Accounting For Fixed Assets 1 PDF

MUHAMMAD ABU BAKAR
FCCA, ACA
Accounting
for Fixed
Assets
IAS 38
Intangible Assets
IAS 38
2 3/30/2018 Muhammad Abu Bakar FCCA, ACA ©ACCA Think Ahead 2
abubakar@mabbizsolutions.com
1 IAS 38 Intangible assets
Intangible assets are defined by IAS 38 as non-monetary assets without
physical substance. IAS 38 Intangible assets was published in 1998 and
revised in 2008.
1.1 The objectives of the standard

A. To establish the criteria for when an intangible asset mayor
should be recognised
B. To specify how intangible assets should be measured
C. To specify the disclosure requirements for intangible assets
1.2 Definition of an intangible asset
The definition of an intangible asset is a key aspect of the standard, because

the rules for deciding whether or not an intangible asset may be recognised
in the accounts of an entity are based on the definition of what an intangible
asset is.
An intangible asset is an identifiable non-monetary asset without physical
substance The asset must be: IAS 38
3/30/2018 Muhammad Abu Bakar FCCA, ACA ©ACCA Think Ahead 3
A. Controlled by the entity as a result of events in the past
B. Something from which the entity expects future economic benefits to flow
Examples of items that might be considered as intangible assets include computer

software, patents, copyrights, motion picture films, customer lists, franchises and
fishing rights. An item should not be recognised as an intangible asset, however, unless
it fully meets the definition in the standard. The guidelines go into great detail on
this matter.
1.3 Intangible asset: must be identifiable
An intangible asset must be identifiable in order to distinguish it from goodwill. With

non-physical items, there may be a problem with 'Identifiable.
A. If an intangible asset is acquired separately through purchase, there may be a

transfer of a legal right that would help to make an asset identifiable.
B. An intangible asset may be identifiable if it is separable, i.e. if it could be rented or
sold separately. However, 'separability' is not an essential feature of an intangible
asset.
IAS 38
1.4 Intangible asset: control by the entity
Another element of the definition of an intangible asset is that it must be

under the control of the entity as a result of a past event. The entity must
therefore be able to enjoy the future economic benefits from the asset, and
prevent the access of others to those benefits. A legally enforceable right is
evidence of such control, but is not always a necessary condition.
A. Control over technical knowledge or know-how only exists if it is

protected by a legal right.
B. The skill of employees, arising out of the benefits of training costs, are
most unlikely to be recognizable as an intangible asset, because an entity
does not control the future actions of its staff.
C. Similarly, market share and customer loyalty cannot normally be
intangible assets, since an entity cannot control the actions of its
customers.
IAS 38
1.5 Intangible asset: expected future economic benefits
An item can only be recognised as an intangible asset if economic benefits are

expected to flow in the future from ownership of the asset. Economic benefits
may come from the sale of products or services, or from a reduction in
expenditures (cost savings).
An intangible asset, when recognised initially, must be measured at cost. It

should be recognised if, and only if both the following occur.
A. It is probable that the future economic benefits that are attributable to

the asset will flow to the entity.
B. The cost can be measured reliably.
IAS 38
Management has to exercise its judgment in assessing the degree
of certainty attached to the flow of economic benefits to the
entity. External evidence is best.
A. If an intangible asset is acquired separately, its cost can

usually be measured reliably as its purchase price (including
incidental costs of purchase such as legal fees, and any costs
incurred in getting the asset ready for use).
B. When an intangible asset is acquired as part of a business
combination (i.e. an acquisition or takeover), the cost of the
intangible asset is its fair value at the date of the acquisition.
IAS 38
IFRS 3 explains that the fair value of intangible assets acquired in
business combinations can normally be measured with sufficient
reliability to be recognised separately from goodwill.
Quoted market prices in an active market provide the most reliable

