(Your answer must be confined in four to five lines)
:::::::::::::::::::::::::::::::::::::::
Solution:
· Charge all research cost to expense. [IAS 38.54]
· Development costs are capitalized only after technical and commercial feasibility of the asset for sale [IAS 38.57]
· Or uses have been established. This means that the entity must intend and be able to complete the intangible asset and either uses it or sells it and be able to demonstrate how the asset will generate future economic benefits. [IAS 38.57]
· Purchased: capitalize
Initial Recognition: In-process Research and Development Acquired in a Business Combination
A research and development project acquired in a business combination is
recognized as an asset at cost, even if a component is research. Subsequent
expenditure on that project is accounted for as any other research and
development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognizing such expenditure as an intangible asset).
[IAS 38.34]
b. Explain briefly why IAS-38 compels a rigid set of
structure which prevents the capitalization of all research
expenditures and make it difficult to capitalize development
expenditures?
Solution:-
SUMMARY OF IAS 38
Objective
The objective of IAS 38 is to prescribe the accounting treatment for intangible
assets that are not dealt with specifically in another IFRS. The Standard requires
an entity to recognize an intangible asset if, and only if, certain criteria are met.
The Standard also specifies how to measure the carrying amount of intangible
assets and requires certain disclosures regarding intangible assets. [IAS 38.1]
Scope
IAS 38 applies to all intangible assets other than: [IAS 38.2-3]
· financial assets
· exploration and evaluation assets (extractive industries)
· expenditure on the development and extraction of minerals, oil, natural
gas, and similar resources
· intangible assets arising from insurance contracts issued by insurance
companies
· intangible assets covered by another IFRS, such as intangibles held for
sale, deferred tax assets, lease assets, assets arising from employee
benefits, and goodwill. Goodwill is covered by IFRS 3.
Key Definitions
Intangible asset: an identifiable nonmonetary asset without physical substance.
An asset is a resource that is controlled by the entity as a result of past events (for
example, purchase or self-creation) and from which future economic benefits
(inflows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical
attributes of an intangible asset are:
· Identifiably
· control (power to obtain benefits from the asset)
· Future economic benefits (such as revenues or reduced future costs)
Identifiably: an intangible asset is identifiable when it: [IAS 38.12]
· is separable (capable of being separated and sold, transferred, licensed,
rented, or exchanged, either individually or together with a related
contract) or
· arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligations.
Examples of possible intangible assets include:
· computer software
· patents
· copyrights
· motion picture films
· customer lists
· mortgage servicing rights
· licenses
· import quotas
· franchises
· customer and supplier relationships
· marketing rights
Intangibles can be acquired:
· by separate purchase
· as part of a business combination
· by a government grant
· by exchange of assets
· by self-creation (internal generation)
Recognition
Recognition criteria. IAS 38 requires an entity to recognise an intangible asset,
whether purchased or self-created (at cost) if, and only if: [IAS 38.21]
· it is probable that the future economic benefits that are attributable to the
asset will flow to the entity; and
· the cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or
generated internally. IAS 38 includes additional recognition criteria for internally
generated intangible assets (see below).
The probability of future economic benefits must be based on reasonable and
supportable assumptions about conditions that will exist over the life of the
asset. [IAS 38.22] The probability recognition criterion is always considered to be
satisfied for intangible assets that are acquired separately or in a business
combination. [IAS 38.33]
If recognition criteria not met. If an intangible item does not meet both the
definition of and the criteria for recognition as an intangible asset, IAS 38
requires the expenditure on this item to be recognised as an expense when it is
incurred. [IAS 38.68]
Business combinations. There is a presumption that the fair value (and therefore
the cost) of an intangible asset acquired in a business combination can be
measured reliably. [IAS 38.35] An expenditure (included in the cost of
acquisition) on an intangible item that does not meet both the definition of and
recognition criteria for an intangible asset should form part of the amount
attributed to the goodwill recognised at the acquisition date.
Reinstatement. The Standard also prohibits an entity from subsequently
reinstating as an intangible asset, at a later date, an expenditure that was
originally charged to expense. [IAS 38.71]
Initial Recognition: Research and Development Costs
· Charge all research cost to expense. [IAS 38.54]
· Development costs are capitalised only after technical and commercial
feasibility of the asset for sale or use have been established. This means
that the entity must intend and be able to complete the intangible asset
and either use it or sell it and be able to demonstrate how the asset will
generate future economic benefits. [IAS 38.57]
If an entity cannot distinguish the research phase of an internal project to create
an intangible asset from the development phase, the entity treats the expenditure
for that project as if it were incurred in the research phase only.
