CHAPTER # 01

INTANGIBLE ASSETS
CHAPTER-1 IAS 38: Intangible Assets

LO1: INTRODUCTION
1.1 Assets
A resource controlled by the company as a result of past events and from which future economic benefits
are expected to flow to the entity.

1.1.1 Control of Asset

Company has the power to obtain the future economic benefits flowing from the underlying resource
and can also restrict the access of others to those benefits.

1.1.2 Future economic benefits

This means increase in Revenue or decrease in costs.

1.2 Scope [IAS 38: 2, 3, 6 & 9]

IAS 38 is required to be applied in accounting for intangible assets.

1.2.1 IAS 38 not Applicable to

a) intangible assets held for sale in the ordinary course of business (IAS 2 is applicable).
b) deferred tax assets (IAS 12 is applicable).
c) leases of intangible assets (IFRS 16 is applicable).
d) financial assets (IAS 32 or IFRS 10/IAS 27/IAS 28 is/are applicable)
e) goodwill acquired in a business combination (IFRS 3 is applicable).
f) assets arising from contracts with customers (IFRS 15 is applicable)
Rights held by a lessee under licensing agreements for items such as motion picture films, video
recordings, plays, manuscripts, patents and copyrights are within the scope of IAS 38 and are excluded
from the scope of IFRS 16.

1.3 Definition [IAS 38: 8 & 10]

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

1.3.1 Identifiable [IAS 38: 11 & 12]

An asset is identifiable if it either:
• is separable (can be exchanged, rented, sold or transferred separately); or
• arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable.

Illustration # 01: (ICAP Example # 01)

An entity incurred Rs. 4 million on a massive marketing campaign to promote a new product. The
accountant wishes to capitalize these costs. The cost of the advertising campaign is not separable as it
cannot be separated from the entity and sold, transferred, rented or exchanged etc. Furthermore, the
advertising campaign does not arise from contractual or legal rights. Thus, the cost of the advertising
campaign is not identifiable and must be expensed out.

1
CHAPTER-1 IAS 38: Intangible Assets

1.3.2 Non-monetary [IAS 38: 8]

Monetary asset is cash/Bank/Debtors. Monetary assets are money held and assets to be received in fixed
or determinable amounts of money, for example, cash and trade receivable. Intangible asset must be a
non-monetary asset.

1.3.3 Physical and non-physical elements [IAS 38: 4 & 5]

Some intangible assets may be contained in or on a physical substance such as;
• Compact discs (in the case of computer software)
• Legal documentation (in the case of License or patent)
In Such cases, physical element of the asset is secondary to its intangible component (i.e., the knowledge
embodied in it)

Illustration # 02: (ICAP Example # 02)

Market and technical knowledge may give rise to future economic benefits. Control over such knowledge
exists if it is protected by legal rights such as copyrights, a restraint of trade agreement (where
permitted) or by a legal duty on employees to maintain confidentiality.

Illustration # 03: (ICAP Example # 03)

The entity usually has insufficient control over the expected economic benefits from customer
relationships and loyalty for such items (e.g., portfolio of customers, market shares) to meet the
definition of intangible assets.

Illustration # 04: (ICAP Example # 04)

The exchange transactions for the same or similar non-contractual customer relationships provide
evidence that the company is able to control those benefits in the absence of such legal rights. Such
exchange transactions also provide evidence that the customer relationship is separable so, thus meeting
the intangible asset definition. This means that a purchased customer list would usually be capitalised.

Illustration # 05: (ICAP Example # 05)

An entity may have a team of skilled staff and may be able to identify incremental staff skills leading to
future economic benefits from training. The entity may also expect that the staff will continue to make
their skills available to the entity. However, an entity usually has insufficient control over the expected
future economic benefits (e.g., an employee might leave the entity taking with him the skills obtained
from training) arising from a team of skilled staff and from training for these items to meet the definition
of an intangible asset. Similarly, specific management or technical talent is unlikely to meet the definition
of an intangible asset, unless it is protected by legal rights to use it.

Illustration # 06: (ICAP Example # 06)

An entity acquired a fishing license. The directors insist that it is a physical asset since it is written on a
piece of paper. Although the fishing license has a physical form (the related legal documentation), the
license is right rather than the physical proof thereof. Such a right (whether documented or not) is always
considered to be intangible.

2
CHAPTER-1 IAS 38: Intangible Assets

In determining whether an asset that incorporates both intangible and tangible elements should be
treated under IAS 16 Property, Plant and Equipment or as an intangible asset under IAS 38, an entity uses
judgement to assess which element is more significant. For example, computer software for a computer‑
controlled machine tool that cannot operate without that specific software is an integral part of the
related hardware and it is treated as property, plant and equipment. The same applies to the operating
system of a computer. It is included in PPE.

Illustration # 07: (ICAP Example # 07)

An air-conditioning unit has software installed to control and display the temperature including its
connectivity with the remote. The software element of air-conditioning unit is insignificant and
supportive only to its physical parts including compressor etc. which achieve its primary purpose i.e., air
cooling. The air-conditioning unit shall be accounted for as PPE.

However, when the software is not an integral part of the related hardware, computer software is treated
as an intangible asset.

Example # 01: (ICAP Example # 08)

The following information relates to the financial statements of Fazal for the year to 31 March 20X5.
The IT division has begun a training course for all managers in a new programming language at a cost of
Rs. 200,000. The consultants running the training course have quantified the present value of the training
benefits over the next two years to be Rs. 400,000. The project cost has been included in the statement
of financial position as a current asset. The accounting policy note identifies that the costs will be written
off over the next two years to match the benefits.
Required: Explain the correct accounting treatment for the above.

Answer:
An entity may have a team of skilled staff and may be able to identify incremental staff skills leading to
future economic benefits from training. The entity may also expect that the staff will continue to make
their skills available to the entity.
However, an entity usually has insufficient control over the expected future economic benefits arising
from a team of skilled staff and from training for these items to meet the definition of an intangible asset.
Therefore, IAS 38 specifically states that training costs should not be capitalised. Hence the treatment
adopted by Fazal is not correct and the training costs should be charged to P&L.

3
CHAPTER-1 IAS 38: Intangible Assets

LO2: RECOGNITION AND INITIAL MEASUREMENT

2.1 Recognition of intangible assets [IAS 38: 18, 21 & 22]
An Intangible asset shall be recognized if and only if:
a) It is probable that the expected future economic benefits that are attributable to the asset will flow
to the entity; and
b) The cost of asset can be measured reliably

2.2 Initial measurement [IAS 38: 24]

An Intangible asset shall be measured initially at cost.

2.3 Sources of acquisition

• Acquired or purchased separately
• Acquired in exchange of another asset
• Acquired by way of government grant
• Internally generated including Research & Development (covered later in this chapter)
• Acquired in business combination (consolidation)

2.3.1 Intangible assets acquired or purchased separately [IAS 38: 25 to 32]

The cost of a separately acquired intangible asset comprises:
• Purchase Price
• Less Trade Discount
• Less Rebate/Subsidy
• Add Import duty
• Add Non-refundable taxes
• Add any directly attributable costs as;
o Employee benefits
o Professional fees
o Legal fees
o Consulting fees
o Testing fees

2.3.1.1 Exclusion from cost of intangible assets

• Cost of introducing a new product (Advertising/promotional)
• Cost of conducting business in a new location/with new class of customers
• Staff training costs
• Administration costs
• General overhead costs
• Initial operating losses
• Cost of redeploying the assets

2.3.1.2 Cessation of capitalisation

Capitalisation of costs stops when intangible asset is in workable location and condition.

4
CHAPTER-1 IAS 38: Intangible Assets

2.3.1.3 Purchase of Intangible asset beyond normal credit terms

If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price
equivalent.

Interest expense
Interest expense = Price with deferred payments – Price with normal credit terms
= 100,000 – 85,000 = 15,000
Treatment of Interest expense
• Can be expensed out
• Can be captitalised (IAS-23)

Example # 02: (ICAP Example # 09)

Ateeq Limited acquires new technology that will significantly reduce its energy costs for manufacturing.
Costs incurred include:
Rs.
Cost of new technology 1,500,000
Trade discount provided 200,000
Training course for staff in new technology 70,000
Initial testing of new technology 20,000
Losses incurred while other parts of plant shutdown during testing and training 30,000
Required: Calculate the cost that can be capitalised.

Answer:

The cost that can be capitalised is: Rs.

Cost of new technology 1,500,000
Less discount (200,000)
Plus, initial testing 20,000
Total 1,320,000

Example # 03: (ICAP Example # 10)

On 30 June 20X4, Habib Limited (HL) discovered that it had been manufacturing a product illegally
since this product happened to be a patented product for which it did not have the necessary rights.
HL immediately shut down its factory and hired a firm of lawyers to act on its behalf in the
acquisition of the necessary rights to manufacture this patented product.
• Legal fees of Rs.50,000 were incurred during July 20X4.
The legal process was finalized on 31 July 20X4, HL was then required to pay Rs.800,000 to
purchase the rights, including Rs.80,000 as refundable taxes.
During the month of July 20X4, factory was shut-down:
• Overhead costs of Rs.40,000 were incurred;
• Significant market share was lost due to shut-down. HL’s total sales over August and September was
Rs. 20,000 but its expenses were Rs. 50,000, resulting in a loss of Rs. 30,000.
To increase market share, HL spent an extra Rs.25,000 aggressively marketing its product. This
marketing campaign was successful, resulting in sales returning to profitable levels in October.
Required: Discuss which of the above costs relating to acquisition of patent can be capitalised.

