Lecture 4 - Intangible Non-current Assets

Describe the history of intangible assets in accounting

• 19th and early 20th century: Industry dominated by tangible assets

• 1990s growth of internet and telecommunications businesses

• From end of 20th century economic growth of many businesses driven by investments in non-physical items such as:

  • Intellectual capital/knowledge

  • Organisational structures/corporate values

  • Reputation/brand names

• Today, products are increasingly intangible ⇒ services and assets used to produce them are increasingly intangible

What is an intangible assets?

• An intangible asset is a non-current asset in the SOFP, therefore it will be used in the business for more than one accounting period

• An intangible asset is an identifiable, non-monetary asset without physical substance

• An intangible asset is identifiable if it falls in either of these categories:

  • It is separate - the asset can be bought/sold separately from the rest of the business

  • It arises from legal/contractual rights - the asset will arise as part of purchasing an entire company

What are examples of intangible assets?

• Computer software

• Licensing and franchises

• Copyrights

• Patents

• Trademarks (ie. logos)

• Assets under development

To be recognised in the FS, an intangible asset…

• Must satisfy the definition of the asset (control, past events)

• Must satisfy the definition of an element (reliable measurement)

• Must be identifiable, non-monetary and without physical substance

Describe the initial measurement of intangible assets (depends on how the asset has arisen)

• Separate acquisition

  • Recognise at cost

  • Purchase price + directly attributable costs

• Acquired as part of a business combination

  • Fair value at the date of acquisition

• Internally developed intangibles

  • Developed and cultivated by a company through its own efforts and resources rather than acquired

  • Not separate - cannot be distinguished from the cost of developing a business as a whole

  • No reliable measurement - no initial recognition

  • But separate rules for R&D

What are the rules for research and development?

• Internally developed with potential to be capitalised

  • Research is always an expense

  • Development assets that satisfy specific criteria may be capitalised

• Capitalise development is PIRATE is true:

  • Probable economic benefits

  • Intention to complete the project

  • Resources available to complete the project

  • Ability to use or sell the item

  • Technologically feasible

  • Expenses on the project can be identified

What is the subsequent measurement of intangible assets?

• Cost model

  • Carrying amount cost less accumulated amortisation and impairment losses

• Revaluation model

  • Carrying amount of fair value less accumulated amortisation and impairment losses

  • Adjust the revaluation surplus

  • Must apply to whole class of assets

• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13)

Describe the cost model

• Finite life (eg. patent) ⇒ amortise

  • Over useful economic life

  • On a systematic basis (straight line)

  • Commences when the asset is available for use

  • Residual is usually zero unless there is an active market

  • Review amortisation period at least annually

• Infinite life (eg. trademark) ⇒ don’t amortise

  • Review annually for impairment

Describe the revaluation model

• Market value (fair value) of the asset

  • Determined by reference to an active market

  • Unlikely for intangible assets - many of them are unique (except freely traded taxi licences)

  • Where no active market exists, use the cost model

  • Review revaluations regularly

How are revaluation increases/decreases recognised on the FS?

Describe de-recognition

• An intangible asset shall be de-recognised either on disposal or when no future economic benefits are expected from its use or disposal

• The gain or loss arising from the de-recognition of an intangible asset shall be:

  • Determined as the difference between the net disposal proceeds and the carrying amount of the asset

  • Recognised in the IS when the asset is de-recognised (not to be classified as revenue)

Is an internally generated brand an intangible assets on the entity’s SOFP?

• NO! An intangible asset is:

  • A present economic resource controlled by the enterprise

  • A result of past events with future economic benefits

  • Is separable

• “Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets

• “Expenditure on internally generated brands (…) cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets”

What are the intangible non-current assets here?

• Trademarks with indefinite lives - trademarks are identifiable legal rights with value but no physical substance

• Goodwill - is considered an intangible asset because it represents non-physical benefits a business has, such as its reputation, customer loyalty and strong relationships. It arises when a company acquires another business for more than the fair value of its identifiable net assets

• Other non-current assets - don’t know enough info but some may be intangible

What is the definition of Investment Property (IAS 40)?

• Land or building or both

• Held to earn rentals or for capital appreciation (to increase the value over time)

Give some examples of investment property

• Land held for long-term capital appreciation

• Land held for a currently undetermined future use

• A building owned by the entity leased to a third party under an operating lease

• A building which is vacant but is to be leased out under an operating lease

• A property which is being constructed or developed for future use as an investment property

What doesn’t count as investment property?

• Owner occupied property (property being used by the entity)

  • In the production or supply of goods and services or for administration (IAS 16 PPE)

• Property for sale in the ordinary course of business (IAS 2)

• Property being constructed or developed on behalf of someone else (IFRS 15 Revenue from Contracts with Customers)

How is investment property recognised?

• The property satisfied the definitions in IAS 40

• It it probable that economic benefit will flow to the company

• The cost can be reliably measured

Describe the measurement of investment property

• Initially at cost

  • Purchase price + directly attributable costs

• Subsequently

  • Cost model (same as IAS 16 PPE)

  • Fair value model

    • Include in SOFP at fair value

    • Review annually: Changes in fair value should be recognised in the FS for the period in which they arise

    • No depreciation/impairment

What conditions must be met for an intangible non-current asset to be classified as “held for sale” under IFRS 5?

• The asset is available for immediate sale

  • Management is committed to a plan to sell

  • An active programme to locate a buyer is initiated

  • The asset is being actively marketed for sale at a reasonable price in relation to its fair value

• The sale is expected within 12 months

• The sale is highly probable

  • Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn

How are these assets measured?

• Immediately before the initial classification of the asset as “held for sale” recognise:

  • The carrying amount - measured in accordance with applicable IFRS (cost model, revaluation model)

• Non-current assets classified as “held for sale”:

  • Measure at the lower of:

    • The carrying amount

    • Fair value less costs to sell

  • Presented separately on the SOFP (IFRS 5)

  • Do not depreciate

How are these assets shown in the SOFP?

• Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale must be disclosed separately from other assets in the SOFP ⇒ shown in ‘current assets’ but below the ‘other current assets’ section

• The liabilities of a disposal group classified as held for sale must also be disclosed separately from other liabilities in the SOFP

What is a discontinued operation and the criteria for one?

• A discontinued operation is a component of an entity that has been disposed of or is classified as held for sale

• Discontinued operation criteria:

  • Represents a separate major line of business or geographical area

  • Part of a single coordinated plan to dispose of a major line of business or area

  • A subsidiary acquired exclusively for resale (IFRS 5)

Describe the disclosure for discontinued operations

• An entity must disclose a single amount on the IS, comprising the total of

  • The post-tax profit or loss of discontinued operations

  • The post-tax gain or loss recognised on the measurement to fair value less cost to sell or on disposal of the asset continuing the discontinued operations

• Analysis must be presented in the notes or in the face of the IS

  • The revenue, expenses and pre-tax profit or loss of discontinued operations

  • The relative income tax expense

  • The gain or loss recognised on the measurement to fair value less cost to sell or on the disposal of the asset constituting the discontinued operation