Initial Recognition: In-process Research and Development Acquired in a Business
Combination
A research and development project acquired in a business combination is
recognised as an asset at cost, even if a component is research. Subsequent
expenditure on that project is accounted for as any other research and
development cost (expensed except to the extent that the expenditure satisfies
the criteria in IAS 38 for recognising such expenditure as an intangible asset).
[IAS 38.34]
Initial Recognition: Internally Generated Brands, Mastheads, Titles, Lists
Brands, mastheads, publishing titles, customer lists and items similar in
substance that are internally generated should not be recognised as assets. [IAS
38.63]
Initial Recognition: Computer Software
· Purchased: capitalise
· Operating system for hardware: include in hardware cost
· Internally developed (whether for use or sale): charge to expense until
technological feasibility, probable future benefits, intent and ability to use
or sell the software, resources to complete the software, and ability to
measure cost.
· Amortisation: over useful life, based on pattern of benefits (straight-line is
the default).
Initial Recognition: Certain Other Defined Types of Costs
The following items must be charged to expense when incurred:
· internally generated goodwill [IAS 38.48]
· start-up, pre-opening, and pre-operating costs [IAS 38.69]
· training cost [IAS 38.69]
· advertising and promotional cost, including mail order catalogues [IAS
38.69]
· relocation costs [IAS 38.69]
For this purpose, 'when incurred' means when the entity receives the related
goods or services. If the entity has made a prepayment for the above items, that
prepayment is recognised as an asset until the entity receives the related goods
or services. [IAS 38.70]
Initial Measurement
Intangible assets are initially measured at cost. [IAS 38.24]
Measurement Subsequent to Acquisition: Cost Model and Revaluation Models Allowed
An entity must choose either the cost model or the revaluation model for each
class of intangible asset. [IAS 38.72]
Cost model. After initial recognition the benchmark treatment is that intangible
assets should be carried at cost less any amortisation and impairment losses. [IAS
38.74]
Revaluation model. Intangible assets may be carried at a revalued amount (based
on fair value) less any subsequent amortisation and impairment losses only if fair
value can be determined by reference to an active market. [IAS 38.75] Such active
markets are expected to be uncommon for intangible assets. [IAS 38.78]
Examples where they might exist:
· production quotas
· fishing licences
· taxi licences
Under the revaluation model, revaluation increases are credited directly to
"revaluation surplus" within equity except to the extent that it reverses a
revaluation decrease previously recognised in profit and loss. If the revalued
intangible has a finite life and is, therefore, being amortised (see below) the
revalued amount is amortised. [IAS 38.85]
Classification of Intangible Assets Based on Useful Life
Intangible assets are classified as: [IAS 38.88]
· Indefinite life: no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity.
· Finite life: a limited period of benefit to the entity.
Measurement Subsequent to Acquisition: Intangible Assets with Finite Lives
The cost less residual value of an intangible asset with a finite useful life should
be amortised on a systematic basis over that life: [IAS 38.97]
· The amortisation method should reflect the pattern of benefits.
· If the pattern cannot be determined reliably, amortise by the straight line
method.
· The amortisation charge is recognised in profit or loss unless another IFRS
requires that it be included in the cost of another asset.
· The amortisation period should be reviewed at least annually. [IAS 38.104]
The asset should also be assessed for impairment in accordance with IAS 36. [IAS
38.111]
Measurement Subsequent to Acquisition: Intangible Assets with Indefinite Lives
An intangible asset with an indefinite useful life should not be amortised. [IAS
38.107]
Its useful life should be reviewed each reporting period to determine whether
events and circumstances continue to support an indefinite useful life assessment
for that asset. If they do not, the change in the useful life assessment from
indefinite to finite should be accounted for as a change in an accounting estimate.
