Topic 5 (2014)Apunte Español
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International Financial Accounting
5. INTANGIBLE ASSETS (IAS 38 AND SIC 32)
Sic 32 just says how to account for webpages
• They are resources controlled by an entity from which the entity expects to derive
future economic benefits
• They lack physical substance
• They are identifiable
CRITERIA FOR RECOGNITION
It must comply:
• It is probable that future economic benefits will flow to the entity.
• The cost of the asset can be reliably measured.
For recognition, Must satisfy both criteria for recognition. Sometimes difficult: problems a) Identifying whether and when there is an identifiable asset that will generate expected future economic benefits; b) Determining the cost of the asset reliably: – Difference between Maintaining or Enhancing 2. THE LIFE OF INTANGIBLE ASSETS. RECOGNITION It can be purchased or internally produced The price paid for the intangible asset will reflect expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity.
The probability recognition criterion is considered to be satisfied for separately acquired intangible assets.
- The cost of a separately acquired intangible asset can usually be measured reliably.
The cost of a separately acquired intangible asset comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; (b) any directly attributable cost of preparing the asset for its intended use, including employee benefits, professional fees and costs of testing the proper functioning of the asset.
Costs of introducing a new product or service including advertising and promotion costs, costs of conducting a business in a new location including staff training costs and administrative or other general overhead costs are not part of the cost of an intangible asset.
I. CASE - Entity A is a supplier to airlines.
- Two lines of business: sweet (six brands) and salty snacks (four brands).
- The company incurs expenditure related to research and development of new products, such as design of variations to current products and designs of new products.
- R&D expenditures of €2m for the sweet snack unit, and €3.5m for the salty snack unit were incurred during 2010.
1 International Financial Accounting Elisabeth Martinez - The expenditure cannot be allocated separately to any specific product, but can be associated with a line of business.
Should R&D costs be capitalised? The answer is No because it doesn’t comply the II. TO CAPITALIZE COSTS… To assess whether an internally generated intangible asset meets the criteria for recognition, an entity should classify the generation of the asset into: • A research phase; and • A development phase.
Research = Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
Examples of Research Activities: • Activities aimed at obtaining new knowledge; • Search for, evaluation and final selection of, applications of research findings or other knowledge; • Search for alternatives for materials, devices, products, processes, systems or services; and • Formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.
Development = Application of research findings or other knowledge to plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.
• Design, construction and testing of pre-production or pre-use prototypes and models; • Design of tools, jigs, molds and dies involving new technology; • Design, construction and operation of a pilot plant; • Design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.
Research expenditure . No intangible asset arising from research (or from the research phase of an internal project) should be recognized.
. Such expenditure should be expensed as incurred.
. 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, such expenditure should be expensed as incurred.
In the development phase of an internal project, an entity can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits.
-This is because the development phase of a project follows the research phase and therefore will be further advanced.
2 International Financial Accounting Elisabeth Martinez CRITERIA TO CAPITALIZE R&D 1. Technical feasibility of completing the intangible asset so that it will be available for use or sale; 2. Its intention to complete the intangible asset and use or sell it; 3. Its ability to use or sell the intangible asset; 4. How future economic benefits will probably be generated.
5. Availability of adequate resources to complete the development and to use or sell the intangible asset; 6. Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
3 International Financial Accounting Elisabeth Martinez IV. INTERNALLY GENEREATED ASSET • The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.
• Examples of directly attributable costs: (a) Costs of materials and services used or consumed in generating the intangible asset; (b) Costs of employee benefits incurred from the generation of the intangible asset; (c) Fees to register a legal right; (d) Amortization of patents and licenses that are used to generate the intangible asset; (e) Borrowing costs.
The following are not components of the cost of an internally generated intangible asset: (a) Selling, administrative and other general overhead expenditure; (b) Identified inefficiencies and initial operating losses incurred before the asset achieves planned performance; and(c) expenditure for training of staff to operate the asset.
• Expenditure for an intangible asset should be recognized as an expense as incurred.
Costs never recognized as assets: Research expenditure, except where it forms part of the cost of a business combination.
• Start-up costs, unless such costs (for example, costs of commissioning) are included in the cost of a tangible fixed asset.
