects the pattern in which future economic benefits are expected to be consumed
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future economic benefits are expected to be consumed
If that pattern cannot be determined reliably: straight‐line
Rarely evidence to support an amortization method that results in a lower amount of accumulated amortization than under the straight‐line method
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IAS 38 – Intangible assets
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Subsequent measurement
Intangible assets with an indefinite useful life No amortization, but annual impairment test
Review each period to determine if circumstances continue to Review each period to determine if circumstances continue to support an indefinite useful life assessment If not, begin to amortize (change in estimate)
Amortization period, amortization method and residual value shall be reviewed at least at each financial year‐end.
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Intangible assets with an indefinite useful life are tested at least annually for impairment in accordance with IAS 36 Other intangible assets are tested for impairment when there is an
indication for impairment
Subsequent expenditures
Most subsequent expenditures are likely to maintain the expected future economic benefits rather than meeting h d f f bl d hthe definition of an intangible asset and the recognition criteria
Only rarely will expenditure incurred after the initial recognition be recognized in the carrying amount of an asset
Subsequent expenditure on brands, mastheads, publishing titles, customer lists is always recognized in profit or loss as
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incurred
Cannot be distinguished from expenditure to develop the business as a whole.
IAS 38 – Intangible assets
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Subsequent expenditures
Subsequent research or development expenditures that relate to an in‐process research or development project
d l b b dacquired separately or in a business combination and recognized as an intangible asset is
Recognized as an expense when incurred if it is research expenditure
Recognized as an expense if it is development expenditure that does not satisfy the criteria for recognition as an intangible
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asset; and
Added to the carrying amount if it meets the criteria for recognition as a development asset
Retirements and disposals
An intangible asset shall be derecognized
On disposal; or
When no future economic benefits are expected from its use or disposal
Difference between the net disposal proceeds and the carrying amount is a gain or loss arising from the derecognition of the intangible asset and shall be recognized in profit or loss (but not as revenue).
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g p ( )
IAS 38 – Intangible assets
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Related topics
Overview
Annual improvements 2007
SIC 32 – Web site costs
IFRIC 12 – Service concession arrangements
Emission rights
© Veronique Weets 201036
IAS 38 – Intangible assets
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Annual improvements 2007
Clarification that expenditure on advertising and promotional activities includes mail order catalogues
Th tit h ld i th dit i l ti t The entity should recognize the expenditure in relation to goods when it has access to those goods When it owns them
The entity should recognize services when it receives those services When they are performed by a supplier in accordance with a contract to deliver them
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contract to deliver them E.g. when an advertisement is developed, not when the entity uses this to deliver an advertisement to customers
Does not preclude the recognition of a prepayment
SIC 32 – Web site costs
The stages of a web site’s development can be described as follows: Planning Planning
Feasibility studies, defining objectives and specifications, evaluating alternatives and selecting preferences
Application and infrastructure development Obtaining a domain name, purchasing and developing hardware and operating software, installing developed applications and stress testing
Graphical design development
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Graphical design development Designing the appearance of web pages
Content development Creating, purchasing, preparing and uploading information, either textual or graphical in nature
IAS 38 – Intangible assets
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SIC 32 – Web site costs
Operating stage starts once development of a web site has been completed
Maintaining and enhancing the applications, infrastructure, graphical design and content of the web site.
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SIC 32 – Web site costs
Issues Whether the web site is an internally generated intangible asset that
is subject to the requirements of IAS 38;is subject to the requirements of IAS 38;
The appropriate accounting of such expenditure
Consensus An entity’s own web site that arises from development and is for
internal or external access is an internally generated intangible asset
An intangible asset is recognized if the entity is able to demonstrate h i b i ill b bl f i b fi
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how its web site will generate probable future economic benefits E.g. by enabling orders to be placed
Not if web site is developed solely or primarily for promoting or advertizing its own products and services
IAS 38 – Intangible assets
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SIC 32 – Web site costs
If criteria for capitalization are met
Planning stage = research phase
Expense
Application and infrastructure development, graphical design and content stage = development phase
Capitalize if expenditure is directly attributable and necessary to creating, producing or preparing the web site for it to be capable of operating in the manner intended by management
Content to advertize and promote products and services should be
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Content to advertize and promote products and services should be expensed
Operating phase
Expense unless criteria for subsequent capitalization are met
IFRIC 12 – Service concession arrangements
IAS 38 – Intangible assets
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Overview
Introduction
Definitions
Common features of service concession arrangements
Scope of IFRIC 12
Accounting for a SCA by the operator
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Introduction
IFRIC 12 was issued 30/11/2006 and:
Applies to accounting by operators of private to public service concession arrangements
Entities shall apply the interpretation for annual periods beginning on or after 1/1/2008, retrospectively
No transitional provisions
!: prospective application is allowed if retrospective application is considered impracticable. In this case the asset shall be
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ptested for impairment.