[IAS 38.109]
The asset should also be assessed for impairment in accordance with IAS 36. [IAS
38.111]
Subsequent Expenditure
Subsequent expenditure on an intangible asset after its purchase or completion
should be recognised as an expense when it is incurred, unless it is probable that
this expenditure will enable the asset to generate future economic benefits in
excess of its originally assessed standard of performance and the expenditure can
be measured and attributed to the asset reliably. [IAS 38.60]
Disclosure
For each class of intangible asset, disclose: [IAS 38.118 and 38.122]
· useful life or amortisation rate
· amortisation method
· gross carrying amount
· accumulated amortisation and impairment losses
· line items in the income statement in which amortisation is included
· reconciliation of the carrying amount at the beginning and the end of the
period showing:
o additions (business combinations separately)
o assets held for sale
o retirements and other disposals
o revaluations
o impairments
o reversals of impairments
o amortisation
o foreign exchange differences
o other changes
· basis for determining that an intangible has an indefinite life
· description and carrying amount of individually material intangible assets
· certain special disclosures about intangible assets acquired by way of
government grants
· information about intangible assets whose title is restricted
· contractual commitments to acquire intangible assets
Additional disclosures are required about:
· intangible assets carried at revalued amounts [IAS 38.124]
· the amount of research and development expenditure recognised as an
expense in the current period [IAS 38.126]
::::::::::::::::::::::::::::::
SOLUTION:
::::::::::::::::::::::::::::::
· Charge all research cost to expense. [IAS 38.54]
· Development costs are capitalized only after technical and commercial feasibility of the asset for sale [IAS 38.57]
· Or uses have been established. This means that the entity must intend and be able to complete the intangible asset and either uses it or sells it and be able to demonstrate how the asset will generate future economic benefits. [IAS 38.57]
· Purchased: capitalize
Initial Recognition: In-process Research and Development Acquired in a Business Combination
A research and development project acquired in a business combination is
recognized as an asset at cost, even if a component is research. Subsequent
expenditure on that project is accounted for as any other research and
development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognizing such expenditure as an intangible asset). [IAS 38.34]
b. Explain briefly why IAS-38 compels a rigid set of structure which prevents the capitalization of all research expenditures and make it difficult to capitalize development expenditures?
Solution:-
SUMMARY OF IAS 38
Objective
The objective of IAS 38 is to prescribe the accounting treatment for intangible
assets that are not dealt with specifically in another IFRS. The Standard requires
an entity to recognize an intangible asset if, and only if, certain criteria are met.
The Standard also specifies how to measure the carrying amount of intangible
assets and requires certain disclosures regarding intangible assets. [IAS 38.1]
Scope IAS 38 applies to all intangible assets other than: [IAS 38.2-3]
· financial assets
· exploration and evaluation assets (extractive industries)
· expenditure on the development and extraction of minerals, oil, natural
gas, and similar resources
· intangible assets arising from insurance contracts issued by insurance
companies
· intangible assets covered by another IFRS, such as intangibles held for
sale, deferred tax assets, lease assets, assets arising from employee
benefits, and goodwill. Goodwill is covered by IFRS 3.
Key DefinitionsIntangible asset: an identifiable nonmonetary asset without physical substance.
An asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical attributes of an intangible asset are:
· Identifiably
· control (power to obtain benefits from the asset)
· Future economic benefits (such as revenues or reduced future costs)
Identifiably: an intangible asset is identifiable when it: [IAS 38.12]
· is separable (capable of being separated and sold, transferred, licensed,
rented, or exchanged, either individually or together with a related
contract) or
· arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligations.
Examples of possible intangible assets include:· computer software
· patents
· copyrights
· motion picture films
· customer lists
· mortgage servicing rights
· licenses
· import quotas
· franchises
· customer and supplier relationships
· marketing rights
Intangibles can be acquired:
· by separate purchase
· as part of a business combination
· by a government grant
· by exchange of assets
· by self-creation (internal generation)
RecognitionRecognition criteria. IAS 38 requires an entity to recognise an intangible asset,
whether purchased or self-created (at cost) if, and only if: [IAS 38.21]
· it is probable that the future economic benefits that are attributable to the
asset will flow to the entity; and
· the cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or
generated internally. IAS 38 includes additional recognition criteria for internally generated intangible assets (see below).
The probability of future economic benefits must be based on reasonable and
supportable assumptions about conditions that will exist over the life of the
asset. [IAS 38.22] The probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business
combination. [IAS 38.33]
If recognition criteria not met. If an intangible item does not meet both the
definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense when it is incurred. [IAS 38.68]
Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset acquired in a business combination can be measured reliably. [IAS 38.35] An expenditure (included in the cost of
acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.
Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS 38.71]
Initial Recognition: Research and Development Costs
· Charge all research cost to expense. [IAS 38.54]
· Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. [IAS 38.57]
If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.
Initial Recognition: In-process Research and Development Acquired in a Business
Combination
A research and development project acquired in a business combination is
recognised as an asset at cost, even if a component is research. Subsequent
expenditure on that project is accounted for as any other research and
development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for recognising such expenditure as an intangible asset). [IAS 38.34]
Initial Recognition: Internally Generated Brands, Mastheads, Titles, Lists
Brands, mastheads, publishing titles, customer lists and items similar in
substance that are internally generated should not be recognised as assets. [IAS 38.63]
Initial Recognition: Computer Software
· Purchased: capitalise
· Operating system for hardware: include in hardware cost
· Internally developed (whether for use or sale): charge to expense until
technological feasibility, probable future benefits, intent and ability to use
or sell the software, resources to complete the software, and ability to
measure cost.