Costs that should be expensed as incurred include preliminary expenses of establishing a legal entity, expenditure on opening a new facility or business (pre-opening costs) or expenditure on starting up a new operation or launching a new product or process.
• Training costs.
• Advertising and promotion costs.
• Relocation expenses.
• Re-organization costs.
V. EXAMPLE “SHAKIRA” a) Legal costs of acquiring the copyrights: 15M CAPITALIZED b) Operational costs (studio time lost, etc.) during the start-up period: 1M EXPENSE c) Advertising campaign to launch the artist: 1M EXPENSE 3. THE LIFE OF INTANGIBLE ASSET. MEASUEREMENTS AFTER RECOGNITION As with the tangible assets, there are two models: Cost model: Intangible assets should be carried at cost less accumulated amortization and impairment losses.
Revaluation model: Intangible asset should be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and any subsequent accumulated impairment losses.
4 International Financial Accounting Elisabeth Martinez I. AMORTIZATION • Useful life: finite and indefinite • Residual value 0 unless: - There is a commitment by a third party to purchase the asset at the end of the useful life.
- There is an active market for the asset.
4. THE USEFUL LIFE OF AN INTANGIBLE ASSET. DERECOGNITION • An intangible asset should be derecognized: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal • The gain or loss arising from the derecognition of an intangible asset = Net disposal proceeds- carrying amount of the asset.
• Gain (or loss) should be recognized in the income statement in the period in which derecognition occurs.
II.EXCERCICE 5.4 Pre-opening costs of a business facility EXPENSE.
Recipes, secret formulas, models and designs, prototype CAPITAILZE Training, customer loyalty, and market share EXPENSE An in-house-generated accounting software. ? If it complies all the 6 criteria, capitalized The design of a pilot plant EXPENSE Licensing, royalty and stand-still agreements CAPITALIZED Operating and broadcast rights CAPITALIZED Goodwill purchased in a business combination CAPITALIZED A medical-developed patented drug approved for medical use CAPITALIZED A license to manufacture a steroid by means of a government grant CAPITALIZED Cost of courses taken by management in quality engineering management EXPENSE A television advertisement that will stimulate the sales in the technology industry EXPENSE 5 International Financial Accounting Elisabeth Martinez III. EXCERCICE 5.8 1. Capitalize costs €5,950 Wage Expense €3750 Operation expenses €10,950 Other expenses TO (here we only account for Aug, Sept and Oct.
€12,450 Software-in-process TO Cash €5,950 Acc. depreciation €3,750 Cash €10,950 Works carried out for intangible assets (revenue) €12,450 2. Account for 1st OCT X2 €212,450 Software TO Software expenses €212,450 TO Acc. Amortization €17,704.17 Amortization starts: !"!,!"#!! ! ∗ = 17,704.17 ! !" €17,704.17 Amortization expense 6 International Financial Accounting Elisabeth Martinez 3. Account for 1st OCT X3 January to Sept: (without the new residual value) 212,450 − 0 9 ∗ = 53,112.5 3 12 €53,112.5 Amortization expense (January to September) TO Acc. Depreciation €53,112.5 1st OCT X2 212,450 − 17,704.17 − 53,112.5 − 1,500 3 ∗ = 17,516.6 2 12 (This is: actual value of the software-accumulated depreciation x2- accumulated depreciation Jan to Sep- Residual costs) 7 International Financial Accounting Elisabeth Martinez 4. SPECIFIC INTANGIBLES. WEB SITE DEVELOPMENT COSTS 5.SPECIFIC INTANGIBLES. GOODWILL 8 International Financial Accounting Elisabeth Martinez I. EXCERCIE 5.9 MASTERMIND €2,600 Elements of transports €5,000 Patent €2,500 Accounts receivable €1,000 Customer database (intangible asset) €1,900 Goodwill €95 Retained Earnings (5% Goodwill) TO Bank€13,000 Goodwill reserve €95 9 International Financial Accounting Elisabeth Martinez 6. SPECIFIC INTANGIBLES. SOFTWARE DEVELOPMENT 7. SPECIFIC INTANGIBLES. PATENTS 10 International Financial Accounting Elisabeth Martinez 8. SPECIFIC INTANGIBLES. TRANSFER RIGHTS 9. SPECFIC INTANGIBLES. STATE CONCESSIONS 11 ...