Assuming that all these criteria are met, the cost of the development should comprise all directly

attributable costs
necessary to create the asset and to make it capable of operating in the manner intended by management.
Directly attributable costs do not include selling or administrative costs, or training costs or market research. The
cost of upgrading existing machinery can be recognised as property, plant and equipment. Therefore the
expenditure on the project should be treated as follows:
Recognised in statement
of financial position
Property,
Intangible plant and
Expense (P/L) Assets equipment
$m $m $m
Research 3
Prototype design 4
Employee costs 2
Development work 5
Upgrading machinery 3
Market research 2
Training 1
6 11 3

Prochain should recognise $11 million as an intangible asset.

Apartments
The apartments are leased to persons who are under contract to the company. Therefore they cannot be classified
as investment property. IAS 40 Investment property specifically states that property occupied by employees is not
investment property. The apartments must be treated as property, plant and equipment, carried at cost or fair
value and depreciated over their useful lives.
Although the rent is below the market rate the difference between the actual rent and the market rate is simply
income foregone (or an opportunity cost). In order to recognise the difference as an employee benefit cost it would
also be necessary to gross up rental income to the market rate. The financial statements would not present fairly
the financial performance of the company. Therefore the company cannot recognise the difference as an employee
benefit cost.

7 Scramble
Text reference. Intangible assets and impairment are covered in Chapter 4. IFRS 9 is covered in Chapter 7.
Top tips. Parts (a) and (b) were on impairment testing. You may have found Part (b), requiring determination of the
discount rate to be used, rather difficult, and you may have needed to draw on your financial management studies.
Part (c) was on intangible assets (agents' fees on transfer of players to the club and extension of players' contracts)
and an IFRS 9 financial asset (rights to ticket sales of another football club).
Easy marks. There are no obviously easy marks in this question.
Examiner's comment. In Part (a) many candidates automatically assumed that the accounting treatments were
incorrect but in this case the entity was correctly expensing maintenance costs, as these did not enhance the asset
over and above original benefits. Similarly, the decision to keep intangibles at historical cost is a matter of choice
and therefore the accounting policy outlined in the question was acceptable. In Part (b), candidates realised that the
discount rate was not in accordance with IAS 36, but did not explain why. In Part (c) definition of an intangible
asset was well expressed by students and candidates realised in most cases that the players' registration rights met
the definition of intangible assets. However very few candidates stated that the agents' fees represented
professional fees incurred in bringing the asset into use and therefore could be included in intangibles.

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 Marking scheme
Marks
Intangible assets subjective assessment 7
Cash generating units subjective assessment 7
Intangible assets subjective assessment 9
Professional 2
25

(a) Internally developed intangibles

IAS 38 Intangible assets allows internally developed intangibles such to be capitalised provided certain
criteria (technological feasibility, probable future benefits, intent and ability to use or sell the software,
resources to complete the software, and ability to measure cost) are met. It is assumed, in the absence of
information to the contrary, that they have; accordingly Scramble's treatment is correct in this respect.
Scramble is also correct in expensing the maintenance costs. These should not be capitalised as they do not
enhance the value of the asset over and above the original benefits.
As regards subsequent measurement, IAS 38 requires that an entity must choose either the cost model or
the revaluation model for each class of intangible asset. Scramble has chosen cost, and this is acceptable
as an accounting policy.
Intangible assets may have a finite or an indefinite useful life. IAS 38 states that an entity may treat an
intangible asset as having an indefinite useful life, when, having regard to all relevant factors there is no
foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
'Indefinite' is not the same as 'infinite'. Computer software is mentioned in IAS 38 as an intangible that is
prone to technological obsolescence and whose life may therefore be short. Its useful life should be
reviewed each reporting period to determine whether events and circumstances continue to support an
indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from
indefinite to finite should be accounted for as a change in an accounting estimate.
The asset should also be assessed for impairment in accordance with IAS 36 Impairment of assets.
Specifically, the entity must test the intangible asset for impairment annually, and whenever there is an
indication that the asset may be impaired. The asset is tested by comparing its recoverable amount with its
carrying amount.
The cash flows used by Scramble to determine value in use for the purposes of impairment testing do not
comply with IAS 36. Scramble does not analyse or investigate the differences between expected and actual
cash flows, but this is an important way of testing the reasonableness of assumptions about expected cash
flows, and IAS 36 requires such assumptions to be reasonable and supported by evidence.
Scramble is also incorrect to include in its estimate of future cash flows those expected to be incurred in
improving the games and the expected increase in revenue resulting from that expense. IAS 36 requires
cash flow projections to relate to the asset in its current condition. Nor should cash flow estimates include
tax payments or receipts as here.
(b) Discount rate for impairment
While the cash flows used in testing for impairment are specific to the entity, the discount rate is supposed
to appropriately reflect the current market assessment of the time value of money and the risks specific
to the asset or cash generating unit. When a specific rate for an asset or cash generating unit is not directly
available from the market, which is usually the case, the discount rate to be used is a surrogate. An estimate
should be made of a pre-tax rate that reflects the current market assessment of the time value of money
and the risks specific to the asset that have not been adjusted for in the estimate of future cash flows.
According to IAS 36, this rate is the return that the investors would require if they chose an investment that
would generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to
derive from the assets.