5
CHAPTER-1 IAS 38: Intangible Assets

Answer:
Purchase price: The purchase price should be capitalized, but this must exclude refundable taxes. Rs.
720,000 (800,000 – 80,000).
Legal costs: This is a directly attributable cost. Directly attributable costs must be capitalized i.e., Rs.
50,000.
Overhead costs: This is not an incidental cost that is necessary to the acquisition of the rights (the shut-
down was only necessary because HL had been operating illegally).
Operating loss: The operating loss incurred while demand for the product increased to its normal level is
an example of a cost that was incurred after the rights were acquired. Costs incurred after the Intangible
Asset is available for use will not be capitalized.
Advertising campaign: The extra advertising incurred in order to recover market share is an example of a
cost that was incurred after the rights were acquired. Furthermore, advertising costs are listed in IAS 38
as one of the costs that should be expensed out.

Example # 04:
A company acquired a software (Intangible asset) with the following details:
Rs.
Purchase Price (including Refundable taxes 15%) 115,500
Staff training Cost 200
Consultancy charges for implementation of software 5,000
Required: Calculate cost of software to be capitalised?

Answer:
Rs.
115,500
Purchase Price – only Non-Refundable taken ( x 100) 100,435
115
Staff training Cost Ignored
Add: Consultancy charges for implementation of software 5,000
Cost of the software 105,435

Example # 05:
On 1st January 2019, QL entered into an agreement to replace existing ERP Software at a cost of Rs. 360
million. According to the agreement, 40% payment was made on signing of the contract while remaining
amount was paid on 31.05.19.
The entire cost of the project was financed through a specific Loan from MCB at mark up of 15% pa. The
Software became operational on November 01, 2019.
Required:
Calculate cost to be recognized in books as intangible asset.

Answer:
General borrowing
01.01.19 360 x 40% = 144
31.05.19 360 x 60% = 216
Borrowing cost to be incurred as on 31.10.19;
144 x 15% x 10/12 = 18
216 x 15% x 5/12 = 13.5

Cost of the software = 360 + 18 + 13.5 = 391.5

6
CHAPTER-1 IAS 38: Intangible Assets

Example # 06:
On 1st January 2019, QL acquired a license for Rs. 600 million. QL made an initial payment of Rs. 100
million and remaining amount will be paid in 2 equal instalments on Jan 01, 2020 and Jan 01, 2021.
• Cost of financing was 10% pa.
Required: Calculate cost of license to be recognized in books as intangible asset.

Answer:
01.01.19 31.12.19 31.12.20
T0 T1 T2
Net Cashflow 100 250 250
Discount factor @ 10% (1 + 0.1)-n (1 + 0.1)-0 (1 + 0.1)-1 (1 + 0.1)-2
100 x 1 250 x 0.909 250 x 0.826
Present Value 100 227.25 206.5
Value in use (Cost of license) 100 + 227.25 + 206.5 = 533.75

2.3.2 Intangible asset acquired in exchange of another asset [IAS 38: 45 & 46]
Sometimes, instead of selling we exchange the old intangible asset with the new one. In this case
normally we will receive new intangible asset and will hand over the old intangible asset to the person
from whom new intangible asset is bought. Obviously, some cash will also be paid to settle the
transaction. In this case following steps will be performed while passing the journal entry.
Step-1: The old intangible asset will be removed from books by crediting old intangible asset and by
debiting accumulated amortisation a/c.
Step-2: The cash paid to settle the transaction will be credited.
Step-3: The cost of new intangible asset will be debited in books.
Step-4: The balancing figure will be gain or loss.
Note:
The asset acquired will only be recognised and the asset given up will only be derecognised if the
transaction has a commercial substance. A transaction is said to have a commercial substance. A
transaction is said to have a commercial substance if its future cashflows are expected to change as a
result of the transaction.

Entry Dr. Cr.

Entry on exchange Intangible asset a/c (new) xxx
of intangible asset Accumulated amortisation a/c xxx
P/L a/c (balancing) xxx
Intangible asset a/c (old) xxx
Cash xxx
(In case there is loss on disposal)

Dr. Intangible asset a/c Cr.

Bal. b/d xxx Disposal (cost of old intangible asset) xxx
Cash/Bank
Disposal (cost of new intangible asset) xxx
Bal. c/d xxx
xxx xxx

7
CHAPTER-1 IAS 38: Intangible Assets

Dr. Accumulated amortisation a/c Cr.

Disposal (accumulated depreciation of
old intangible asset) xxx Bal. b/d xxx
Amortisation xxx
Bal. c/d xxx xxx
xxx xxx

Dr. Disposal a/c Cr.

Intangible asset Accumulated amortisation
(cost old intangible asset) xxx (old intangible asset) xxx
Cash xxx Intangible asset a/c (cost of new asset) xxx
Gain on disposal (Bal. fig.) xxx Loss on disposal (Bal. fig.) xxx
xxx xxx

Note:

1. Sometimes, cash paid to settle the transaction will not be given in the question rather you will be
provided with trade-in-allowance. Trade-in-allowance is the value assigned by the shopkeeper to our
old intangible asset. In such case, cash paid can be calculated through following equation:

Cash paid = Cost of new intangible asset – Trade in allowance

However, if "fair value of the acquired intangible asset is more clearly evident” then its fair value will
be considered as cost."

2. Gain/ (loss) on exchange of intangible asset can be calculated through shortcut way as follows:

Gain/ (loss) = Trade in allowance – Book value of intangible asset disposed off

2.3.2.1 Cost of exchanged intangible asset in certain circumstances

Sometimes the fair market value of new intangible asset is not known in the exchange transaction, in this
case cost of new intangible asset will be calculated in the following way.
Cost of new intangible asset to be debited in
Scenario
exchange entry
Only fair value of new intangible asset is given Fair value of new intangible asset
Fair value of new intangible asset is not given Fair value of old intangible asset + cash paid
but fair value of old intangible asset is given Fair value of old intangible asset − cash received
Fair value of old intangible assets and fair Fair value of old intangible asset + cash paid
value of new intangible assets both are known Fair value of old intangible asset − cash received
Fair value of both new intangible asset and old
Book value of old intangible asset + cash paid
intangible asset is not given/ Transaction lack
Book value of old intangible asset − cash received
commercial substance
Transaction lack commercial substance means that future cash flows from new intangible asset change
minimally.

8
CHAPTER-1 IAS 38: Intangible Assets

Example # 07:
Mr. Umair has exchanged an intangible asset with a new one. The cost of old intangible asset and its
accumulated depreciation on date of disposal is Rs.40,000 and Rs.13,000 respectively. Cash paid to settle
the transactions was Rs.18,000.
Required: Pass journal entries under 3 independent scenarios.
(i) Fair market value of new intangible asset is Rs. 50,000.
(ii) Fair market value of new intangible asset is not known and fair market value of old intangible
asset is Rs. 25,000.
(iii) Fair market value of old and new intangible asset is not known.

Answer:

(1) Dr. Cr.

Asset (new) 50,000
Accumulated Depreciation 13,000
P/L (Bal.) 5,000
Asset (old) 40,000
Cash 18,000

(2) Dr. Cr.

Asset (new) (25,000 + 18,000) 43,000
Accumulated Depreciation 13,000
P/L (Bal.) 2,000
Asset (old) 40,000
Cash 18,000

(3) Dr. Cr.

Asset (new) (27,000 + 18,000) 45,000
Accumulated Depreciation 13,000
Asset (old) 40,000
Cash 18,000

9
CHAPTER-1 IAS 38: Intangible Assets

2.3.3 Intangible asset acquired by way of government grant [IAS 38: 44]

An intangible Asset may be acquired by way of a government grant.

• Free of charge

• For nominal consideration

2.3.3.1 Intangible assets in Government grant

• Airport landing right

• Licenses to operate radio or television stations

• Import licenses

• Quotas

• Right to Access other restricted resources

2.3.3.2 Recognition
• Intangible asset and grant initially recorded at Fair value

• Intangible Asset at nominal amount plus any directly attributable expense

Example # 08:
PAK Govt. granted the entity an intangible asset: Entity Paid a nominal amount of Rs 1,200. The fair value
of intangible asset is Rs. 100,000.
Required:
Pass journal entries according to the relevant IFRS.

Answer:

(i) At Nominal amount

Intangible asset 1,200

Cash/Bank 1,200

(ii) At Fair Value

Intangible asset 100,000

Deferred Income 98,800
Cash/Bank 1,200

10
CHAPTER-1 IAS 38: Intangible Assets

LO3: INTERNALLY GENERATED ITEMS

3.1 Recognition issue [IAS 38: 51 to 53]
It can sometimes be difficult for a company to assess whether an internally-generated asset qualifies for
recognition as an asset in the financial statements because:
a) it is not identifiable; or
b) its cost cannot be determined reliably.

To assess whether an internally generated intangible asset meets the criteria for recognition, an entity
classifies the generation of the asset into:
a) a research phase; and
b) a development phase.

