Intangible Assets and Assessment Session Notes
Overview of today's discussion
This session covers exam-style preparation notes based on a transcript that discusses balancing explanatory notes for financial statements, AI usage in assessment tasks, and a deep dive into intangible assets. It also touches on related topics like presentation of financial statement headings, references to accounting standards (AASB), and practical examples/exercises. The flow moves from interpreting what requires explanatory notes in financial statements, through how to apply accounting standards to intangible assets, to an example exercise on initial recognition, followed by treatment of a complex PPE (property, plant and equipment) depreciation/revaluation scenario and a plan for upcoming impairment topics.
Balance sheet vs. profit and loss: when explanatory notes are needed
If you do something different from the figure given in the question (e.g., split or combine figures), you should provide explanatory notes to justify why the presentation differs. This is to ensure transparency and justify deviations.
The speaker emphasizes that explanatory notes are not always required for every line, but are necessary for items that are different from what the question specifies or that involve significant estimation or judgment.
Presentation and references for subheadings
The assessment task’s presentation example did not show a reference for subheadings (e.g., current assets/current liabilities).
If you are discussing the statement itself, follow the presentation as per the relevant accounting standard. Subheadings should generally be present with appropriate references where relevant.
Some participants asked about including AASB paragraphs and subsections in an extra column; the instructor clarified that you should include references where relevant, but not every line will have a reference.
The key takeaway: follow the standard’s presentation rules; include detailed references where it helps justification and compliance, but don’t over-cite where not necessary.
Using AI in assessment tasks
The class discussed whether the goal is to correct AI-generated outputs and compare results. The teacher asked students to describe how they would use AI for their tasks.
Accepted approaches include: describing how AI is used to validate entries (e.g., assets, goodwill) and asking AI to verify correctness of the treatment.
The educator stressed that in question two, you have the liberty to decide how you want to use AI as a learning partner; it’s part of the reflection. Others mentioned using AI to check references to AASB standards.
Some students planned to test references to AASB standards with AI. This use is acceptable as long as the student clearly describes the approach in the assignment.
A concern raised was about PDFs containing information not necessarily meant to be applied directly; this is part of the learning process to interpret standards and determine applicability.
Question about liquidity and classification (current vs non-current)
The discussion touched on whether to present the statement of financial position as current/non-current or solvency-based. If the question doesn’t specify, justification for choosing a classification (e.g., liquidity focus) is expected.
The instructor suggested to justify the chosen classification, and if opting for a non-standard classification, justify why.
Intangible assets: overview and core concepts
The session moved to intangible assets, with an aim to summarize the entire section and emphasize two main categories: purchased (separate acquisition) and internally generated.
It is noted that goodwill is part of intangible assets but has different recognition rules; purchased goodwill can be recognized when acquired separately; internally generated goodwill generally cannot be recognized.
Acknowledgement that the area is debatable and that digital assets (e.g., cryptocurrencies) pose challenges; the closest standard to address these is the intangible assets standard (AASB 138).
The two main categories of intangible assets are purchased (separate acquisition) and internally generated; goodwill is included but has special treatment in consolidation contexts.
The two key components of the policy matter are definition and recognition/measurement/disclosure, with the emphasis on the four policy areas for intangible assets: definition, recognition, measurement, and disclosure.
Definition and characteristics of intangible assets
An intangible asset is defined as an identifiable non-monetary asset without physical substance.
Three characteristics from the definition:
It is a non-monetary asset (not cash, receivables, etc.). For example, cash equivalents are monetary items, while intangible assets are not.
It is identifiable (separable) – it can be separated from the entity and sold or licensed.
It lacks physical substance.
The “identifiability” (separability) characteristic distinguishes many intangible assets, and goodwill often challenges separability when not separately acquired.
Goodwill can be recognized only when purchased through an acquisition (purchase goodwill); internally generated goodwill does not meet the separability criterion and is typically not recognized as an asset in the balance sheet.
Recognition criteria for intangible assets (AASB 138 context)
The recognition criteria are anchored in the conceptual framework’s qualitative characteristics (faithful representation and relevance) but are explicitly defined in AASB 138.
Two main criteria:
1) Probable future economic benefits will flow to the entity from the asset. In practice, this means there must be a reasonable expectation (a professional judgment call) that benefits will be realized.
2) The cost of the asset can be measured reliably (cost can be ascertained with sufficient reliability).The term
Probable is often interpreted as more likely than not; for liabilities the term is sometimes “likely” or “possible,” with higher confidence associated with “probable.” The rule of thumb is to treat the likelihood as a threshold for capitalization.
