the basic things you need to know 16 and ias 38… · - cost model - revaluation model • an...

Non-current assetsThe basic things you need to know

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Agenda/Contents

IAS 16 - Property, plant and equipment

IAS 38 - Intangible assets

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July 2016PwC's Academy

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Definitions

Property, plant & equipment Investment property Intangible asset

Tangible assets that:- are held for use in the

production or supply of goods or services, for rental to others, or for administrative purposes; and

- are expected to be used during more than one period

Property (land or a building - or part of a building - or both) held to earn rentals or for capital appreciation or both, rather than for:- use in the production or

supply of goods or services or for administrative purposes; or

- sale in the ordinary course of business

An identifiable non-monetary asset without physical substance

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Land and buildingsAnalysis of a building

• Assuming that an entity owns a building that is:

- partly held for own-use (eg. a floor is used for administration purposes), and

- partly held for rental or capital appreciation

the building must be analysed between the element that is PPE, and the element that is investment property

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IAS 16 - Property, plant & equipment

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Scope

• IAS 16 applies in accounting for PPE except when another Standard requires or permits a different accounting treatment

• It does not apply to:

- property, plant and equipment classified as held for sale (IFRS 5)

- biological assets related to agricultural activity (IAS 41)

- the recognition and measurement of exploration and evaluation assets (IFRS 6)

- mineral rights or reserves such as oil and natural gas

… but does apply to PPE used to develop or maintain the assets described above

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Definitions

Cost the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction

Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS13)

Carrying amount

the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses

Depreciation the systematic allocation of the depreciable amount of an asset over its useful life

Impairment loss

the amount by which the carrying amount of an asset exceeds its recoverable amount

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Definitions (continued)

Depreciable amount

the cost of an asset, or other amount substituted for cost, less its residual value

Residual value the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal

Useful life the period over which an asset is expected to be available for use by an entity; orthe number of production or similar units expected to be obtained from the asset by an entity

Recoverable amount

the higher of an asset’s net selling price and its value in use

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Recognition

• An asset is defined as:

- A resource controlled by a company

- As a result of a past event

- From which future economic benefits are expected to flow to the entity

• The cost of an item of PPE is recognised as an asset if, and only if:

- it is probable that future economic benefits associated with the item will flow to the entity; and

- the cost of the item can be measured reliably

• An entity does not recognise in the carrying amount of an item of PPE the costs of the day-to-day servicing of the item

- rather, these costs are recognised in profit or loss as incurred (as ‘repairs and maintenance’)

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Measurement at recognition Elements of cost

• An item that qualifies for recognition as an asset shall initially be recorded at its cost

• The cost of an item of property, plant and equipment comprises:

- its purchase price, including import duties/non-refundable purchase taxes, after deducting discounts and rebates

- any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating

- the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located

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Measurement at recognition Elements of cost: quick exercise

• ‘Entity A’ purchased new plant and machinery and incurred the following costs:

Nature of expense Capitalise?

Reinforcement of factory floor

Freight

Asset’s list price

Trade discount obtained (i.e. a negative amt)

Installation costs

Staff training (to operate the asset)

P

P

P

P

P

O

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Elements of costExamples of directly attributable costs

• Examples of directly attributable costs are:

- costs of employee benefits arising directly from the construction or acquisition of the item of PPE

- costs of site preparation

- initial delivery and handling costs

- installation and assembly costs

- costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced during testing)

- professional fees

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Elements of costCosts which may not be capitalised

• Examples of costs that are not costs of an item of PPE are:

- costs of introducing a new product or service (eg. costs of advertising and promotional activities)

- costs of conducting business in a new location or with a new class of customer (eg. costs of staff training)

- administration and other general overhead costs

• Costs incurred in using or redeploying an item are not included in the carrying amount of that item

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Elements of costAncillary activities

• Some operations occur in connection with the construction or development of an item of PPE, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management

- for example, income may be earned through using a building site as a car park until construction starts

• Because incidental operations are not necessary, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense

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Elements of costSelf-constructed assets

• The cost of a self-constructed asset is determined using the same principles as for an acquired asset

• If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale (IAS 2)

• Any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost of the asset

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Elements of costBarter agreements

• The cost of an item of PPE is the cash price equivalent at the recognition date

• One or more items of PPE may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The cost of such an item of PPE is measured at fair value unless:

- the exchange transaction lacks commercial substance, or

- the fair value of neither the asset received nor the asset given up is reliably measurable

• If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up

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Barter agreementsCommercial substance