Research [IAS 38: 54 to 56] Development [IAS 38: 57 to 59]

Definition Definition
Research is original and planned investigation Development is the application of research
undertaken with the prospect of gaining new findings or other knowledge to a plan or design for
scientific or technical knowledge and the production of new or substantially improved
understanding. materials, devices, products, processes, systems or
services before the start of commercial production
or use.
Accounting Treatment: Accounting Treatment:
• This expenditure is capitalised if it meets
certain criteria;
Intangible asset Dr.
Research expense Dr. Cash/Bank Cr.
Cash/Bank Cr. • Otherwise, this expenditure is recognised as an
expense when it is incurred.
Development expense Dr.
Cash/Bank Cr.
Examples: Examples:
• activities aimed at obtaining new knowledge; • the design, construction and testing of
• the search for, evaluation and final selection pre‑production or pre‑use prototypes and
of, applications of research findings or other models;
knowledge; • the design of tools, jigs, moulds and dies
• the search for alternatives for materials, involving new technology;
devices, products, processes, systems or • the design, construction and operation of a
services; and pilot plant that is not of a scale economically
• the formulation, design, evaluation and final feasible for commercial production; and
selection of possible alternatives for new or • the design, construction and testing of a
improved materials, devices, products, chosen alternative for new or improved
processes, systems or services. materials, devices, products, processes,
systems or services.

11
CHAPTER-1 IAS 38: Intangible Assets

3.2 Conditions for development phase to be recognised as intangible asset

An intangible asset arising from development (or from the development phase of an internal project)
shall be recognised if, and only if, an entity can demonstrate all of the following:
a) the technical feasibility of completing the intangible asset so that it will be available for use or sale.
b) its intention to complete the intangible asset and use or sell it.
c) its ability to use or sell the intangible asset.
d) how the intangible asset will generate probable future economic benefits. Among other things, the
entity can 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.
e) the availability of adequate technical, financial and other resources to complete the development
and to use or sell the intangible asset.
f) its ability to measure reliably the expenditure attributable to the intangible asset during its
development.

3.3 Recognition prohibition [IAS 38: 63 to 64, 48 to 50]

An internally generated Intangible asset is created by a company through its own efforts
Recognition prohibited (IAS-38) Recognition permitted (IAS-38)
(If internally generated) (If separately purchased)
1. Goodwill 1. Goodwill
2. Brands 2. Brands
3. Mastheads 3. Mastheads
4. Publishing titles 4. Publishing titles
5. Customer lists 5. Customer lists

(If internally generated) (If separately purchased)

It is prohibited because the costs of producing It is permitted because the cost of purchasing
these items cannot be distinguished separately these items can be distinguished separately from
from the cost of developing and operating the the cost of developing and operating the business
business as a whole. as a whole.

3.4 Cost of an internally generated intangible asset [IAS 38: 65 to 67]

The cost of an internally generated Intangible asset comprises all directly attributable costs necessary to
create, produce, and prepare the asset to be capable of operating in the manner intended by
management.
Examples of directly attributable costs are:
(a) Costs of materials and services used or consumed in generating the Intangible asset;
(b) Costs of Employee benefits (as defined in IAS-19) arising from the generation of the Intangible asset;
(c) Fees to register a legal right; and
(d) Amortisation of patents and licenses that are used to generate the intangible asset.

Example # 09:
An entity is developing a new production process. During 2020, expenditure incurred was
Rs. 100,000 of which Rs. 90,000 was incurred before 31.10.20 and Rs. 10,000 was incurred between 01
Nov, 2020 and 31 Dec, 2020.
The company is able to demonstrate that, at 01 December 2020, the production process met the certain
criteria need for recognition as an intangible asset.
Required: Discuss the accounting treatment for the year ended 31.12.20.

12
CHAPTER-1 IAS 38: Intangible Assets

Answer:
Rs. 9,000 Rs. 5,000 Rs.5,000
|-----Research phase-----→|--Development phase--→|---------Intangible (WIP)--------→|
01.01.20 31.10.20 30.11.20/01.12.20 31.12.20

Research expense 90,000 → Less from G.P

Cash/Bank 90,000

Development expense 5,000 → Less from G.P

Cash/Bank 5,000

Intangible asset (WIP) 5,000 → Non-Current asset (B.S)

Cash/Bank 5,000

Illustration # 08: (ICAP Example # 11)

Company Q has undertaken the development of a new product. Total costs to date have been Rs.
800,000. All of the conditions for recognising the development costs as an intangible asset have now
been met.
However, Rs. 200,000 of the Rs. 800,000 was spent before it became clear that the project was
technically feasible, could be resourced and the developed product would be saleable and profitable.
The Rs. 200,000 incurred before all of the conditions for recognising the development costs as an
intangible asset were met must be written off as research costs (expense). The remaining Rs. 600,000
should be capitalised and recognised as an intangible asset (development costs).

Example # 10:
On 01.01.19, an entity started research on a project to build a formula. On 01.01.20, development phase
started but conditions criteria for recording intangible asset were only met on 30.09.20.
• Development was completed on 31.10.21.
Following are the details of expenses which are incurred evenly.
Rs.
In 2019 50,000
In 2020 60,000
In 2021 25,000
Required: Pass the Journal entries for 2019, 2020 & 2021.

Answer:
9 3
Rs. 50,000 60,000 x 12 = Rs. 45,000 60,000 x 12 = Rs. 15,000 25,000
|---Research phase---→|Development phase→|--Intangible (WIP)--→| Intangible asset→|
01.01.19 31.12.19/01.01.20 30.09.20 31.12.20 31.12.21

Research expense 50,000 → Less from G.P

Cash/Bank 50,000

Development expense 45,000 → Less from G.P

Cash/Bank 45,000

Intangible asset (WIP) 15,000

Cash/Bank 15,000

13
CHAPTER-1 IAS 38: Intangible Assets

Intangible asset (WIP) 25,000

Cash/Bank 25,000

Intangible asset 40,000 → Non-Current asset (B.S)

Intangible asset (WIP) 40,000

Example # 11:
On 01.01.21, an entity started research on a project and incurred Rs. 120,000.
Development phase started on 01.01.22 and incurred Rs. 100,000 on development. On 01.09.22,
recording criteria for development cost as intangible asset was met. Development cost for 2023 was Rs.
80,000. The project has not yet completed on 31.12.23.
Required: Prepare Journal entries for 2021, 2022 and 2023.

Answer:
8 4
Rs. 120,000 100,000 x 12 = 66,667 100,000 x 12 = 33,333 Rs. 80,000
|---Research phase---→|Development phase→|--Intangible (WIP)--→| Intangible (WIP) →|
01.01.21 31.12.21/01.01.22 31.08.22 31.12.22 31.12.23

Research expense 120,000 → Less from G.P

Cash/Bank 120,000

Development expense 66,667 → Less from G.P

Cash/Bank 66,667

Intangible asset (WIP) 33,333 → Non-Current asset (B.S)

Cash/Bank 33,333

Intangible asset (WIP) 80,000 → Non-Current asset (B.S)

Cash/Bank 80,000

Example # 12: (ICAP Example # 12)

Sino Care Limited (SCL) started a R&D project for developing new product on 1st January 20X1. The
following expenditure was incurred during 20X1. Year-end is 31 December 20X1.
• Research phase (1 January to 31 March): Rs. 1 million per month
• Development phase (1 April to 31 October): Rs. 1.5 million per month.
The project become technically feasible on 31 August 20X1 when initial patent was also submitted for
registration.
Required: Discuss the accounting treatment.

Answer:
Expenditure incurred in research phase from 1 January to 31 March of Rs. 3 million (i.e., Rs. 1 million x 3
months) shall be charged to profit or loss.
Expenditure incurred in development phase from 1 April to 31 August of Rs. 7.5 million (i.e., Rs.
1.5 million x 5 months) shall be charged to profit or loss since in this period the capitalisation criteria was
not met. Even after the criteria for capitalisation has been met subsequently, this expenditure shall not
be reinstated as an asset.
Expenditure incurred in development phase after capitalisation criteria has been met from 1 September
to 31 October of Rs. 3 million (i.e., Rs. 1.5 million x 2 months) shall be capitalised as intangible asset.

14
CHAPTER-1 IAS 38: Intangible Assets

Example # 13: (ICAP Example # 13)

Saqib Limited began researching and developing an intangible asset. The following is a summary of the
costs that the R&D Department incurred each year:
Rs.
20X1: 180,000
20X2: 100,000
20X3: 80,000
Additional information:
• The costs listed above were incurred evenly throughout each year.
• Included in the costs incurred in 20X1 are administrative costs of Rs. 60,000 that are not considered
to be directly attributed to the research and development process. The first two months of the year
were dedicated to research. Then development began from 1 March 20X1 but it was unable to
measure reliably the expenditure on development till 31 March 20X1.
• Included in the costs incurred in 20X2 are administrative costs of Rs. 20,000 that are considered to be
directly attributed to the research and development process.
• Included in the costs incurred in 20X3 are training costs of Rs. 30,000 that are considered to be
directly attributed to the research and development process as in preparation for the completion of
the development process, certain employees were trained on how to operate the asset.
Required:
Prepare journal entries related to the costs incurred for each of the years ended 31 December 20X1 to
20X3 and briefly comment on accounting treatment.

Answer:

20X1 Debit Credit

Administration expense (not directly attributable) 60,000
Research Expense (180,000-60,000) x 2/12 20,000
Development Expense (180,000-60,000) x 1/12 10,000
Development cost (Asset) (180,000-60,000) x 9/12 90,000
Bank 180,000
20X2 Debit Credit
Development cost (Asset) 100,000
Bank 100,000
20X3 Debit Credit
Training Expense 30,000
Development cost (Asset) 50,000
Bank 80,000
Comments
Administration costs are capitalized if they are considered directly attributable (see 20X2), otherwise they
are expensed (see 20X1).
Training costs are always expensed even if they are considered to be directly attributable (see 20X3).
Research costs are always expensed.
Development costs that are expensed due to being incurred before the recognition criteria were met may
not be subsequently capitalized, even if the recognition criteria are subsequently met. They remain
expensed.