estimate of the fair value of an intangible asset. If no active market
exists for an intangible asset, its fair value is the amount that the entity
would have paid for the asset, at the acquisition date, in an orderly
transaction between market participants, on the basis of the best
information available. In determining this amount, an entity should
consider the outcome of recent transactions for similar assets. There
are techniques for estimating the fair values of unique intangible
assets (such as brand names) and these may be used to measure an
intangible asset acquired in a business combination.
In accordance with IAS 20, intangible assets acquired by way of
government grant and the grant itself may be recorded initially either
at cost (which may be zero) or fair value.
IAS 38
1.6 Exchanges of assets
If one intangible asset is exchanged for another, the cost of the intangible asset is
measured at fair value unless:
A. The exchange transaction lacks commercial substance, or

B. The fair value of the asset did not receive nor can the asset given up be measured
reliably. Otherwise, its cost is measured at the carrying amount of the asset given
up.
1.7 Internally generated goodwill
Internally generated goodwill may not be recognised as an asset.

The standard deliberately precludes recognition of internally generated goodwill
because it requires that, for initial recognition, the cost of the asset rather than its fair
value should be capable of being measured reliably and that it should be identifiable
and controlled. Thus you do not recognize an asset which is subjective and cannot be
measured reliably.
IAS 38
2 Research and development costs
Development costs can be recognised as an asset if they meet
certain criteria.
2.1 Research
Research activities by definition do not meet the criteria for

recognition under IAS 38. This is because, at the research stage
of a project, it cannot be certain that future economic benefits
will probably flow to the entity from the project. There is too
much uncertainty about the likely success or otherwise of the
project. Research costs should therefore be written off as an
expense as they are incurred.
IAS 38
Examples of research costs
A. Activities aimed at obtaining new knowledge

B. The search for, evaluation and final selection of, applications of
research findings or other knowledge
C. The search for alternatives for materials, devices, products,
processes, systems or services
D. The formulation, design evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
systems or services
IAS 38
2.2 Development
Development costs may qualify for recognition as intangible assets provided

that the following strict criteria can be demonstrated.
A. The technical feasibility of completing the intangible asset so that it will be

available for use or sale
B. Its intention to complete the intangible asset and use or sell it
C. Its ability to use or sell the intangible asset
D. How the intangible asset will generate probable future economic benefits.
Among other things, the entity should demonstrate the existence of a
market for the output of the intangible asset or the intangible asset itself
or, if it is to be used internally, the usefulness of the intangible asset.
E. Its ability to measure the expenditure attributable to the intangible asset
during its development reliably
IAS 38
In contrast with research costs development costs are incurred at a
later stage in a project, and the probability of success should be more
apparent. Examples of development costs include:
A. The design, construction and testing of pre-production or pre-use

prototypes and models
B. The design of tools, jigs, moulds and die’s involving new technology
C. The design, construction and operation of a pilot plant-that is not of
a scale economically feasible for commercial production
D. The design, construction and testing of a chosen alternative for new
or improved materials, devices, products, processes, systems or
services
IAS 38
2.3 Other internally generated intangible assets
The standard prohibits the recognition of internally generated brands,

mastheads, publishing titles and customer lists and similar items as
intangible assets. These all fail to meet one or more (in some cases all)
the definition and recognition criteria and in some cases are probably
indistinguishable from internally generated goodwill.
2.4 Cost of an internally generated intangible asset
Intangible assets should be initially be measured at cost, but

subsequently they can be carried at cost or at a revalued amount.
IAS 38
The costs allocated to an internally generated intangible asset should be only
costs that can be directly attributed or allocated on a reasonable and
consistent basis to creating, producing or preparing the asset for its intended
use. The principles underlying the costs which may or may not be included
are similar to those for other non-current assets and inventory.
The cost of an internally generated intangible asset is the sum of the

