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Project B 150,000
New colour-fast dye. Expected to cost a total of $3,000,000 to complete. The dye is being developed as a cheaper replacement for a dye already used in Y Co’s most successful product, cost savings of over $10,000,000 are expected from its use. Although Y has demonstrated that the dye is a viable product, and has the intention to finish developing it, the completion date is currently uncertain because external funding will have to be obtained before the development work can be completed.
Project C 110,000
Investigation of new adhesive recently developed in aerospace industry. If this proves effective then Y Co may well generate significant income because it will be used in place of existing adhesives.
Explain how the three research projects A, B and C will be dealt with in Y Co's statement of profit or loss and other comprehensive income and statement of financial position.
In each case, explain your proposed treatment in terms of IAS 38 Intangible assets.
Learning outcome C2(a)
Y Co had the following balances relating to deferred development expenditure at 30 September 20X4: $
Deferred development expenditure (cost) 1,250,000
Amortisation (125,000)
Carrying value at 30 September 20X4 1,125,000 The existing deferred development expenditure is being amortised over 10 years on a straight line basis. Show how these balances and the research and development costs in the previous question will be disclosed in the accounts of Y Co at 30 September 20X5.
Show extracts from the:
(a) Statement of profit or loss (b) Statement of financial position (c) Notes to the financial statements
Section summary
If the criteria laid down by IAS 38 are satisfied, development costs should be capitalised as an intangible asset. They are then amortised, beginning from the time when the development project is available for use.
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7: Intangible non-current assets PART B SINGLE COMPANY FINANCIAL ACCOUNTS 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.
If a business has goodwill, it means that the value of the business as a going concern is greater than the value of its identifiable net assets. The valuation of goodwill is extremely subjective and fluctuates constantly. For this reason internally generated goodwill is not shown as an asset in the statement of financial position.
Purchased positive goodwill arising on a business contribution is recognised as an intangible asset under the requirements of IFRS 3. It must then be reviewed for impairment annually.
Purchased negative goodwill is credited to profit or loss in the year of acquisition.
If the criteria laid down by IAS 38 are satisfied, development costs should be capitalised as an intangible asset. They are then amortised, beginning from the time when the development project is available for use.
1 Intangible assets can only be recognised in a company's accounts if:
It is probable that ……… ……… ……… will flow to the entity The cost can be ……… ………
2 What are the criteria which must be met before development expenditure can be recognised as an intangible asset?
3 Research costs must be expensed. True
False
4 How is goodwill calculated under IFRS 3?
5 The following statements relate to intangible assets.
1 An intangible asset should be amortised on a systematic basis over the asset's useful life.
2 Internally generated goodwill may be carried in the statement of financial position if the value can be determined with reasonable certainty.
3 Internally generated brands can never be recognised as intangible assets. Which of the above statements are consistent with IAS 38 Intangible Assets? A 1 and 2 only B 1 and 3 only C 2 only D 3 only
Quick Quiz
Chapter Roundup
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1 Future economic benefits. Measured reliably. 2 PIRATE criteria:
Probable economic benefits will be generated by the intangible asset Intention to complete the intangible asset and use or sell it
Resources (technical, financial) adequate to complete the development and to use or sell Ability to use or sell the intangible asset
Technical feasibility of completing the intangible asset Expenditure can be measured reliably.
3 True
4 Goodwill is calculated as the difference between the purchase consideration and the fair value of the identifiable assets and liabilities acquired
5 B Internally generated goodwill can not be recognised as an intangible asset as its cost cannot be reliably measured.
7.1 Revaluation
In this example, the downward valuation of $500 can first be set against the revaluation surplus of $400. The revaluation surplus will be reduced to nil and a charge of $100 made as an expense in 20X4.
7.2 Useful life
Factors to consider would include the following.
(a) Legal protection of the brand name and the control of the entity over the (illegal) use by others of the brand name (ie control over pirating)
(b) Age of the brand name
(c) Status or position of the brand in its particular market
(d) Ability of the management of the entity to manage the brand name and to measure activities that support the brand name (eg advertising and PR activities)
(e) Stability and geographical spread of the market in which the branded products are sold (f) Pattern of benefits that the brand name is expected to generate over time
(g) Intention of the entity to use and promote the brand name over time (as evidenced perhaps by a business plan in which there will be substantial expenditure to promote the brand name)
Answers to Quick Quiz
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7: Intangible non-current assets PART B SINGLE COMPANY FINANCIAL ACCOUNTS7.3 Intangible asset
At the end of 20X3, the production process is recognised as an intangible asset at a cost of $10,000. This is the expenditure incurred since the date when the recognition criteria were met, that is 1 December 20X3. The $90,000 expenditure incurred before 1 December 20X3 is expensed, because the recognition criteria were not met. It will never form part of the cost of the production process recognised in the statement of financial position.
7.4 Research and development I Project A
This project meets the criteria in IAS 38 for development expenditure to be recognised as an asset. These are as follows.
(a) P – how the intangible asset will generate probable future economic benefits: Customers have already placed advanced orders for the final product after development
(b) I – its intention to complete the intangible asset and use to sell it: Y Co intends to finish development of the product by late 20X6 and then sell the right to use it to customers
(c) R – the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset: Adequate resources to exist, the project seems to be in the late stages of development
(d) A – its ability to use or sell the intangible asset: Customers have already placed advanced orders for the final product, so Y Co’s ability to use the asset is clear
(e) T – the technical feasibility of completing the intangible asset so that it will be available for use or sale: the capabilities of the product were demonstrated to customers, so the technical feasibility is assured (f) E – its ability to measure reliably the expenditure attributable to the intangible asset during its
development: Y Co has a reliable estimation of costs to date and to complete.
Hence the costs of $280,000 incurred to date should be capitalised as an intangible asset in the statement of financial position. Once the material is ready for use, the intangible asset should be amortised over its useful life. Project B
This project meets most of the criteria discussed above which would enable the costs to be carried forward, however, it fails on the availability of adequate resources to complete the project. As such, the costs cannot be capitalised and should be expensed to the income account.
Once funding is obtained the situation can then be reassessed and future costs may be capitalised. Project C
This is a research project according to IAS 38, ie original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge or understanding.
There is no certainty as to its ultimate success or commercial viability and therefore it cannot be considered to be a development project. IAS 38 therefore requires that costs be written off as incurred.
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7.5 Research and development II
(a) STATEMENT OF PROFIT OR LOSS (EXTRACT)
$
Research expenditure (Project C) 110,000
Development costs (Project B) 150,000
Amortisation of capitalised development costs 125,000 (b) STATEMENT OF FINANCIAL POSITION (EXTRACT)
$ Non-current assets
Intangible assets – deferred development expenditure (1,125 – 125 + 280) 1,280,000 (c) NOTE TO THE FINANCIAL STATEMENTS