• The decision as to whether or not a transaction has commercial substance depends on the extent to which the entity’s future cash flows are expected to change as a result of the transaction

• A transaction has commercial substance if the difference in either of the two points below is significant relative to the fair value of the assets exchanged:

- the risk, timing and amount of the cash flows of the asset received differs from those of the asset given up

- the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life of the part of the entity’s operations affected by the transaction changes as a result of the exchange

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Barter agreementsCommercial substance

• The decision as to whether or not a transaction has commercial substance depends on the extent to which the entity’s future cash flows are expected to change as a result of the transaction

• A transaction has commercial substance if the difference in either of the two points below is significant relative to the fair value of the assets exchanged:

- the risk, timing and amount of the cash flows of the asset received differs from those of the asset given up

- the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life of the part of the entity’s operations affected by the transaction changes as a result of the exchange

For example, an entity might exchange a factory that is fully operational in exchange for a greenfield site on which it

intends to construct a new factory. The cash flows from the operational assets of the factory given up are quite different

in configuration from those of the greenfield site

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Barter agreementsTransactions that lack commercial substance

• Where a transaction lacks commercial substance, no gain or loss is recognised on the barter transaction

- the initial carrying amount of the assets acquired must equal the carrying amount of the assets that are transferred

• For example, Entity A exchanges the following assets:

- transfer out: asset carried at €10,000 and valued at €12,000

- transfer in: cash of €4,000 and another asset valued at €7,500

• Accounting entries:

Dr Cash 4,000

Cr Non-current asset 10,000

Dr Non-current asset 6,000

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Measurement after recognitionMeasurement models

• IAS 16 permits two accounting models:

- cost model

- revaluation model

• An entity must choose the cost model or the revaluation model as its accounting policy

- accounting policy applies to an entire class of PPE

A class of property, plant and equipment is a grouping of

assets of a similar nature and use in an entity’s operations

Examples may include: land and buildings; machinery; aircraft; motor vehicles; furniture and fixtures; and office equipment

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Measurement after recognitionCost model

• Under the cost model, an item of PPE is carried at its cost less any accumulated:

- depreciation, and

- impairment losses

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Measurement after recognition Depreciation

• Depreciation is the systematic allocation of an asset’s cost (less residual value, if any) over its useful life

• The deprecation charge for each period is recognised in profit or loss unless it is included in the carrying amount of another asset

- eg. depreciation included in factory overheads absorbed in the carrying amount of inventories

• A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the

- straight-line method,

- diminishing balance method, and

- the units of production method

Eg. €1,000 or 10% p.a.

Eg. 15% of closing BV p.a.

Depreciation is based on output levels

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DepreciationStraight line method

• Assume computer equipment is bought at a cost of €2,000

• Useful life is 3 years, and there is a residual value of €200

€

Acquisition date 2,000

Depreciation charge in year 1 (600)

Carrying amount at end of year 1 1,400


Carrying amount at end of year 2 800



Constant charge

Constant charge

Constant charge

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DepreciationDiminishing balance method

• Formula for calculating depreciation rate is:

where N is the useful life

• In the previous example, this is worked out as

N

asset of cost

value residual1

%58.53 3

2,000

2001

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DepreciationDiminishing balance method (continued)

• Assume computer equipment is bought at a cost of €2,000

• Useful life is 3 years, and there is a residual value of €200

€


Depreciation charge in year 1 (53.58%) (1,072)


Depreciation charge in year 2 (53.58%) (497)


Depreciation charge in year 3 (53.58%) (231)


Constant percentageConstant

percentageConstant

percentage

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DepreciationUnits of production method

• Assume manufacturing equipment is bought at a cost of €10,000

• Equipment’s useful life is expected to be 20,000 units of production

€


Depreciation charge in year 1 (2,000 units produced) (1,000)






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DepreciationChoice of a method

• The depreciation method used must reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity

• The depreciation method applied to an asset must be reviewed at least at each financial year-end

- if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method must be changed to reflect the changed pattern

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DepreciationChanges in estimates

• The residual value and the useful life of an asset are estimated when the asset is acquired

- requirement to be reviewed at least at each financial year-end

• If subsequent expectations differ from previous estimates, the change(s) are accounted for as a change in an accounting estimate in accordance with IAS 8

- the change is reflected prospectively, i.e. past accounting entries are not amended

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DepreciationWhen depreciation should be charged

• Depreciation of an asset begins when it is available for use

- i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management

• Depreciation is a matching of the consumption of an asset to the charge in the income statement

