ias 38 intangibles
TRANSCRIPT
IAS 38 - Intangibles
Intangibles Page 7
Executive summary
► IFRS permits periodic revaluation of intangible assets (except for goodwill) to fair value. US GAAP does not allow revaluation.
► IFRS requires that development costs are capitalized when technical and economic feasibility of a project can be demonstrated in accordance with specific criteria. Under US GAAP, most types of development costs are expensed as incurred.
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Progress on convergence
► In 2006, the FASB and the IASB agreed to converge their standards on intangible assets. However, in 2007 both Boards agreed not to add a project to their joint agenda. In 2008, the FASB indicated that it will consider in the future whether to undertake a project to eliminate the differences in the accounting for research and development costs by fully adopting IAS 38 at some point in the future.
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Characteristics
The definition of intangible assets is non-monetary assets without physical substance.
The recognition criteria require there be probable future economic benefits and costs that can be reliably measured.
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IFRSUS GAAP
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Acquisition of intangiblesPurchased intangibles
In general, intangible assets that are acquired outside of a business combination are recognized at fair value at the time of acquisition.
Direct costs of securing a patent, including an acquisition from others, are included in the cost.
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IFRSUS GAAP
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Acquisition of intangiblesPurchased intangibles
IFRS► These costs would be expensed, except in
the rare circumstance that they improve future economic benefit.
US GAAP► Permits certain costs incurred subsequent
to its initial recognition (e.g., legal costs to defend a patent infringement) to be capitalized.
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Acquisition of intangiblesInternally created intangibles
Internally generated assets other than goodwill, brands, mastheads, publishing titles, newspapers and customer lists may be recognized as assets if certain additional criteria are met. These additional criteria will be discussed in research and development.
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IFRSUS GAAP
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Types of intangibles
Market-related intangible assets.
Customer-related intangible assets.
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SimilarArtistic-related intangible assets — these ownership rights are protected by copyrights.
IFRSUS GAAP
Contract-related intangible assets — a common form is a franchise.
Technology-related intangible assets.
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Periodic revaluationCarrying value
Assuming no impairment, intangible assets are valued at cost less any accumulated amortization.
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IFRSUS GAAP
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Periodic valuationCarrying value
IFRS► Revaluation to the fair value of intangible assets other than goodwill is
an allowable alternative treatment:► Because this requires reference to an active market for the specific type of
intangible, it is relatively uncommon in practice. ► Increases in value should be credited to the account “revaluation surplus.”
Revaluation surplus is an account that is included in accumulated OCI. Increases in value are not recorded in the revaluation surplus account if the increase reverses a loss that was previously expensed; that portion may be credited to an unrealized gain account which will flow through net income.
► Any decrease in value should be included as an unrealized loss in income unless it reverses the revaluation surplus relating to the same asset; that portion can be debited to revaluation surplus (OCI).
US GAAP► Revaluation is
not permitted.
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Periodic valuationCarrying value
IFRS► Revaluation (continued):
► If the revalued basis of an asset exceeds the cost basis, there will be an increase in the annual amortization. To the extent there is an increase in amortization expense, per IAS 38, paragraph 87, an entity may reverse the portion of reserve surplus related to this increase by debiting revaluation surplus and crediting retained earnings. Alternatively, this transfer may be completed upon disposal of the asset.
► When an asset is disposed of, any remaining revaluation surplus related to that asset can be transferred to retained earnings.
US GAAP► Revaluation is
not permitted.
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Periodic valuationCarrying value
IFRS► Revaluation (continued):
► If an intangible asset is revalued, an entity can account for the accumulated amortization at the date of revaluation by:► Amortization elimination method: the accumulated amortization can be
eliminated against the intangible asset itself.► Proportionate restatement method: the accumulated amortization can be
restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. The proportionate restatement method is rarely used in practice, thus no example is provided.
US GAAP► Revaluation is
not permitted.
