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Intangible assets (IAS 38)

VIVA Subject Guide
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No physical substance but has value to the business.

  • patents

  • brand names

  • licences

3 factors to considerIdentifiabilityControlRecognitioni.e. can sell separatelyIAS 38Framework

1 Separate acquisition

Capitalise at cost plus any directly attributable costs (e.g. legal fees, testing costs). Amortisation is charged over the useful life of the asset, starting when it is available for use.

2 Research

Research expenditure is charged immediately to profit or loss in the year in which it is incurred.

3 Development

Development expenditure must be capitalised when it meets all the criteria.

  • Sell/use

  • Commercially viable

  • Technically feasible

  • Resources to complete

  • Measure cost reliably (expense)

  • Probable future economic benefits (overall)

4 Internally generated

Internally generated brands, mastheads cannot be capitalised as their cost cannot be separated from the overall cost of developing the business.

Example 1 – Intangibles

Booker is involved in developing new products and has spent $15 million on acquiring a patent to aid in this development. The initial investigative phase of the project cost an additional $6 million, whereby it was determined that the future feasibility of the product was guaranteed.

Subsequent expenditure incurred on the product was $8 million, of which $5 million was spent on the functioning prototype and the remainder on getting the product into a safe and saleable condition.

A further $1 million was spent on marketing and $0.5 million on training sales staff on how to demonstrate the use of the product.

At the reporting date the product had not yet been completed.

Explain how Booker should account for the expenditure in its financial statements.

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Example Answer 1 – Intangibles

The purchase of the patent should be capitalised at $15 million and amortised over its useful life.

The $6 million spent on the investigative phase is essentially research and should be expensed through profit or loss as incurred.

The $8 million subsequently spent after completion of the research phase is development expenditure and is capitalised as an intangible non-current asset on the statement of financial position.

It is not yet amortised as the project is not yet complete but an impairment review should be carried out to see if the asset has lost value.

The $1.5 million spent on marketing and training should both be expensed through profit or loss immediately.