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Respected Lecturer,
Would you please tell me in which regard would a company control an intangible asset?.
This company has entered into an agreement with a software provider to use their software. They have spent extraordinary amounts of money to make their computer systems compatible with the software. However terms of the contract show that they can be denied service, if it so fits the software provider, and also would have to pay for any consulting of the usability of the software that they are not clear on.
Additionally there is no specific term of time which the company may use this asset. And they still pay yearly fees for the use of the asset.
These provisions alone shows that the company (in my believe) does not control the asset or they should capitalize it.
They are currently in the process of putting the asset into use and they have capitalized the before mentioned ”extraordinary amounts of money” and have started to amortize it.
They have benefited from the use of the asset, but I believe that because of the strict terms of the contract they should not capitalize this asset.
Is my belief correct? I am very confused.
Please assist me with any reasoning you have made.
(Remember me from the system notes question Mr. Mike 🙂 )
Real life situation, Should I have inboxed you?, I was afraid I would not get a reply.
It doesn’t look to me like your client(?) has control – “… they can be denied service …..”
I suppose it could depend on exactly what you mean by the above extract but if it means that the provider can prevent the use of the software then your client shouldn’t be capitalising
That is exactly what I meant. But they have capitalized the amounts of money they spent on making their systems compatible, should they still not capitalize it?
If this additional expenditure improves the asset (not just prolongs its life) but actually generated additional income / profits, then subsequent expenditure should be capitalised.
But have these improvements satisfied that requirement or is any increase in benefit entirely dependent upon something that lies outside the company’s control ie the continued use of the software?
It seems to me that any increase in generated benefits comes down to the continuing use of the software and that’s beyond our control. I think they should be writing these additional costs off against the profits of the year in which the expenditure was incurred.
But those are just my thoughts! This is one for the reporting partner to decide upon – its not one for me! If you were to start paying me the level of remuneration enjoyed by the partners in an accountancy firm, then I may be prepared to stick my neck out and be definitive.
But you don’t, you won’t so nor will I!
These are my thoughts exactly. And also this situation I believe is a bit above my pay grade myself.
I really appreciate the reply, and you indulging me, even though this isn’t necessarily related to studying..
Thank you so much Mr. Mike. 🙂
Dear Mike,
Have a small doubt in this adjustment of ‘Intangible Assets’ (part of a Consolidation ques June 2007):
-> At 1 April 2006 Beta had a long standing portfolio of loyal customers that regularly ordered goods and services from Beta. In addition, the workforce of Beta was highly trained and the expertise of the workforce was seen by the directors as conferring significant competitive advantage to Beta. The customer relationships and the expertise of the workforce were not included in the balance sheet of Beta at 31 March 2006 because the directors did not consider that they met the recognition criteria in IAS 38 – Intangible Assets – for internally developed intangible assets. The directors of Alpha considered that the customer relationships had a market value of $20 million at
1 April 2006 and that based on the life cycle of the existing products, the existing customers would continue to order goods and services from Beta for at least five years from that date. They estimated that the fair value of the competitive advantage conferred by the workforce was $15 million at 1 April 2006 and that the average period to retirement for a typical employee was twenty years.My doubt is: Why are we taking into account the ‘Customers relations’ and not the ‘competitive advantage of the workforce’ ? Acc. to me both should NOT be Intangible assets because as per the standard (IAS 38), we can’t control either our workforce or the customers..??
Please reply..
Thanks!
There used to be a different definition of goodwill “back in the day!” which was “goodwill is the value of long-established customers remaining” and that out-of-date and now replaced definition seems to me to fit the customer relations aspect perfectly!
Yes, I can see that that is an identifiable intangible asset
Now, the workforce! Are you happy in your employment. Does your employer treat you well? Or are you looking to leave that employment and find work somewhere else taking advantage of your specialised skills that you have learned in your current position?
Can your employer stop you leaving?
Therefore, does your employer control you (or your colleagues)?
The only situation in the 21st century of such control is in the context of a master / slave relationship and thankfully there are fewer and fewer examples of that type of relationship still in existence
Does that answer it for you?
Yes, I agree to you.
But i am still confused when the standard (ias 38) says:
‘Market share and Customer loyalty cannot normally be intangible assets, since an entity cannot control the actions of the customers.’
Do we still want to say that customers relations are Intangible Assets knowing that the entity Cannot control their actions?
Thanks..
Really, the only issue here is “What is the value of the goodwill?” because, if we put no value on the customer relations, the value of the goodwill increases whereas if we did recognise the customer relations value then the goodwill would be lower.
It’s merely a way of allocating correctly the value of the intangible assets
I’m still going to go with recognition as a separately identified intangible asset.
What does the answer say?
The answer has taken $ 20 mn as the increase in the market value of the customer relations and considered it in calculation Goodwill. In the Balance Sheet, they have shown it as 16 mn (after amortising it by 4mn because the life is 5 yrs). This means that solution has taken it as an Intangible Asset.
But my point is that, if no value had been placed on the intangible customer relations then, because the consideration paid together with the nci value remains fixed, when we deduct the fair value of the identifiable assets we are left with a figure for goodwill.
If we had included an amount for customer relations, then the balancing value of goodwill would have been reduced by the value of the customer relations, but the total fair value of the assets would have been the same
Does that make sense to you?
The goodwill would have been 20 million greater if we hadn’t included the customer relation value
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