Lecture Week 4
Lecture Week 4
Lecture 4
Intangibles
Department of Accounting
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Minimum Readings
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Learning Objectives
At the end of this lecture you should be able to:
1. Define an intangible asset and discuss its characteristics.
2. Understand the recognition issues and subsequent
measurement (revaluation, amortisation, impairment) for
intangibles as per AASB 138.
3. Differentiate and account for research and development
expenditure.
4. Understand accounting for intangibles as a controversial
issue with significant impacts on the capital markets.
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Asset Definition vs Intangible Assets Definition
The Conceptual Framework definition of an asset:
A resource controlled by the entity as a result of past
events from which the future economic benefits are
expected to flow to the entity.
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Intangibles Definition
Identifiable
Identifiability creates barriers to recognition in financial
statements. It is a test of:
Separability: The capacity of being separated from the
entity and sold, transferred, licensed, rented or exchanged.
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Intangibles - Definition
Non-monetary
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Intangibles - Definition
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Intangibles - Importance
Increasing business expenditure on intangibles
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AASB 138 Intangible Assets 1 Jan 2005
Para 63
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Intangibles Dot com crash
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Intangibles Do they matter?
Survey of ASX 200 conducted by PWC during 2005
51% of market capitalisation unexplained by balance sheets (%
too high?)
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Intangibles IFRS impact
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Intangibles Accounting Treatment
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Intangibles Accounting Treatment
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Intangibles - Recognition Issues
Initial
Recognition Measurement
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Intangibles - Recognition Issues
Recognition Initial Measurement
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Intangibles -Subsequent Measurement
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Intangibles -Subsequent Measurement
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Intangibles -Subsequent Measurement
Cost Model
Cost comprises:
Purchase price, import duties and any other costs directly
attributable to the cost of preparing the asset for intended
use
Discounts and rebates are deducted from cost
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Intangibles -Subsequent Measurement
Revaluation Model
FV needs active market AASB138 Para 78
AASB 13 Appendix A Defined Terms
active market A market in which transactions for the asset
...take place with sufficient frequency and volume to
provide pricing information on an ongoing basis.
Para 78 An active market cannot exist for brands,
newspaper mastheads, music and film publishing rights,
patents or trademarks.
Exceptions: transferable taxi licences, fishing licences and
production quotas
Effectively, AASB138 rules out the revaluation of intangible
assets.
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Quiz: Does an active market exist for the following intangibles?
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Intangibles -Subsequent Measurement
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Intangibles -Subsequent Measurement
Review annually
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Intangibles -Subsequent Measurement
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Quiz: Do we amortise the following intangibles?
Useful life Amortised?
finite or
indefinite?
Acquired copyright
Remaining legal life of 40 years
Market trends shows only 25 more years of
future economic benefits
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Lecture Illustrative Example 1
The following are transactions incurred by Ben Ltd:
A brand was purchased with cash for $2.6 million on 1 July 2015. The
company estimates that the future benefits from this asset will be generated
indefinitely.
Ben Ltds customer base increased by 30% during the financial year.
A patent was acquired with cash for $800,000 on 1 July 2015. Patent Law
indicates the patent is legally valid for 10 years. Ben Ltd expects to hold the
patent for 8 years.
Required:
(a) Explain the accounting treatment for the brand name, customer base and
patent with respect to AASB138 Intangible Assets for both initial and
subsequent measurement and recognition.
(b) Provide the journal entries to record the patent for the year ending 30 June
2016. 29
Solution to Illustrative Example 1(a)
Initial recognition and Subsequent measurement
measurement
Brand No active market, cannot be
Recognised as an asset
name revalued
at costexternally
acquired Not amortized due to indefinite life
Subject to impairment testing
(impaired if CA>RA)
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Research and Development Expenditures
Research Development
Original and planned investigation undertaken Application of research findings or other
with the prospect of gaining new scientific or knowledge to a plan or design for the production
technical knowledge and understanding. of new or substantially improved materials,
devices, products, processes, systems or
services before the start of commercial
production or use.
Expenditure on research shall be recognised All six conditions must be satisfied before
as an expense (AASB138 Para 54). development costs can be capitalised
(AASB138 Para 57)
Cannot suitably demonstrate that it will at
this stage generate future economic Reliable measurement
benefits.
Adequate resources
Technical feasibility
Probable future economic benefits
Ability to use or sell
Intention to complete 32
Lecture Illustrative Example 2:
Research and Development
Monash Solutions Ltd has been involved in a research
project in 2015, the following related to the expenditure:
Research phase $30,000
Development phase $400,000
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Solution to Illustrative Example 2
1. Write off research expense as incurred:
Dr Research expense 30,000
Cr Cash 30,000
3. Impairment recognition:
Dr Impairment loss 400k-360k=40,000
Cr Accumulated impairment- Deferred Development Cost (Asset) 40,000
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During 2018 a breakthrough in agricultural science improved
chances of the product succeeding and development
resumed. The project was completed in 2018. At the end of
2018 costs incurred on the project were expected to be
recoverable. Innovator expects that 10% of the project
revenue will be received in 2019, 20% in 2020, 30% in 2021,
30% in 2022 and 10% in 2023. After five years the product
will be at the end of its useful life because the disease found
in turnips will have been eradicated. Costs incurred were as
follows:
Research Development
($000) ($000)
2017 40 10
2018 12 60 36
Required:
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Solution to Illustrative Example 3
Required:
(a) How much research expenditure and development expenditure should be
recognised as an expense in 2017?
$50,000 to be expensed
= $40,000 research expenditure must be expensed
+ $10,000 development expenditure (unsuccessful prototype, not expecting feb)
(c) State how much expenditure should be carried forward (deferred) and
reported in the balance sheet at the end of 2017 and 2018.
2017: $nil
2018: $60,000
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Solution to Illustrative Example 3 (continued)
(d) Prepare journal entries for the amortisation of deferred costs in 2019 and
2020, assuming that actual revenues are as expected.
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Solution to Illustrative Example 3 (continued)
(e) Assume that after charging amortisation based on sales revenue at the end
of 2021 the discounted net cash flows expected to be generated from the
deferred expenditure were estimated as $15,000. Prepare any journal entries
required to account for this information.
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Prescribed Article
Mitrione, L., Tanewski, G., & Birt, J. (2014). The relevance
to firm valuation of research and development
expenditure in the Australian health-care industry.
Australian Journal of Management, 39(3), 425452.
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Prescribed Article
Purpose
Investigate the value relevance (i.e. information useful for
decision making) of R&D expenditure in the Australian
health care sector following the adoption of IAS 38
(AASB138)
Why are we reading this article?
Linked to intangible assets (R&D), qualitative
characteristics of information, agency theory.
This article provides insights to regulators (e.g., the AASB,
the IASB) in policy making relating to R&D reporting.
Positive Research
Sample:186 Australian health-care firms (20062009)
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Major findings:
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Accounting for Intangibles as a Controversial
Issue
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Disclosure Requirements For Intangible Assets
General requirements:
(a) Each class of intangible asset, distinguishing between
internally generated and other intangible assets.
(b) Where useful lives are indefinite and finite. If finite the
useful lives or amortisation rates and the methods used.
(c) Opening and closing amounts for accumulated
amortisation, impairments, revaluations and movements in
income statement line items e.g. amortisation expense
(d) Where intangible assets are measured after acquisition
using revaluation models, full details of revaluations.
Opening and closing balances and reconciliations.
Significant assumptions in determining fair values.
Para 118
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Disclosure Requirements For Intangible Assets
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Next Week
Leases
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