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Intangible Assets

Khalid Mahmood bajwa - FCMA

 Definition
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 An intangible asset is an identifiable non-

monetary asset without physical substance.
 controlled by the entity as a result of events
in the past.
 something from which the entity expects
future economic benefits to flow.

Khalid Mahmood bajwa - FCMA

 Definition
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Khalid Mahmood bajwa - FCMA

 Khalid Mahmood bajwa - FCMA 4

MEASUREMENT
The measurement of cost depends on the method
of acquisition of an intangible asset. Intangible
assets can be acquired …
by separate purchase,

as part of a business combination,

by exchange of assets,

by a government grant,

by self-creation (internal generation).

 Measurement
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At recognition After recognition

By separate purchase or
by self creation: AT Cost model: Revaluation model:
COST
Cost Fair value
As part of a business Less: Less: Subsequent
combination or Accumulated accumulated
by exchange of assets: AT amortization amortization
FV Less: Less: Subsequent
Accumulated accumulated
By Government grant: AT impairment impairment
COST or AT FV

Khalid Mahmood bajwa - FCMA

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 acquired separately: If the entity acquires an

intangible asset separately, the cost would be
its purchase price.
 part of a business combination: when there
is an acquisition or takeover, an intangible
included should be measured as its fair value
at the date of acquisition.

Khalid Mahmood bajwa - FCMA

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 government grant: intangible assets acquired

by way of government grant and the grant itself
may be recorded initially either at cost or fair
value. (IAS 20)

 internally generated intangible asset: The cost of

an internally operated intangible asset is the sum
of the expenditure incurred from the date when
the intangible asset first meets the recognition
criteria.
Khalid Mahmood bajwa - FCMA
 Internally generated
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 The standard prohibits the recognition of

internally generated brands, publishing titles
and customer lists and similar items as
intangible assets.
 As internally generated goodwill is subjective
and cannot be measured reliably so will not
be recognized

Khalid Mahmood bajwa - FCMA

 Internally generated: R&D
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Research:
 
(i) Obtaining new knowledge,
(ii) Evaluation, final selection, application of
research/knowledge,
(iii) Search, evaluation and final selection of alternate
materials, devices, products, processes, systems or
services.

Khalid Mahmood bajwa - FCMA

 Internally generated: R&D
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Development:
 
(i) Design, construction, testing of prototypes
(ii) Design of tool, dies
(iii) Design, construction and operation of pilot plant
not for commercial production
(iv) Design, construction, testing of chosen alternate
material, devices, products, processes, systems or
services
Khalid Mahmood bajwa - FCMA
 Research and development costs
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 Research costs should be written off as an expense

as they incurred.
 Development costs may qualify for recognition as
intangible assts provided the following strict criteria
can be demonstrated.
1) The technical feasibility of completing the intangible
asset so that it will be available for use or sale.
2) Its intention to completing the intangible asset so
that it will be available for use or sale.
3) Its ability to use or sell the intangible asset.

Khalid Mahmood bajwa - FCMA

 Research and development costs
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4) How the intangible asset will generate

probable future economic benefits. Among
other things, the entity should demonstrate
the existence of a market for the output of the
intangible asset or the intangible asset itself,
or if it is to be used internally, the usefulness
of the intangible asset.
5) its ability to measure the expenditure
attributable to the intangible asset during its
development reliably.
Khalid Mahmood bajwa - FCMA
 Amortization
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 An intangible asset with a finite useful life is
amortized, and an intangible asset with an
indefinite useful life is not amortized.
 The amortization charge for each period should
normally be recognized in profit and loss.
 The residual value of an intangible asset with a
finite useful life shall be assumed to be zero
unless
(i) commitment by 3rd party or
(ii) active market exists to calculate residual value
and it is probable that active market will exist at
the end of useful life.
Khalid Mahmood bajwa - FCMA
 Amortization
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 Amortization method should reflect the pattern of

benefits. If pattern of benefits is not clear, straight line
method will be used.
 The amortization period and the amortization method
for an intangible asset with a finite useful life shall be
reviewed at least at each financial year-end.
 Amortization period: Amortization starts when asset
is available for use and ends when asset is
derecognized or when asset is classified as held for
sale, whichever is earlier.

Khalid Mahmood bajwa - FCMA

 Amortization
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 An intangible asset with an indefinite useful life

shall not be amortized.
 Instead it should be tested for impairment
annually and whenever there is an indication
that the intangible asset may be impaired.
 The standard excludes financial assets, mineral
rights, expenditure on the exploration,
development and extraction of minerals and
intangible assets arising in insurance enterprises
from contracts with policy holders.
Khalid Mahmood bajwa - FCMA
 Revaluation of Intangibles
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 Only those intangible assets are revalued whose fair value

can be measured with reference to active market.
 Revaluation model requires application to ENTIRE class of
intangible asset to which the asset belongs unless where
active market does not exist for any intangible asset.
 Revaluations shall be made with sufficient REGULARITY
to ensure that the carrying amount does not differ materially
from that which would be determined using fair value at the
balance sheet date. However, if subsequently active market
does not exist, its last revalued amount will be reduced by
accumulated amortization (in normal way).
Khalid Mahmood bajwa - FCMA
 Revaluation gain / loss
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Revaluation

Gain Loss

If loss on Otherwise: If revaluation

revaluation of such To reserve exist for Otherwise:
intangible was Revaluation such intangible To I/S
charged to I/S in reserve then: To
previous period revaluation
then charge gain: To reserve
I/S

Khalid Mahmood bajwa - FCMA