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 Rates that should be considered are the entity's weighted average cost of capital, the entity's incremental
borrowing rate or other market rates. The objective must be to obtain a rate which is sensible and justifiable.
Scramble should not use the risk free rate adjusted by the company specific average credit spread of
outstanding debt raised two years ago. Instead the credit spread input applied should reflect the current
market assessment of the credit spread at the time of impairment testing, even though Scramble does not
intend raising any more finance.
Disclosures
With regard to the impairment loss recognised in respect of each cash generating unit, IAS 36 would
disclosure of:
x The amount of the loss
x The events and circumstances that led to the loss
x A description of the impairment loss by class of asset
It is no defence to maintain that this information was common knowledge in the market. The disclosures
are still needed. It should be noted that IAS 1 requires disclosure of material items, so this information
needs to be disclosed if the loses are material, with materiality determined using a suitable measure such
as percentage of profit before tax.
(c) Recognition of intangible assets
Registration rights and agents' fees
The relevant standard here is IAS 38 Intangible assets. An intangible asset may be recognised if it gives
control (the power to benefit from the asset), if it meets the identifiability criteria in IAS 38, if it is probable
that future economic benefits attributable to the asset will flow to the entity and if its fair value can be
measured reliably. For an intangible asset to be identifiable the asset must be separable or it must arise from
contractual or other legal rights. It appears that these criteria have been met:
(i) The registration rights are contractual.
(ii) Scramble has control, because it may transfer or extend the rights.
(iii) Economic benefits will flow to Scramble in the form of income it can earn when fans come to see the
player play.
IAS 38 specifies the items that make up the cost of separately acquired assets:
(i) Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates, and
(ii) Any directly attributable cost of preparing the asset for its intended use.
IAS 38 specifically mentions, as an example of directly attributable costs, 'professional fees arising directly
from bringing the asset to its working condition'. In this business, the players' registration rights meet the
definition of intangible assets. In addition, Scramble is incorrect in believing that the agents' fees paid on
extension of players' contracts do not meet the criteria to be recognised as intangible assets. The fees are
incurred to service the player registration rights, and should therefore be treated as intangible assets.
Rights to revenue from ticket sales
Whether Rashing can show these rights as intangible assets depends on whether the IAS 38 criteria have
been met. Since Rashing has no discretion over the pricing of the tickets and cannot sell them, it cannot be
said to control the asset. Accordingly, the rights cannot be treated as an intangible asset.
The entity is only entitled to cash generated from ticket sales, so the issue is one of a contractual right to
receive cash. The applicable standard is therefore not IAS 38 but IFRS 9 Financial instruments, under which
the rights to ticket revenue represent a financial asset.
IFRS 9 has two classifications for financial assets: amortised cost and fair value. Financial assets are
classified as being at amortised cost if both of the following apply.
(i) The asset is held within a business model whose objective is to hold the assets to collect the
contractual cash flows.

114 Answers
 (ii) The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal outstanding.
All other financial assets are measured at fair value.
Rashing's receipts are regular cash flows, but they are based on ticket revenues, which are determined by
match attendance. Therefore they are not solely payments of principal and interest, and do not meet the
criteria for classification at amortised cost. Consequently, the financial asset should be classified as being
at fair value under IFRS 9.

8 Estoil
Text reference. Impairment is covered in Chapter 3 of your Study Text.
Top tips. As Question 4 on the paper, this was different from the usual current issues question in the topic it tested
(IAS 36), although not in structure, being a discussion followed by application to a scenario. While IAS 36 is
brought forward knowledge from F7, the depth of discussion required is greater, and the scenario requires more
thought. Part (a) required a discussion of factors to take account of in conducting an impairment test , followed by
an application to a scenario in Part (b). The discussion required drew on your financial management knowledge (eg
WACC).
Easy marks. There are no obvious easy marks in this question.
Examiners comment. Candidates scored well on Part (a) of the question. Marks were gained for discussion of
each of the issues based on one mark per point, which meant that candidates could score 10 marks by discussing
only 2 points per issue. Part (b) dealt with issues have been identified by the IASB as being extremely judgemental
and the cause of subjectivity in financial statements. The question was quite well answered by candidates.

Marking scheme
Marks
(a) Subjective 1 mark per point 13
(b) Subjective 10
Professional marks 2
25

(a) Entities must determine, at each reporting date, whether there are any indications that impairment has
occurred. Indicators of impairment may be internal or external. The following factors need to be considered
when conducting an impairment test under IAS 36 Impairment of assets.
(i) Changes in circumstances in the reporting period
Circumstances may change due to internal factors, for example matters as physical damage, adverse
changes to the methods of use of the asset, management restructuring and over-estimation of cash
flows, and external factors, such as adverse changes in the markets or business in which the asset
is used, or adverse changes to the technological, economic or legal environment of the business.
If such indicators come to light between the date of the impairment test and the end of the next
reporting period, more than one impairment test may be required in the accounting period. In
addition, tests for impairment of goodwill and some other intangible assets may be performed at any
time during the accounting period, provided it is performed at the same time each year. Not all
goodwill is tested at the year end some entities test it at an interim period. Should impairment
indicators arise after the annual impairment test has been performed, it may be necessary to test
goodwill for impairment at the year end and at a subsequent interim reporting date as well.
A possible indicator of impairment is volatility in financial statements; for example sharp changes in
commodity prices may cause the assets of mining and energy companies to be impaired. In such
cases, the assets affected should be tested in the interim period.

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