expenditure incurred from the date when the intangible asset first meets the
recognition criteria. If, as often happens, considerable costs have already been
recognised as expenses before management could demonstrate that the
criteria have been met, this earlier expenditure should not be retrospectively
recognised at a later date as part of the cost of an intangible asset.
IAS 38
2.5 Recognition of an expense
All expenditure related to an intangible which does not meet the criteria for
recognition either as an identifiable intangible asset or as goodwill arising on
an acquisition should be expensed as incurred. The IAS gives examples of
such expenditure:
•Start up costs • Advertising costs
•Training costs • Business relocation costs
Prepaid costs for services, for example advertising or marketing costs for
campaigns that have been prepared but not launched, can still be recognised
as a prepayment.
IAS 38
2.6 Measurement of intangible assets subsequent to initial recognition
The standard allows two methods of valuation for intangible assets after they
have been first recognised.
Applying the cost model, an intangible asset should be carried at its cost,
less any accumulated amortization and less any accumulated impairment
losses.
IAS 38
The revaluation model allows an intangible asset to be carried at a revalued
amount, which is its fair value at the date of revaluation, less any subsequent
accumulated amortization and any subsequent accumulated impairment
losses.
A. The fair value must be able to be measured reliably with reference to an

active market in that type of asset.
B. The entire class of intangible assets of that type must be revalued at the
same time (to prevent selective revaluations).
C. If an intangible asset in a class of revalued intangible assets cannot be
revalued because there is no active market for this asset, the asset
should be carried at its cost less any accumulated amortization and
impairment losses.
D. Revaluations should be made with such regularity that the carrying
amount does not differ from that which would be determined using fair
value at the end of the reporting period.
IAS 38
This treatment is not available for the initial recognition of intangible assets.
This is because the cost of the asset must be reliably measured.
The guidelines state that there will not usually be an active market in an
intangible asset; therefore the revaluation model will usually not be available.
For example, although copyrights, publishing rights and film rights can be
sold, each has a unique sale value. In such cases, revaluation to fair value
would be inappropriate. A fair value might be obtainable however for assets
such as fishing rights or quotas or taxi cab licenses.
Where an intangible asset is revalued upwards to a fair value, the amount of

the revaluation should be credited directly to equity under the heading of a
revaluation surplus.
However, if a revaluation surplus is a reversal of a revaluation decrease

that was previously charged against income, the increase can be recognised as
income.
IAS 38
Where the carrying amount of an intangible asset is revalued downwards,
the amount of the downward revaluation should be charged as an expense
against income, unless the asset has previously been revalued upwards. A
revaluation decrease should be first charged against any previous
revaluation surplus in respect of that asset.
Downward revaluation
An intangible asset is measured by a company at fair value. The asset was

revalued by $400 in 20X3, and there is a revaluation surplus of $400 in the
statement of financial position. At the end of 20X4, the asset is valued again,
and a downward valuation of $500 is required.
Required
State the accounting treatment for the downward revaluation.

In this example, the downward valuation of $500 can first be set against the
revaluation surplus of $400. The revaluation surplus will be reduced to $nil
and a charge of $100 made as an expense in 20X4.
IAS 38
When the revaluation model is used, and an intangible asset is
revalued upwards, the cumulative revaluation surplus may be
transferred to retained earnings when the surplus is
eventually realized. The surplus would be realized when the
asset is disposed of. However, the surplus may also be realized
over time as the asset is used by the entity. The amount of the
surplus realized each year is the difference between the
amortization charge for the asset based on the revalued
amount of the asset, and the amortization that would be
charged on the basis of the asset's historical cost. The realized
surplus in such case should be transferred from revaluation
surplus directly to retained earnings, and should not be taken
through profit or loss.
IAS 38
2.7 Useful life
An entity should assess the useful life of an intangible asset, which may be
finite or indefinite. An intangible asset has an indefinite useful life when
there is no foreseeable limit to the period over which the asset is expected
to generate net cash inflows for the entity.
Many factors are considered in determining the useful life of an intangible

