13 Disposals/retirements of intangible assets
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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.
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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?
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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.
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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
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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