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Carrying value example Revaluation
Example 1Intangibles Inc. owns a freely transferable bus operator’s license, which it acquired on January 1, 2010 at an initial cost of $100,000. The useful life of the license is five years (based on the date until which it is valid). The entity uses the straight-line method to amortize the intangible.Such licenses are frequently traded between existing operators. At the balance sheet date, December 31, 2011, due to a government-permitted increase in fixed bus fares, the traded value of such a license was $130,000. The accumulated amortization on December 31, 2011, amounted to $40,000.
► What journal entries are required on December 31, 2011, to reflect the change in carrying value (cost or revalued amount less accumulated amortization) on the revaluation of the operating license using US GAAP and IFRS?
► What journal entries are required on December 31, 2012, using US GAAP and IFRS?
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Carrying value example Revaluation
Example 1 solution:2011US GAAP: Revaluation is not permitted.IFRS:Accumulated amortization $ 40,000
Intangible asset $ 40,000 Intangible asset $ 70,000
Revaluation surplus – intangibles (OCI) $ 70,000
The net result is that the asset has a revised carrying amount of $130,000 ($100,000 – $40,000 + $70,000). The accumulated amortization may alternatively be restated proportionately.
2012US GAAP:Amortization expense $ 20,000
Accumulated amortization $ 20,000IFRS:Amortization expense $ 43,333
Accumulated amortization $ 43,333
Revaluation surplus – intangibles (OCI) $ 23,333Retained earnings $ 23,333
Note that this journal entry is optional.
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Carrying value example Revaluation
Example 2
Peter’s Photography, Inc. (PPI) reports using IFRS and acquires the ownership rights to a celebrity photograph on December 1, 2010, for $530. PPI accounts for these rights under the revaluation model. Assume, for the sake of simplicity, that there is no amortization recognized on this asset. The fair value of the asset changes as follows:
► What are the balances in revaluation surplus at the end of each year? ► How much revaluation is recognized through OCI each year? ► How much revaluation is recognized in income each year?
December 1, 2010 $530
December 31, 2010 $550
December 31, 2011 $520
December 31, 2012 $510
December 31, 2013 $555
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Example 2 solution:
The upward revaluation at A is accounted for in revaluation surplus through OCI. The downward revaluation at B first reduces revaluation surplus for that asset to zero and the excess of $10 is recognized as a loss in income. The second downward revaluation at C is recognized as a loss in income. The upward revaluation at D first reverses the cumulative loss recognized in income and the excess of $25 is accounted for through OCI in revaluation surplus.
Carrying value example Revaluation
Value of asset
End-of-year balance in the
revaluation surplus account
Annual effect on OCI
Annual effect on net income
December 1, 2010 $530 – – –
A – December 31, 2010 550 $20 $20 –
B – December 31, 2011 520 – (20) $(10)
C – December 31, 2012 510 – – (10)
D – December 31, 2013 555 25 25 20
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Carrying value example Restatement of accumulated amortization at revaluation
Example 3
The Boston Commons Company (BCC) reports using IFRS and owns a franchise of tea shops in the Boston area named Tea Party. BCC currently carries the franchise rights for Tea Party at $120,000. In this last year, Tea Party’s business has been quite successful due to the demand for its English tea products. This success resulted in an increase in the market value of the franchise rights to $150,000. Accordingly, BCC has revalued these rights. The original cost basis of the rights is $300,000, and the current accumulated amortization is $180,000.
► Please provide the journal entries to record the revaluation of these franchise rights.
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Carrying value example Restatement of accumulated amortization at revaluation
Example 3 solution:
Amortization elimination:
Accumulated amortization $180,000Franchise rights $180,000
Franchise rights $30,000Revaluation surplus – franchise (OCI) $30,000
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Periodic valuationImpairment – definition of impairment indicators
Impairment indicators for an asset include such items as significant change in its use, projected losses related to its use and a significant decline in its market value.