15
CHAPTER-1 IAS 38: Intangible Assets

Example # 14: (ICAP Example # 14)

During 20X5 Henry has the following research and development projects in progress:

Project A was completed at the end of 20X4. Development expenditure brought forward at the beginning
of 20X5 was Rs. 412,500 on this project. Savings in production costs arising from this project are first
expected to arise in 20X5. In 20X5 savings are expected to be Rs. 100,000, followed by savings of Rs.
300,000 in 20X6 and Rs. 200,000 in 20X7.

Project B commenced on 1 April 20X5. Costs incurred during the year were Rs. 56,000. In addition to
these costs a machine was purchased on 1 April 20X5 for Rs. 30,000 for use on the project. This machine
has a useful life of five years. At the end of 20X5 there were still some uncertainties surrounding the
completion of the project.

Project C had been started in 20X4. In 20X4 the costs relating to this project of Rs. 36,700 had been
written off, as at the end of 20X4 there were still some uncertainties surrounding the completion of the
project. Those uncertainties have now been resolved before a further Rs. 45,000 costs incurred during
the year.
Required: Show movement and balance of non-current assets of Henry for the year to 31 December 20X5.

Answer:

Property, plant Research &

& equipment Development
Rs. Rs.
Cost
On 1 January 20X5 - 412,500
Additions 30,000 45,000
On 31 December 20X5 30,000 457,500
Accumulated depreciation/amortisation
On 1 January 20X5 - -
Charge for the year 4,500 W1 68,750 W2
On 31 December 20X5 4,500 68,750
Carrying amount on 31 December 20X5 25,500 388,750
On 31 December 20X4 - 412,500

W1 – Depreciation charge (machine) Rs.

Rs. 30,000 / 5 years x 9/12 4,500
W2 – Amortisation charge (project A) Rs.
100,000 / (100,000 + 300,000 + 200,000) x Rs. 412,500 68,750
Comments

The costs in respect of Project B cannot be capitalised as there are uncertainties surrounding the
successful outcome of the project – but the machine bought may be capitalised in accordance with IAS
16. The 20X5 costs in respect of Project C can be capitalised as the uncertainties have now been resolved.
However, the 20X4 costs cannot be reinstated.

16
CHAPTER-1 IAS 38: Intangible Assets

LO4: ACQUIRED IN BUSINESS COMBINATION

4.1 Acquisition of intangible asset in a business combination [IAS 38: 33 & 34]
If an asset acquired in a business combination is separable or arises from contractual or other legal rights,
sufficient information exists to measure reliably the fair value of the asset. Thus, the reliable
measurement criterion is also satisfied.

Example # 15: (ICAP Example # 15)

Company X buys 100% of Company Y. Company Y owns a famous brand that it launched several years
ago. The fair value of the brand has been estimated at Rs. 6 million at acquisition date.
Required: Discuss the recognition of brand in financial statements.

Answer:
The brand is not recognised in Company Y’s financial statements (IAS 38 prohibits the recognition of
internally generated brands).
From the Company X group viewpoint, the brand is a purchased asset. Part of the consideration paid by
Company X to buy Company Y was to buy the brand and it should be recognised in the consolidated
financial statements at its fair value of Rs. 6 million.

4.2 Acquiree’s in-process research and development project [IAS 38: 34]
In process research and development is recorded as an asset if it meets the definition of an asset and it is
identifiable. (Note: Here research is capitalized as well)
Subsequent (further) expenditure on such a project is accounted for in the usual way by applying the IAS 38.
(Note: It means research will be expensed, however if development meet condition, it will be capitalized)

Example # 16:
A Company purchased an incomplete research & development project from another company for Rs.
200,000 (fair value) on 01.01.19.
The purchased price analysed as follows:
Rs.
Research 50,000
Development 150,000
Subsequent expenditure has been incurred on this project as follows during the year 2019.
Rs.
Research: Further research was considered necessary 75,000
Development: Capitalisation recognition criteria met on 01.08.19 240,000
Required: Journal entries in relation to purchase in process research & development for 2019?

Answer:
01.01.19 Intangible asset (WIP) 200,000
Cash/Bank 200,000
31.12.19 Research expense 75,000
Cash/Bank 75,000
31.07.19 Development expense 140,000
7
Cash/Bank 140,000 (240,000 x 12)

17
CHAPTER-1 IAS 38: Intangible Assets

01.08.19 Intangible asset (WIP) 100,000

5
Cash/Bank 100,000 (240,000 x )
12

Example # 17: (ICAP Example # 16)

Company X buys 100% of Company Y. Company Y has spent Rs. 600,000 on a research and development
project. This amount has all been expensed as the IAS 38 criteria for capitalising costs incurred in the
development phase of a project have not been met. Company Y has knowhow as the result of the
project. Company X estimates the fair value of Company Y’s knowhow which has arisen as a result of this
project to be Rs. 500,000.
Required: Discuss the accounting treatment.

Answer:
The in-process research and development is not recognised in Company Y’s financial statements (IAS 38
prohibits the recognition of internally generated brands).
From the Company X group viewpoint, the in-process research and development is a purchased asset.
Part of the consideration paid by Company X to buy Company Y was to buy the knowhow resulting from
the project and it should be recognised in the consolidated financial statements at its fair value of Rs.
500,000.

4.3 Subsequent expenditure on acquired research and development [IAS 38: 42 & 43]
Sometimes business may incur certain expenses after the asset is in its workable location and conditions.
These are subsequent expenditure which is always expensed out except if the expense is incurred and
result is in following styles:
➔ Useful life of the asset has been increased
➔ Output Quantity from the asset has been increased
➔ Quality of the Output from the asset has been increased
➔ Capacity of the asset has been increased
➔ Asset's production time decreases

4.3.1 Recognition of Subsequent Expenditure

Subsequent expenditure is only capitalized if it can be measured and attributable to an asset and
enhances the value of the asset.
• Rare addition in intangible
• Rare enhancement in value of asset
• Difficult to attribute subsequent expenditure to a particular intangible asset

Example # 18: (ICAP Example # 17)

Continuing the previous example, Company X owns 100% of Company Y and has recognised an intangible
asset of Rs. 500,000 as a result of the acquisition of the company Y.
Company Y has spent a further Rs. 150,000 on the research and development project since the date of
acquisition. This amount has all been expensed as the IAS 38 criteria for capitalising costs incurred in the
development phase of a project have not been met.
Required: Discuss the accounting treatment.

Answer:
The Rs. 150,000 expenditure is not recognised in Company Y’s financial statements (IAS 38 prohibits the
recognition of internally generated brands).
From the Company X group viewpoint, further work on the in-process research and development project
is research and the expenditure of Rs. 150,000 must be expensed.

18
CHAPTER-1 IAS 38: Intangible Assets

LO5: MEASUREMENT AFTER RECOGNITION

5.1 Amortisation [IAS 38: 97, 98, 98A & 100]
Amortisation is the systematic allocation of the depreciable amount of an intangible asset.
Amortisation of Intangible asset

Indefinite Para IAS 38 # 107 Finite Para IAS-38 # 94, 105

Period of benefit is not known Period of benefit is known

No amortisation is charged Amortisation is charged

i.e.,
Purchase goodwill-
Intangible CWIP- Without Renewal option With Renewal
option

Shorter of Renewal cost is Renewal cost is

minimal considerable

Legal life vs Useful life

Legal life = Original legal life + renewal life Legal life = Original life

Renewal cost

On the original contract date On the option exercise date

Will not record If renewed If not renewed

Will not record

If at considerable cost If at minimal cost

Intangible asset Dr. Renewal expense Dr.

Bank Cr. Bank Cr.

19
CHAPTER-1 IAS 38: Intangible Assets

Amortisation shall cease at the earlier of the date that the asset is classified as held for sale (IFRS 5) and
the date that the asset is derecognised.

A variety of amortisation methods can be used;

i. Straight line method,
ii. Diminishing balance method;
iii. The units of production method

The amortisation charge for each period shall be recognised in profit or loss unless IAS 38 or another
Standard permits or requires it to be included in the carrying amount of another asset.

5.2 Residual Value

The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless:
a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
b) there is an active market for the asset and
• residual value can be determined by reference to that market; and
• it is probable that such a market will exist at the end of the asset’s useful life.

Residual Value

Indefinite Finite

Not applicable
Active Market No Active Market

Take from active market

Any commitment No commitment
from third party from third party

Take that value as Zero

residual value

The amortisation period and the amortisation method for an intangible asset with a finite useful life shall
be reviewed at least at each financial year‑end.
Change in estimate (Life)

From Finite to indefinite From indefinite to Finite

Not explained by IAS 38 Explained by IAS 38

20
CHAPTER-1 IAS 38: Intangible Assets

Example # 19:
A company purchased a license on 01.01.19 costing Rs. 200,000.
Legal life is granted 10 years whereas useful life (Expected period of cash generation) is 12 years.
Required: Calculate amortisation expense for 2019 & 2020.

Answer:
Cost 200,000 200,000
Amortisation expense = = = = 20,000
Shorter of: Legal life vs Useful life Shorter of: 10 vs 12 10

Example # 20:
A Company purchased a license for 16 Years at Rs. 300,080 on 01.01.20. It is renewable for further 6
years at a cost of Rs. 1,000.
Required: Calculate amortisation expense for 2020 & 2021.

Answer: (If renewal cost is minimal)

Cost 300,080 300,080
Amortisation expense = = = = 13,640
Useful life+Renewal period 16+6 22

Example # 21:
Ansari & Co. purchased a license for 4 Years on 01.01.09 at a cost of Rs. 100,000. It can be renewed for
further 2 Years by paying Rs. 60,000
Required: Pass Journal entries for year ended 2009, 2010, 2011, 2012, 2013, 2014 assuming it was
renewed on 01.01.13.

