1. R&D; Goodwill; Intangible Assets and Brands
Chapter 19
R&D; Goodwill; Intangible Assets and Brands

2. 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.

3. 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

4. Intangibles Initial recognition is at cost (para 24)
Two categories of intangible asset:
externally acquired or
internally generated .

5. 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)

6. 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).

7. 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.

8. 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.

9. Accounting treatment of goodwill
Purchased goodwill is recognised in the statement of financial position (capitalised) as an asset
Amortisation prohibited
Annual impairment reviews

10. 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.

11. 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

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. Intellectual property – two categories
Industrial property
Inventions
Trademarks
Designs
Copyright
Literary and artistic works.