Intangible Assets Impairment Revaluation by MikeJenny

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									 Processing, Reporting and
Auditing Financial Accounts

 Intangible Assets & Impairment
  IAS 38, IAS 36 and IFRS 3



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     Intangible Assets - IAS 38
   3 Criteria
   Identifiable
   Separable (capable of being separated and sold,
    transferred, licensed, rented, or exchanged, either
    individually or as part of a package) or
   Arises from contractual or other legal rights
   Control over a resource
   Means the company should have the power to
    obtain future economic benefits
   Usually derived from a legal right
   Note IFAC definition of “intangible” includes
    Human Capital
   Existence of future economic benefits
   This is expected over a period of years
   Intangibles are always Non-Current Assets           2
                Examples
   Examples of possible intangible assets
    include:
   computer software
   patents
   copyrights
   motion picture films
   customer lists
   mortgage servicing rights
   licenses
   import quotas
                                             3
              Examples
   Intangibles can be acquired:
   by separate purchase
   as part of a business combination
   by a government grant
   by exchange of assets
   by self-creation (internal
    generation)
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               Recognition
   Recognition criteria.
   IAS 38 requires an enterprise to
    recognise an intangible asset, whether
    purchased or self-created (at cost) if,
    and only if
   it is probable that the future economic
    benefits that are attributable to the
    asset will flow to the enterprise
   the cost of the asset can be measured
    reliably.
                                              5
             Measurement
   When an item is recognised as
    intangible it is measured initially at
    cost.
   Purchased intangibles
   Can add directly attributable costs
   Once intangible is in a condition
    where it can be used
   All costs treated as operating
    expenses                                 6
    Failure to meet the criteria
   If an intangible item does not
    meet both the definition of and
    the criteria for recognition as an
    intangible asset then
   IAS 38 requires the expenditure
    on this item to be recognised as
    an expense when it is incurred
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             Amortisation
   Intangibles are non-current assets
   Therefore should be amortised
   2 models of carrying amounts
   A model must be chosen for each
    class of intangible asset
   Cost model or
   Revaluation model
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                  2 models
   Cost model
   Carrying amount =
   Cost
   Less accumulated amortisation
   Less accumulated impairment losses
   Revaluation model
   After initial recognition at cost
   Carrying amount =
   Fair value at date of (regular) revaluation
   Less accumulated amortisation since
    revaluation
   Less accumulated impairment losses since
    revaluation                                   9
               Fair Value
   Fair value can only be determined by
    reference to an active market
   Such active markets are expected to be
    uncommon for intangible assets
   Examples might be
   Milk quotas
   Freely traded taxi licences
   Where no active market exists – use
    cost model
                                             10
               Accounting
   Under the revaluation model
   revaluation increases are credited
    directly to "revaluation surplus" within
    equity except to the extent that it
    reverses a revaluation decrease
    previously recognised in the income
    statement
   If the revalued intangible has a finite
    life and is, therefore, being amortised
    the revalued amount is amortised
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Classification of Intangible Assets
       Based on Useful Life
   Intangible assets are classified as
   Indefinite life:
   No foreseeable limit to the period
    over which the asset is expected to
    generate net cash inflows for the
    entity.
   Finite life:
   A limited period of benefit to the
    entity.
                                      12
      Measurement Subsequent to
    Acquisition: Intangible Assets with
                Finite Lives
   The cost less residual value of an intangible
    asset with a finite useful life should be
    amortised over that life
   The amortisation method should reflect the
    pattern of benefits
   If the pattern cannot be determined reliably,
    amortise by the straight line method
   The amortisation charge is recognised in profit
    or loss unless another IFRS requires that it be
    included in the cost of another asset.
   The amortisation period should be reviewed at
    least annually
   The asset should also be assessed for
    impairment in accordance with IAS 36
                                                  13
      Measurement Subsequent to
    Acquisition: Intangible Assets with
              Indefinite Lives
   An intangible asset with an indefinite useful
    life should not be amortised
   Its useful life should be reviewed each
    reporting period to determine whether
    events and circumstances continue to
    support an indefinite useful life assessment
    for that asset
   If they do not, the change in the useful life
    assessment from indefinite to finite should
    be accounted for as a change in an
    accounting estimate
   The asset should also be assessed for
    impairment in accordance with IAS 36          14
     Research & Development
              (R&D)
   Research
   Original and planned investigation
    undertaken with the prospect of gaining
    new scientific or technical knowledge
    and understanding
   Development
   Application of research findings to a
    plan or design for production of new or
    substantially improved materials,
    devices etc before the start of
    commercial production or use            15
             Basic rules are
   Charge all research cost to expense
   Development costs are capitalised only
   after technical and commercial feasibility
    of the asset for sale or use have been
    established
   Therefore the enterprise must intend and
    be able to complete the intangible asset
    and
   either use it or sell it and
   be able to demonstrate how the asset will
    generate future economic benefits         16
              Basic rules are
   If an enterprise cannot distinguish the
    research phase of an internal project to
    create an intangible asset from the
    development phase
   the enterprise treats the expenditure for
    that project as if it were incurred in the
    research phase only
   If an asset is recognised as intangible
   It is shown in BS as development costs
    capitalised
   It will be amortised from time it is
    available for use
   Over period of expected economic benefit   17
        Internally-generated
   Internally-generated intangible
    assets
   May capitalise
   Costs of materials
   Labour costs
   Fees to register legal rights

