Intangible Asset

Question 1• At 1st January 2015, a direct-mail marketing company acquires

$200,000 a customer list and expects that it will be able to derive benefit from the information on the list for at least one year, but no more than three years.

• At 31st December, 2015, the active market value of customer list is $100

• Required:• How do you account that customer list?

Question 1• The customer list would be amortised over management’s best estimate

of its useful life, say 18 months ($200,000/1.5years*1 year). Although the direct-mail marketing company may intend to add customer names and other information to the list in the future, the expected benefits of the acquired customer list relate only to the customers on that list at the date it was acquired. The customer list also would be reviewed for impairment (IAS 36.)

Dr. Amortization expenses Cr. Intangible asset ($200,000/1.5years*1 year)

Dr. Impairment loss Cr. Intangible asset

$100 -($200,000/1.5years*1 year)

Self Test Question 1:

Stanley Co is developing a new production process. During 20X9, expenditure incurred was $120,000, of which $95,000 was incurred before 1 December 20X9 and $25,000 between 1 December 20X9 and 31 December 20X9. Stanley Co can demonstrate that, at 1 December 20X9, the production process met the criteria for recognition as an intangible asset. How should the expenditure be treated?

Answer:Self Test Question 1:

• Before 1 December 20X9:

Dr Expenses $95,000 Cr Cash $95,000

• 1st December 20x9:

Dr Intangible asset $25,000 Cr Cash $25,000

The $95 000 expenditure incurred before 1 December 20X9 is expensed, because the recognition criteria were not met. It will never form part of the cost of the production process recognized in the statement of financial position.

At the end of 20X9, the production process is recognized as an intangible asset at a cost of $25 000. This is the expenditure incurred since the date when the recognition criteria were met, that is 1 December 20X9.

Self Test Question 2:

A non-current asset with a carrying value of $160m was impaired and written down to its recoverable value of $120m two year ago.After an upturn in business, the asset has a market value of $135m. Had the impairment not taken place, the carrying value of the asset would have been $130m.(assume cost model was used)RequiredConsider how this impairment is reversed.

Answer: Self Test Question 2:

• The asset is recognized at $15m.

• The reversal of impairment loss in income statement is $ 10m.

The reversal of the impairment loss is recognized to the extent it increases the carrying amount of the non-current assets to what it would have been had the impairment not take place.

This means that the reversal of the impairment loss can only be recognized at $10m. The asset is recognized at $130m and a reversal of the impairment loss of $10 m is recognized in the income statement.

$130m

160 m 120 m Net book value

130 m want to adjust NBV

Self-test Question 3

It can be difficult to establish the useful life of an intangible asset in practice. Write brief notes on factors to consider when determining the useful life of a purchased brand name and how to provide evidence that its useful life might, in fact, exceed 20 years.

Answer: Self-test Question 3

– ( ａ ) the expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team;

– ( ｂ ) typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way;

– ( ｃ )technical, technological, commercial or other types of obsolescence;

– ( ｄ ) 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;

– ( ｅ ) expected actions by competitors or potential competitors;

– ( ｆ ) 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;

– ( ｇ ) 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;

– ( ｈ )and whether the useful life of the asset is dependent on the useful life of other assets of the entity.

Answer: Self-test Question 3

– (a)Legal protection of the brand name and the control of the entity over the illegal use by others of the brand name (i.e. control over pirating)

– (b) Age of the brand name– (c) Status of position of the brand in its particular market– (d) Ability of the management of the entity to manage the

brand name and to measure activities that support the brand name (e.g. advertising and PR activities)

Answer: Self-test Question 3

– (e) Stability and geographical spread of the market in which the branded products are sold

– (f) Pattern of benefits that the brand name is expected to generate over time

– (g) Intention of the entity to use and promote the brand name over time (as evidenced perhaps by a business plan in which there will be substantial expenditure to promote the brand name)

Question 4 :Example of computer software and hardware

What are the treatment can be illustrated by reference to computer software and hardware?

The treatment depends on the nature of the asset and its origin.

Answer :Question 4 :Example of computer software and hardware

AnswerThe treatment depends on the nature of the asset and its origin.

Question 5 :self test question 4

As an aid to your revision. list the examples given in HKAS 38 of activities that might be included in either research or development.

Question 5 :self test question 4• Research :Example 1:activities aimed at obtaining new knowledge;Example 2:the search for, evaluation and final selection of, applications of research findings or other knowledge;Example 3: the search for alternatives for materials, devices, products, processes, systems or services; andExample 4: the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

• Development:Example 1: the design, construction and testing of pre- production or pre-use prototypes and models;

Example 2:the design of tools, jigs, moulds and dies involving new technology;

Example 3:the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and

Example 4: the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

Question 6:Self Test question 5Stauffer is a public listed company reporting under HKFRSs. It has asked for you opinion on the accounting treatment of the following items:

(a) The Stauffer brand has become well known and has developed a lot of customer loyalty since the company was set up 8 years ago. Recently, valuation consultants valued the brand for sale purposes at $ 14.6m. Stauffer's directors are delighted and plan to recognise the brand as an intangible asset in the financial statements. They plan to report the gain in the revaluation surplus as they feel that Crediting it to profit or loss would be imprudent.

(b)On 1 October 20X5 the company was awarded one of 6 licences issued by the government b operate a production facility for 5 years. A 'nominal' sum of $1m was paid for the licence, but its fair value is actually $3m.

(c) The company undertook an expensive, but successful advertising campaign during the year to promote a new product. The campaign cost $1m, but the directors believe that the extra sales generated by the campaign will be well in excess of that over its 4 year expected useful life.

