1. Connolly – International Financial Accounting and Reporting – 4 th Edition CHAPTER 9 INTANGIBLE ASSETS

2. Connolly – International Financial Accounting and Reporting – 4 th Edition 8.1 INTRODUCTION Intangible assets are important to the future success of a business (e.g. brand, R&D) Accounting treatment of intangible assets has caused great difficulty and confusion over the years Goodwill is arguably always present, but its value is difficult to define and is constantly changing Two primary forms:  Legal: customer lists, copyrights, patents and goodwill  Competitive: knowledge, collaboration and structural activities

3. Connolly – International Financial Accounting and Reporting – 4 th Edition 8.2 IAS 38 INTANGIBLE ASSETS Objective: To prescribe treatment of intangible assets not covered by other IFRSs Scope: Applies to all intangible assets with certain exceptions Exceptions include: Goodwill (IFRS 3 – See Chapter 26) Financial assets (IAS 39 and IFRS 9 – See Chapter 25) Mineral rights, related exploration and development expenditure incurred

4. Connolly – International Financial Accounting and Reporting – 4 th Edition Capitalising intangible assets Must meet the definition of an asset:  Asset – resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity Intangible asset – non-monetary asset without physical substance that meets all of the following criteria:  Identifiability  Control over a resource  Existence of future economic benefits

5. Connolly – International Financial Accounting and Reporting – 4 th Edition Identifiability An intangible asset must be identifiable It is identifiable if it is:  separable, or  arises from contractual or other legal rights e.g. patents, motion picture films, fishing licences arise from contractual rights

6. Connolly – International Financial Accounting and Reporting – 4 th Edition Control over a resource Must satisfy the definition of an asset Thus there must be control:  Entity has power to obtain economic benefits flowing from underlying resource, and  Prevent access of others to those benefits Control will generally result from legal rights enforceable by law Note there must be identifiability and control

7. Connolly – International Financial Accounting and Reporting – 4 th Edition Existence of future economic benefits For recognition:  Probable that future economic benefits that are attributable to the asset will flow to entity  Cost can be measured reliably If all three criteria met, the asset should be recognised at cost initially Cost comprises:  Purchase price (incl. duties)  Any directly attributable costs of preparing asset for intended use (cost of getting asset to working condition, legal fees etc.)

8. Connolly – International Financial Accounting and Reporting – 4 th Edition Example 9.1: Meeting recognition criteria An entity is developing a new production process. During 2011, expenditure incurred was €1,000, of which €900 was incurred before 1 December 2011 and €100 was incurred in December 2011. At December 2011, the production process met the criteria for recognition as an intangible asset. At end 2011 an intangible asset of €100 should be recorded, with €900 being expensed (i.e. incurred before recognition criteria made). During 2012, further expenditure incurred amounted to €2,000. At the end of 2012 the recoverable amount of the know-how is estimated to be €1,900. Therefore, at the end of 2012 the cost of the production process is €2,100 (€100 + €2,000). An impairment loss of €200 needs to be recorded, which may be reversed in a subsequent period if the requirements of IAS 36 are met (See Chapter 10).

9. Connolly – International Financial Accounting and Reporting – 4 th Edition Internally generated goodwill Distinguish between internally generated and purchased goodwill Internally generated goodwill should not be recognised as an asset (related expenditure should be expensed in the period incurred) Note: Purchased goodwill is an intangible asset – see IFRS 3 Business Combinations (See Chapter 26)

10. Connolly – International Financial Accounting and Reporting – 4 th Edition Internally generated intangible assets – development costs Distinguish between research and development expenditure

11. Connolly – International Financial Accounting and Reporting – 4 th Edition Research phase Obtaining new knowledge Searching for alternatives:  Materials  Products  Processes Evaluation of alternatives Expense in the year incurred Not to be carried forward in SFP Rationale is that at this stage there is insufficient certainty that expenditure will generate future economic benefits

12. Connolly – International Financial Accounting and Reporting – 4 th Edition Development phase Application of research findings to a plan for production of new or substantially improved:  Products  Processes  Systems Prior to commencement of commercial production

13. Connolly – International Financial Accounting and Reporting – 4 th Edition Development recognition criteria Must meet ALL of the following 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

