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For each class of intangible assets, disclosure is required of the following:





The method of amortisation used







The useful life of the assets or the amortisation rate used







The gross carrying amount, the accumulated amortisation and the accumulated impairment losses

as at the beginning and the end of the period







A reconciliation of the carrying amount as at the beginning and at the end of the period (additions,

retirements/disposals, revaluations, impairment losses, impairment losses reversed, amortisation

charge for the period, net exchange differences, other movements)







The carrying amount of internally-generated intangible assets



The financial statements should also disclose the following:





In the case of intangible assets that are assessed as having a indefinite useful life, the carrying

amounts and the reasons supporting that assessment







For intangible assets acquired by way of a government grant and initially recognised at fair value,

the fair value initially recognised, the carrying amount, and whether they are carried under the

benchmark or the allowed alternative treatment for subsequent remeasurements







The carrying amount, nature and remaining amortisation period of any intangible asset that is

material to the financial statements of the entity as a whole







The existence (if any) and amounts of intangible assets whose title is restricted and of intangible

assets that have been pledged as security for liabilities







The amount of any commitments for the future acquisition of intangible assets



Where intangible assets are accounted for at revalued amounts, disclosure is required of the following:





The effective date of the revaluation (by class of intangible assets)







The carrying amount of revalued intangible assets







The carrying amount that would have been shown (by class of assets) if the cost model had been

used, and the amount of amortisation that would have been charged







The amount of any revaluation surplus on intangible assets, as at the beginning and end of the

period, and movements in the surplus during the year (and any restrictions on the distribution of

the balance to shareholders)



The financial statements should also disclose the amount of research and development expenditure that

have been charged as expenses of the period.



5.15 Section summary





An intangible asset should be recognised if, and only if, it is probable that future economic benefits

will flow to the entity and the cost of the asset can be measured reliably.







An asset is initially recognised at cost and subsequently carried either at cost or revalued amount.







Costs that do not meet the recognition criteria should be expensed as incurred.







An intangible asset with a finite useful life should be amortised over its useful life. An intangible

asset with an indefinite useful life should not be amortised.



Question



List



As an aid to your revision, list the examples given in IAS 38 of activities that might be included in either

research or development.



Part B Accounting standards  3: Non-current assets



107



Answer

IAS 38 gives these examples.

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 evaluation of product or process alternatives







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



Question



Project



Forkbender Co develops and manufactures exotic cutlery and has the following projects in hand.

1

$'000



Deferred development

Expenditure b/f 1.1.X2

Development expenditure

Incurred during the year

Salaries, wages and so on

Overhead costs

Materials and services

Patents and licences

Market research



Project

2

3

$'000

$'000



4

$'000



280



450



–



–



35

2

3

1

–



–

–

–

–

–



60

–

11

–

2



20

3

4

–

–



Project 1: was originally expected to be highly profitable but this is now in doubt, since the scientist in

charge of the project is now behind schedule, with the result that competitors are gaining ground.

Project 2: commercial production started during the year. Sales were 20,000 units in 20X1 and future

sales are expected to be: 20X2 30,000 units; 20X3 60,000 units; 20X4 40,000 units; 20X5 30,000 units.

There are no sales expected after 20X5.

Project 3: these costs relate to a new project, which meets the criteria for deferral of expenditure and

which is expected to last for three years.

Project 4: is another new project, involving the development of a 'loss leader', expected to raise the level

of future sales.



The company's policy is to defer development costs, where permitted by IAS 38. Expenditure carried

forward is written off evenly over the expected sales life of projects, starting in the first year of sale.

Required



Show how the above projects should be treated in the accounting statements of Forkbender Co for the

year ended 31 December 20X2 in accordance with best accounting practice. Justify your treatment of each

project.



108



3: Non-current assets  Part B Accounting standards



Answer

Project 1 expenditure, including that relating to previous years, should all be written off in 20X2, as there

is now considerable doubt as to the profitability of the project.

Since commercial production has started under project 2 the expenditure previously deferred should now

be amortised. This will be done over the estimated life of the product, as stated in the question.

Project 3: the development costs may be deferred.

Since project 4 is not expected to be profitable its development costs should not be deferred.

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2 (extract)



$'000



NON-CURRENT ASSETS

Intangible assets

Development costs (Note 2)



431



NOTES TO THE ACCOUNTS



1



Accounting policies

Research and development



Research and development expenditure is written off as incurred, except that development costs

incurred on an individual project are carried forward when their future recoverability can be

foreseen with reasonable assurance. Any expenditure carried forward is amortised over the period

of sales from the related project.