· Amortisation: over useful life, based on pattern of benefits (straight-line is
the default).
Initial Recognition: Certain Other Defined Types of Costs
The following items must be charged to expense when incurred:
· internally generated goodwill [IAS 38.48]
· start-up, pre-opening, and pre-operating costs [IAS 38.69]
· training cost [IAS 38.69]
· advertising and promotional cost, including mail order catalogues [IAS
38.69]
· relocation costs [IAS 38.69]
For this purpose, 'when incurred' means when the entity receives the related
goods or services. If the entity has made a prepayment for the above items, that
prepayment is recognised as an asset until the entity receives the related goods
or services. [IAS 38.70]
Initial Measurement
Intangible assets are initially measured at cost. [IAS 38.24]
Measurement Subsequent to Acquisition: Cost Model and Revaluation Models Allowed
An entity must choose either the cost model or the revaluation model for each
class of intangible asset. [IAS 38.72]
Cost model. After initial recognition the benchmark treatment is that intangible
assets should be carried at cost less any amortisation and impairment losses. [IAS
38.74]
Revaluation model. Intangible assets may be carried at a revalued amount (based
on fair value) less any subsequent amortisation and impairment losses only if fair
value can be determined by reference to an active market. [IAS 38.75] Such active
markets are expected to be uncommon for intangible assets. [IAS 38.78]
Examples where they might exist:
· production quotas
· fishing licences
· taxi licences
Under the revaluation model, revaluation increases are credited directly to
"revaluation surplus" within equity except to the extent that it reverses a
revaluation decrease previously recognised in profit and loss. If the revalued
intangible has a finite life and is, therefore, being amortised (see below) the
revalued amount is amortised. [IAS 38.85]
Classification of Intangible Assets Based on Useful Life
Intangible assets are classified as: [IAS 38.88]
· Indefinite life: no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity.
· Finite life: a limited period of benefit to the entity.
Measurement Subsequent to Acquisition: Intangible Assets with Finite Lives
The cost less residual value of an intangible asset with a finite useful life should
be amortised on a systematic basis over that life: [IAS 38.97]
· The amortisation method should reflect the pattern of benefits.
· If the pattern cannot be determined reliably, amortise by the straight line
method.
· The amortisation charge is recognised in profit or loss unless another IFRS
requires that it be included in the cost of another asset.
· The amortisation period should be reviewed at least annually. [IAS 38.104]
The asset should also be assessed for impairment in accordance with IAS 36. [IAS
38.111]
Measurement Subsequent to Acquisition: Intangible Assets with Indefinite Lives
An intangible asset with an indefinite useful life should not be amortised. [IAS
38.107]
Its useful life should be reviewed each reporting period to determine whether
events and circumstances continue to support an indefinite useful life assessment
for that asset. If they do not, the change in the useful life assessment from
indefinite to finite should be accounted for as a change in an accounting estimate.
[IAS 38.109]
The asset should also be assessed for impairment in accordance with IAS 36. [IAS
38.111]
Subsequent Expenditure
Subsequent expenditure on an intangible asset after its purchase or completion
should be recognised as an expense when it is incurred, unless it is probable that
this expenditure will enable the asset to generate future economic benefits in
excess of its originally assessed standard of performance and the expenditure can
be measured and attributed to the asset reliably. [IAS 38.60]
Disclosure
For each class of intangible asset, disclose: [IAS 38.118 and 38.122]
· useful life or amortisation rate
· amortisation method
· gross carrying amount
· accumulated amortisation and impairment losses
· line items in the income statement in which amortisation is included
· reconciliation of the carrying amount at the beginning and the end of the
period showing:
o additions (business combinations separately)
o assets held for sale
o retirements and other disposals
o revaluations
o impairments
o reversals of impairments
o amortisation
o foreign exchange differences
o other changes
· basis for determining that an intangible has an indefinite life
· description and carrying amount of individually material intangible assets
· certain special disclosures about intangible assets acquired by way of
government grants
· information about intangible assets whose title is restricted
· contractual commitments to acquire intangible assets
Additional disclosures are required about:
· intangible assets carried at revalued amounts [IAS 38.124]
· the amount of research and development expenditure recognised as an
expense in the current period [IAS 38.126]
