Financial Accounting
Sharonhy
LectureNotes-AssetValuation-Intangibles2.pptx
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Asset Valuation - Intangibles
Lecture
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Objectives of this lecture
Understand what types of assets can be considered intangible assets and understand the differences between intangible and tangible assets
Understand when expenditure on intangible assets should be recognised as an asset
Understand when expenditure on intangible assets must be expensed
Understand that intangible assets will either need to be systematically amortised or be the subject of impairment testing and that this choice will depend upon whether the asset is expected to have a limited useful life or an indefinite life
Understand how to account for research and development expenditure
Be able to define goodwill and explain how it is calculated for accounting purposes
Definition of intangible assets
What do you think intangible assets are?
Definition of intangible assets (cont.)
Identifiable vs unidentifiable intangible assets
Identifiable intangible assets
A specific value can be placed on each individual asset, and they can be separately identified and sold
Definition of intangible assets (cont.)
Identifiable vs unidentifiable intangible assets (cont.)
Unidentifiable intangible assets
Intangible assets that cannot be separately sold
Which intangible assets can be recognised and included in the statement of financial position?
AASB 138 Intangible Assets
Internally generated intangible assets (except internally generated development expenditure) are not to be carried forward as assets
Specifically, paragraph 63 states:
Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets
Which intangible assets can be recognised and included in the statement of financial position? (cont.)
AASB 138 Intangible Assets (cont.)
Intangible assets may be recognised only upon acquisition from an external party and only when there is an associated ‘cost’
‘Cost’ to include purchase price (including legal fees, taxes and deducting discounts) and cost involved in getting asset ready for use
Initial recognition of an intangible asset at an amount other than cost not permitted
Internally generated intangibles cannot subsequently be recognised through revaluation
Recognition of intangible assets
To summarise, intangible asset to be recognised when:
Asset definition
It is probable that the future economic benefits attributable to the asset will flow to the entity
Cost can be measured reliably
There is control over the future economic benefits
Specific for intangibles
They are not internally generated (except for development costs)
General amortisation requirements for intangible assets
Intangible assets (other than goodwill) that are considered to have a limited useful life are required to be amortised over their useful lives
Useful life of an intangible asset under AASB 138
The period of time over which the asset is expected to be used by the entity, or the number of production or similar units expected to be obtained from the asset by the entity
General amortisation requirements for intangible assets (cont.)
In determining the amortisation charge of an asset we need to consider the expected residual value of the asset
General amortisation requirements for intangible assets (cont.)
Amortisation method should reflect the pattern in which the economic benefits are derived—if the pattern cannot be determined reliably, the straight-line amortisation method is to be used
Intangible assets may have an ‘indefinite life’
No foreseeable limit on the period over which the asset is expected to generate cash flows
Revaluation of intangible assets
AASB 138—intangible assets may be revalued only if there is an ‘active market’
Only assets that have been acquired at cost can subsequently be revalued
Revaluation of intangible assets (cont.)
Where revaluation occurs it must be to fair value of asset
An amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction
Revaluations to be done regularly so that recorded value does not differ materially from fair value at balance sheet date
Subsequent to revaluations any amortisation charges to be based on revalued amount taking into account remaining useful life
Revaluations of goodwill are not permitted in Australia, whether internally generated or externally acquired
Research and development
Introduction
AASB 138 applies to intangible assets generally; however, there are a number of paragraphs dealing specifically with research and development
Research and development
May account for a large proportion of expenditure for some entities
Accounting problem: will expenditure with reasonable probability provide future benefits?
AASB 138 applies the simplifying assumption that all expenditure undertaken on the research component of research and development is to be expensed
Research and development (cont.)
Research
Considered separately from development
Generally precedes development
Research is defined as:
original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
Development
Defined as (AASB 138, par. 8):
application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services prior to the commencement of commercial production or use
Typically involves the commercial application of knowledge generated in earlier research phases
Research and development (cont.)
What are some examples of development?
Research and development (cont.)
Research expenditure—to be expensed as incurred
AASB 138 (par. 54)
No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research shall be recognised as an expense when incurred
In justifying the above requirement:
AASB 138 (par. 55)
In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred
Research and development (cont.)
Development expenditure can be deferred only if the entity can show all of the following (AASB 138, par. 57):
The technical feasibility of completing the intangible asset
Its intention to complete the intangible asset, and use or sell it
Its ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits, including the existence of a market for the intangible asset or, where the intangible asset is to be used internally, its usefulness
The availability of adequate technical, financial and other resources to complete the development
Its ability to measure reliably expenditure on the intangible asset during its development
Goodwill
What is goodwill?
Arises when one entity acquires another entity, or part thereof, e.g. one company acquires a controlling interest in another entity
An unidentifiable intangible asset that cannot be individually identified and is an intrinsic part of the business
Cannot be purchased or sold separately, but only as part of an entity in its entirety
Represents the future economic benefits associated with an existing customer base, efficient management, reliable suppliers, etc.
Goodwill (cont.)
What is goodwill? (cont.)
Could be built up over a number periods (internally generated) or obtained (purchased) by acquiring an existing business
The relevant accounting standard is AASB 3 Business Combinations, which defines goodwill as:
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised
Goodwill (cont.)
Internally generated versus purchased goodwill
Goodwill may be internally generated or acquired by purchasing an existing business
Only purchased goodwill is permitted to be recorded. The view is that:
purchased goodwill can be measured more reliably than internally generated goodwill, based on the amount paid
Purchased goodwill is measured as:
the excess of the cost of acquisition (purchase consideration plus incidental expenses) incurred by the acquirer over the fair value of the identifiable net assets and contingent liabilities acquired
Goodwill (cont.)
How is goodwill measured?
As we just learned, purchased goodwill is measured as the excess of the cost of acquisition (purchase consideration plus incidental expenses) incurred by the acquirer over the fair value of the identifiable net assets and contingent liabilities acquired
In relation to the above measurement rule, ‘fair value’ is:
the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction
Purchase consideration:
should be measured at the fair value of what is given up in the exchange