Answer: (If renewal cost is considerable)

Date Description Debit Credit
01.01.09 License (Intangible asset) 100,000
Cash/Bank 100,000
31.12.09 Amortisation expense 25,000
100,000
Accumulated amortisation ( ) 25,000
4
31.12.10 Amortisation expense 25,000
100,000
Accumulated amortisation ( ) 25,000
4
31.12.11 Amortisation expense 25,000
100,000
Accumulated amortisation ( ) 25,000
4
31.12.12 Amortisation expense 25,000
100,000
Accumulated amortisation ( ) 25,000
4
01.01.13 License (Intangible asset) 60,000
Cash/Bank 60,000
31.12.09 Amortisation expense 30,000
60,000
Accumulated amortisation ( ) 30,000
2
31.12.09 Amortisation expense 30,000
60,000
Accumulated amortisation (
4
) 30,000

21
CHAPTER-1 IAS 38: Intangible Assets

Example # 22:
Ansari & Co. purchased a license for 4 Years on 01.01.09 at a cost of Rs. 100,000. It can be renewed for
further 2 Years by paying Rs. 6,000
Required: Pass Journal entries for year ended 2009, 2010, 2011, 2012, 2013, 2014 assuming it was
renewed on 01.01.13.

Answer: (If renewal cost is minimal)

Date Description Debit Credit
01.01.09 License (Intangible asset) 100,000
Cash/Bank 100,000
31.12.09 Amortisation expense 16,667
100,000
Accumulated amortisation ( ) 16,667
6
31.12.10 Amortisation expense 16,667
100,000
Accumulated amortisation ( ) 16,667
6
31.12.11 Amortisation expense 16,667
100,000
Accumulated amortisation ( ) 16,667
6
31.12.12 Amortisation expense 16,667
100,000
Accumulated amortisation ( ) 16,667
6
01.01.13 Renewal expense 6,000
Cash/Bank 6,000
31.12.09 Amortisation expense 16,667
60,000
Accumulated amortisation ( ) 16,667
6
31.12.09 Amortisation expense 16,667
60,000
Accumulated amortisation ( ) 16,667
6

Definitions of some terms

Patent:
Patent rights entitle their owners, for limited period of time, the monopoly to manufacture or use a
certain product or process.
Trademark:
Trademarks are the rights to symbols, names, and other unique properties of a product, such as
packaging, style, and even colour in some instances.
Copyright:
Copyrights represent the legal right on both published and unpublished work of an author to sell, copy, or
perform a piece of literary, musical, or art work.
License:
Licenses are the contractual rights to use another's property, whether it to be a patent, trademark,
copyright, lease or exploration of natural resources.
Franchise:
Franchises provide their holders with the right to practice a certain kind of business in a certain
geographical location as sanctioned by the franchiser. Fast-food restaurants, for example, MC Donald’s,
etc.

22
CHAPTER-1 IAS 38: Intangible Assets

Goodwill:
Goodwill refers to the price or value above the market value of the tangible assets of a company. When a
company is bought, the price paid will often be higher than the market value of its facilities, equipment,
inventory, etc. A company develops this intangible asset by establishing a strong business track record,
credit rating, reputation and name.

5.3 Acquired Goodwill in Business Combination

Rs.
Cost of investment 1,000
Less fair value of net assets (700)
Less fair value of intangible asset- say brand (200)
Value of goodwill purchase 100

5.4 Impairment Loss

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.
Impairment

If indefinite If Finite

Impairment test will be Impairment test will only be

performed compulsorily performed when any indication

Indication of Impairment

From active market to no active market From indefinite life to finite life

Active Market

May exists May not exist (Due to uniqueness)

• Taxi licenses • Brands

• Fishing licenses • Newspaper mastheads
• Production Quotas • Music & film publishing rights
• Patents
• Trade marks
23
CHAPTER-1 IAS 38: Intangible Assets

5.5 Summarization of Journal entries

→ When research expense incurred
Research expense Dr.
Bank Cr.

→ When development expense incurred not meeting criteria

Development expense Dr.
Bank Cr.

→ When development expense incurred meeting criteria

Development asset/Intangible asset (CWIP) Dr.
Bank Cr.

→ When Intangible asset (CWIP) transferred to Intangible asset

Intangible asset Dr.
Intangible asset (CWIP)/Development asset Cr.

→ When Intangible asset is purchased

Intangible asset Dr.
Bank Cr.

→ When purchased in process research & development

Intangible asset (CWIP) Dr.
Bank Cr.

→ Amortisation expense recorded

Amortisation expense Dr.
Accumulated amortisation/Intangible asset Cr.

→ Impairment loss recorded

Impairment loss expense Dr.
Accumulated Impairment Loss Cr.

Example # 23:
A company started research & development on developing a formula. Details of cost incurred are as
follows:
Year Rs.
01.01.18 -------→31.12.18 240,000
01.01.19 -------→31.12.19 200,000
On 31.10.18, recording criteria for capitalisation of development cost was met.
Recoverable amount Rs.
31.12.18 180,000
31.12.19 220,000
Required: Prepare journal entries for 2018 & 2019.

24
CHAPTER-1 IAS 38: Intangible Assets

Answer:
Date Description Debit Credit
31.10.18 Research and Development expense 200,000
10
Cash/Bank (240,000 x ) 200,000
12
31.12.18 Intangible asset (WIP) 40,000
2
Cash/Bank (240,000 x ) 40,000
12
31.12.18 Intangible asset (WIP) 200,000
Cash/Bank 200,000
Carrying value = 200,000 + 40,000 = 240,000

Example # 24:
Mr. Ansari has a formula to give CFAP Tips to his old students, this was capitalized in the past on
01.01.16.
• On 01.01.18, this formula is appearing in the books at cost of Rs. 200,000 and Accumulated
amortisation on that date is Rs. 40,000.
• This formula was capitalized on 01.01.16.
• On 31.12.18, Mr. Ansari decided to put this intangible asset for Impairment test.
• Expected operating cash inflows from the intangible asset for the upcoming 3 years as Rs. 80,000, Rs.
75,000 & Rs. 70,000.
• Operating cash outflows for the 3 years as Rs. 10,000, Rs. 15,000 & Rs. 20,000.
• Pre-tax discount rate is 10%.
• A company has contacted Mr. Ansari showing its interest in formula buying at a price of Rs. 110,000.
• Ansari expected the selling cost at Rs. 5,000.
Required: Calculate and Journalize Impairment loss, if any?

Answer:
31.12.18 Carrying amount as on 31.12.18 (W-1) 140,000
31.12.18 Impairment Loss (Nil)
31.12.18 Recoverable amount 150,740
(W-1) Carrying amount as on 31.12.18
WDV = Cost – Acc. Depreciation Acc. Amortisation = Opening + for the year
40,000
= 200,000 – 60,000 Acc. Amortisation = 40,000 + = 60,000
2
= 140,000
(W-2) Recoverable amount as on 31.12.18
Higher of; 150,740
Fair Value less Cost to sell (110,000 – 5,000) 105,000
Value in use (W-2.1) 150,740
(W-2.1) Value in use
T1 T2 T3 T4
Operating cash inflows - 80,000 75,000 70,000
Operating cash outflows - (10,000) (15,000) (20,000)
Net Cashflow - 70,000 60,000 50,000
Discount factor @ 10% (1 + 0.1)-n - (1 + 0.1)-1 (1 + 0.1)-2 (1 + 0.1)-3
- 70,000 x 0.909 60,000 x 0.826 50,000 x 0.751
Present Value - 63,636 49,587 37,550
Value in use (Cost of license) 63,636 + 49,587 + 37,550 = 150,740

25
CHAPTER-1 IAS 38: Intangible Assets

5.6 Retirement and disposals [IAS 38: 112 to 115]

The disposal of an intangible asset may occur in a variety of ways (e.g., by sale, by entering into a finance
lease, or by donation). The date of disposal of an intangible asset is the date that the recipient obtains
control in accordance with IFRS 15.
An intangible asset shall be derecognised:
a) on disposal; or
b) when no future economic benefits are expected from its use or disposal.
If a part of an intangible asset is being disposed of and replaced, then an entity:
a) derecognizes the carrying amount of the replaced part; and
b) recognizes the cost of the replacement part.
Retirement & disposal

Sale Finance lease Donation

De recognition

On Disposal When no benefits expected

from use or disposal
Dr. Intangible asset a/c Cr.
Bal. b/d (Cost) xxx Disposal (cost) xxx Replaced
Cash/Bank (Cost) xxx Bal. c/d (Cost) xxx Part
Replacement xxx xxx
Part
5.7 Choice of accounting policy [IAS 38: 72 to 75, 79 & 81]
An entity shall choose either:
• the cost model (i.e., cost less any accumulated amortisation and impairment); or
• the revaluation model (i.e., fair value less any subsequent accumulated amortisation and
impairment) as its accounting policy.
Subsequent measurement

Cost model Subsequent model

Cost Revalued amount

Less Accumulated amortisation Less Accumulated amortisation
Less Accumulated Impairment losses Less Accumulated Impairment losses
WDV WDV

26
CHAPTER-1 IAS 38: Intangible Assets

5.8 Measurement under revaluation model [IAS 38: 76, 77 & 79]
The revaluation model does not allow:
a) the revaluation of intangible assets that have not previously been recognised as assets e.g., internally
generated brand; or
b) the initial recognition of intangible assets at amounts other than cost.
The revaluation model is applied after an asset has been initially recognised at cost. However, if only part
of the cost of an intangible asset is recognised as an asset because the asset did not meet the criteria for
recognition until part of the way through the process (e.g., development costs), the revaluation model
may be applied to the whole of that asset.
Also, the revaluation model may be applied to an intangible asset that was received by way of a
government grant and recognised at a nominal amount.