(d) Stauffer owns a 30- year patent which it acquired 2 years ago for $8m which is being amortised over its remaining useful life of 16 years from acquisition rather than 30 years. The product sold is performing much better than expected. Company valuation consultants have valued its current market price at $14m.

e) On 1st August 2006, the company acquired a small company in the same line of business. FP included R&D project, which showed promising results (main reasons why company purchased the other company), but was awaiting government approval. The project was included In the company’s own books at $3m at the date of acquisition date, while the company’s net assets were valued at a fair value of $12m (Excluding the project).

Answer: Question 6:Self Test question 5

• (a) Brand:• The brand is an internally generated intangible asset. In HKAS38 is

not allowed the recognition of internally generated profit because this is not reliably measured. The company should not recognize the brand in the company’s balance sheet.

• (b)License:• The licence issued by the government is an intangible asset . The

company has two ways to record it:• The licence is recorded of its fair value $3m and has a depreciation

of $600000 per year.• The licence is recorded with the nominal price of $1m and has a

depreciation of $200000 in every year

Question 6:Self Test question 5Stauffer is a public listed company reporting under HKFRSs. It has asked for you opinion on the accounting treatment of the following items:

(a)Stauffer brand

The Stauffer brand is an 'internally generated' intangible asset rather than a purchased one. HKAS38 specifically prohibits the recognition of internally generated brands, on the grounds that they cannot be reliably measured in the absence of a commercial transaction. Stauffer will not therefore be able to recognize the brand in its statement of financial position.

Question 6:Self Test question 5

(b)LicenseThe license is an intangible asset acquired by a government grant. It can be accounted for in one of two ways:1•The asset is recorded at the nominal price (cash paid) of $1m and depreciated at $200,000per annum of its five year life, or

Dr. Intangible asset $1M Cr. Cash $1M Dr. Amortization $0.2 Cr. A.A 1M/5yrorDr. Intangible asset $3M Cr. Cash $1M Cr. Deferred income $2M (Gov. Grant)Dr. Amortization $3M/5yr Cr. A.A $3M/5yrDr. Deferred income-FP $2m/5yr Cr. I/S $0.4m

Question 6:Self Test question 5

(b)License

2•The asset is recorded at its fair value of $3m and a government grant is shown as deferred income at $2m. The asset is depreciated over the five years at an annual rate of $600,000per annum. The grant is amortized as income through profit or loss over the same period at a rate of $400,000 per annum. This results in the same net cost of $200,000 in profit or loss per annum as the first method.

Answer: Question 6:Self Test question 5

• (c)Advertising campaign:• The advertising campaign is only a expense.

According HKAS38, the advertising expense cannot be capitalized.

• The advertising campaign is treated as an expense. Advertising expenditure cannot be capitalised under HKAS 38, as the economic benefits it generates cannot be clearly identified so no intangible asset is created

Question 6:Self Test question 5 (d)Patent

The patent is amortised to a nil residual value at $500,000 per annum based on its acquisition cost of $8m and remaining useful life of 16 years. The patent cannot be revalued under the HKAS 38 rules as there is no active market as a patent is unique. HKAS 38 does not permit revaluation without an active market as the value cannot be reliably measured in the absence of a commercial transaction

$8 m / 16 yr

Self-test question 7: Self test Q 6what are the main characteristics of goodwill which distinguish it from other intangible non-current assets? To what extent do you consider that these characteristics should affect the accounting treatment of goodwill? State your reasons.

Self-test question 7: Self test Q 6

Goodwill vs Other Intangible Asset:

Goodwill:(a)cannot be realized or sold separately (b) no relationship to any costs incurred.

(c) Impossible to value reliably the individual factors or components that may contribute to it

(d) Wide fluctuations due to internal and external circumstances

(e) Assessment highly subjective, unique to valuer at point in time.

Other Intangible Asset:

(a)No physical existence

(b)Expect to benefit the company for more than one year.

(c)High degree of uncertainty relating to the value of future economic benefits to be derived.

(d)Difficult to identify specific revenue arising from the use of particular intangible asset.

(e)Difficult to determine the costs in some cases.

Self-test question 7: Self test Q 6Goodwill may bee distinguished from other intangible non-current assets by reference to the following characteristics.

Goodwill:(a)It is incapable of realisation separately from the business as a whole. (b) Its value has no reliable or predictable relationship to any costs which may have been incurred.

(c) Its value arises from various intangible factors such as skilled emplyees, effective advertising or a strategic location. These indirect factors cannot be valued.

(d) The value of goodwill may fluctuate widely according to internal and external circumstances over relatively short periods of time.

(e) The assessment of the value of goodwill is highly subjective.

Self-test question 7: Self test Q 6

It could be argued that, because goodwill is so different from other intangible non-current assets it does not make sense to account for it in the same way. Thus the capitalization and amortization treatment would not be acceptable. Furthermore, because goodwill is so difficult to value, any valuation may be misleading, and it is best eliminated from the statement of financial position altogether. However, there are strong arguments for treating it like any other intangible non-current asset. This issue remains controversial.

Question 8Intangible assets

Revolution Co. is a design company based in Hong Kong. The company’s year end is 31 December . In 20X2 the company began investigating the prospect of developing a new engine system which would, if successful, cut petrol engine carbon emissions by 50%. In the period 20X2-20X3 Revolution Co. spend $15m on this research.

Answer:Revolution Co. spend $15m on this research.

In the period 20X2-20X3, the research cost $15 should be recognized as an expense.