Week 4 Chapter 11: Accounting for Intangible Assets Nature of ...
Week 4 Chapter 11: Accounting for Intangible Assets Nature of Intangible Assets *AASB 138 – an identifiable non-monetary asset without physical substance. Must bring future economic benefit based on past events and be identifiable. Eg. Patent, copyrights, brand names, licences. Intangibles are inert – by themselves neither create value nor generate growth. Distinguishing Intangibles from Good-Will The requirement for intangible assets to be ‘ identifiable’ is to distinguish them from goodwill. Where, goodwill represents future economic benefits from assets that are not capable of being individually identified and separately recognised. Lacks the characteristic of identifiability (AASB138), thus isn’t an intangible. *good will is only recognised when it is purchased in an arm’s length transaction. Intangible Assets: purchased v developed naturally If an internally developed intangible is expected to yield future economic benefit, it should be recorded as an asset at its cost of development. Eg. Patent at the cost of developing the product or registering the patent. Accounting for Intangible Assets Initial recognition of intangible asset: should be recorded if the definition and recognition criteria are met. However the cost of the intangibles should be recognised as an expense in the period it is incurred based on the grounds: 1. Consistent with the treatment of the cost for income tax purposes: as some costs are tax deductable eg. R&D expenses (up to 125% of amount spent) 2. Cost fails to meet the asset-recognition criteria 3. Cost of intangibles is frequently immaterial. Measurement of intangible Asset: After initially recognising at purchase price or R&D cost, should it be re-valued using the cost of re-valuation method. Beyond this we test for the existence of impairment of the asset at the end of each reporting period. Accounting Standards on Intangible assets Not subject to the requirements of AASB 1013, but they were subject to AASB 1021 ‘depreciation’. Now there is ASSB 138 dealing with intangibles. For intangibles internally developed, research expenditure (research phase expenditure) no intangibles recognised. Costs from this stage recognised as an expense. For those intangibles purchased, the cost is the purchase price plus import duties, taxes, directly attributable costs of preparing an asset for intended use. Address subsequent recognition requirements. Amortisation of intangibles only required when Asset has a finite life. For these, AASB 138 requires that the depreciable amount of the asset be allocated over its useful life.
* recoverable amount is the higher of the fair value – costs to sell and value-in-use. *revaluation of intangibles isn’t allowed AASB136, unless traded on an traded in active market (which is rare).
Research and Development: four aspects; o Defining R&D: Research is the planned investigation with prospects of new knowledge, not concerned with the commercial objective. Development: Application of research findings to a plan for the production of improved materials/devices/services etc. It is concerned with the commercial application prior to production. It is made of two phases; 1. Research phase 2. Development phase o Initial recognition of R&D: 1. Costs recognised as expenses in the period in which they are incurred: expense method 2. Costs recognised as expenses in the period in which they are incurred and then reinstated if the costs are subsequently expected to generate future economic benefits: expense-and-reinstate method 3. Some of the costs could be recognised as intangible assets while others could be recognised as expenses: selective capitalisation method Required by AASB 138, research costs and expenses must be recognised in the period of outlay, while development costs may be recognised as intangible assets, provided they meet the definition & recognition criteria of intangible assets and the 6 condition in para 57 AASB 138. 4. All costs recognised as intangible assets: capitalisation method o Subsequent measurement of research and development: If development costs are recognised as intangible assets, how then to measure that asset? Re-valuation is limited to traded assets, development assets don’t trade in active markets, thus cost model is used. Hence, development assets must be ‘cost less any accumulated amortisation and impairment loss). If have an indefinite life, no amortisation. *residual value assumed to be zero, with amortisation occurring when asset is available for use. o Disclosure of information. Other Intangible Assets; o Patents: Recorded at cost if purchased AASB 138. Only the costs in the development phase may be recognised as an asset, only if the six conditions are met. Have a finite life (even though useful life may be shorter) thus are subject to amortisation. o Trademarks and Brand names: If purchased than is recognised in accordance with AASB 138 and measured initially at cost. Internally generated have an indefinite life (theoretically) thus no amortisation.
* recoverable amount is the higher of the fair value – costs to sell and value-in-use. *revaluation of intangibles isn’t allowed AASB136, unless traded on an traded in active market (which is rare).
Research and Development: four aspects; o Defining R&D: Research is the planned investigation with prospects of new knowledge, not concerned with the commercial objective. Development: Application of research findings to a plan for the production of improved materials/devices/services etc. It is concerned with the commercial application prior to production. It is made of two phases; 1. Research phase 2. Development phase o Initial recognition of R&D: 1. Costs recognised as expenses in the period in which they are incurred: expense method 2. Costs recognised as expenses in the period in which they are incurred and then reinstated if the costs are subsequently expected to generate future economic benefits: expense-and-reinstate method 3. Some of the costs could be recognised as intangible assets while others could be recognised as expenses: selective capitalisation method Required by AASB 138, research costs and expenses must be recognised in the period of outlay, while development costs may be recognised as intangible assets, provided they meet the definition & recognition criteria of intangible assets and the 6 condition in para 57 AASB 138. 4. All costs recognised as intangible assets: capitalisation method o Subsequent measurement of research and development: If development costs are recognised as intangible assets, how then to measure that asset? Re-valuation is limited to traded assets, development assets don’t trade in active markets, thus cost model is used. Hence, development assets must be ‘cost less any accumulated amortisation and impairment loss). If have an indefinite life, no amortisation. *residual value assumed to be zero, with amortisation occurring when asset is available for use. o Disclosure of information. Other Intangible Assets; o Patents: Recorded at cost if purchased AASB 138. Only the costs in the development phase may be recognised as an asset, only if the six conditions are met. Have a finite life (even though useful life may be shorter) thus are subject to amortisation. o Trademarks and Brand names: If purchased than is recognised in accordance with AASB 138 and measured initially at cost. Internally generated have an indefinite life (theoretically) thus no amortisation.
