Study Material, a project of ILM Community

Set # 04 – Intangible Assets (IAS 38)

Case Study 1
Brilliant Inc. acquires copyrights to the original recordings of a famous
singer. The agreement with the singer allows the company to record and
rerecord the singer for a period of five years. During the initial six-month
period of the agreement, the singer is very sick and consequently cannot
record. The studio time that was blocked by the company had to be paid
even during the period the singer could not sing. These costs were
incurred by the company:
(a) Legal cost of acquiring the copyrights $10 million
(b) Operational loss (studio time lost, etc.) during start-up period $ 2
million
(c) Massive advertising campaign to launch the artist $ 1 million

Required
Which of the above items is a cost that is eligible for capitalization as an
intangible asset?

Case Study 2
Extreme Inc. is a newly established enterprise. It was set up by an
entrepreneur who is generally interested in the business of providing
engineering and operational support services to aircraft manufacturers.
Extreme Inc., through the contacts of its owner, received a confirmed
order from a well known aircraft manufacturer to develop new designs for
ducting the air conditioning of their aircraft. For this project, Extreme
Inc. needed funds aggregating to $1 million. It was able to convince
venture capitalists and was able to obtain funding of $1 million from two
Silicon Valley venture capitalists. The expenditures Extreme Inc.
incurred in pursuance of its research and development project follow, in
chronological order:
• January 15, 20X5: Paid $175,000 toward salaries of the technicians
(engineers and consultants)
• March 31, 20X5: Incurred $250,000 toward cost of developing the duct
and producing the test model
• June 15, 20X5: Paid an additional $300,000 for revising the ducting
process to ensure that product could be introduced in the market
• August 15, 20X5: Developed, at a cost of $80,000, the first model
(prototype) and tested it with the air conditioners to ensure its
compatibility
• October 30, 20X5: A focus group of other engineering providers was
invited to a conference for the introduction of this new product. Cost of
the conference aggregated to $50,000.
• December 15, 20X5: The development phase was completed and a cash
flow budget was prepared.
Net profit for the year 20X5 was estimated to equal $900,000.

Required
What is the proper accounting treatment for the various costs incurred
during 20X5?

Case Study 3
Costs generally incurred by a newly established entity include
(a) Preopening costs of a business facility
(b) Recipes, secret formulas, models and designs, prototype
(c) Training, customer loyalty, and market share
(d) An in-house–generated accounting software
(e) The design of a pilot plan
(f) Licensing, royalty, and stand-still agreements
(g) Operating and broadcast rights
(h) Goodwill purchased in a business combination
(i) A company-developed patented drug approved for medical use
(j) A license to manufacture a steroid by means of a government grant
(k) Cost of courses taken by management in quality engineering
management
(l) A television advertisement that will stimulate the sales in the
technology industry

Required
Which of the above-mentioned costs are eligible for capitalization
according to IAS 38, and which of them should be expensed when they
are incurred?

Case Study 4
Active Asset Inc. owns a freely transferable taxi operator’s license, which
it acquired on January 1, 20X1, at an initial cost of $10,000. The useful
life of the license is five years (based on the date it is valid for). The entity
uses the straight-line method to amortize the intangible.
Such licenses are frequently traded either between existing operators or
with aspiring operators. At the balance sheet date, on December 31,
20X2, due to a government-permitted increase in fixed taxi fares, the
traded values of such a license was $12,000. The accumulated
amortization on December 31, 20X2, amounted to $4,000.

Required
What journal entries are required at December 31, 20X2, to reflect the
increase/decrease in carrying value (cost or revalued amount less
accumulated depreciation) on the revaluation of the operating license
based on the traded values of similar license? Also, what would be the
resultant carrying value of the intangible asset after the revaluation?

MULTIPLE-CHOICE QUESTIONS

1. A newly set up dot-com entity has engaged you as its financial

advisor. The entity has recently completed one of its highly publicized
research and development projects and seeks your advice on the
accuracy of the following statements made by one of its stakeholders.
Which one is it?
(a) Costs incurred during the “research phase” can be capitalized.
(b) Costs incurred during the “development phase” can be capitalized if
criteria such as technical feasibility of the project being established
are met.
(c) Training costs of technicians used in research can be capitalized.
(d) Designing of jigs and tools qualify as research activities.

2. Which item listed below does not qualify as an intangible asset?

(a) Computer software.
(b) Registered patent.
(c) Copyrights that are protected.
(d) Notebook computer.

3. Which of the following items qualify as an intangible asset under IAS

38?
(a) Advertising and promotion on the launch of a huge product.
(b) College tuition fees paid to employees who decide to enroll in an
executive M.B.A. program at Harvard University while working with the
company.
(c) Operating losses during the initial stages of the project.
(d) Legal costs paid to intellectual property lawyers to register a patent.

4. Once recognized, intangible assets can be carried at

(a) Cost less accumulated depreciation.
(b) Cost less accumulated depreciation and less accumulated
amortization.
(c) Revalued amount less accumulated depreciation.
(d) Cost plus a notional increase in fair value since the intangible asset is
acquired.

5. Which of the following disclosures is not required by IAS 38?

(a) Useful lives of the intangible assets.
(b) Reconciliation of carrying amount at the beginning and the end of the
year.
(c) Contractual commitments for the acquisition of intangible assets.
(d) Fair value of similar intangible assets used by its competitors.