- depreciation is recognised even if the fair value of the asset exceeds its carrying amount

- repairs and maintenance of an asset do not negate the need to depreciate an asset

• Depreciation does not cease when the asset becomes idle or is retired from active use (unless the asset is fully depreciated)

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DepreciationSeparate components

• Each part of an item of PPE with a cost that is significant in relation to the total cost of the item must be depreciated separately

- eg. in the case of an aeroplane, the following components will be depreciated at different rates, based on their useful life:

◦ fuselage

◦ engines

◦ seating/fittings

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DepreciationSeparate components: land and buildings

• Land and buildings are separable assets and are accounted for separately, even when they are acquired together

- with some exceptions, such as quarries, mines and sites used for landfill, land has an unlimited useful life and therefore is not depreciated

- buildings have a limited useful life and therefore are depreciable assets

• An increase in the value of the land on which a building stands does not generally affect the determination of the depreciable amount of the building

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Measurement after recognition Impairment

• An entity applies IAS 36, Impairment of Assets to determine whether an item of PPE is impaired,

• That standard explains how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognises, or reverses, the recognition of, an impairment loss

• Compensation from third parties for items of PPE that were impaired, lost or given up is included in profit or loss when the compensation becomes receivable

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Measurement after recognition Revaluation model

Acquisition dateFirst revaluation

date Subsequent dates

PPE recorded at cost (less subsequent

depreciation / impairment

losses)

PPE carried at revalued amount

Revalued amount = fair value at

revaluation date less subsequent

accumulated depreciation /

impairment losses

PPE carried at revalued amount

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Revaluation modelExample

Background information

• non-current asset purchased on 1 March 2010

• cost price analysed as follows:

• useful life of 10 years; residual value of €9,000. Straight line method to be applied

€

List price 48,000

Trade discount (2,000)

Freight costs 3,000

Installation costs incurred internally 5,000

54,000

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Revaluation modelExample (continued)

• accounting policy is to charge a full year’s depreciation in the year of purchase and no depreciation is the year of retirement or sale

• accounting policy to revalue equipment

- no revaluations required in 2010, 2011 and 2012

- valued at €42,000 on 31 December 2013, with no change in estimated useful life and residual value

• revaluation surplus is transferred to retained earnings as the asset is used

• year end is 31 December

Required

• accounting effect at 31 December 2010, 2013 and 2014

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Carryingamount

Rev’nreserve

Cost on 1 March 2010 54,000 -

Depreciation to 31 December 2010 (4,500) -

Carrying amount on 31 December 2010 49,500 -

Depreciation to 31 December 2013 (3 years) (13,500) -

Carrying amount prior to revaluation 36,000 -

Revaluation surplus 6,000 6,000

Carrying amount on 31 December 2013 42,000 6,000


Transfer to retained earnings - (1,000)


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Carryingamount

Rev’nreserve

Cost on 1 March 2010 54,000 -










Depreciation is initially calculated as depreciable amount (54,000 -9,000) / useful life (10 years)

There is no change in depreciation rate until there is a change in

carrying amount, or estimates of residual value or useful life

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Carryingamount

Rev’nreserve

Cost on 1 March 2010 54,000 -










The revaluation surplus is the difference between the fair value

(€42,000) and the carrying amount (€36,000)

The revaluation surplus is recognised in a revaluation reserve:

(Dr Non-current asset; Cr Revaluation reserve)

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Carryingamount

Rev’nreserve

Cost on 1 March 2010 54,000 -










Subsequent to the revaluation, depreciation is calculated as

depreciable amount (€42,000 -€9,000) / remaining useful life (6

years)

This represents an annual depreciation charge of €5,500,

which is €1,000 greater than the original depreciation charge

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Carryingamount

Rev’nreserve

Cost on 1 March 2010 54,000 -










The additional depreciation charge of €1,000 * 6 remaining years

represents nothing other than the revaluation surplus, which is

credited to the revaluation reserve

An entity is allowed to transfer an amount equivalent to the increased

depreciation charge from the revaluation reserve to retained

earnings

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Carryingamount

Rev’nreserve

Cost on 1 March 2010 54,000 -










The net effect on retained earnings, subsequent to the revaluation

surplus, is that these are decreased by an annual depreciation charge

of €5,500 and increased by an annual transfer of €1,000, i.e. an overall decrease of €4,500, which

is equivalent to the original position

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Carryingamount

Rev’nreserve

Cost on 1 March 2010 54,000 -










Upon revaluation, the accumulated depreciation is offset against the

gross carrying amount

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The following accounting entries would be required upon revaluation:

Dr Non-current asset (accumulated depreciation) 18,000

Cr Non-current asset (cost) 18,000

Being the offset of accumulated depreciation against the asset’s cost (which will now represent revalued amount)

Dr Non-current asset (cost) 6,000

Cr Revaluation reserve (in equity) 6,000

Being the revaluation surplus upon revaluation

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Revaluation modelSources of fair value

Type of asset Fair value considerations

Land and buildings Usually determined from market-based evidence by appraisal that is normally undertaken by professionally qualified valuers

Plant and equipment Usually determined by appraisal

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Revaluation modelFrequency of revaluations

• Revaluations must be carried out regularly so that the carrying amount of an asset does not differ materially from its fair value at the end of the reporting period

• The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalued

- when the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required

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Revaluation modelAssets subject to revaluation

• If an item of PPE is revalued, the entire class of PPE to which that asset belongs must be revalued

- decrease of carrying amount Expense

- increase of carrying amount Equity (Revaluation surplus)

• However, on subsequent revaluations:

- the increase is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss

- the decrease is debited directly to equity under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset

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Revaluation modelBalance in the revaluation reserve

Carrying amount

beforerev’n

Fairvalue

Rev’nreserve

(cumula-tive)

Retained earnings (cumula-

tive)

Purchase100 100 - -

Revaluation 180 85 5 -

Revaluation 264 50 - (9)

Revaluation 330 44 5 -

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Revaluation modelDeferred tax

• Where the revaluation model is applied, deferred tax considerations must be made

• Deferred tax is calculated at a rate which reflects the expected manner of recovery of the asset

- the expected manner of recovery of PPE is generally through consumption/continued use (i.e. depreciation) – deferred tax is provided for at 35%

- the land element of property is generally not expected to be recovered through consumption/continued use – deferred tax therefore reflects an expected mode of recovery through sale

• Deferred tax is recognised directly in other comprehensive income

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Depreciation modelsSwitching between models

• The choice of a model is an accounting policy choice

• Voluntary changes in accounting policies must be carried out in accordance with IAS 8

- a change in accounting policy is therefore only permitted if it results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s:

◦ financial position,

◦ financial performance, or

◦ cash flows

- a change from the cost model to the revaluation model must however be applied prospectively

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Derecognition

• The carrying amount of an item of PPE is derecognised:

- on disposal; or

- when no future economic benefits are expected from its use or disposal

• The gain or loss arising from derecognition is included in profit or loss when the item is derecognised

- gains may not be classified as revenue

◦ an exception exists if, in the course of its ordinary activities, an entity routinely sells items of PPE that it has previously held for rental to others

• Gains or losses = net disposal proceeds - carrying amount

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• Asset purchased in a previous period has a carrying amount of €5,000

• Disposal proceeds are €4,000

• The gain/loss on disposal is calculated as follows:

Dr Cash 4,000

Dr Loss on disposal (income statement) 1,000

Cr Non-current asset 5,000

€

Disposal proceeds 4,000

Carrying amount (5,000)

Loss on disposal (1,000)

DerecognitionExample

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DisclosureAn overview

• The financial statements must disclose, for each class of PPE:

- accounting policy (including measurement bases, depreciation methods, and useful lives or depreciation rates)

Source: Simonds Farsons Cisk p.l.c. 31 January 2011Depreciation method

Depreciation rates used

Measurement basis (in this case at cost, with Land and Buildings being revalued)

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DisclosureAn overview (continued)


- the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period, together with a reconciliation of the opening to the closing balances

- depreciation and impairment charges for the year

- nature and effect of changes in accounting estimates

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Source: Simonds Farsons Cisk p.l.c. 31 January 2011

Carrying amount and accumulated

dep’n at the beginning of the

year is reconciled to that at the end

of the year

Carrying amount and accumulated

dep’n at the beginning of the

year is reconciled to that at the end

of the year

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Depreciation and any impairment charges for the

year also need to be disclosed...

