ACC210 Financial Accounting: Week 4, Intangibles, Chapter 6 Comprehension Questions

What are the key characteristics of an intangible asset? [blank_start]Identifiable[blank_end]: it must be able to be separable from the entity, and transferrable through market trade so as to exclude many possible intangibles that are difficult to measure e.g. staff morale, good customer relations. or legal or contractual rights which benefit a company. [blank_start]Non[blank_end]-[blank_start]monetary[blank_end]: this characteristic excludes financial assets such as loans receivables from being classified as intangibles. [blank_start]Without[blank_end] [blank_start]physical[blank_end] [blank_start]substance[blank_end]: excludes items of physical substance, as defined in AASB 116 (PP&E)

Explain what is meant by ‘identifiability’. Para [blank_start]12[blank_end] of AASB [blank_start]138[blank_end] states An asset meets the identifiability criterion in the definition of an intangible asset when it: (a) is [blank_start]separable[blank_end], i.e. is capable of being [blank_start]separated[blank_end] or [blank_start]divided[blank_end] from the entity and s[blank_start]old[blank_end], t[blank_start]ransferred[blank_end], l[blank_start]icensed[blank_end], r[blank_start]ented[blank_end] or e[blank_start]xchanged[blank_end], either individually or together with a related contract, asset or liability; or (b) arises from c[blank_start]ontractual[blank_end] or other l[blank_start]egal[blank_end] r[blank_start]ights[blank_end], regardless of whether those rights are t[blank_start]ransferable[blank_end] or separable from the entity or from other rights and obligations. (a) excludes [blank_start]goodwill[blank_end], and other possible assets such as staff morale (b) is included to allow such assets as water rights, where these were allocated by a government but if not used were unable to be on-sold and so were not separable, to be classified as intangible assets

How do the principles for amortisation of intangible assets differ from those for depreciation of PP&E? • Basic principle of [blank_start]allocation[blank_end] of the [blank_start]depreciable[blank_end] [blank_start]amount[blank_end] on a [blank_start]systematic[blank_end] [blank_start]basis[blank_end] over useful life is the same. • With intangibles, [blank_start]straight[blank_end]-[blank_start]line[blank_end] method is the default method where the [blank_start]pattern[blank_end] of [blank_start]receipt[blank_end] of [blank_start]benefits[blank_end] cannot be reliably determined. Not the same with PP&E. • With intangibles can have [blank_start]indefinite[blank_end] lives. Not the same with PP&E. • With intangibles with finite lives, residual value is assumed to be [blank_start]zero[blank_end], unless para [blank_start]100[blank_end] criteria are met: (a) there is a [blank_start]commitment[blank_end] by a third party to [blank_start]purchase[blank_end] the asset at the end of its [blank_start]useful[blank_end] [blank_start]life[blank_end]; or (b) there is an active [blank_start]market[blank_end] for the asset and: (i) [blank_start]residual[blank_end] [blank_start]value[blank_end] can be determined by reference to that market; and (ii) it is probable that such a market will exist at the end of the asset’s useful life. Not so for PPE.

How is the useful life of an intangible asset determined? Useful life must be assessed as [blank_start]finite[blank_end] or [blank_start]indefinite[blank_end]. Paragraph 90 states: Many factors are considered in determining the useful life of an intangible asset, including: (a) the [blank_start]expected[blank_end] [blank_start]usage[blank_end] of the asset by the entity and whether the asset could be [blank_start]managed[blank_end] [blank_start]efficiently[blank_end] by another management team; (b) typical product [blank_start]life[blank_end] [blank_start]cycles[blank_end] for the asset and public information on estimates of [blank_start]useful[blank_end] [blank_start]lives[blank_end] of [blank_start]similar[blank_end] assets that are [blank_start]used[blank_end] in a similar way; (c) technical, technological, commercial or other types of [blank_start]obsolescence[blank_end]; (d) the [blank_start]stability[blank_end] of the [blank_start]industry[blank_end] in which the asset operates and changes in the [blank_start]market[blank_end] [blank_start]demand[blank_end] for the products or services [blank_start]output[blank_end] from the asset; (e) expected [blank_start]actions[blank_end] by [blank_start]competitors[blank_end] or potential competitors; (f) the level of [blank_start]maintenance[blank_end] [blank_start]expenditure[blank_end] required to obtain the expected future [blank_start]economic[blank_end] [blank_start]benefits[blank_end] from the asset and the entity's ability and intention to reach such a level; (g) the [blank_start]period[blank_end] of [blank_start]control[blank_end] over the asset and legal or similar [blank_start]limits[blank_end] on the use of the asset, such as the expiry dates of related leases; and (h) whether the useful life of the asset is [blank_start]dependent[blank_end] on the useful life of other assets of the entity.

What intangible assets can never be recognised if internally generated? Why? Paragraph [blank_start]63[blank_end] states: Internally generated b[blank_start]rands[blank_end], m[blank_start]astheads[blank_end], p[blank_start]ublishing[blank_end] t[blank_start]itles[blank_end], c[blank_start]ustomer[blank_end] l[blank_start]ists[blank_end] and items similar in substance shall not be recognised as intangible assets. Paragraph [blank_start]64[blank_end] gives the reason: Expenditure on internally generated b[blank_start]rands[blank_end], m[blank_start]astheads[blank_end], p[blank_start]ublishing[blank_end] t[blank_start]itles[blank_end], c[blank_start]ustomer[blank_end] l[blank_start]ists[blank_end] and items similar in substance cannot be d[blank_start]istinguished[blank_end] from the cost of d[blank_start]eveloping[blank_end] the business as a whole. Therefore, such items are not recognised as intangible assets.