If the recognition criteria are not met, the item must be expensed rather than capitalized. Expensing reduces PPE-like assets from the balance sheet and impacts the P&L immediately.
The two criteria reflect professional judgment: accountants must justify why they believe future economic benefits will flow and why the cost can be reliably measured.
Initial recognition: flowchart and key paragraphs
Initial recognition involves deciding whether to capitalize an asset or expense it. The process uses:
The asset’s identifiability/separability,
Whether it is internally generated,
The specific guidance on internally generated assets (paragraphs 63 and 64 exclude many items from capitalization, e.g., brands, some patents).
If the asset is identifiable and separable, the next question is whether it is internally generated. If inwardly generated cost falls under paragraphs 63-64 (e.g., certain brands, patents developed internally), it may be expensed rather than capitalized.
If not excluded by paragraphs 63-64, then determine whether the costs are related to research or development (paragraph 57 includes six criteria for capitalization for development costs).
Research vs development: initial phase costs are usually expensed (e.g., testing, search for alternatives); development costs can be capitalized if all six criteria in paragraph 57 are satisfied (ensuring completion of the project and ability to use or sell the asset) and if costs can be reliably measured and meet the probabilities criteria.
Paragraph 24 requires initial recognition at cost if the criteria are met; otherwise, expense.
The flowchart also highlights the treatment of internally generated versus purchased assets.
Post-recognition: measurement options and market considerations
After recognition, intangible assets can be measured using one of two models: cost model or revaluation model.
The revaluation model is rare for intangibles because it requires an active market (defined via references to fair value concepts). An active market exists when there is a market with sufficient frequency and volume to provide pricing information on an ongoing basis.
If an active market exists, revaluation is possible; otherwise, the cost model is used.
Post-recognition measurement includes: cost or fair value (for revaluation), less accumulated amortization, and less accumulated impairment losses. For impairment, recognition is required when the asset’s recoverable amount falls below carrying amount.
A note on terminology: amortization is used for intangible assets; depreciation is used for tangible assets. In practice, some texts may use the terms interchangeably; the standard distinguishes the two.
Amortization vs depreciation and impairment considerations
Intangible assets with finite useful lives are amortized over their useful life; those with indefinite lives are tested for impairment annually (and more frequently if indicators exist).
For finite-lived intangibles, amortization is recognized over the estimated life. The policy for impairment testing is reviewed annually and when there are indicators of impairment.
The impairment process involves comparing the recoverable amount with the carrying amount and recognizing impairment losses if required. Impairment policy for intangibles is linked to both cost and revaluation models, depending on the model adopted.
Exercise 1: Initial recognition decisions for seven items
For each item below, determine whether it should be capitalized as an intangible asset, with reasons and paragraph references. The items and likely guidance discussed include:
Training costs for a new product: Expensed. Paragraph 29(b) excludes staff training costs from capitalization; while training is necessary, it does not create a separate identifiable asset.
Cost of testing in search for product alternatives: Expensed. Paragraph 56(c) identifies search for alternatives as a research activity; if it remains uncertain, costs are expensed.
Legal costs in securing a patent: Capitalizable if directly attributable to preparing the asset for its intended use (e.g., securing patent rights). Paragraphs 27-28 support capitalization of legal costs directly attributable to asset preparation.
Long-term receivables: Monetary items; do not meet the intangible asset definition; expensed (not an intangible asset).
Cost of acquiring a trademark: Separate acquisition; capitalize at cost (paragraph 24).
Cost of developing a patent: Internally generated; initially expensed under R&D (paragraph 57 context and 56/57). If development costs pass all six criteria in paragraph 57, capitalization is possible.
Advertising to increase goodwill: Internally generated goodwill; typically cannot be capitalized; expense.
Case-specific scenario: A hypothetical project departments consider R&D to produce a medicinal product using cane toad poison. The CFO suggests outsourcing the R&D to an external company to obtain a patent and avoid P&L expense, while the board considers in-house development vs outsourcing. Key decision factors include:
If done in-house: R&D costs are generally expensed during the research phase and only capitalized if the six criteria in paragraph 57 are satisfied for development.
If outsourced: The cost to acquire a patent from an external firm can be capitalized as separate acquisition; however, the price may include costs incurred in the development process by the external firm, leading to capitalization but with careful consideration of faithful representation and substance over form.
The discussion also highlighted faithful representation: does outsourcing align with substance over form and ensure faithful, complete, and neutral presentation? These considerations should inform governance and disclosure.
Takeaways from the exercise: The exercise demonstrates how the standard's criteria constrain capitalization and why genuine attribution to developing a new asset (R&D) is required for capitalization, while routine training or exploration costs are expensed.
