Paper acca fa/ fia ffa financial accounting chapter 9 intangible assets(ias 38)

Paper ACCA FA/ FIA FFA

FINANCIAL ACCOUNTING

CHAPTER 9 - INTANGIBLE ASSETS

Intangible assets(IAS 38)

• Intangible asset is an asset without a physical existence or substance from which benefits will be obtained over the long-term future
• Intangible asset can be purchased (e.g. software) or may be created within a business (goodwill, brand name) without any expenditure being incurred; therefore,
• Intangible asset is included in statement of financial position as non-current asset only if expenditure has been incurred to obtain it and it therefore has a measurable cost

Examples of intangible assets

• Development costs
• Goodwill (dealt with IFRS 3)
• Trade marks
• Licenses
• Patents
• Copyrights
• Franchises

Research and development costs

• Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
• Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use

Examples of research and development activities

Research

• Activities aimed at obtaining new knowledge
• The search for applications of research findings or other knowledge
• The search for product or process alternatives
• The formulation and design of possible new or improved product or process alternatives

Development

• The design, construction and testing of pre-production prototypes and models
• The design of tools, jigs, moulds and dies involving new technology
• The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production
• The design construction and testing of a chosen alternative for new/improved materials

Development costs capitalization

• Development expenditure should be recognized as an asset only when the business can demonstrate all of the following
• How the intangible asset will generate probable future economic benefits. Among other things, the
• entity should demonstrate the existence of a market for the output of the intangible asset itself or, if
• it is to be used internally, the usefulness of the intangible asset
• Its intention to complete the intangible asset and use or sell it
• The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset
• Its ability to use or sell the intangible asset
• The technical feasibility of completing the intangible asset so that it will be available for use or sale
• Its ability to measure reliably the expenditure attributable to the intangible asset during its development

Accounting for intangible assets

• The accounting treatment is similar to tangible non-current asset i.e. the asset is shown as non-current asset in statement of financial position.
• Non-current assets are depreciated. However, the term used for depreciation of intangible assets is amortization. Intangible assets are amortized over the period in which they are expected to provide benefits to company.
• Intangible assets with indefinite useful life should not be amortized.

Amortization

• If the useful life of an intangible asset is finite, its capitalized development costs must be amortized
• The amortization method used should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise. If the pattern can not be determined, straight line method should be used
• An intangible asset with indefinite useful life should not be amortized