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IFRSUS GAAP
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Periodic valuationImpairment – recognition
An impaired asset must be written down and the write-down should be recorded in net income.
IFRSUS GAAP
Similar, although an exception exists where an intangible asset has been revalued and the impairment loss is reversing an accumulated revaluation surplus balance for that asset. In that case, the portion of impairment that is reversing a prior increase in valuation may be debited to revaluation surplus (thus decreasing accumulated OCI).
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Cost allocationFinite-lived intangible assets
Amortization of intangible assets over their estimated useful lives is generally required. Similar
IFRSUS GAAP
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Cost allocationFinite-lived intangible assets
IFRS► This method is not prohibited, but it is not
required.
US GAAP► Under ASC 985-20-35, capitalized
software costs are amortized on a product-by-product basis:► The annual amortization is the greater of
the amount computed using: (a) the ratio that current gross revenues for a product bear to the total of the current and anticipated future gross revenues for that product; or (b) the straight-line method over the remaining estimated economic life of the product, including the period being reported.
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Cost allocationIndefinite-lived intangible assets
If there is no foreseeable limit to the period during which an intangible asset is expected to generate net cash inflows to the entity, the useful life is considered to be indefinite and is not amortized.
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IFRSUS GAAP
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Goodwill
Goodwill is recognized only as a result of a business combination. For a 100% acquisition, the acquirer recognizes the acquiree’s net identifiable assets (including any intangible assets) at fair value at the acquisition date and recognizes goodwill, which represents the excess of the purchase price over the acquirer’s interest in the fair value of the identifiable net assets of the acquiree.
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IFRSUS GAAP
Goodwill is subject to an annual impairment test.
Negative goodwill is recognized immediately as income (after reassessing the purchase price allocation).
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Research and development
Internal costs related to the research phase of research and development are expensed as incurred under both accounting models.
Under converged standards, in-process research and development is to be recognized as an indefinite-lived intangible asset separately from goodwill at its acquisition-date fair value.
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IFRSUS GAAP
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Research and development
IFRS► Development costs are capitalized when
technical and economic feasibility of a project can be demonstrated in accordance with specific criteria. Some of the criteria include: demonstrating technical feasibility, intent to complete the asset and ability to sell the asset in the future, as well as others.
US GAAP► Development costs are expensed as
incurred, unless addressed by a separate standard.
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Research and development example
Example 9 – Internet Imaging Inc. (Triple I), is working on a project to create a database of picture images which it intends to sell over the internet. Triple I has identified the following stages and costs incurred in its project:
Research stageThis stage included identifying the system requirements, searching for an appropriate database and other system materials and images to purchase, gaining the technical knowledge necessary to collect and transfer the images and overall project feasibility. Costs incurred were $50,000 during the period of January 1, 2010 through March 31, 2010. On April 1, 2010, Triple I determined that it would complete the intended project. Additional research costs of $75,000 were incurred during the period of April 1, 2010 through June 30, 2010.
Development stageThis stage included performing market analysis to identify potential demand, acquiring system materials and images to populate the database; designing the website; and testing a system prototype. During the period of May 1, 2010 through August 31, 2010, Triple I incurred development costs of $100,000. On August 31, 2010, Triple I determined that its project was technically feasible. During the period of September 1, 2010 through October 31, 2010, Triple I incurred development costs of $50,000. On October 31, 2010, Triple I received its results from its market study and determined that the project was economically feasible. Additional development costs of $200,000 were incurred during the period of November 1, 2010 through December 31, 2010.
Production stageTriple I will launch its imaging database on the internet on January 1, 2011.
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Research and development example
Example 9 continued:► Complete the diagram below by inputting the research and development costs for 2010 in the appropriate
periods based on the information above.
► Based on the diagram, determine which research and development costs Triple I can capitalize related to this project during 2010 using US GAAP and IFRS?