Revaluation Model

Active market No Active market

Revaluation take place Revaluation cannot take place

Active market Active market • No revaluation if valuer assign value

continues to exist stops to exist without active market.
• No revaluation if restriction on transfer/
New revaluation at Asset will be at latest Sale
regular interval Market value

Example # 25: (ICAP Example # 19)

During the year ended 31 December 20X7, following transactions were made by Zebra Limited (ZL):
On 1 April 20X7 ZL acquired a license for operating a TV channel for Rs. 86.3 million out of which Rs. 50
million was paid immediately. The balance amount is payable on 1 April 20X9. A mega social media and
print media campaign was launched to promote the channel at a cost of Rs. 10 million. The transmission
of the channel started on 1 August 20X7.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since the
renewal cost is significant, the management intends to renew the license only once and sell it at the end
of 8 years.
In the absence of any active market, the management has estimated that residual value of the license
would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
Required: Discuss how these transactions should be recorded in ZL’s books of accounts for the year
ended 31 December 20X7.

27
CHAPTER-1 IAS 38: Intangible Assets

Answer:
These transactions should be recorded in ZL’s books of accounts for the year ended 31 December 20X7 as
follows:
Since a part of the payment for the license has been deferred beyond normal credit terms so the license
will be initially recognised at cash price equivalent of Rs. 80 million i.e., Rs. 50 million plus Rs. 30 million
(i.e., present value of Rs. 36.3 million discounted at 10% for 2 years.)
The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be included in the
cost of the license and will be charged to Profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the original 5
years only.
The residual value of the license will be assumed to be zero since there is no active market for the license
and there is no commitment by third party to purchase the license at the end of useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated from 1 April 20X7
when the license was available for use:
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with increasing the
liability of payable for license with same amount.

28
CHAPTER-1 IAS 38: Intangible Assets

LO6: DISCLOSURE
6.1 Classes of intangible assets [IAS 38: 119]

A class of intangible assets is a grouping of assets of a similar nature and use in an entity’s operations.
Examples of separate classes may include:
a) brand names;
b) mastheads and publishing titles;
c) computer software;
d) licenses and franchises;
e) copyrights, patents and other industrial property rights, service and operating rights;
f) recipes, formulae, models, designs and prototypes; and
g) intangible assets under development.
The classes mentioned above may be disaggregated (or aggregated) into smaller (or larger) classes if this
results in more relevant information for the users of the financial statements.

6.2 General disclosure [IAS 38: 118]

An entity shall, for each class of intangible assets, distinguishing between internally generated intangible
assets and other intangible assets, disclose the following:
a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortisation rates
used;
b) the amortisation methods used for intangible assets with finite useful lives;
c) the gross carrying amount and any accumulated amortisation (aggregated with accumulated
impairment losses) at the beginning and end of the period;
d) the line item(s) of the statement of comprehensive income in which any amortisation of intangible
assets is included.

6.3 Reconciliation [IAS 38: 118]

An entity shall, for each class of intangible assets, distinguishing between internally generated intangible
assets and other intangible assets, disclose a reconciliation of the carrying amount at the beginning and
end of the period showing:
a) additions, indicating separately:
i. internal development,
ii. acquired separately, and
iii. acquired through business combinations);
b) disposals;
c) increases or decreases during the period resulting from revaluations from impairment losses
recognised or reversed;
d) any amortisation recognised during the period;
e) net exchange differences (under IAS 21);
f) other changes in the carrying amount during the period.

29
CHAPTER-1 IAS 38: Intangible Assets

6.4 Disclosure under certain circumstances [IAS 38: 122]

An entity shall also disclose:

a) 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. In giving these reasons, the
entity shall describe the factor(s) that played a significant role in determining that the asset has an
indefinite useful life.
b) a description, the carrying amount and remaining amortisation period of any individual intangible
asset that is material to the entity’s financial statements.
c) for intangible assets acquired by way of a government grant and initially recognised at fair value:
i. the fair value initially recognised for these assets;
ii. their carrying amount; and
iii. whether under the cost model or the revaluation model.
d) the existence and carrying amounts of intangible assets whose title is restricted and the carrying
amounts of intangible assets pledged as security for liabilities.
e) the amount of contractual commitments for the acquisition of intangible assets.

6.5 Disclosure in case of revalued intangible assets [IAS 38: 124]

If intangible assets are accounted for at revalued amounts, an entity shall disclose the following:
a) by class of intangible assets:
i. the effective date of the revaluation;
ii. the carrying amount of revalued intangible assets; and
iii. the carrying amount using the cost model; and
b) 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.

6.6 Disclosure of research and development expense [IAS 38: 126 & 127]

An entity shall disclose the aggregate amount of research and development expenditure recognised as an
expense during the period. Research and development expenditure comprises all expenditure that is
directly attributable to research or development activities.

6.7 Additional disclosure [IAS 38: 128]

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

a) a description of any fully amortised intangible asset that is still in use; and
b) a brief description of significant intangible assets controlled by the entity but not recognised as assets
because they did not meet the recognition criteria.

30
CHAPTER-1 IAS 38: Intangible Assets

Example # 26: (ICAP Example # 23)

Toby entered into the following transactions during the year ended 31 December 2015. The directors of
Toby wish to capitalise all assets wherever possible.
On 1 January Toby acquired the net assets of George for Rs. 105,000. The assets acquired had the
following book and fair values.
Book value Fair value
Rs. Rs.
Goodwill 5,000 5,000
Patents 15,000 20,000
Non-current assets 40,000 50,000
Other sundry net assets 30,000 25,000
90,000 100,000
i. The patent expires at the end of 2022. The goodwill arising from the above had a recoverable value
at the end of 2015 of Rs. 7,000.
ii. On 1 April Toby acquired a brand from a competitor for Rs. 50,000. The directors of Toby have
assessed the useful life of the brand as five years.
iii. During the year Toby spent Rs. 40,000 on developing a new brand name. The development was
completed on 30 June. The useful life of this brand has been assessed as eight years.
iv. The directors of Toby believe that there is total goodwill of Rs. 2 million within Toby and that this has
an indefinite useful life.
Required: Prepare the note to the financial statements for intangible assets as at 31 December 2015.

Answer:

Goodwill Patents Brands Total

Intangible assets
Rs. Rs. Rs. Rs.
Cost
On 1 January 2015 - - - -
Acquired in business combination 10,000 W1 20,000 - 50,000
Separately acquired - - 50,000 30,000
On 31 December 2015 10,000 20,000 50,000 80,000
Acc. amortisation/impairment
On 1 January 2015 - - - -
Amortisation - 2,500 W3 7,500 W4 10,000
Impairment 3,000 W2 - - 3,000
On 31 December 2015 3,000 2,500 7,500 13,000
Carrying amount on 31 December 2015 7,000 17,500 42,500 67,000
W1: Rs. 105,000 – 95,000 = Rs. 10,000
W2: Rs. 10,000 – 7,000 = Rs. 3,000
W3: Rs. 20,000 / 8 years = Rs. 2,500
W4: Rs. 50,000 / 5 years x 9/12 = Rs. 7,500
Tutorial note: IAS38 Intangible assets prohibits the recognition of internally generated brands
(3) or internally-generated goodwill (4).

31
CHAPTER-1 IAS 38: Intangible Assets

LO7: SIC 32: WEB SITE COSTS

7.1 The issue [SIC 32: 1 & 4]
An entity may incur expenditure on the development and operation of its own web site for internal or
external access:
a) A web site designed for external access may be used for various purposes such as to promote and
advertise an entity’s own products and services, provide electronic services, and sell products and
services.
b) A web site designed for internal access may be used to store company policies and customer details,
and search relevant information.
The main issues are:
a) whether the web site is an internally generated intangible asset that is subject to the requirements of
IAS 38; and
b) the appropriate accounting treatment of such expenditure.

7.2 Exclusion from scope [SIC 32: 5 & 6]

SIC 32 does not apply to expenditure on
a) purchasing, developing, and operating hardware (e.g., web servers, staging servers, production
servers and internet connections). IAS 16 applies.
b) when an entity incurs expenditure on an Internet service provider hosting the entity’s web site, the
expenditure is recognised as an expense when services are received
(conceptual framework and IAS 1.88)
c) the development or operation of a web site for sale to another entity (IAS 2 and IFRS 15 applies).
d) Leases of intangible assets accounted for under IFRS 16

32
CHAPTER-1 IAS 38: Intangible Assets

7.3 General Consensus [SIC 32: 7 & 8]

7.4 Consensus: Planning Stage [SIC 32: 2 & 9]

33
CHAPTER-1 IAS 38: Intangible Assets

7.5 Consensus: Development Stage [SIC 32: 2 & 9]

34
CHAPTER-1 IAS 38: Intangible Assets

7.6 Consensus: Operating Stage [SIC 32: 3 & 9]

7.7 Other web site related costs

35
CHAPTER-1 IAS 38: Intangible Assets

Practice Questions
Question # 01:

The following scenarios are all unrelated.

Part A:
Apple Limited is a successful engineering business. Over the past number of years, the company has prepared a
customer list. At a recent board meeting, the directors suggested recognizing an intangible asset for this.
Required: To briefly discuss whether customer list can be recognized as an intangible asset in terms of IAS 38.