asset, including:
• Expected usage
• Typical product life cycles
• Technical, technological, commercial or other types of obsolescence
• The stability of the industry; expected actions by competitors
• The level of maintenance expenditure required
• Legal or similar limits on the use of the asset, such as the expiry dates of
related leases
IAS 38
Computer software and many other intangible assets normally have short lives because
they are susceptible to technological obsolescence. However, uncertainty does not
justify choosing a life that is unrealistically short.
The useful life of an intangible asset that arises from contractual or other legal rights
should not exceed the period of the rights, but may be shorter depending on the period
over which the entity expects to use the asset.
2.8 Amortization period and amortization method
An intangible asset with a finite useful life should be amortized over its expected
useful life.
A. Amortization should start when the asset is available for use.

B. Amortization should cease at the earlier of the date that the asset is classified as
held for sale in accordance with IFRS 5 Non-current assets held for sale and
discontinued operations and the date that the asset is derecognized.
C. The amortization method used should reflect the pattern in which the asset's
future economic benefits are consumed. If such a pattern cannot be predicted
reliably, the straight-line method should be used.
D. The amortization charge for each period should normally be recognised in profit or
loss. IAS 38
The residual value of an intangible asset with a finite useful life is assumed
to be zero unless a third party is committed to buying the intangible asset at
the end of its useful life or unless there is an active market for that type of
asset (so that its expected residual value can be measured) and it is probable
that there will be a market for the asset at the end of its useful life.
The amortization period and the amortization method used for an intangible
asset with a finite useful life should be reviewed at each financial year-end.
2.9 Intangible assets with indefinite useful lives
An intangible asset with an indefinite useful life should not be amortized.

(IAS 36 requires that such an asset is tested for impairment at least annually.)
The useful life of an intangible asset that is not being amortized should be
reviewed each year to determine whether it is still appropriate to assess its
useful life as indefinite. Reassessing the useful life of an intangible asset as
finite rather than indefinite is an indicator that the asset may be impaired and
therefore it should be tested for impairment.
Intangible assets could appear as part of an accounts preparation question or
in an MCQ. Make sure you know the capitalization
IAS 38 criteria.
2.10 Disposals/retirements of intangible assets
An intangible asset should be eliminated from the statement of

financial position when it is disposed of or when there is no
further expected economic benefit from its future use. On
disposal the gain or loss arising from the difference between
the net disposal proceeds and the carrying amount of the
asset should be taken to profit or loss as a gain or loss on
disposal (i.e. treated as income or expense).
IAS 38
3 Goodwill (IFRS 3)
Purchased goodwill arising on consolidation is retained in the statement of
financial position as an intangible asset under IFRS 3. It must then be
reviewed annually for impairment.
3.1 What is goodwill?
Goodwill is created by good relationships between a business and its

customers.
A. By building up a reputation (by word of mouth perhaps) for high quality