Research phaseDevelopment phase
$ $$ $ $
January 1, 2010
March 31, 2010
April 1, 2010
May 1, 2010
June 30, 2010
August 31, 2010
September 1, 2010
October 31, 2010
November 1, 2010
December 31, 2010
Research Initiated
Decision to complete
the project
Development initiated
Research completed
Technical feasibility reached
Economic feasibility reached
Development completed
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Research and development example
Example 9 solution:Using US GAAP, Triple I cannot capitalize any research and development costs. Using IFRS, Triple I cannot capitalize any research costs, similar to US GAAP; however, Triple I may capitalize development costs when technical and economic feasibility of a project can be demonstrated in accordance with specific criteria. Some of the stated criteria include: demonstrating technical feasibility, intent to complete the asset and ability to sell the asset in the future, as well as others. As shown in the diagram below, Triple I met these criteria on October 31, 2010; therefore, the $200,000 incurred from November 1, 2010 through December 31, 2010, prior to the product launch on January 1, 2011, may be capitalized.
Research phaseDevelopment phase
$50,000 $75,000$100,000 $50,000 $200,000
January 1, 2010
March 31, 2010
April 1, 2010
May 1, 2010
June 30, 2010
August 31, 2010
September 1, 2010
October 31, 2010
November 1, 2010
December 31, 2010
Research Initiated
Decision to
complete the project
Development initiated
Research completed
Technical feasibility reached
Economic feasibility reached
Development completed
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Other costs
Start-up costs, including initial operating losses, cannot be capitalized. Similar
IFRSUS GAAP
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Other costs
IFRS► Advertising and promotional costs are
expensed as incurred. A prepayment may be recognized as an asset only when payment for the goods or services is made in advance of the entity having access to the goods or receiving the services.
US GAAP► Advertising and promotional costs are
either expensed as incurred or expensed when the advertising takes place for the first time under US GAAP. Direct-response advertising may be capitalized if the specific criteria in ASC 340-20-25-4, Other Assets and Deferred Costs-Capitalized Advertising Costs-Recognition, are met.
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Disclosures
The disclosure requirements under US GAAP and IFRS for intangible assets are, in most respects, similar.
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IFRSUS GAAP
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Disclosures
US GAAP► GAAP does not, within a single standard,
address comprehensive disclosure requirements for intangible assets:► Under SEC rules, SEC registrants are
required to disclose identifiable intangible assets separately from unidentifiable intangible assets and goodwill, along with the method of determining their respective amounts.
► Despite the additional disclosures required by SEC rules, it is likely that there will be more disclosures for intangible assets under IAS 38 than under US GAAP
IFRS► IAS 38 includes a long list of general disclosures
for each class of intangible asset:► Internally generated intangible assets must be
distinguished from other intangible assets. ► Separate disclosure is required for intangible assets
being amortized over more than 20 years, for intangible assets being carried under the allowed alternative treatment at revalued amounts, and for research and development expenditures.
► IAS 38 encourages disclosure of a description of any fully amortized intangible asset that is still in use and disclosure of a description of any intangible asset that did not meet the recognition criteria.
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Disclosures
IFRS► Requires disclosures about impairment
losses in the aggregate and by class of asset and reportable segment and, if material, by individual asset or CGU.
► IAS 36 specifies additional reporting requirements for impairment losses and the reversal of those impairment losses for revalued assets.
US GAAP► Requires disclosures about impairment
losses and the circumstances giving rise to those losses. However, detailed disclosures by individual asset or CGU are not required.
► Because ASC 360 does not permit the revaluation of assets, it does not provide guidance on revaluation.
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Disclosures
IFRS► If an asset’s recoverable amount is
measured as its value in use, IAS 36 requires disclosure of the discount rate used in calculating that measure and encourages, but does not require, disclosure of the key assumptions used.
US GAAP► If a surrogate for fair value is developed by
discounting an enterprise’s estimates of an asset’s future cash flows, ASC 360 requires disclosure of that fact, but not of the discount rate or the key assumptions used.