Practical example: Cane toad poison R&D scenario – accounting judgment and governance
The board’s decision to outsource R&D might reduce P&L impact in the current year if a patent is acquired later, but cost justification should consider the substance of the transaction and whether the outsourcing arrangement transfers control of the asset and the future economic benefits to the company.
Faithful representation requires that financial statements reflect the substance of the transaction. Outsourcing merely to avoid expense may not align with substance, depending on the arrangement and terms.
The exercise invites the student to discuss qualitative considerations (reliability of estimates, management bias, and the potential need for disclosures about important judgments) in addition to the quantitative accounting treatment.
PPE topic preview: depreciation, revaluation, and journal entries context
The transcript moves to PPE (not intangible assets) and discusses questions involving multiple machines, costs, and a mid-year revaluation. Key concepts include:
How to determine depreciation per machine over the period from first July 20XX to 30 June 20XX, given the information on costs and useful life.
The impact of a mid-year revaluation (e.g., 1 January 20XX) on depreciation, adjusting depreciation up to the revaluation date, and recalculating carrying amounts post-revaluation using fair value at the revaluation date.
The post-revaluation depreciation basis (e.g., six-year life) and the treatment of disposals and gains/losses arising from revaluation.
The need to adjust depreciation for the period between revaluation and year-end, using half-year depreciation for periods of partial years (e.g., January to June).
Interrelation between carrying amount, fair value, and accumulated depreciation, and the concept of a disposal account used for recording gains or losses on disposal.
The instructor notes a correction to a date in an exercise (2025 vs 2026 for year-end), emphasizing the importance of accurate dating in journal entries.
The PPE discussion reinforces the need to apply the same principles across assets, including when to revalue, how to calculate depreciation, and how to present gains and losses in the financial statements.
Imp impairment topic roadmap and upcoming sessions
A plan was outlined to cover impairment in a subsequent session (topic 5C). In the break, an additional, quick recording would be provided to introduce the impairment topic and address questions related to assessment three.
The upcoming sequence is intended to build from topic five (PPE/Intangible mix) to impairment (topic 5C) and then to broader topics (topic six and seven) with a view to completing assessment tasks.
Students were reminded they could contact the instructor during the break if they needed help and that the course would continue to offer support remotely.
Key mathematical and definitional references (LaTeX-formatted)
Intangible asset definition (informal):
ext{Intangible Asset} = ext{Identifiable} \land ext{Monetary} = ext{false} \land ext{Physical substance} = ext{false}.Active market definition (conceptual):
ext{Active Market} ext{ exists if the market has sufficient frequency and volume to provide pricing information on an ongoing basis.}Recognition criteria (conceptual):
ext{Economic benefits} ext{ must be probable} \text{and} \text{Cost must be measurable reliably}.Initial recognition at cost (AASB 138, para. 24):
ext{Carrying amount}_{ ext{initial}} = ext{Cost}.Post-recognition measurement (cost model):
ext{Carrying amount}{t} = ext{Carrying amount}{t-1} - ext{amortization}{t} - ext{impairment}{t}.Post-recognition measurement (revaluation model):
ext{Carrying amount}_{ ext{revalued}} = ext{Fair value at revaluation date},
and subsequently amortized with the carrying amount adjusted for gains/losses to OCI up to the extent of any revaluation surplus.Amortization time frame (finite life):
ext{Amortization}_{t} = rac{ ext{Cost} - ext{Residual Value}}{ ext{Useful Life}} ext{ (straight-line, if applicable).}Goodwill recognition context: purchased goodwill may be recognized; internally generated goodwill is generally not recognized as an asset.
Summary of practical takeaways
Explanatory notes are required when you diverge from the question’s figures or presentation, and you should justify the changes.
Use standard presentation guidelines and add references where relevant, but not every line needs a citation.
For intangible assets, capitalization is strict: rely on the two recognition criteria, the nature (identifiability, non-monetary, lack of physical substance), and the six criteria in paragraph 57 for development costs.
Use the cost model by default for post-recognition intangible assets; switch to revaluation only if an active market exists and the asset’s fair value is reliably measurable.
Distinguish between amortization (intangible assets) and depreciation (tangible assets); impairment is a separate ongoing consideration.
In assessment tasks, strategically apply these principles to both in-house and outsourced scenarios, and consider faithful representation and substance over form when advising on decision-making.
Be prepared for complex PPE questions that involve mid-year revaluations and subsequent depreciation; ensure accuracy with date references and journal entries, including the use of appropriate disposal/gain-loss accounts.
Expect impairment discussions in the next sessions and stay engaged during breaks to keep up with topic progression.