products or high standards of service
B. By responding promptly and helpfully to queries and complaints from
customers
C. Through the personality of the staff and their attitudes to customers
IAS 38
The value of goodwill to a business might be considerable. However, goodwill is not
usually valued in the accounts of a business at all, and we should not normally expect
to find an amount for goodwill in its statement of financial position. For example, the
welcoming smiles of the bar staff may contribute more to a bar's profits than the fact
that a new electronic cash register has recently been acquired. Even so, whereas the
cash register will be recorded in the accounts as a non-current asset, the value of staff
would be ignored for accounting purposes.
On reflection, we might agree with this omission of goodwill from the accounts of a
business.
A. The goodwill is inherent in the business but it has not been paid for, and it does
not have an 'objective' value. We can guess at what such goodwill is worth, but
such guesswork would be a matter of individual opinion, and not based on hard
facts.
B. Goodwill changes from day to day. One act of bad customer relations might
damage goodwill and one act of good relations might improve it. Staff with a
favorable personality might retire or leave to find another job, to be replaced by
staff that needs time to find their feet in the job, etc. Since goodwill is continually
changing in value, it cannot realistically be recorded in the accounts of the
business.
IAS 38
3.2 Purchased goodwill
There is one exception to the general rule that goodwill has no objective valuation.
This is when a business is sold. People wishing to set up in business have a choice of
how to do it - they can either buy their own long-term assets and inventory and set up
their business from scratch, or they can buy up an existing business from a proprietor
willing to sell it. When a buyer purchases an existing business, he will have to
purchase not only its long-term assets and inventory (and perhaps take over its
accounts payable and receivable too) but also the goodwill of the business.
Purchased goodwill is shown in the statement of financial position because it has
been paid for. It has no tangible substance, and so it is an intangible non-current
asset.
3.3 How is the value of purchased goodwill decided?
When a business is sold, there is likely to be some purchased goodwill in the selling
price. But how is the amount of this purchased goodwill decided?
IAS 38
This is not really a problem for accountants, who must simply record the
goodwill in the accounts of the new business. The value of the goodwill is a
matter for the purchaser and seller to agree upon in fixing the
purchase/sale price. However, two methods of valuation are worth
mentioning here:
A. The seller and buyer agree on a price for the business without
specifically quantifying the goodwill. The purchased goodwill will then
be the difference between the price agreed and the value of the
identifiable net assets in the books of the new business.
B. However, the calculation of goodwill often precedes the fixing of the
purchase price and becomes a central element of negotiation. There are
many ways of arriving at a value for goodwill and most of them are related
to the profit record of the business in question.
IAS 38
No matter how goodwill is calculated within the total agreed purchase price,
the goodwill shown by the purchaser in his accounts will be the difference
between the purchase consideration and his own valuation of the net
assets acquired. If A values his net assets at $40,000, goodwill is agreed at
$21,000 and B agrees to pay $61,000 for the business but values the net
assets at only $38,000, then the goodwill in B's books will be $61,000 -
$38,000 = $23,000.
3.4 IFRS 3 Business combinations
IFRS 3 covers the accounting treatment of goodwill acquired in a business

combination.
Goodwill. Future economic benefits arising from assets that are not capable
of being individually identified and separately recognised.
(IFRS 3)
IAS 38
Goodwill acquired in a business combination is recognised as an asset and is
initially measured at cost. Cost is the excess of the cost of the combination
over the acquirer's interest in the net fair value of the acquirer’s identifiable
assets, liabilities and contingent liabilities.
After initial recognition goodwill acquired in a business combination is

measured at cost less any accumulated impairment losses. It is not
amortized. Instead it is tested for impairment at least annually, in accordance
with IAS 36 Impairment of assets.
Negative goodwill arises when the acquirer's interest in the net fair value of
the acquirer’s identifiable assets, liabilities and contingent liabilities exceeds
the cost of the business combination. IFRS 3 refers to negative goodwill as the
'excess of acquirer's interest in the net fair value of acquiree's identifiable
assets, liabilities and contingent liabilities over cost'.
Negative goodwill can arise as the result of errors in measuring the fair value
of either the cost of the combination or the acquiree's identifiable net assets.
It can also arise as the result of a bargain purchase.
IAS 38
Where there is negative goodwill, an entity should first reassess the
amounts at which it has measured both the cost of the combination and the
acquiree's identifiable net assets. This exercise should identify any errors.
Any negative goodwill remaining should be recognised immediately in
profit or loss.
IFRS 3 requires extensive disclosures. These include a reconciliation of the

carrying amount of goodwill at the beginning and end of the period, showing
separately:
A. The gross amount and accumulated impairment losses at the beginning

of the period
B. Additional goodwill recognised during the period
C. Impairment losses recognised during the period
D. Net exchange differences arising during the period, and
E. The gross amount and accumulated impairment losses at the end of the
period
IAS 38
Characteristics of goodwill
What are the main characteristics of goodwill which distinguish it from other
intangible non-current assets? To what extent do you consider that these
characteristics should affect the accounting treatment of goodwill? State your
reasons.
Goodwill may be distinguished from other intangible non-current assets by

reference to the following characteristics.
A. It is incapable of realization separately from the business as a whole.