2



Development costs



$'000

Balance brought forward 1 January 20X2

Development expenditure incurred

during 20X2

Development expenditure amortised

during 20X2 (321 + 90 + 27)



$'000

730



139

438

(299)

431



Balance carried forward 31 December 20X2



Note. IAS 38 would not permit the inclusion of market research in deferred development costs.

Market research costs might, however, be carried forward separately under the accruals principle.

Workings



B/F

Salaries etc

Overheads

Materials etc

Patents etc

C/F

Written off



1

$'000

280

35

2

3

1



–

321



2

$'000

450

–

–

–

–

(360)

90



3

$'000

–

60

–

11

–

(71)

–-- –



4

$'000

–

20

3

4

–

–

27



Total

$'000

730

115

5

18

1

(431)

438



*Note. An alternative basis for amortisation would be:



20

180  450 = 50

The above basis is more prudent, however, in this case.



Part B Accounting standards  3: Non-current assets



109



6 Goodwill

FAST FORWARD



Impairment rules follow IAS 36. There are substantial disclosure requirements.



Goodwill is created by good relationships between a business and its customers.

(a)



By building up a reputation (by word of mouth perhaps) for high quality products or high

standards of service



(b)



By responding promptly and helpfully to queries and complaints from customers



(c)



Through the personality of the staff and their attitudes to customers



The value of goodwill to a business might be extremely significant. However, goodwill is not usually

valued in the accounts of a business at all, and we should not normally expect to find an amount for

goodwill in its statement of financial position. For example, the welcoming smile of the bar staff may

contribute more to a bar's profits than the fact that a new electronic cash register has recently been

acquired. Even so, whereas the cash register will be recorded in the accounts as a non-current asset, the

value of staff would be ignored for accounting purposes.

On reflection, we might agree with this omission of goodwill from the accounts of a business.

(a)



The goodwill is inherent in the business but it has not been paid for, and it does not have an

'objective' value. We can guess at what such goodwill is worth, but such guesswork would be a

matter of individual opinion, and not based on hard facts.



(b)



Goodwill changes from day to day. One act of bad customer relations might damage goodwill and

one act of good relations might improve it. Staff with a favourable personality might retire or leave

to find another job, to be replaced by staff who need time to find their feet in the job. Since

goodwill is continually changing in value, it cannot realistically be recorded in the accounts of the

business.



6.1 Purchased goodwill

FAST FORWARD



If a business has goodwill, it means that the value of the business as a going concern is greater than the

value of its separate tangible assets. The valuation of goodwill is extremely subjective and fluctuates

constantly. For this reason, non-purchased goodwill is not shown as an asset in the statement of financial

position.

There is one exception to the general rule that goodwill has no objective valuation. This is when a

business is sold. People wishing to set up in business have a choice of how to do it – they can either buy

their own non-current assets and inventory and set up their business from scratch, or they can buy up an

existing business from a proprietor willing to sell it. When a buyer purchases an existing business, he will

have to purchase not only its long-term assets and inventory (and perhaps take over its accounts payable

and receivable too) but also the goodwill of the business.

Purchased goodwill is shown in the statement of financial position because it has been paid for. It has no

tangible substance, and so it is an intangible non-current asset.



6.2 How is the value of purchased goodwill decided?

FAST FORWARD



When someone purchases a business as a going concern the purchaser and vendor will fix an agreed

price which includes an element in respect of goodwill. The way in which goodwill is then valued is not an

accounting problem, but a matter of agreement between the two parties.

When a business is sold, there is likely to be some purchased goodwill in the selling price. But how is the

amount of this purchased goodwill decided?



110



3: Non-current assets  Part B Accounting standards



This is not really a problem for accountants, who must simply record the goodwill in the accounts of the

new business. The value of the goodwill is a matter for the purchaser and seller to agree upon in fixing

the purchase/sale price. However, two methods of valuation are worth mentioning here.

(a)



The seller and buyer agree on a price without specifically quantifying the Goodwill. The

purchased goodwill will then be the difference between the price agreed and the value of the

tangible assets in the books of the new business.



(b)



However, the calculation of goodwill often precedes the fixing of the purchase price and becomes a

central element of negotiation. There are many ways of arriving at a value for goodwill and most

of them are related to the profit record of the business in question.



No matter how goodwill is calculated within the total agreed purchase price, the goodwill shown by the

purchaser in his accounts will be the difference between the purchase consideration and his own

valuation of the tangible net assets acquired. If A values his tangible net assets at $40,000, goodwill is

agreed at $21,000 and B agrees to pay $61,000 for the business but values the tangible net assets at only

$38,000, then the goodwill in B's books will be $61,000 – $38,000 = $23,000.