14. Connolly – International Financial Accounting and Reporting – 4 th Edition Cost of internally generated intangible asset Directly attributable costs  Materials  Labour  Fees such as patents Allocate on a reasonable and consistent basis Necessary and identifiable overheads:  Depreciation  Insurance premiums, rent

15. Connolly – International Financial Accounting and Reporting – 4 th Edition Subsequent expenditure Subsequent expenditure should be expensed unless:  Will increase future economic benefits  Can be attributed to the asset  Can be reliably measured

16. Connolly – International Financial Accounting and Reporting – 4 th Edition Measurement after initial recognition After initial recognition an entity can choose between:  Cost model  Revaluation model Cost model – items are carried at cost less any accumulated amortisation and less any accumulated impairment losses Revaluation model – items are carried at fair value at the date of revaluation, less any subsequent accumulated amortisation and less any subsequent accumulated impairment losses

17. Connolly – International Financial Accounting and Reporting – 4 th Edition Revaluation gains and losses (the revaluation model) In general, revaluation gains and losses are accounted for as follows: revaluation gains are credited to a revaluation reserve and are recognised as ‘other comprehensive income’ in SPLOCI revaluation losses are recognised as an expense in arriving at profit or loss The situation is more complex if an item is revalued upwards after a previous downwards revaluation (or vice versa). The treatment is the same as for property, plant and equipment under IAS 16 (See Chapter 6), including accumulated amortization.

18. Connolly – International Financial Accounting and Reporting – 4 th Edition Useful life of an intangible asset An intangible asset with indefinite useful live is not amortised. Instead, the asset is reviewed annually to assess whether there has been a fall in value in accordance with IAS 36 Impairment of Assets (See Chapter 10). An intangible asset with a finite useful life should be amortised over its EUEL. See Chapter 9, Example 9.2

19. Connolly – International Financial Accounting and Reporting – 4 th Edition Amortisation period and method The amortisation method chosen should match the usage pattern of that asset Available amortisation methods include:  the straight-line method  the diminishing balance method If the asset’s usage pattern cannot be estimated reliably, the straight-line method should be used

20. Connolly – International Financial Accounting and Reporting – 4 th Edition Amortisation period and method (Cont’d) The residual value and useful life should be reviewed at least at the end of each financial year If expectations differ from previous estimates, these should be accounted for as a change in an accounting estimate in accordance with IAS 8 Similarly, the amortisation method used should be reviewed at least at the end of each financial year, with any change being accounted for as a change in an accounting estimate in accordance with IAS 8 See Chapter 9, Example 9.3

21. Connolly – International Financial Accounting and Reporting – 4 th Edition 9.3 DISCLOSURE Accounting policies for intangible assets For each class of intangible asset  Method of amortisation used for finite useful lives  Whether useful lives are indefinite or finite. If finite, useful life of assets or amortisation rates used  Gross carrying amount, any accumulated amortisation (aggregated with accumulated impairment losses) at beginning and end of period  Line items of the SPLOCI – P/L in which any amortisation of intangible assets is included  Reconciliation of the carrying amount at the beginning and at the end of the period (additions, disposals, revaluations, impairment, amortisation charge for period)

22. Connolly – International Financial Accounting and Reporting – 4 th Edition Disclosure Intangible assets that have indefinite useful life, the carrying amounts and the reasons supporting the assessment of an indefinite life Carrying amount, nature and remaining amortisation period of any individual intangible asset that is material to the financial statements of the entity as a whole The existence of (if any) and amounts of intangible assets whose title is restricted and of intangible assets that have been pledged as security for liabilities Amount of any contractual commitments for the future acquisition of intangible assets Where intangible assets have been accounted for under revaluation model  Effective date of revaluation  Carrying amount of revalued intangible assets

23. Connolly – International Financial Accounting and Reporting – 4 th Edition SUMMARY Purchased intangible assets should be capitalised as assets Internally generated goodwill should not be capitalised Internally developed intangible assets should be capitalised only where it is probable that future economic benefits will flow to the enterprise and the cost of the asset can be measured reliably Capitalised intangible assets are subject to amortisation and impairment review