B. Its value has no reliable or predictable relationship to any costs which
may have been incurred.
C. Its value arises from various intangible factors such as skilled employees,
effective advertising or a strategic location. These indirect factors cannot
be valued.
D. The value of goodwill may fluctuate widely according to internal and
external circumstances over relatively short periods of time.
E. The assessment of the value of goodwill is highly subjective.
IAS 38
It could be argued that, because goodwill is so different from
other intangible non-current assets it does not make sense to
account for it in the same way. Thus the capitalization and
amortization treatment would not be acceptable. Furthermore,
because goodwill is so difficult to value, any valuation may be
misleading, and it is best eliminated from the statement of
financial position altogether. However, there are strong
arguments for treating it like any other intangible non-current
asset. This issue remains controversial.
IAS 38

Accounting For Fixed Assets 1 PDF

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Accounting For Fixed Assets 1 PDF

Hochgeladen von

Copyright:

Verfügbare Formate

MUHAMMAD ABU BAKAR

1.1 The objectives of the standard

1.2 Definition of an intangible asset

The definition of an intangible asset is a key aspect of the standard, because

Examples of items that might be considered as intangible assets include computer

1.3 Intangible asset: must be identifiable

An intangible asset must be identifiable in order to distinguish it from goodwill. With

A. If an intangible asset is acquired separately through purchase, there may be a

Another element of the definition of an intangible asset is that it must be

A. Control over technical knowledge or know-how only exists if it is

An item can only be recognised as an intangible asset if economic benefits are

An intangible asset, when recognised initially, must be measured at cost. It

A. It is probable that the future economic benefits that are attributable to

A. If an intangible asset is acquired separately, its cost can

Quoted market prices in an active market provide the most reliable

A. The exchange transaction lacks commercial substance, or

1.7 Internally generated goodwill

Internally generated goodwill may not be recognised as an asset.

Research activities by definition do not meet the criteria for

A. Activities aimed at obtaining new knowledge

Development costs may qualify for recognition as intangible assets provided

A. The technical feasibility of completing the intangible asset so that it will be

A. The design, construction and testing of pre-production or pre-use

The standard prohibits the recognition of internally generated brands,

2.4 Cost of an internally generated intangible asset

Intangible assets should be initially be measured at cost, but

The cost of an internally generated intangible asset is the sum of the

A. The fair value must be able to be measured reliably with reference to an

Where an intangible asset is revalued upwards to a fair value, the amount of

However, if a revaluation surplus is a reversal of a revaluation decrease

An intangible asset is measured by a company at fair value. The asset was

State the accounting treatment for the downward revaluation.

Many factors are considered in determining the useful life of an intangible

2.8 Amortization period and amortization method

A. Amortization should start when the asset is available for use.

2.9 Intangible assets with indefinite useful lives

An intangible asset with an indefinite useful life should not be amortized.

An intangible asset should be eliminated from the statement of

3.1 What is goodwill?

Goodwill is created by good relationships between a business and its

A. By building up a reputation (by word of mouth perhaps) for high quality

3.3 How is the value of purchased goodwill decided?

3.4 IFRS 3 Business combinations

IFRS 3 covers the accounting treatment of goodwill acquired in a business

After initial recognition goodwill acquired in a business combination is

IFRS 3 requires extensive disclosures. These include a reconciliation of the

A. The gross amount and accumulated impairment losses at the beginning

Goodwill may be distinguished from other intangible non-current assets by

A. It is incapable of realization separately from the business as a whole.

Das könnte Ihnen auch gefallen