Part B:
Banana Limited is a company in the IT industry. The success of the company is built around software which it has
developed internally and for which a patent is registered as well as the skills of the staff that operate the
software. Staff is required to give one month's notice of their resignation.
Required: To briefly discuss whether the patent and the staff skills can be recognized as an intangible asset in
terms of lAS 38, Intangible Asset.

Part C:
Carrot Limited operates toll roads on national routes throughout the country. The company purchased a license
to operate a toll road 17 years ago for Rs. 10,000,000. It was expected that toll road would be in use for 20 years
and economic benefits will flow evenly over 20 years. The estimated toll road usage is 1,000,000 cars per year.
At the time, there were no plans to construct alternative routes in the area.
During the current year, Government announced plans, and construction began on a bridge in the area that
would significantly reduce usage of the toll road. The directors estimated that the economic benefits would
decrease each year over remaining three years. The estimated toll road usage is expected to drop to 800,000
cars, 600,000 cars and 400,000 cars, respectively, over the remaining three years of the license. The right to
operate the toll road was correctly recognized as an intangible asset upon purchase seventeen years ago.
Required: To discuss the accounting issues relating to the measurement of the license for the toll road over its
economic life.

Question # 02:

Muneer Limited is a small company involved in the fishing industry. It operates a number of fishing boats and
fishes mainly for "tuna". The fish is processed and canned in its factory and the canned tuna is supplied to
supermarkets around the country.
On 2 January 20X6, the company acquired a fishing license at a cost of Rs. 600,000. The license has a legal life of
4 years with no residual value. The license grants Muneer Limited the right to fish for tuna in a demarcated area
of the Karachi Sea shore. No other fishing company may fish for tuna in this area during the term of the license.
No entries have been made in the accounting records relating to the fishing license during the current year.
Required:
Discuss the recognition, measurement and disclosure of the fishing license in the financial statements of Muneer
Limited at 31 December 20X6, in terms of International Financial Reporting Standards.

36
CHAPTER-1 IAS 38: Intangible Assets

Question # 03:
Hollywood Soap has acquired rights of producing very famous toilet soap. At present soap is very popular and its
popularity is increasing by every passing day. They paid Rs. 400 million for acquisition of production rights
without any time limit. At present, management believes that the product, has an unlimited useful life.
Required: State accounting treatment of the above expenditure including its amortisation policy.

Question # 04:

Janes Company provided the following information on intangible assets:

a) A patent was purchased from the Lou Company for Rs. 700,000 on January 1, 2009. Janes estimated the
remaining useful life of the patent to be 10 years.
b) Effective January 1, 2011, based on new events that have occurred, Janes estimates that the remaining life of
the patent purchased from Lou is only five more years.
c) During 2011, a franchise was purchased from the Rink Company for Rs. 500,000. The contractual life of the
franchise is 10 years.
Required: Prepare the entries necessary in 2009 to 2011 to reflect the above information.

Question # 05:

A company entered into a research and development project, the costs of which are as follows (all costs are
incurred evenly over the year)
Rs.
20X1 120,000
20X2 100,000
On 1 September 20X1, the recognition criteria for capitalisation of development costs are met.
The recoverable amounts are as follows:
Rs.
31 December 20X1 90,000
31 December 20X2 110,000
Required: Show all journals related to the costs incurred for each of the years ended 31.12.20X1 and 20X2?

Question # 06:

A company bought an incomplete research and development project from another company for Rs. 400,000
(considered to be a fair value) on 1 January 20X1. The purchase price has been analysed as follows:
Rs.
Research 100,000
Development 300,000
Subsequent expenditure has been incurred on this project as follows:
Rs.
Research: Further research into possible markets was considered necessary 200,000
Development: Incurred evenly throughout the year. All recognition criteria for capitalization as 480,000
a development asset were met on 1 June 20X1.
Required: Show all journals related to the in-process research and development for 20X1.

37
CHAPTER-1 IAS 38: Intangible Assets

Question # 07:

During the financial year 2006, Uman Inc decided to expand its activities in the food industry. It purchased a
well-known franchise for Rs. 2,500,000 on 30 June 2006. The franchise is recognized throughout Europe and
Uman Inc obtained the right to use the franchise for a period of 20 year in France. It is probable that future
economic benefits will flow from the franchise.
1) The franchise is not an intangible asset and cost of Ra. 2,500,000 should be expensed immediately profit and
loss A/c.
2) The franchise has indefinite life.
3) The franchise is an intangible asset as it is identifiable and has no physical substance.
4) The franchise cost can be measured at Rs. 2,500,000 and it is probable that Uman Inc will generate revenue
from its use therefore, it is an asset.
5) Uman controls the franchise through the legal right to use the franchise over the period of 20 years.
Required: Which of the following statements are correct?

Question # 08:

Kenoly Corporation owns a patent tilt has a carrying amount of Rs. 300,000. Kenoly expects future net cash
flows from this patent to total Rs. 210,000. The fair value of the patent is Rs. 110,000.
Required: Prepare Kenoly's journal entry, if necessary, to record the loss on impairment on 31 December, 2012.

Question # 09:

The following is the information of a license obtained by Alpha Limited for making and selling a life-saving drug.
License cost 8,300,000
Amortisation upto 31 December 2007 3,112,500
Total duration of the license 8 years
Unfortunately, on 1st January 2009, government has introduced a legislation that effectively bans this type of
product. As a consequence of this, the product was lifted from the market and company decided to stop the sale
of this kind of drug.
Required: Amounts to be charged to profit and loss account in year 2009 in respect for impairment loss.

Question # 10:

Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of Rs. 120,000 on April
1, 2010. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years.
Required: Prepare Gershwin's April 1 journal entry and December 31 adjusting entry.

Question # 11:

On September 1, 2010, Winans Corporation acquired Aumont Enterprises for a cash payment of Rs. 700,000. At
the time of purchase, the fair value of net assets is Rs. 620,000.
Required: Compute the amount of goodwill acquired by Winans.

38
CHAPTER-1 IAS 38: Intangible Assets

Question # 12:

Larry Byrd, Inc. spent Rs. 68,000 as registration fees while developing the trade name of its new product, the
Mean Bean.
Required: Prepare the journal entries to record the Rs. 68,000 expenditure and the first year’s amortization,
using an 8-year life.

Question # 13:

An entity is developing a new production process. During 2005, expenditure incurred was Rs. 1,000, of which Rs.
900 was incurred before 1 December 2005 and Rs. 100 was incurred between 1 December 2005 and 31
December 2005. The entity is able to demonstrate that, at 1 December 2005, the production process met the
criteria for recognition as an intangible asset.
During 2006, expenditure incurred is Rs. 2,000. At the end of 2006, the recoverable amount of the know-how
embodied in the process (including future cash outflows to complete the process before it is available for use) is
estimated to be Rs. 1,900.
Required: Discuss the accounting treatment.

Question # 14:

Ace Ltd purchased a 5-year fishing license for Rs. 100,000. The company expects to renew the license at the end
of the 5-year period for a further 3 years. The government has indicated that they will re-grant the license to
Ace Ltd.
Required: Discuss the number of years over which the license should be amortised, assuming that the costs
associated with the renewal is:
(a) Rs. 100; or
(b) Rs. 99,000.

Question # 15:

Yoyo has, for many years, manufactured a yoghurt drink called 'Yog-Nog'. This brand name was originally
acquired from a competitor. The cost of acquisition was Rs. 800,000, which was duly capitalised. No
amortisation had been charged since the brand was already 80 years old at the time of acquisition and, at that
time, there was no indication that demand for this drink will decrease.

Sales of Yog-Nog have, in recent times, been falling. The marketing department, after much research suggested
that the fall in sales was due to outdated brand name. The suggestion was accepted and the drink was re-
launched as ‘Yogi-Yippi’. The cost of re-launching the drink came to Rs. 450,000 and was capitalised as a Yogi-
Yippi Brand name since it was expected that sales would now improve.
The previous brand name, ‘Yog-Nog', with a carrying amount of Rs. 800,000, was expensed in full in the current
year ended 31 December 20X0.

Required: Critically analyze the above issue, explaining whether the treatment is correct or incorrect and
justifying your advice with reference to International Financial Reporting Standards.

39
CHAPTER-1 IAS 38: Intangible Assets

Question # 16:

Quencher Limited's business involves the bottling and distribution of a wide variety of carbonated soft drinks.
Some drinks are developed internally, whilst other brands are purchased. The following information is relevant
to the business for the year ended 30 May 20X5.
N-Gee:
• On 1 April 20X5, Quencher acquired the well-known brand, N-Gee for Rs. 2,500,000.
• In addition to this, Rs. 175,000 was spent on legal fees to secure the right to use this brand.
• Due to the fact that Quencher's staff had never previously been exposed to N-Gee, extensive training took
place during April 20X5. The total cost of training is Rs. 200,000.
• Sales of N-Gee drinks commenced on 15 May 20X5.
• The N-Gee brand has an estimated useful life of 15 years.
Flip top:
Flip top is a revolutionary type of can which has been developed internally by Quencher. The can has a
resealable top which allows can to be sealed after opening to prevent the gas escaping. In January 20X4 the idea
for this new product was launched, and a loan of Rs. 5 million was obtained to finance this project.
The associated costs for the year ended 31 May 20X5 are as follows:
Expenditure
Date Nature of activity
Rs.
Market surveys to establish whether or not consumers would
01.06.20X4 – 31.07.20X4 40,000
want such a can
01.08.20X4 – 15.09.20X4 Evaluation of a number of alternative designs 200,000
A design is chosen and engineers produce a plan which
30.09.20X4
indicates that it is technically possible to produce can.
01.10.20X4 – 31.01.20X5 Design and construction of a pilot manufacturing plant 1,100,000
01.02.20X5 – 31.05.20X5 Testing of a pilot manufacturing plant 600,000
• The market surveys suggested that there is a market for the can.
• Quencher has applied to register the Flip top can as a patent.
Required:
a) IAS 38: Intangible Assets, defines an intangible asset as 'an identifiable non-monetary asset without physical
substance.
Discuss, with reasons, and with reference to IAS 38: Intangible Assets,
i) whether the N-Gee brand can be recognized as an intangible asset
ii) the correct accounting treatment for all N-Gee costs in Quencher's financial statements for the year
ended 31 May 20X5.
b) IAS 38: Intangible Assets, defines research and development as follows:
‘Research is original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.’
‘Development is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, systems or services before the
start of commercial production or use.’
Required: Discuss, with reference to IAS 38: Intangible Assets, the correct accounting treatment for all the costs
incurred in relation to the Flip top can for the year ended 31 May 20X5.

