Chapter 13

Intangible Assets

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Contents

Intangible assets: definition and recognition

Internally generated intangible assets
Measurement subsequent to initial recognition
Retirement and disposal
Accounting for purchased goodwill

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Intangible assets
A few examples:

Patents
Brands
Trademarks
R&D
Copyrights
Software licence
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Intangible assets (contd)

Is an identifiable non-monetary asset without
physical substanstance (IAS 38 para. 8)
The definition above excludes goodwill,
which is by definition non-identifiable
Goodwill is defined in IFRS 3 as follows
future economic benefits arising from assets
that are not capable of being individually
identified and separately recognized
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Intangible assets (contd)

An asset meets the identifiability criterion in the
definition of an intangible asset when it:

is separable, i.e. is capable of being

separated or divided from the entity and
sold, transferred, licensed, rented or
exchanged, either individually or together
with a related contract, asset or liability; or
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Intangible assets (contd)

arises from contractual or other legal
rights, regardless of whether those rights
are transferable or separable from the
entity or from the rights and obligations
An entity controls the asset if the entity has the power
to obtain the future economic benefits flowing from
the underlying resource and to restrict the access of
others to those benefits

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Recognition and measurement

The recognition of an item as an intangible asset
requires an entity to demonstrate that the item meets:

(a) the definition of an intangible asset; and

(b) the recognition criteria

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Recognition criteria

An intangible asset shall be recognized if, and only if:

(a) it is probable that the expected future

economic benefits that are attributable to
the asset will flow to the entity; and
(b) the cost of the asset can be measured
reliably

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Recognition criteria (contd)

An entity shall assess the probability of expected

future economic benefits using reasonable and
supportable assumptions that represent
managements best estimate of the set of economic
conditions that will exist over the useful life of the
asset

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Initial measurement of an
intangible asset
An intangible asset shall be measured initially at cost

Purchased intangible assets: four modes of

acquisitions are considered:

separate acquisition
acquisition as part of a business combination
acquisition by way of a government grant and
acquisition by exchange of assets

Internally generated intangible assets

International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Intangible assets:
measurement
An intangible asset shall be measured initially at cost
Cost is the amount of cash or cash equivalents paid or
the fair value of other consideration given to acquire an
asset at the time of its acquisition or construction, or
when applicable, the amount attributed to that asset
when initially recognized in accordance with the
requirements of IFRS 2 (share-based payment)

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Accounting for
purchased goodwill
Definition: future economic benefits arising from
assets that are not capable of being individually
identified and separately recognized
Goodwill in IAS GAAP is the difference between the
fair value of the purchase consideration given and the
aggregate fair values of the identifiable assets and
liabilities of the acquiree that are recognized on
acquisition, as discussed earlier.
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Accounting for purchased

goodwill (contd)
What is recognized as goodwill on acquisition
is therefore a function of the recognition
criteria and valuation rules applied to the
identifiable assets and liabilities. As such,
therefore, it is not itself an identifiable asset or
liability but a residual amount. Nevertheless,
IAS GAAP require it to be shown as an asset.
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Determination of
goodwill
The acquirer shall, at the acquisition date, allocate the cost of a
business combination by recognizing the acquirees identifiable
assets, liabilities and contingent liabilities that satisfy the
recognition criteria at their fair values at that date, except for
non-current assets (or disposal groups) that are classified as
held for sale which shall be recognized at fair value less costs to
sell.
Any difference between the cost of the business combination
and the acquirers interest in the net fair value of the identifiable
assets, liabilities and contingent liabilities so recognized shall be
accounted for as goodwill.
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Determination of
goodwill (contd)
The acquirer shall recognize separately the
acquirees identifiable assets, liabilities and
contingent liabilities at the acquisition date only if they
satisfy the following criteria at that date:
in the case of an asset other than an intangible asset, it is
probable that any associated future economic benefits will
flow to the acquirer and its fair value can be measured
reliably
in the case of a liability other than a contingent liability, it is
probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and its fair
value can be measured reliably
in the case of an intangible asset or a contingent liability, its
fair value can be measured reliably
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Determination of
goodwill (contd)

The excess of cost over the net fair value of the identifiable
assets is the goodwill on acquisition figure. The acquirer is
required to treat such goodwill as follows (paras 512): The
acquirer shall, at the acquisition date:
a) recognize goodwill acquired in a business combination as
an asset; and
b) initially measure that goodwill at its cost, being the excess
of the cost of the business combination over the acquirers
interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities recognized in
accordance with para. 36
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA

Determination of
goodwill (contd)
If the acquirers interest in the net fair value of the
identifiable assets, liabilities and contingent liabilities
recognized in accordance with para. 36, exceeds the
cost of the business combination, the acquirer shall:
reassess the identification and measurement of the
acquirees identifiable assets, liabilities and contingent
liabilities and the measurement of the cost of the
combination
recognize immediately in profit or loss any excess remaining
after that reassessment
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 2011 Cengage Learning EMEA