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Intangible assesta (Amortisation (IAS 38 is more restrictive about…
Intangible assesta
Amortisation
Intangible assets must be depreciated, although this is referred to as amortisation, in relation to intangible assets
The first thing to assess is the intangible asset's useful life, it is possible to have an intangible asset with an infinite useful life if there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity
The standard requires an entity to assess whether the useful life of an intangible asset is finite or indefinite and if finite, the length of that useful life
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Any intangible assets based on contractual legal rights, for example in relation to a licence will only have a life as long as those legal rights exist
Any rights to a renewal period can only be used to extend the useful life if renewal would be at no cost
The depreciable amount of an intangible asset with a finite useful life is allocated on a systematic basis over its useful life
The amortisation method should reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity, if this cannot be determined, the straight line method is used
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IAS 38 is more restrictive about residual values than IAS 16 for items of property, plant and equipment. The residual value of an intangible asset with a finite useful life must be assumed to be zero unless
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The standard requires frequent review of the estimated useful life of an intangible asset, its expected residual value and whether it is impaired. These reviews must be thoroughly documented and often involve considerable investigation by auditors as part of their audit work
Measurement
The standard distinguishes between intangibles purchased separately from intangibles that are purchased as part of a business combination
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A intangible asset acquired as part of a business combination will be measured at fair value at the date of acquisition
As with tangible assets, an entity may follow either a cost or revaluation model for intangible assets after initial recognition
There are even greater restrictions placed on the revaluation model for intangible assets and it is very rare to see such revaluations in practice
Research and development
IAS 38 deals specifically with research and development, key issues and major components of performance for some businesses, particularly in the IT, pharmaceutical and engineering sectors
The standard distinguishes between a research phase where there is still significant uncertainty about whether any costs will be recovered through successful product launch and the development phase, where there is much more evidence about a likely successful launch and hence recovery of costs
No intangible asset arising from research may be recognised as an asset. Expenditure on research must instead be recognised as an expense when it is incurred
An intangible asset arising from development should be recognised as an asset if, and only if, an entity can demonstrate the following
The Technical feasibility of completing the intangible asset so that it will be available for sale or use
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How the intangible asset will generate Probable future economic benefits. The entity can demonstrate the existence of a market for the output of the intangible asset or the intangible itself if it to be used internally, the usefulness of the asset
The availability of adequate technical, financial and other Resources to complete the development and to use or sell the intangible asset
Its ability to measure reliably the Expendiutre attributable to the intangible asset during its development
Expenditure on an intangible item that was initially recognised as an expense cannot be recognised as part of the cost of an intangible asset at a later date
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Recognition
IAS 38 states that an intangible asset should be recognised by an entity if, and only if
It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity
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When an entity assess the probability of expected future economic benefits, it must use reasonable and supportable assumptions that represent management's best estimate of the set of economic conditions that will exist over the useful life of the asset
Where intangible assets are acquired as part of a business combination, the probably test in relation to expected future economic benefits is assumed to be met. This means that some intangibles will be recognised by an acquirer on an acquisition which were not recognised by the target company beforehand
Derecongition
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Any net gain or loss arsing from the derecongition of an intangible asset is included in profit or loss at the point when the item is derecongised
Gains cannot be classified as revenue and if the amounts are material, companies often disclose them separately in the statement of profit or loss so they are not confused with ongoing profits from operations
Disclosure
To the extent that intangible assets are material for an entity, the standard requires substantial disclosures, including all movements in the year for each class of assets such as additions, disposals, amortisation, impairments and revaluations
Disclosures are also required on any restrictions of title including pledge of assets as security for borrowings and any contractual commitments for purchase of intangible assets in the future
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The importance of intangible assets has grown considerably for the modern economy with companies relying on know how, brands and intellectual property rights to run their business and make profits rather than tangible assets
Accounting for intangibles, predominately in IAS 38 'Intangible Assets' remains restrictive in terms of what can be shown as an asset, except when that tangible is acquired on its own or within another business
IAS 38 only deals with those intangible assets that are not covered by other standards. IAS 38 requires an entity to recognise an intangible asset if and only specified criteria are met, how to measure the carrying amount of intangible assets and it also requires specified disclosures about intangible assets
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