Explain the difference between ‘research’ and ‘development’. Paragraph 8 contains the following definitions: Research is [blank_start]original[blank_end] and [blank_start]planned[blank_end] [blank_start]investigation[blank_end] undertaken with the prospect of [blank_start]gaining[blank_end] new [blank_start]scientific[blank_end] or [blank_start]technical[blank_end] knowledge and understanding. Development is the [blank_start]application[blank_end] of research [blank_start]findings[blank_end] or other knowledge to a [blank_start]plan[blank_end] or [blank_start]design[blank_end] for the [blank_start]production[blank_end] of new or substantially improved m[blank_start]aterials[blank_end], d[blank_start]evices[blank_end], p[blank_start]roducts[blank_end], p[blank_start]rocesses[blank_end], s[blank_start]ystems[blank_end] or s[blank_start]ervices[blank_end] before the start of commercial production or use.

Paragraph 56 gives examples of research activities: (a) activities aimed at obtaining n[blank_start]ew[blank_end] k[blank_start]nowledge[blank_end]; (b) the s[blank_start]earch[blank_end] for, evaluation and final selection of, a[blank_start]pplications[blank_end] of research findings or other knowledge; (c) the search for alternatives for m[blank_start]aterials[blank_end], d[blank_start]evices[blank_end], p[blank_start]roducts[blank_end], p[blank_start]rocesses[blank_end], s[blank_start]ystems[blank_end] or services; and (d) the f[blank_start]ormulation[blank_end], d[blank_start]esign[blank_end], e[blank_start]valuation[blank_end] and final selection of possible alternatives for new or improved m[blank_start]aterials[blank_end], d[blank_start]evices[blank_end], p[blank_start]roducts[blank_end], p[blank_start]rocesses[blank_end], s[blank_start]ystems[blank_end] or services.

Para [blank_start]59[blank_end] gives examples of development activities: (a) the design, [blank_start]construction[blank_end] and [blank_start]testing[blank_end] of pre-[blank_start]production[blank_end] or pre-[blank_start]use[blank_end] [blank_start]prototypes[blank_end] and [blank_start]models[blank_end]; (b) the [blank_start]design[blank_end] of t[blank_start]ools[blank_end], j[blank_start]igs[blank_end], m[blank_start]oulds[blank_end] and d[blank_start]ies[blank_end] involving new technology; (c) the design, construction and [blank_start]operation[blank_end] of a [blank_start]pilot[blank_end] [blank_start]plant[blank_end] that is not of a scale economically [blank_start]feasible[blank_end] for [blank_start]commercial[blank_end] production; and (d) the design, construction and testing of a [blank_start]chosen[blank_end] [blank_start]alternative[blank_end] for new or improved materials, devices, products, processes, systems or services

Explain when development outlays can be realised as an asset . Paragraph 57 states that when ALL the following [blank_start]recognition[blank_end] [blank_start]criteria[blank_end] are met, an intangible asset can be recognised from development outlays: (a) the [blank_start]technical[blank_end] [blank_start]feasibility[blank_end] of [blank_start]completing[blank_end] the intangible asset so that it will be available for [blank_start]use[blank_end] or [blank_start]sale[blank_end]. (b) its [blank_start]intention[blank_end] to [blank_start]complete[blank_end] the intangible asset and use or sell it. (c) its [blank_start]ability[blank_end] to use or sell the intangible asset. (d) how the intangible asset will [blank_start]generate[blank_end] probable [blank_start]future[blank_end] [blank_start]economic[blank_end] [blank_start]benefits[blank_end]. Among other things, the entity can demonstrate the existence of a [blank_start]market[blank_end] for the [blank_start]output[blank_end] of the intangible asset or the intangible asset itself or, if it is to be used [blank_start]internally[blank_end], the [blank_start]usefulness[blank_end] of the intangible asset. (e) the availability of adequate technical, [blank_start]financial[blank_end] and other [blank_start]resources[blank_end] to complete the development and to use or [blank_start]sell[blank_end] the intangible asset. (f) its ability to [blank_start]measure[blank_end] [blank_start]reliably[blank_end] the [blank_start]expenditure[blank_end] [blank_start]attributable[blank_end] to the intangible asset during its development.

Explain how intangible assets are initially measured, and whether the measurement differs dependent on whether the assets are acquired in a business combination or internally generated by an entity. Paragraph [blank_start]24[blank_end] states that an intangible asset must be initially measured at [blank_start]cost[blank_end]. When internally generated, [blank_start]cost[blank_end] is based upon [blank_start]capitalisation[blank_end] of development costs. When acquired in a business combination, cost is measured as the [blank_start]fair[blank_end] [blank_start]value[blank_end] of the asset at [blank_start]acquisition[blank_end] [blank_start]date[blank_end], and a hierarchy of measures of fair value is available.

What are the recognition criteria for intangible assets? Paragraph [blank_start]21[blank_end] states: An intangible asset shall be recognised if, and only if: (a) it is p[blank_start]robable[blank_end] that the e[blank_start]xpected[blank_end] f[blank_start]uture[blank_end] e[blank_start]conomic[blank_end] b[blank_start]enefits[blank_end] that are a[blank_start]ttributable[blank_end] to the asset will flow to the entity; and (b) the cost of the asset can be m[blank_start]easured[blank_end] r[blank_start]eliably[blank_end].