11.2 Intangible Assets: Initial Recognition and MeasurementRecognition as an intangible asset is based on both criteria being met: Show
If these are not met, then the item is expensed when it is incurred. If the three conditions of an intangible asset and the two recognition criteria above are met, then the intangible asset is:
Intangible assets can be acquired:
Rather than depreciating intangible assets, the cost is amortized. Amortization expense is calculated using the straight-line method over the useful life of the intangible asset. 11.2.1 Purchased Intangible AssetsIntangible assets purchased from another party are measured at cost. Costs are capitalized to intangible assets the same way as is done for property, plant, and equipment. As a basic review, capital costs include the acquisition cost, legal fees, and any direct costs required to get the intangible asset ready for use. If intangible assets are purchased with other assets, the cost is then allocated to each asset based on relative fair values (basket purchase). Other costs, such as training to use the asset, marketing, administration or general overhead, interest charges due to late payment for the asset purchase, and any costs incurred after the asset is put into its intended use, are expensed as incurred. Like property, plant, and equipment, intangible assets that are purchased in exchange for other monetary and/or non-monetary assets are measured at either the fair value of the assets given up or the fair value of the intangible asset received, whichever is the most reliable measure, if there is commercial substance. When an exchange lacks commercial substance, the assets received are measured at the lessor of the carrying amount or the fair value of the assets given up. If a company receives an intangible asset at no cost or for a nominal cost in the form of a government grant such as a grant of timber rights, then the fair value of the intangible asset acquired is typically the amount recorded. 11.2.2 Internally Developed Intangible AssetsAll company activities to create new products or substantially improve existing products are to be separated into a research phase and a development phase for the various costs incurred. In broad terms, research is the planned investigation undertaken with the hope of gaining new scientific or technical knowledge and have a better understanding. Development on the other hand is the translation of research findings or other knowledge into a plan or design for new or substantially improved materials, devices, products, processes, systems or services before starting commercial production or use. The accounting standards are very clear that costs incurred on research, or during the research phase, of an internal project do NOT meet the criteria for recognition of an intangible asset. Therefore, all such costs are recognized as expenses when they are incurred. Property, plant and equipment needed for research should not be expensed. Those assets should be capitalized and depreciated as usual with depreciation deducted as part of research and development costs. To reiterate, research costs are normally expensed. An intangible asset can be recognized during the development stage of an internal project but only when an entity can demonstrate its technical and financial feasibility and the company’s intention to generate future economic benefits. In order for costs incurred during the development stage to be capitalized, all of the six specific conditions listed below must be demonstrated. Meeting the six criteria means that an entity should only capitalize costs incurred during the development phase only when the future benefits are reasonably certain. There is a fine line that has to be monitored when capitalizing development costs. Often internally generated intangible assets are recognized in limited situations and projects may be in process for some time before ALL six criteria are met. Only when all the criteria are met do the costs begin to be capitalized. No costs incurred prior to this point and previously expenses can be added to the internally generated intangible asset. Below is a summary of the two phases and their accounting treatment (IFRS, 2014; IAS 38 Intangible Assets):
To further expand on research and development, these activities can be further expanded into stages or phases. Below is a list of various activities that can be broken out by each stage: Activities in the research stage:
Activities in the development stage:
During the research phase, all costs are recognized as expenses as they are incurred. In contrast, for development costs, all six of the criteria listed above must be met in order to capitalize costs, otherwise the development costs are also expensed. For ASPE, CPA Handbook, Sec. 3064, Goodwill and Intangible Assets (CPA Canada, 2016), allows a choice between expensing the costs for internally developed intangibles or recognizing the intangible asset when certain criteria (similar to the criteria above) are met. 11.2.3 Intangible Assets: Subsequent MeasurementAfter the initial recognition and measurement, subsequent measurement is as follows:
The accounting treatment under both models is applied the same way as is applied to property, plant, and equipment (tangible assets). Since intangible assets rarely have an active market to provide readily available fair values, discussions in this chapter will focus on the cost model. Cost Model
An intangible asset with a limited useful life will be amortized over its estimated useful life, like plant and equipment, as follows:
If the intangible asset has an indefinite life, no amortization is recorded, but it will be subject to review at the end of each reporting period. Should this status change to a definite life, it is treated as a change in estimate and accounted for prospectively. Indefinite life assets are also subject to impairment reviews and adjustments. 11.2.4 Intangible Assets: Impairment and DerecognitionThe process of impairment and derecognition of intangible assets is like that of property, plant, and equipment. Similar to property, plant and equipment the carrying value of intangible assets and goodwill should be reviewed to ensure they do not exceed economic benefits the assets are expected to provide. If an item is determined to be impaired, its carrying amount will have to be written down and a loss on impairment is recognized. Below is a summary of two models used for definite-life and indefinite-life intangible assets.
To summarize the Cost Recovery Impairment Model (ASPE):
Rational Entity Impairment Model (IFRS): The entry for impairment for both ASPE and IFRS is: Amortization calculation after impairment for both ASPE and IFRS is based on the ad- justed carrying value after impairment, the revised residual value (if any), and the asset’s estimated remaining useful life. Revised amortization = (carrying value after impairment − revised residual value (if any)) ÷ Estimated remaining useful life How would you measure the value of an intangible asset?To get the value of your intangible assets, you take this overall business valuation and subtract the value of the net assets on the balance sheet. What's left over is commonly referred to as goodwill.
What is a recognized intangible asset?An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory.
What are the criteria for the recognition of development cost as an intangible asset?Development phase
Under IAS 38, an intangible asset arising from development must be capitalised if an entity can demonstrate all of the following criteria: the technical feasibility of completing the intangible asset (so that it will be available for use or sale) intention to complete and use or sell the asset.
What methods are used to value intangible assets after first recognition?Three methods used to value intangible assets include the market, income and cost approaches.
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