6.3 IFRS 3 (Revised) Business combinations

FAST FORWARD



Purchased goodwill is retained in the statement of financial position as an intangible asset under the

requirements of IFRS 3. It must then be reviewed for impairment annually.



IFRS 3 covers the accounting treatment of goodwill acquired in a business combination.

It is possible to define goodwill in different ways. The IFRS 3 definition of goodwill is different from the

more traditional definition and emphasises benefits, rather than the method of calculation.



Key terms



Goodwill. An asset representing the future economic benefits arising from other assets acquired in a

business combination that are not individually identified and separately recognised.

(IFRS 3)



Goodwill recognised in a business combination is an asset and is initially measured at cost. Cost is the

excess of the cost of the combination over the acquirer's interest in the net fair value of the acquiree's

identifiable assets, liabilities and contingent liabilities.

After initial recognition goodwill acquired in a business combination is measured at cost less any

accumulated impairment losses. It is not amortised. Instead, it is tested for impairment at least annually,

in accordance with IAS 36 Impairment of assets.



6.3.1 Goodwill and non-controlling interests

The old IFRS 3 looked at goodwill from the point of view of the parent company, ie comparing,

consideration transferred with the parent's share of net assets acquired.

IMPORTANT!



The revised IFRS 3 views the group as an economic entity. This means that it treats all provides of equity

including non-controlling interests as shareholders in the group, even if they are not shareholders in the

parent.

Therefore, goodwill attributed to the non-controlling interest needs to be recognised.



We will come back to this point in Chapter 12.



6.3.2 Bargain purchase

A bargain purchase arises when the net of the acquisition-date amounts of the identifiable assets acquired

and the liabilities assumed exceeds the consideration transferred (see Chapter 12).

A bargain purchase might happen, for example, in a business combination that is a forced sale in which

the seller is acting under compulsion. However, the recognition or measurement exceptions for particular



Part B Accounting standards  3: Non-current assets



111



items may also result in recognising a gain (or change the amount of a recognised gain) on a bargain

purchase.

Before recognising a gain on a bargain purchase, the acquirer must reassess whether it has correctly

identified all of the assets acquired and all of the liabilities assumed and must recognise any additional

assets or liabilities that are identified in that review. The acquirer must then review the procedures used to

measure the amounts this IFRS requires to be recognised at the acquisition date for all of the following:



(a)



The identifiable assets acquired and liabilities assumed



(b)



The non-controlling (formerly minority) interest in the acquiree, if any



(c)



For a business combination achieved in stages, the acquirer's previously held interest in the

acquiree



(d)



The consideration transferred



The purpose of this review is to ensure that the measurements appropriately reflect all the available

information as at the acquisition date.



Question



Characteristics of goodwill



What are the main characteristics of goodwill which distinguish it from other intangible non-current

assets? To what extent do you consider that these characteristics should affect the accounting treatment

of goodwill? State your reasons.



Answer

Goodwill may be distinguished from other intangible non-current assets by reference to the following

characteristics.

(a)



It is incapable of realisation separately from the business as a whole.



(b)



Its value has no reliable or predictable relationship to any costs which may have been incurred.



(c)



Its value arises from various intangible factors such as skilled employees, effective advertising or a

strategic location. These indirect factors cannot be valued.



(d)



The value of goodwill may fluctuate widely according to internal and external circumstances over

relatively short periods of time.



(e)



The assessment of the value of goodwill is highly subjective.



It could be argued that, because goodwill is so different from other intangible non-current assets it does

not make sense to account for it in the same way. Therefore, the capitalisation and amortisation treatment

would not be acceptable. Furthermore, because goodwill is so difficult to value, any valuation may be

misleading, and it is best eliminated from the statement of financial position altogether. However, there are

strong arguments for treating it like any other intangible non-current asset. This issue remains

controversial.



112



3: Non-current assets  Part B Accounting standards



Chapter Roundup





You must learn the IASB Framework definition of an asset: a resource controlled by the entity as a result

of past events and from which future economic benefits are expected to flow to the entity.







This definition ties in closely with the definitions produced by other standard-setters, particularly FASB

(USA) and ASB (UK).







The definition has three important characteristics:

–

–

–







Future economic benefit

Control (ownership)

Transaction to acquire control has taken place



You should already be familiar with many standards relating to non-current assets from earlier studies.

If not, go back to your earlier study material.

–

–

–



IAS 16 Property, plant and equipment

IAS 20 Accounting for government grants and disclosure of government assistance

IAS 23 Borrowing costs







IAS 36 Impairment of assets covers a controversial topic and it affects goodwill as well as tangible longterm assets.







