Intangibles and Impairment of Assets Learn | Consult | Research Intangibles • Identifiable non-monetary asset without physical substance • IAS 38 prescribes special criteria for an asset to be recognized as intangible asset • Tangible or intangible must meet the criteria of asset to be recognized – Controlled by entity as a result of past event – Probable future economic inflow (revenue or cost saving) Recognition • Must meet the definition of asset • Must meet criteria set by IAS 38 – Cost of asset reliably measured – Probable economic inflow Recognized at cost!! Recognition – Internally generated The standard states that expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are not recognized as intangible assets (because they cannot be distinguished from the cost of developing the business as a whole). • Similarly, start-up, training, advertising, promotional, relocation and reorganisation costs are all recognised as expenses. Purchased Intangibles • If value of an intangible can not be valued reliably, while purchasing a company, include the value as a part of goodwill A special note on goodwill • Inherent goodwill Vs Purchased goodwill How is it different? – Balancing figure – Cant be sold as a separate asset Research and Development • Research – Initial investigation done to acquire new scientific knowledge or understanding • Development – Application of research findings to design a new product or improve an existing system of product before production R&D treatment • Write-off Research expenses • Development expenses – Capitalize if following conditions met – Technical feasibility – Intention and ability to make, use or sell – Economic feasibility – market for the product/usefulness – Expenditures attributable to development reliably measured
Initial recognition Eg. development expenditure The PIRATE criteria – Recognition Subsequent recognition • Cost model or Revaluation model Revaluation Model • If the revaluation model is followed, the revaluation must be fair value at date of revaluation by reference to an active market. – An active market is a market where all of the following conditions exist: • The items traded are homogenous, • Willing buyers and sellers can normally be found at any time • Prices are available to the public. Amortization and impairment • If useful life is fixed amortize Straight line with zero residual value – Start amortization once asset is ready to use • If useful life is not fixed, test for impairment – Atleast annually (IAS 36) Impairment of Assets • The focus of IAS 36 • Impairment occurs when the carrying value (NBV) exceeds the recoverable amount The Recoverable Amount • The cost or spending on an asset can be recovered in two ways 1. By selling it 2. By using it • So the recoverable amount is either the value we get from selling an asset (the fair value) or the value we get by using the asset (value in use) Recoverable Amount The FV less cost to sell • FV is determined by; A binding agreement to sell – Current market prices (if active market exists) • Less any selling expenses Value in use • Estimate the future cash flows (inflows and outflows) resulting from the use of the asset and ultimately its disposal • Apply suitable discount rate to come with a PV of future cash flows. • Financing cost and taxes not included Impairment Review • Calculate the carrying value • Calculate the recoverable amount as higher of: – Fair Value less cost to sell – Value in use (PV of future cash flows) • If CV>RV, then report impairment otherwise leave it as it is Reporting an impairment Impairment losses must be recognized i. e. the asset written down to its recoverable amount • Impairment losses are generally charged to I/S • If asset has been revalued, charge to revaluation reserve until exhausted, than to I/S. Page 246 Page 246 Indicators of impairment • External sources – Significant decline in market value of the asset – Significant changes with an adverse effect on the entity in the technological, market, economic or legal environment in which the entity operates – Increased market interest rates or other market rates of return affecting discount rates and thus reducing value in use
Indicators of impairment • Internal sources – Evidence of obsolescence or physical damage. – Significant changes with an adverse effect on the entity including: • the asset becoming idle • plans to discontinue or restructure an operation to which the asset belongs • Plans to dispose of it earlier than expected • reassessing the useful life of an asset as finite rather than indefinite – Internal evidence available that asset performance will be worse than expected.