...as do additions to assets in the course

of construction

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DisclosureOther disclosures

• The financial statements must also disclose information relating to:

- existence (and amounts) of restrictions on title, and PPE pledged as security for liabilities

- expenditures recognised in the carrying amount of an item of PPE in the course of its construction

- contractual commitments for the acquisition of PPE

- if applicable, compensation from third parties for items of PPE that were impaired, lost or given up that is included in profit or loss


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DisclosureOther disclosures (continued)

• If items of PPE are stated at revalued amounts, the following must also be disclosed:

- effective date of the revaluation

- whether an independent valuer was involved

- methods and significant assumptions applied

- extent to which the items’ fair values were determined directly by reference to observable prices in an active market or recent market transactions on arm’s length terms (or other valuation techniques)

- the carrying amount (by class) that would have been recognised had the assets been carried under the cost model

- revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders

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DisclosureOther disclosures (continued)


Date of revaluation

Involvement of an independent architect

Basis on which valuation was arrived at (in this case open

market prices)

Carrying amount had the asset been carried under the cost model

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IAS 38 Intangible assets

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Intangible assetsIntroduction

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

• The 3 critical attributes of an intangible asset are:

- Identifiability

- Control

- Future economic benefits

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Intangible assetsIdentifiability

• An intangible asset is identifiable when it:

- is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or

- arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations

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Intangible assetsControl and future economic benefits

Control

• An entity controls an asset if it has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits

Future economic benefits

• May include revenue from sale of products or services, cost savings or other benefits resulting from the use of the asset by the entity

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Examples of intangible assets

• Trade marks

• Trade names

• Internet domain names

• Newspaper mastheads

• Non-competition agreements

• Customer lists - valuable, and in some markets are frequently leased or exchanged (subject of course to legislation!)

• Customer contracts and the related relationships

• Plays, operas, ballets

• Literary works and titles

• Musical works

• Pictures and photographs

• Video and audiovisual material

• Licensing and royalty agreements

• Operating and broadcasting rights

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Assets that may not be capitalised as intangibles

• Expenditure incurred on the following may not be capitalised as intangible assets:

- start-up activities (eg. legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business, or launch new products)

- training activities

- advertising and promotional activities

- relocating or reorganising part or all of entity

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Similarities between Intangible assets and PPE

• There are a number of similarities between intangible assets and PPE:

- initial recognition (at cost)

- two accounting policy choices:

◦ cost model

◦ fair value model

- (in the case of intangible assets with finite lives) method of application of the above models

- impairment considerations

- disposals

- disclosure requirements of PPE are also applicable to IP

The major differences, on which we will focus in this session, are the concepts of

finite vs indefinite life assets, and internally generated

assets

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Intangible assets Recognition

no

*Is it probable that the expected future economic benefits

attributable to the asset will flow to the entity?

yes

no

Do not recognise as intangible

assetCan the cost of the asset be

measured reliably?

yes

Recognise as intangible asset if other criteria is also met

*An entity must assess the probability of expected future economic benefits using 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

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Recognition and measurementInternally generated intangible assets

• Internally generated intangible assets are analysed into two phases:

Research The original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding

Development The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use

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Internally generated intangible assetsResearch and development phase

Process of generating an intangible asset

a) Research phase

b) Development phase

No intangible asset may be recognised

Intangible asset may be recognised when it demonstrates:• technical feasibility of the project;• its intention to complete the developments;• its ability to use or sell the intangible asset;• how the intangible asset will generate probable

future economic benefits; • the availability of resources to complete the

development; and• its ability to measure the attributable

expenditure reliably

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Internally generated intangible assetsResearch and development phase: expensed costs

• Any expenditure written off during the research or development phase cannot subsequently be capitalised if the project meets the criteria for recognition at a later date

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Internally generated intangible assetsResearch and development phase: disclosure

• Extract from an accounting policy for intangible assets

Source: GO p.l.c. 31 December 2011

Recognition of development costs is

subject to meeting the specified criteria

Recognition of development costs is

subject to meeting the specified criteria

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Internally generated intangible assetsCosts that may not be capitalised

• The costs relating to many internally generated intangible items cannot be capitalised and are expensed as incurred. This includes expenditures on internally generated:

- brands

- mastheads

- customer lists

- publishing titles

- goodwill

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Subsequent measurement

• Similar to PPE, an entity must choose as its accounting policy:

- the cost model, or

- the revaluation model

• If an intangible asset is accounted for using the revaluation model, all the other assets in its class must also be accounted for using the same model, unless there is no active market for those assets

• Both the cost model and the revaluation model are applied in a consistent manner with the equivalent models in IAS 16

An important distinction must however be made between

intangible assets with a finite life, and those with an indefinite life

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Subsequent measurementFinite vs indefinite useful life assets

Intangible assets with a finite useful life

• Have a limited period of benefit to the entity

• Amortisation is carried out on a systematic basis over the useful life of the intangible asset