Impairment is determined by comparing the carrying amount of the asset with its recoverable amount.







The recoverable amount of an asset is the higher of the asset's fair value less costs of disposal and its

value in use.







When it is not possible to calculate the recoverable amount of a single asset, then that of its cash

generating unit should be measured instead.







IAS 40 Investment property defines investment property as property held to earn rentals or for capital

appreciation or both, rather than for:

–

–







Entities can choose between:

–

–







Use in production or supply of goods or services

Sale in the ordinary course of business



A fair value model, with changes in fair value being measured

A cost model – the treatment most commonly used under IAS 16



Intangible assets are defined by IAS 38 as non-monetary assets without physical substance. They must

be:



–

–

–



Identifiable

Controlled as a result of a past event

Able to provide future economic benefits







Intangible assets should initially be measured at cost, but subsequently they can be carried at cost or at a

fair value.







Impairment rules follow IAS 36. There are substantial disclosure requirements.







If a business has goodwill, it means that the value of the business as a going concern is greater than the

value of its separate tangible assets. The valuation of goodwill is extremely subjective and fluctuates

constantly. For this reason, non-purchased goodwill is not shown as an asset in the statement of financial

position.



Part B Accounting standards  3: Non-current assets



113



Chapter Roundup (continued)





When someone purchases a business as a going concern the purchaser and vendor will fix an agreed

price which includes an element in respect of goodwill. The way in which goodwill is then valued is not an

accounting problem, but a matter of agreement between the two parties.







Purchased goodwill is retained in the statement of financial position as an intangible asset under the

requirements of IFRS 3. It must then be reviewed for impairment annually.



Quick Quiz



114



1



How does the IASB Framework define an asset?



2



How might a non-current asset be defined?



3



Define an impairment.



4



How is value in use calculated?



5



What is a cash generating unit?



6



What is the correct treatment for property being constructed for future use as investment property?



7



Investment property must be valued at fair value. True or false?



8



Internally generated goodwill can be recognised. True or false?



9



How should research and development costs be treated under IAS 38?



10



When can a revaluation surplus on intangible assets be transferred to retained earnings?



11



Over what period should an intangible asset normally be amortised?



12



How should the gain or loss on the disposal of an intangible asset be calculated?



13



Why is it unusual to record goodwill as an asset in the accounts?



14



What is purchased goodwill?



15



Over what period should goodwill be amortised?



16



What treatment does IFRS 3 prescribe for a gain on a bargain purchase?



3: Non-current assets  Part B Accounting standards



Answers to Quick Quiz

1



A resource controlled by the entity as a result of past events and from which future economic benefits are

expected to flow to the entity.



2



One intended for use on a continuing basis in the company's activities.



3



A fall in the value of an asset, so that its recoverable amount is now less than its carrying value.



4



The present value of estimated future cash flows generated by the asset, including its estimated net

disposal value (if any).



5



The smallest identifiable group of assets for which independent cash flows can be identified and

measured.



6



Use IAS 16 until the construction is complete, then IAS 40.



7



False, it can be valued at cost or fair value.



8



False



9









10



When the surplus is eventually realised.



11



Over its useful life, which may be finite or indefinite



12



The difference between the net disposal proceeds and the carrying value.



13



The value of goodwill is usually inherent in the business but does not have an 'objective' value.



14



The aggregate of the difference between the fair value of the consideration transferred and any noncontrolling interest, and the fair value of any non-controlling interest, and the fair value of the net assets.



15



Goodwill should not be amortised.



16



Before recognising a gain, measurement procedures for assets and liabilities and for consideration must

be reviewed.



Research costs are written off as an expense as they are incurred

Development costs may qualify as intangible assets if the criteria in Paragraph 5.7.2 are met.



Now try the questions below from the Practice Question Bank



Number



Level



Marks



Time



Q4



Examination



25



49 mins



Q5



Examination



25



49 mins



Q6



Examination



25



49 mins



Part B Accounting standards  3: Non-current assets



115



116



3: Non-current assets  Part B Accounting standards



Employee

benefits



Topic list



Syllabus reference



1 IAS 19 Employee benefits



C6



2 Short-term employee benefits



C6



3 Post-employment benefits



C6



4 Defined contribution plans



C6



5 Defined benefit plans: recognition and measurement



C6



6 Defined benefit plans: other matters



C6



7 Other long-term benefits

8 Disclosures



C6, F2

C6



Introduction

An increasing number of companies and other entities now provide a pension

and other employee benefits as part of their employees' remuneration

package. In view of this trend, it is important that there is standard best

practice for the way in which employee benefit costs are recognised,

measured, presented and disclosed in the sponsoring entities' accounts.



117