1.List two assets which would not meet the ‘identifiable’ aspect of the definition of an intangible asset. (2 Marks)
Answer: Goodwill and Knowledge. These items are either not separable from the company or do not meet the definition of an asset because the benefits they represent cannot be controlled by the entity.
2.Intangible assets acquired via a separate acquisition are always recognised. Why? (2 Marks)
The probability recognition criterion is always considered to be satisfied for separately acquired intangible assets. The price paid for the asset automatically takes into account the probability of expected benefits to be received.
3.How is an intangible asset acquired as part of a business combination measured for initial recognition? Why? (2 Marks)
Answer: In accordance with AASB 3 Business Combinations, where an intangible asset is acquired as part of a business combination, the cost of that asset is its fair value at acquisition date.
The fair value of an intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the entity. In other words, the effect of probability is reflected in the fair value measurement of the intangible asset.
4.List two ways that fair value could be determined for intangible assets acquired as part of a business combination. (2 Marks)
Recent similar transactions where no active market exists.
Valuation techniques such as NPV and known rates such as royalty rates.
5.In the research phase all expenditure on a project must be expensed. Why? (1 Mark)
Answer: In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists that will generate probable future economic benefits. Therefore, this expenditure is recognised as an expense when it is incurred.
6.Identify three ways in which an entity may obtain an intangible asset. (1 Mark)
Acquisition via a business combination
Internal generation of the asset
7.Where an intangible asset has been separately acquired how is its cost measured? (1 Mark)
The cost of a separately acquired intangible asset comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use Examples of directly attributable costs include Costs of employee benefits and Professional fees.
8.In what circumstances could an in-process development project be recognised as an intangible asset? (2 Marks)
An intangible asset is recognised if the entity can demonstrate all of these conditions (Paragraph 57): Technical feasibility of completing the intangible asset so that it will be available for use or sale; Its intention to complete the intangible asset and use/sell it; Its ability to use/sell the intangible asset;
How the intangible asset will generate probable future economic benefits;
Availability of technical, financial resources to complete development and to use/sell the intangible asset; Ability to measure reliably the expenditure attributable to intangible asset during development.
9.Why does IAS 38, paragraph 63 forbid the recognition of certain internally generated intangible assets? (2 Marks)
Answer: Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets.
10.Where an internally generated intangible asset is recognised by an entity how is its cost measured? (2 Marks)
Answer: Subsequent recognition. Para.72. After initial recognition at cost, an entity must choose for each class of intangible assets whether to measure the assets using the cost model or the revaluation model.
11.Why does the accounting standard IAS 38 contend that an active market cannot exist for brands, newspaper mastheads, music and film publishing rights and trademarks? (1 Mark)
Answer: An active market cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each such asset is unique. These items cannot be distinguished from the cost of developing the business as a whole (Para 64).
12.List two examples of activities which would be carried out in the development phase of an internal project. (2 Marks)
1) The design, construction and testing of pre-production or pre-use prototypes and models
2) The design of tools, moulds and dies involving new technology
13.What is the revaluation model of accounting for intangible assets and when can it be adopted? (2 Marks)
Answer: After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.
Para. 75 Fair values shall be determined by reference to an active market. Revaluations shall be made with such regularity that at the reporting date the carrying amount of the asset does not differ materially from its fair value.
Para.77 the revaluation model is applied after an asset has been initially recognized at cost.
14.When can an entity regard an intangible asset as having an indefinite useful life? (1 Mark)
Answer: Based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
15.List in detail two factors which an entity would consider in determining the useful life of an intangible asset. (2 Marks)
The stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset; Expected actions by competitors or potential competitors.
16.Identify one circumstance in which the residual value of an intangible asset with a finite useful life may be more than zero. (1 Mark)
Answer: There is a commitment by a third party to purchase the asset at the end of its useful life.
17.What is the key difference between the research phase and the development phase of an internal project? (1 Mark)
Answer: No intangible asset arising from research shall be recognised. Expenditure on research shall be recognised as an expense when it is incurred. An intangible asset arising from development can be recognised only if all the six conditions are met.
18.XYZ Ltd has developed a new polymer for powder coating metal giving far superior weather proofing. The company has been granted a 7 year patent protecting its process and expects to be the market leader in this field for at least 1o years. What is the useful life of the process? Why? (2 Marks)
Answer: The useful life is 7 years.
Reason: para 90. One of the factors that should be considered in determining the useful life of intangible assets is the period of control over the asset and legal or similar limits on the use of the asset.
In the above situation, the company has been granted a patent for 7 years. In other words, it has legal right to produce the product for 7 years. Accordingly, 7-year is the useful life of the process.
19.Why can Zedtoo Ltd recognise as an asset the mastheads acquired when it takes over the publishing business of Glossy Mags Ltd but that company was unable to recognise the mastheads as they developed them? (1 Mark)
Answer: In the above situation, Glossy Mags Ltd is the company who internally generated the intangible assets, while Zedtoo Ltd is the company who acquires the mastheads as part of the business combination.
20.Gizmo Ltd has inadvertently discovered an instant painkiller whilst attempting to synthesise krill oil. The painkiller is cheap to produce and is likely to capture a large share of the market. Will Gizmo Ltd be able to recognise the painkiller as an intangible asset? Why? (2 Marks)
Answer: An asset can only be recognized as an intangible asset when it meets
the full 3 characteristics of the intangible asset: identifiable, non-monetary in nature and without physical substance. Among this, the criterion of without physical substance is to exclude items of property, plant and equipment. However, painkiller is something with physical substance. Therefore, it fails to meet the all 3 requirements.