1

Revise lecture 10

2

Intangible assets

3

Intangible assets

Definition

• An intangible asset is an identifiable non-monetary asset without physical substance.

• To meet the definition the asset must be identifiable, i.e. separable from the rest of the business or arising from legal rights.

4

Intangible assets

Recognition To be recognised in the financial statements an intangible

asset must

• Meet the definition of an intangible asset, and

• Meet the recognition criteria of the framework:– It is probable that future economic benefits attributable to the

asset will flow to the entity.– The cost of the asset can be measured reliably.

5

Internally-generated intangibles

The following internally-generated items may never be recognised:

1. Goodwill2. Brands3. Mastheads4. Publishing titles5. Customer lists

6

Intangibles

•Purchased and internally-generated intangibles

7

Purchased intangibles

• If an intangible asset is acquired in a business combination, the fair value of that asset at the date of acquisition is taken.

• The determination of that fair value is easy if an active

market exists, otherwise it may be necessary to take the price the entity would have paid in an arm’s length transaction.

• Any intangible which cannot be measured reliably in an acquisition has to be included in goodwill.

8

• Brands

9

Internally-generated intangibles

Brands:

1. The accounting treatment of brands has been a matter of controversy for some years.

2. IAS 38 intangible assets has now ended the controversy by stating that internally-generated brands and similar assets may never be recognised

10

Measurement of intangible assets

Measurement after initial recognition

There is a choice between

1. The cost model

2. The revaluation model

11

Amortisation

12

Amortisation

• An intangible asset with a finite useful life must be amortised over that life, normally using the straight-line method with a zero residual value

13

Amortisation

An intangible asset with an indefinite useful life:

• Should not be amortised.

• Should be tested for impairment annually, and more often if there is an actual indication of possible impairment.

14

• Goodwill

15

Goodwill

The nature of goodwill Goodwill is the difference between the value of a

business as a whole and the aggregate of the fair values of its separable net assets.

Separable net assets are those assets (and liabilities) which can be identifiable and sold off separately without necessarily disposing of the business as a whole. They include identifiable intangibles such as patents, licences and trade marks.

16

Goodwill

• Fair value is the amount at which an asset or liability could be exchanged in an arm’s length transaction between informed and willing parties, other than in a forced or liquidation sale.

17

Goodwill

• Goodwill may exist because of any combination of a number of possible factors:

1. Reputation for quality or service2. Technical expertise3. Possession of favourable contracts4. Good management and staff

18

Goodwill

Purchased and non-purchased goodwillPurchased goodwill:1. Arises when one business acquires another as

a going concern2. Includes goodwill arising on the consolidation

of a subsidiary or associated company3. Will be recognised in the financial statements

as its value at a particular point in time is certain

19

Goodwill

Non-purchased goodwill:

1. Is also known as inherent goodwill2. Has no identifiable value3. Is not recognised in the fianncial statement

20

• IFRS 3 revised business combinations (Goodwill)

21

IFRS 3

• Goodwill is defined in IFRS 3 as an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identifiable and separately recognised.

22

IFRS 3

• Purchased goodwill is recognised within the FS because at a specific point in time there was a market transaction by which it can be measured. The purchase has established the fair value for the business as a whole which can be compared with the fair value of the separable net assets of the acquiree. The difference is purchased goodwill.

23

IFRS 3

• Goodwill exists in any successful business. However, if the business has never changed hands, this goodwill should not be recognised in the financial statements because no event has occurred to identify its value.

• It can only be subjectively estimate. This is described as inherent goodwill or non-purchased goodwill.

24

IFRS 3

Accounting for goodwill

• Non-purchased goodwill should not be recognised in the financial statement. It certainly exists, but fails to satisfy the recognition criteria in the framework, since it is not capable of being measured reliably.

25

IFRS 3

• Purchases goodwill is dealt with in two accounting standards, according to how it arose.

• Goodwill arising on the purchase of a subsidiary is covered by IFRS 3 revised, while all other goodwill is covered by IAS 38.

• When the purchased consideration is less than the value of the acquired identifiable net assets this is known as a bargain purchase (negative goodwill) and should be recognised as a credit in the IS and not taken to the SFP.

26

Question

• What are the main characteristics of goodwill which distinguish it from other intangible assets?

27

Answer

• It is a balancing figure. Goodwill itself is not a valued but a comparison is made between the fair value of the whole business and the fair value of the separable net assets of the business. It cannot be valued on its own.

• Goodwill cannot be disposed of as a separate asset.

28

Answer

• The factor contributing to the value of goodwill cannot be valued, e.g. how can one value the benefit of an experienced workforce?

• The value of goodwill is volatile. It can only be given a numerical value at the time of acquisition of the whole world.