INTANGIBLES

Objective: To set out the treatment of intangible assets that are
not covered by other accounting standards - e.g. Goodwill
acquired in a business combination is covered by IFRS 3
BUSINESS COMBINATIONS Most long term intangible assets are
amortised over their expected useful life ( amortisation is the
equivalent of depreciation)
Assets acquired as a result of a government grant (i.e. granting
of Govt Licence) may be capitalised at fair value, along with a
corresponding credit for the value of the grant. Asset and grant
will be amortised/released over useful life. Net effect on profits
is nil

Definition: An “intangible asset” is “an identifiable, non

monetary asset without physical substance” (e.g. Landing rights WAYS TO ACQUIRE INTANGIBLE ASSET
for an airline company) An intangible asset should be recognised A. Separate acquisition2E
if all the following criteria are met: ICPRM B. Acquisition by Business combination
- It is identifiable C. Government grant
- It is controlled by the entity (restricts others access to benefits) D. Exchanges of assets
- Probable Inflow of future economic benefits E. Internally generated intangible asset
- Reliable Measurement of Cost can be made

IAS 38 states that to be identifiable:

– Must be separable (capable of being separated or divided
from the entity and sold, transferred, rented) or
– Must arise from contractual or other legal rights

Control: An entity controls an intangible asset if it has the power

to obtain the future economic benefits (usually net cash inflow)
flowing from the resource
e.g. Legal rights that are enforceable in court, copyrights

Staff training and customers list are not intangible assets

because they fail the control test – staff could leave the business
at any time and the customers on a customer list have no
obligation to make future purchases.
WAYS TO ACQUIRE INTANGIBLE ASSET
F. Separate acquisition2E
G. Acquisition by Business combination B. BUSINESS COMBINATION
H. Government grant - Recognition:
I. Exchanges of assets Recognize asset separately from goodwill if
J. Internally generated intangible asset acquiree’s R&D if meets asset definition &
identifiable
A. Separate Acquisition: - Measurement: FAIR VALUE
- Measured reliably when: purchase consideration in the -
form of cash or other monetary asset C. GOVERNMENT GRANT
- COST = PURCHASE PRICE + DAC - Recognize intangible asset and unearned income
o purchase price, including import duties and NON OR
refundable purchase taxes, after deducting trade - asset (nominal amount + DAC)
discounts and rebates, - if both asset and grant AT FV = recognize as income
o Cash payment- exclude over period in which intangible asset is amortized
refundable/creditable purchase tax
o Issue payable: purchase price = cash price D. EXCHANGE OF ASSET
equivalent. Difference is finance cost. - Commerical substance – fair value
o Issue shares: fair value of asset acquired, - Without commercial substance – cv of asset given
UNLESS fv of asset is clearly and reliably up + cash paid – cash received
determinable - Reference to PPE
o directly attributable cost of preparing the asset for
its intended use – e.g. employee costs and E. INTERNALLY GENERATED INGTANGIBLE
professional fees associated with bringing the asset
to its working condition, testing cost

NOT DAC: staff training, cost of conducting business in new

location, advertising cost, admin, gen overhead
 If phase is undistinguishable from research to development –
EXPENSED.

INTERNALLY GENERATED ASSET

EXPENSED AS INCURRED unless:
GR: Internally generated intangibles are generally not a. Forms part of cost of an intangible asset OR
recognised in the financial statements due to failure of the b. Acquired in business combi and cannot be
identifiability test or its cost cannot be measured reliably recognized as identifiable and separable (exp shall
form part of goodwill at Acq-d.
EXC: The exception to the ban on capitalising internally IF recognized as expense na, it cannot be subsequently
generated intangibles is “Development Expenditure” which recognize as asset even if tech feasib was established.
meets the recognition criteria for capitalisation as an Exxpenditures to provide econ benefit – expensed
intangible asset Ex:
 Start Up, Pre Opening and Pre Operating Costs
 Training Costs
 Relocation Costs
CAPITALIZE EXPENSE  Advertising Costs
o Cost of material and o Selling admin cost  Relocation cost
servces in generating UNLESS expenditure  Reorganization cost
intangible asset can be used to  Goodwill
o Cost of employee prepare assets for
benefits arising from use
generation of asset o Identified
o Fees to register legal inefficiencieis and FAR 1
right initial operaint losses F
o Amortization of parent bef asset achieves FAR
and licences that are planned
used to generate performance
intangible asset o Training staff to
operate asset
  Internally generated branding (not identifiable and  Design, construction and testing of pre production
controllable and measured reliably) prototypes
 Internally generated mastheads (Newspaper  Construction and operation of a pilot plant that is not
masthead) large enough for economic commercial production
Internally generated Publishing Titles  Design, construction and testing of new materials,
 Internally generated Customer Lists products or processes
 Internally generated Customer Rel (contractual or
non c.)
Expenditures after initial recognition:
Cost of developing, maintaining, restoring intangible asset –
EXPENSED unless result s to:
a. Extension of useful life
b. Increase in net cash inflow from use of asset either
increase rev or decrease cost
c. Improve quality of output

Research and Development Expenditure:

 Research: original and planned investigation undertaken
to gain new scientific or technical knowledge and
understanding 15
 Development: the application of research findings or
other knowledge to a plan or design for the production of
new or substantially improved products, processes,
systems or services before the start of commercial
production or use
 Exam Note: If a question uses the word “research” then
this is obviously an indicator to expense the expenditure
Development Expenditure Examples:
Accounting Treatment of Research Costs:
 The cost of research should not be recognised as an asset
 Such expenditure must be written off as an expense in the
year in which incurred
 Tangible assets used in research should be recognised as
plant and eqiupment
Accounting Treatment of Development Costs:
 Expenditure on development can only be capitalised as an
intangible asset when all of the 6 following conditions are
met
 1. P robable Future Economic Benefits
2. I ntention to Complete and use/sell
3. R esources adequate to complete and use/sell
4. A bility to use/sell
5. T echnical Feasibility
6. E xpenditure can be reliably measured
Memory Aid: “PIRATE”
 Failure to meet all 6 conditions means expenditure is
treated as research costs –
 So just because the expenditure is classified as
development expenditure, does not necessairly mean it
will be capitalised - the criteria for capitalisation must first
be met
 Once such expenditure has been written off as an
expense, it cannot subsequently be reinstated as an
intangible asset
 N.B. Amortisation of capitalised development expenditure
does not begin until the commercial use of the product,
service or process has started – matching concept -
matching incomes from the development expenditure
with expenses of development

FAR 1
F
FAR
 o An Intangible asset which could be
revalued is a Taxi Licence, Milk Quotas,
Fishing Quotas 17
 Measurement of Intangibles:

 Initial measurement: cost F. Amortization & Impairment of Intangible Assets:

 For internally generated intangible asset (like
development expenditure) cost is the expenditure Finite Life: Indefinite Life (N.B.)
incurred from the date when the asset first meets the
recognition criteria (Exclude selling,admin & general – Intangible to be Amortised – No Amortisation
overheads; training costs; advertising expenditure) over its Useful Life – Impairment reviews
 The cost of a separately acquired intangible asset – Amortisation written off to to be carried out
comprises: profit or loss annually
o Its purchase price, including import duties and non – If indicators exist, then an – IAS 38 Intangible
refundable purchase taxes, after deducting trade impairment review should be Assets
discounts and rebates, and o carried out (As Per IAS 36
o Any directly attributable cost of preparing the asset IMPAIRMENT OF ASSETS
for its intended use – e.g. employee costs and
professional fees associated with bringing the asset
to its working condition Disclosures

 Subsequent Measurement
– Cost Model (Cost – Acc Amortisation - Any Imp.
Losses) or
– Revaluation Model (Fair Value – Subsequent Acc
Amortisation – Subsequent Imp Losses)
o Rules on Revaluation gains/losses
follow the guidance in IAS 16
 The financial statements should disclose the following for
each class of intangible assets, distinguishing between
internally generated intangible assets and other intangible
assets
 Whether the useful lives are finite or indefinite
 Amortisation rates used for assets with finite lives
 Amortisation methods used for assets with finite lives
 The gross carrying amount and the accumulated
amortisation at the beginning and end of the period and a
reconciliation between the two
 Details of revaluations
 Total amount of research and development expenditure
recognised as an expense during the period
IAS 38 & IFRS 3:
Deals with Purchased Goodwill created when one business
acquires another and will be covered when studying
consolidated accounts in Section 2 of the Syllabus
Intangible Assets (other than Goodwill) Acquired as Part of
Business Combination IFRS 3 Business Combinations and IAS 38
Intangible Assets addresses the recognition of separable
intangible assets.
Once an intangible asset of a Subsidiary is “identifiable” and has
a reliable “fair value”, then it can be recognised as an Intangible
Asset on the acquisition of a Subsidiary.
So for example, €1m spent on a research project , and for which
a reliable fair value of €1.2m has been estimated by the
purchasing company directors, can be recognised as an
intangible asset in the context of a business combination.
Likewise, if a subsidiary has a “customer list” which could be
sold to other companies and the fair value of this “customer list”
can be reliably measured at €3m, then this too can be
recognised as an intangible asset , but again, only in the context
of a business combination
So, in summary, items can be recognised as intangible assets in a
business combination scenario, once they are “identifiable” and
have a “fair value which can be reliably measured”
Website Costs SIC 32 – Intangible Assets
– Web Site Costs, states that an entity’s own website that arises
from development and is for internal or external access is an
FAR 1
F
FAR
internally developed intangible asset that is subject to the – Cost capable of being reliably measured
requirements of IAS 38

All expenditure on developing a website solely for advertising an

entity’s own products and services should be recognised as an
expense when incurred

However, if an entity is able to demonstrate that a website is

capable of generating future economic benefits (for example,
orders can be placed through the website) , then the related
costs can be capitalised (i.e. PIRATE)

Examples of Possible The ff: internally generated

Intangible Assets intangibles cannot be recognized:
include:
Goodwill Acquired in a Start Up, Pre Opening and Pre
Business Combination Operating Costs
Computer Software Training Costs
Patents Relocation Costs
Copyrights Advertising Costs
Motion Picture Films Goodwill
Import Quotas Brands
Franchises Mastheads (Newspaper masthead)
Customer and Supplier Publishing Titles
Relationships Customer Lists
Customer Rel (contractual or non c.)

 If some of the listed items are purchased from another

business entity they might be recognised because
– Pass the “identifiablilty test”