Intangible Assets

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Overview of session

1. Scope and key concepts

2. Recognition

3. Measurement

4. Disclosures

5. Specific implications and next steps

6. Questions

Intangible Assets

1. Scope and key concepts

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Scope

• Intellectual property (“IP”) in general

• 3 broad categories:

– Research and development

– Patents, copyrights, brand names, trade secrets, trade marks,

franchises, concessions, operating right or right of use

– Computer software (developed internally or acquired from a third

party)

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Key definitions

• An intangible asset is an identifiable non-monetary asset without

physical substance held for use in the production or supply of goods or

services, for rental to others, or for administrative purposes

• Useful life is the period of time over which an asset is expected to be

used by the entity

• 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

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Scope

• Fall back on IAS 38 since no specific IPSAS

• Covers accounting for all Intangible Assets, excluding:

– Goodwill

– Financial assets

– Mineral rights and other similar expenditure

– Those arising in insurance companies through contracts with

policy holders

Intangible Assets

2. Recognition

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Criteria for recognition

Intangible resource

3. Capable of generating future economic benefits?

1. Identifiable?

2. Controlled?

Defined

4. Probable that future economic benefits will be generated?

5. Cost reliably measured?

Not an intangible

asset

Recognised

Not recognised

Yes

Yes

NoYes

No

No

Yes

Yes

No

No

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Identifiable

• An asset is identifiable if it is separable:

– An asset is separable if the enterprise could rent, sell, exchange

or distribute the specific future economic benefits attributable to

the asset without also disposing of future economic benefits that

flow from other assets used in the same revenue earning activity.

• But an enterprise may be able to identify an asset in some other way:

– For example, if an intangible asset is acquired with a group of

assets, the transaction may involve the transfer of legal rights that

enable an enterprise to identify the intangible asset.

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Control

• The capacity of an enterprise to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law (e.g. copyrights or a legal duty on employees to maintain confidentiality).

• In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control since an enterprise may be able to control the future economic benefits in some other way.

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Future economic benefits

• Future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the enterprise

– For example, the use of intellectual property in a production

process may reduce future production costs rather than increase

future revenues

• Requires the exercise of sound judgement based on verifiable information

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Measurement of cost

• Cost can be measured:

– Either directly (cost of acquisition of the asset when it is

separately acquired); or

– Indirectly (e.g. by reference to an active market or using

discounted cash flows techniques when the asset is acquired as

part of a business combination)

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Recognition – Internally generated intangible assets

Internally generated goodwill

NO!

Internally generated

intangible assets

Research phase

Development phase

NO! Only if strict criteria met

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Research phase

• Examples of research activities:

– Activities aimed at obtaining new knowledge

– The search for, and evaluation and final selection of, applications

of research findings or other knowledge

– The search for alternatives for materials, devices, products,

processes, systems or services

– The formulation, design, evaluation and final selection of possible

alternatives for new or improved materials, devices, products,

processes, systems or services

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Development phase

• Conditions to be met before capitalisation:

– Technical feasibility of completing the asset

– Intention to complete it and use/sell the asset

– Ability to use/sell the asset

– An analysis of whether the asset will generate future economic

benefits

– Availability of resources to complete the asset and to use/sell it

AND

– Ability to reliably measure the attributable expenditure

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Cannot capitalise…

Internally generated

brands

Customer lists

Publishing titles

Mastheads

…and similar items

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Date for recognition

• During the year, the date of acquisition or date of entry shall correspond to the date on which the risks of ownership of the assets are transferred to the E.C., which in general corresponds to the accepted delivery of the asset

• If an item does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is recognised as an expense when incurred.

Intangible Assets

3. Measurement

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Measurement

Initial measurement:

cost

Subsequent costs:

expense (unless can

prove enhanced economic benefits)

Benchmark treatment• continue to carry at cost*

Alternative treatment• carry at re-valued amount*

by reference to active market

* less amortisation and impairment provisions

The E.C.s’ choice

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Cost of internally generated intangible assets

• Cost = directly attributable expenditure

• Begin when asset first meets recognition criteria

• Cannot back-date to include costs expensed previously

• Specific costs CANNOT be capitalised

– Start-up costs

– Training activities

– Advertising/promotional activities

– Re-locating/re-organising costs

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Measurement - amortisation

Presumption

UEL ≤ 20 years

Amortise over UEL

Rebuttal

UEL > 20 years

Disclose evidence& perform

annual impairment test

Evidence must be persuasive

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Measurement – disposal

• Disposal

– Gain/loss = Net Disposal Proceeds – Carrying Amount

– Recognise in economic outturn account

Intangible Assets

4. Disclosures

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Major disclosures

Internally generated

Acquired

Useful lives or

amortisation rates

Gross opening &

closing balances

Reconciliation of movements

in year

Re-valued intangibles

Disclose separately

Also, R&D costs expensed in the period

Intangible Assets

5. Specific implications and next steps

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Proposed E.C. general accounting policies

Computer software

Software are stated at historical cost less depreciation. Costs associated with maintaining computer software programmes are recognized as an expense

as incurred.

Expenditure, which enhances or extends the performance of computer software programmes beyond their original specifications is recognized as a

capital improvement and added to the original cost of the software.

Computer software recognized as assets are amortized using the straight-line method over their useful lives, not exceeding a period of 4 years.

Research and development

Research expenditure is recognized as an expense as incurred. Costs incurred on development projects are recognized as intangible assets when it is

probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other

development expenditures are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an

asset in a subsequent period. Development costs that have been capitalized are amortized from the commencement of the commercial production of the

product on a straight-line basis over the period of its expected benefit, not exceeding five years.

Other intangible assets

Expenditure to acquire patents, trademarks and licenses is capitalized and amortized using the straight-line method over their useful lives, but not

exceeding 20 years.

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Compliance issues

Issue As per former

regulation

As per IPSAS Accounting rules

EC transition

period 5 years

Internally developed

software

Expensed Capitalise if identifiable,

controlled, future economic

benefits and measurable cost

expensed

Development costs Expensed Capitalise if identifiable,

controlled, future economic

benefits and measurable cost

expensed

Assets under construction N/A To be disclosed as a separate

category within intangible assets

expensed

Amortisation rules Full year from the

date when the asset

is available for use

Pro-rata temporis from the date

when the asset is available for

use

Intangible Assets

6. Questions

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