• Considered for impairment when there is an indication that the asset has been impaired

Intangible assets with an indefinite useful life

• No foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity

• Not amortised

• Tested annually for impairment and whenever there is an indication of impairment

Slide 73


PwC

Subsequent measurementIndefinite useful life assets

• Extract from an accounting policy for intangible assets


An entity must test the IA for

impairment at least annually or

whenever there isan impairment

indicator

Slide 74


PwC

AmortisationChanges in estimates

• Similar to PPE, the residual value and the useful life of an asset are estimated when the asset is acquired

- requirement to be reviewed at least at each financial year-end

• If subsequent expectations differ from previous estimates, the change(s) are accounted for as a change in an accounting estimate in accordance with IAS 8

- the change is reflected prospectively, i.e. past accounting entries are not amended

Slide 75


PwC

Retirements and disposals

• Similar to PPE, an intangible asset is derecognised:

- on disposal; or

- when no future economic benefits are expected from its use or disposal.

• The gain or loss upon derecognition is equal to the difference between net disposal proceeds and carrying amount of the asset

- this is recognised in profit or loss when asset is derecognised

- gains may not be classified as revenue

Slide 76


PwC

DisclosuresAn overview

• The financial statements must disclose, for each class of intangible asset, and distinguishing between internally generated intangible assets and other intangible assets:

- accounting policy, including:

◦ whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortisation rates used

◦ the amortisation methods used for intangible assets with finite useful lives

- the gross carrying amount and any accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period, together with a reconciliation from opening to closing balances

Slide 77


PwC

Intangible assetsDisclosure: accounting policy


Intangible assets are initially

measured at cost

The value of intangible assets is amortised over

its useful life

Slide 78


PwC

DisclosuresOther disclosures

An entity must also disclose:

• the line item(s) of the income statement in which any amortisation of intangible assets is included

• for an intangible asset assessed as having an indefinite useful life, the carrying amount of that asset and the reasons supporting the assessment of an indefinite useful life

- a description of the factor(s) that played a significant role in determining that the asset has an indefinite useful life must be provided

• a description, the carrying amount and remaining amortisation period of any individual intangible asset that is material to the entity’s financial statements

Slide 79


PwC

DisclosuresOther disclosures (continued)

• for intangible assets acquired by way of a government grant and initially recognised at fair value:

- the fair value initially recognised for these assets

- their carrying amount, and

- the measurement basis (cost or revaluation model)

• the existence and carrying amounts of intangible assets whose title is restricted and the carrying amounts of intangible assets pledged as security for liabilities

• the amount of contractual commitments for the acquisition of intangible assets

• the aggregate amount of research and development expenditure recognised as an expense during the period

Slide 80


PwC

DisclosuresOther disclosures: revaluation model

Similar to PPE

• If intangible assets are accounted for at revalued amounts, an entity must disclose the following:

- by class of intangible assets:

◦ the effective date of the revaluation

◦ the carrying amount of revalued intangible assets, and

◦ the carrying amount that would have been recognised had the revalued class of intangible assets been measured after recognition using the cost model,

- the methods and significant assumptions applied in estimating the assets’ fair values

Slide 81


PwC

DisclosuresOther disclosures: revaluation model (continued)

- the amount of the revaluation surplus that relates to intangible assets at the beginning and end of the period, indicating the changes during the period and any restrictions on the distribution of the balance to shareholders; and

Slide 82


PwC

DisclosuresVoluntary disclosures

• An entity is encouraged, but not required, to disclose the following information:

- a description of any fully amortised intangible asset that is still in use; and

- a brief description of significant intangible assets controlled by the entity but not recognised as assets because they did not meet the recognition criteria in this Standard or because they were acquired or generated before the version of IAS 38 Intangible Assets issued in 1998 was effective

Slide 83


This material has been prepared for general guidance on matters of interest only, and does not

constitute professional advice. You should not act upon the information contained in this

material without obtaining specific professional advice. No representation or warranty (express

or implied) is given as to the accuracy or completeness of the information contained in this

material, and, to the extent permitted by law, PricewaterhouseCoopers, its members,

employees and agents do not accept or assume any liability, responsibility or duty of care for

any consequences of you or anyone else acting, or refraining to act, in reliance on the

information contained in this material or for any decision based on it.

© 2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Malta member firm,

and may sometimes refer to the PwC network. Each member firm of which is a separate legal

entity. Please see www.pwc.com/structure for further details.

www.pwcacademy.com.mt

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