IAS 38 – Intangible assets
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Definitions
Service concession arrangements are arrangements:
in which the public sector attracts private sector participation
in the development, financing, operation and maintenance
of infrastructure for public services.
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Definitions
Service concession arrangement GRANTORGRANTOR OPERATOROPERATOR
Public Private
gsets out:
• Performance standards
• Mechanisms for adjusting prices
• Arrangements for arbitrating disputes
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Operator activities:
• Construct/upgrade infrastructure
• Operate and maintain infrastructure for a specified period of time
IAS 38 – Intangible assets
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Common features of a SCA
Contract Obliges the operator to provide the services to the public on behalf
of the grantorof the grantor
Sets the initial prices to be levied by the operator and regulates price revisions over the period of the service arrangement
The grantor is a public sector entity or a private sector entity to which the
responsibility for the service has been delegated
The operator i ibl f f h i f d l d
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is responsible for management of the infrastructure and related services and does not merely act as an agent on behalf of the grantor
is obliged to hand over the infrastructure to the grantor in a specified condition at the end of the period of the arrangement, for little or no incremental consideration.
Scope of IFRIC 12
Public to Private’ service concession arrangements in which:
The grantor controls services provided by the operator; and
Either
The grantor controls any significant residual interest in the infrastructure at the end of the concession arrangement; or
No significant residual interest exists
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IAS 38 – Intangible assets
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Accounting for SCA by the operator The operator does not recognize the assets as PPE or leased assets
Financial assets if Financial assets if
Grantor agrees to pay a specified amount; or
Grantor agrees to guarantee the shortfall between amounts received from users and a specified amount
Intangible assets if
Grantor only pays when users use the service
Grantor only grants a right to charge users for the service Grantor only grants a right to charge users for the service
Bifurcated assets
If the consideration is partly by a financial asset and partly by an intangible asset
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IFRIC 3 – Emission rights (withdrawn)
IAS 38 – Intangible assets
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IFRIC 3 – Emission rights (withdrawn)
Entities have three options
Limit its emissions to its cap
Reduce its emissions to below its cap and sell (or carry forward) the allowances that it does not require
Produce emissions in excess of its cap, in which case it must buy additional allowances for the excess of its cap, in which case it must buy additional allowances for the excess emissions and/or incur a penalty.
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IFRIC 3 – Emission rights (withdrawn)
A cap and trade scheme gives rise to:
An asset for allowances held
Allowances, whether issued by government or purchased, are intangible assets
Allowances that are issued for less than fair value shall be measured initially at their fair value !
A government grant
When allowances are issued for less than fair value, the difference between the amount paid and fair value is a government grant
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between the amount paid and fair value is a government grant
A liability for the obligation to deliver allowances equal to emissions that have been made.
Measured at the best estimate: usually present market price
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IAS 38 – Intangible assets
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IFRIC 3 – Emission rights (withdrawn)
EC decided not to endorse (May 2005)
Intangible measured at fair value through profit and loss ?
Apply hedge accounting model ?
Mismatch measurement and presentation
IASB decided to withdraw (June 2005) and to have project on government grants including emission rights
Currently: « Reconsideration of IFRIC 3 has been deferred pending the conclusion of work on other relevant
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pending the conclusion of work on other relevant projects »
CBN 179‐1 Boekhoudkundige verwerking van broeikasgasemissierechten/ Traitement comptable des quotas
d’émission de gaz à effet de serre
IAS 38 – Intangible assets
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Gross method
Recognise emission rights as intangible assets
Measure at purchase price if purchased in market
Measure at fair value if received at cost lower than fair value
Difference in other income
Can be deferred until emission
Recognise a liability for the emission
Measure at initial cost of the rights for rights held by the entity
Measure at fair value on balance sheet date for rights to
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Measure at fair value on balance sheet date for rights to purchase
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Net method
Calculate at balance sheet date
Number of rights needed
Number of rights held
Recognise difference as asset/liability
Measured at fair value on balance sheet date though profit and loss statement
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IAS 38 – Intangible assets
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Disclaimer
Cethys BVBA takes every care in preparing course material to ensure that the content is accurate and up to date. This course material does not provide an exhaustive presentation ofmaterial does not provide an exhaustive presentation of treatment of topics presented in accordance with IFRS. As such, when evaluating the underlying accounting treatment, the original IFRS Standards and Interpretations should be consulted, and an advice of a qualified IFRS expert should be obtained when deemed necessary. No responsibility for loss occasioned to any person acting or refraining from acting as a
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occasioned to any person acting or refraining from acting as a result of such material can be accepted by Cethys BVBA, or Véronique Weets.