R&D; Goodwill; Intangible Assets and Brands Chapter 19 R&D; Goodwill; Intangible Assets and Brands
Objectives By the end of this chapter, you should be able to: define and explain how to account for research and development (R&D), goodwill and other intangible assets; comment critically on the IASB requirements in IAS 38 and IFRS 3; account for development costs; account for impairment; prepare extract of the entries and disclosure of these items in the statement of comprehensive income and statement of financial position.
Intangibles An intangible asset is defined under IAS 38, as: an identifiable non-monetary asset without physical substance Intangibles include systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles) – see p. 503 (p.354) for more examples An intangible asset must be identifiable (para 12 IAS 38), and there must be control (para 13), as well as the production of future economic benefits and its cost can be reliably measured (para 21) before it may be recognised
Intangibles Initial recognition is at cost (para 24) Two categories of intangible asset: externally acquired or internally generated .
Intangibles Externally acquired: Purchased from another party either separately or as part of a business combination. If purchased separately, eg. buying rights to a book before making it into a film, cost can be established as the purchase price and any other expenses associated with readying the asset for its intended use. plus any duties and non-refundable taxes less any trade discounts or rebates (para 27)
Intangibles Internally generated These arise from the activities of the business. Expenditure on internally developed brands, such as mastheads (newspaper and magazine titles), publishing titles, and customer lists, cannot be distinguished from the cost of developing the entity’s overall business. These intangibles do not meet the definition of assets, and shall not be recognised as intangible assets (IAS 38, para 63).
IFRS 3 business combinations IFRS 3 Business Combinations states: Goodwill is the difference between the cost of acquisition and the acquirer’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities acquired at the date of the exchange transaction. Purchased goodwill is based on Transaction with third party at arm’s length Internally generated goodwill is based on Directors’ valuation of internal goodwill by valuing Business as a whole Separable assets.
Intangibles Buying the business of a competitor may include, for example, the rights to copyrights, patents or mastheads. If these cannot be reliably measured or distinguished from other assets, they become part of purchased goodwill – the premium paid over and above the fair value of tangible and identifiable intangible assets (para 10). Where the price paid for the intangible can be distinguished from goodwill and the future economic benefits that arise can be identified, the test of identifiability is met and it can be recorded as a separate asset (para 34) at fair value at the date of purchase (para 33). This treatment differs from the separate purchase of an intangible, which is recorded at cost.
Accounting treatment of goodwill Purchased goodwill is recognised in the statement of financial position (capitalised) as an asset Amortisation prohibited Annual impairment reviews
Research defined Research – original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding i.e. obtaining new knowledge Search for alternatives Materials Products Processes Evaluation of alternatives.
IAS 38 – accounting treatment for R&D Research: Expense in the year in which incurred Not to be carried forward in statement of financial position i.e research is not capitalised or shown as an asset on the balance sheet. There is no certainty of any future economic benefits being achieved
IAS 38 intangible assets - Development defined Application of research findings to a plan for production of new or substantially improved Products Processes Systems Prior to commencement of commercial production.
Development costs comprise Directly attributable costs Materials Labour Fees such as patents Allocatable on a reasonable and consistent basis Necessary and identifiable overheads Depreciation Insurance premiums, rent.
IAS 38 – development recognition criteria Technical feasibility Intention to complete and use or sell Generate future economic benefits Existence of market for asset or output Availability of adequate resources to complete Technical Financial Reliable measurement of costs possible Expense if not recoverable from future revenue. Otherwise, capitalise and show on balance sheet.
Activities that are neither research or development Activities related to research and development, but cannot be classified for the purposes of the standard as R&D include: Engineering followthrough in an early phase of commercial production Quality control during commercial production, including routine testing Troubleshooting in connection with breakdowns during production Routine efforts to improve the qualities of an existing product.
Brand accounting Include in statement of financial position to pre-empt equity depletion caused by goodwill write-offs or amortisation Typically not amortised but subject to impairment review.
Intellectual property – two categories Industrial property Inventions Trademarks Designs Copyright Literary and artistic works.