                                  18
               As an example
   Computer Software
   Purchased: capitalise
   Operating system for hardware: include in
    hardware cost
   Internally developed (whether for use or sale):
    charge to expense until technological
    feasibility, probable future benefits, intent and
    ability to use or sell the software, resources to
    complete the software, and ability to measure
    cost.
   Amortisation: over useful life, based on pattern
    of benefits (straight-line is the default)
                                                   19
             Another example
   Inventions Ltd a company making microwave/radar
    equipment wants to capitalise the following
   Calibration equipment made by company ($600,000)
    used in calibrating lab equipment
   Microwave detection equipment ($1.5m) has been
    made but found to be too large for aircraft.
    Company believes further $0.5m development would
    make a viable saleable product
   In flight tracking system ($1.25m) has been trialled
    and planned production is for summer. Have
    advanced orders for 2 units & commercial viability is
    high.

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     What are NOT intangibles
   Brands
   Mastheads
   Publishing titles
   Customer lists and
   Items similar in substance that
    are internally generated

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         Goodwill and IFRS 3
   Goodwill is the difference between
   Purchase value of a business and
   Fair value of separable net assets
   Inherent (internally-generated)
    goodwill cannot be an intangible asset
   Purchased Goodwill is and is the
    expectation of future economic benefits
    for the purchaser

                                          22
Conditions applying to recognition of
     Goodwill as an intangible
   Goodwill is recognised by the acquirer as an asset from
    the acquisition date and
   is initially measured as the excess of the cost of the
    business combination over the acquirer's share of the
    net fair values of the acquiree's identifiable assets,
    liabilities and contingent liabilities
   IFRS 3 prohibits the amortisation of goodwill
   Instead goodwill must be tested for impairment at least
    annually in accordance with IAS 36 Impairment of
    Assets
   Negative goodwill
   If the acquirer's interest in the net fair value of the
    acquired identifiable net assets exceeds the cost of the
    business combination
   that excess must be recognised immediately in the
    income statement as a gain
                                                           23
Impairment of Assets- IAS 36
   Purpose of IAS 36

   To ensure that assets are carried at
    no more than their recoverable
    amount, and to define how
    recoverable amount is calculated


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                Definitions
   Impairment
   an asset is impaired when its carrying
    amount exceeds its recoverable amount.
   Carrying amount
   the amount at which an asset is
    recognised in the balance sheet after
    deducting accumulated depreciation and
    accumulated impairment losses
   Recoverable amount
   the higher of an asset's fair value less
    costs to sell and its value in use       25
                Definitions
   Fair value
   the amount obtainable from the sale of
    an asset in a bargained transaction
    between knowledgeable, willing parties.
   Value in use
   the discounted present value of
    estimated future cash flows expected to
    arise from:
   the continuing use of an asset, and from
   its disposal at the end of its useful life
                                                 26
        Cash-Generating Units
   Recoverable amount should be determined for
    the individual asset, if possible
   If it is not possible to determine the
    recoverable amount (fair value less cost to sell
    and value in use) for the individual asset
   then determine recoverable amount for the
    asset's cash-generating unit
   Which is the smallest identifiable group of
    assets
   that generates cash inflows from continuing
    use, and
   that are largely independent of the cash
    inflows from other assets or groups of assets
                                                   27
     Indications of Impairment
   External sources:
   market value declines
   negative changes in technology, markets,
    economy, or laws
   increases in market interest rates
   company stock price is below book value
   Internal sources:
   obsolescence or physical damage
   asset is part of a restructuring or held for
    disposal
   worse economic performance than expected
                                                   28
        Impairment Testing
   When an asset is tested for
    impairment
   Its recoverable amount needs to
    be determined
   This = the higher of..
   Value in Use and
   Fair Value less costs to sell

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    Fair Value Less Costs to Sell
   If there is a binding sale agreement, use
    the price under that agreement less
    costs of disposal
   If there is an active market for that type
    of asset, use market price less costs of
    disposal
   If there is no active market, use the
    best estimate of the asset's selling price
    less costs of disposal
   Costs of disposal are the direct added
    costs only (not existing costs or
    overhead)
                                            30
            Value in Use
   Should reflect
   an estimate of the future cash
    flows the entity expects to
    derive from the asset in an
    arm's length transaction



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