40
CHAPTER-1 IAS 38: Intangible Assets

Question # 17:

During the year 2007, SKY Limited developed two inter-linked websites in house.
• One of them is for external users and provides information about the company's products, operations and
financials. It can also be used for electronic order processing and accepting payments through credit cards.
• The second website is for internal use like intra-net, providing and sharing company's policies, customer
details, employees' information, etc.
Both the websites were launched on September 30, 2007 and are now fully operational. The company has
received a few online orders which it believes will increase over time. On the other hand, use of internal website
has resulted in minor reduction in costs of communication and certain other administrative costs. The
management is optimistic that its utility will increase significantly. However, it is not in a position to estimate the
amount of economic inflows that this website can generate

During the year ended December 31, 2007, the company incurred the following expenditure in the development
of websites
(i) An amount of Rs. 0.3 million was incurred on undertaking a feasibility study and defining
hardware/software specifications for the websites.
(ii) Rs. 4 million were incurred on the development of internal website while an expenditure of Rs. 11 million
has been made on development of external website. The expenditure on external website includes an
amount of Rs. 6 million paid for linking it with the credit card clearing facilities and installation of
security tools.
(iii) The company acquired two dedicated servers and one backup server costing Rs. 3 million in total.
Operating software for the server was acquired for Rs. 2.0 million whereas software related to data
processing and front-end development costed Rs. 3 million. The management is of the view that these
costs would not have been incurred if the website project had not been initiated.
(iv) With effect from October 1, 2007 the company has signed a one-year contract for website maintenance at
a cost of Rs. 2.0 million.
(v) Two IT personnel were trained to operate the websites, at a cost of Rs. 0.2 million.
(vi) Rs. 0.4 million were incurred on the promotion of its external website. The company believes that this
advertising will boost the company's online sales.
Required: Comment on the accounting treatment of each of the above-mentioned costs in the light of relevant
International Accounting Standards.

Question # 18:

A company provided you the following details as on 31 December 2014 before revaluation:
Rs.
Balance in Asset a/c 200
Balance in Accumulated Dep a/c 60
• Asset is revalued at Rs. 250 on 31 December 2014.
Required: Pass journal entries for revaluation on 31 December 2014 using:
a) Net replacement method
b) Gross replacement method

41
CHAPTER-1 IAS 38: Intangible Assets

Question # 19:

Big boy Limited owned a car that had a carrying amount of Rs. 30,000 on 1 January 20X1. Details of this cars,
recorded as two significant parts, were as follows on 1 January 20X1:
• Car structure: Rs. 20,000 – with a remaining useful life of 10 years and a nil residual value
• Car engine: Rs. 10,000 – with a remaining useful life of 2 years and a nil residual value
This old engine (that had originally cost Rs. 12,000) needed to be replaced during 20X1 due to the car having
been driven without oil. The engine was replaced on 1 October 20X1 at a cost of Rs. 15,000. The new engine has
a useful life of 3 years and a nil residual value. The straight-line method is used.
Required: Show the journal entries for year ended December 31, 20X1.

Question # 20:

Following information has been extracted from the books of Sayyarah Limited.
(i) The company, to curb the sharp decline in sales of its products 'Y' and 'Z', paid Rs. 1.7 million to a
consulting company for improvement in the design of the products, if possible.
(ii) On the basis of consultant's report, production of ‘Z’ was discontinued. The consultant had suggested
three new designs for 'Y'. One of them was selected and company incurred Rs. 0.65 million on new
moulds and patented the design at a cost of Rs. 0.3 million. 60% of the fee payable to the consultant is
directly attributable to ‘Y’.
(iii) Manufacturing license of product 'Z' is expiring on June 30, 2008 and has a book value of Rs. 0.5 million.
This license is not transferable.
(iv) The company paid Rs. 1.0 million to an agency for an advertisement campaign for product 'Y' that
increased the company's sales substantially and there is strong evidence that it will also bring net cash
flow of Rs. 6.5 million in the next year. Thereafter its impact will be insignificant.
(v) Product 'T' is one of the top brands of the company and bears a good market reputation. The brand is
currently being reported at zero value in the financial statements despite the fact that the company
incurred Rs. 3 million on setting up a brand development department exclusively for the said item. This
year company has a firm offer for the said brand amounting to Rs. 12 million from another financially
sound company.
Required: Suggest accounting treatment with brief reasons, in respect of each of the above information.

Question # 21:

The following information relates to the financial statements of Fazal for the year to 31 March 2015.
The IT division has begun a training course for all managers in a new programming language at a cost of Rs.
200,000. The consultants running the training course have quantified the present value of the training benefits
over the next two years to be Rs. 400,000. The project cost has been included in the statement of financial
position as a current asset. The accounting policy note identifies that the costs will be written off over the next
two years to match the benefits.
Required: Explain the correct accounting treatment for the above (with calculations if appropriate).

42
CHAPTER-1 IAS 38: Intangible Assets

Practice Answers
Answer # 01:

Part A
An intangible asset is an identifiable non-monetary asset without physical substance.
Though customer list does not have physical substance and is non-monetary but the expenditure on developing
customer list cannot be distinguished from cost of developing business as a whole therefore it cannot be
recognised as an intangible asset.

Part B
Both the patent and staff skills do not have physical substance. The issue is whether or not they meet the
definition of an asset. The patent and staff skills are a resource in that they can be used to generate sales.
The company controls the future benefits from the software by the legal rights of the patent.
In respect of staff skills, although the company will obtain future benefits from the work performed by the staff,
the company does not have control over their skills as the staff can resign at any time by giving one month's
notice.
Therefore, the patent must be recognised as an intangible asset but the staff skills cannot be recognised as an
intangible asset.

Part C
The license to operate the toll road is an intangible asset with a finite useful life. Therefore, the cost of Rs.
10,000,000 is amortised on a systematic basis over its estimated useful life (originally being twenty years in line
with the pattern in which the asset's future economic benefits are expected to be consumed by the entity.
During the eighteenth year, it was estimated that the useful life in cars would be 1,800,000 cars.
(Year 18: 800,000 + Year 19: 600,000 + Year 20: 400,000)
Since the pattern has changed from an even usage, a more appropriate method of amortisation would be to use
the number of cars using the road instead. This change is accounted for as a change in accounting estimate
Carrying amount at the end of 17th year is 1,500,000 (10,000,000 – 10,000,000 / 20 × 17)
This is then amortized over 1,800,000 cars as follows:
• Year 18: Rs. 666,667 (Rs. 1,500,000 / 1,800,000 x 800,000 cars)
• Year 19: Rs. 500,000 (Rs. 1,500,000 / 1,800,000 × 600,000 cars)
• Year 20: Rs. 333,333 (Rs. 1,500,000 / 1,800,000 x 400,000 cars)
The impairment test should be performed at the end the end of 17 year by comparing the recoverable amount
with carrying amount.

43
CHAPTER-1 IAS 38: Intangible Assets

Answer # 02:

Recognition:
The issue here is whether the cost of the fishing licence should have been expensed or recognised as an
intangible asset. To be recognised as an intangible asset, the item must meet the definition of an intangible
asset and the recognition criteria.
• An intangible asset is defined as an identifiable non-monetary asset without physical substance.
• The fishing licence is identifiable as it arises from a legal right to fish in the demarcated area
• As an asset, the intangible asset must be a resource controlled by the entity, from a past event and must
result in an expected inflow of future economic benefits
• Muneer Limited does have control over the fishing licence as no other company may fish for tuna in the
demarcated area during the term of the licence.
• The past event is the acquisition of the license before year-end.
• Future economic benefits should flow through increased revenue from the sale of fish.
• The fishing licence (although the related documentation has physical form), does not have physical substance
as the most significant aspect is the licensed ability to perform fishing.
Applying the recognition criteria,
• As the fishing license is a separately acquired intangible asset, the probability of future economic benefits is
satisfied.
• The cost is reliably measured as an amount of Rs. 600,000 was paid for the fishing license.
Conclusion: The licence should be capitalized as an intangible asset since it meets the relevant definition and
recognition criteria

Measurement:
• The fishing licence has a finite life and must be amortised.
• The life is determined as the shorter of the actual life and legal life.
• The actual life is not relevant but the licence provides the company with a legal life of four years.
• The residual value is zero.
• The pattern of future economic benefits is not apparent and therefore the straight-line may be used for
amortisation.
• Amortisation of Rs. 150,000 must be expensed during 20X6 [(Rs. 600,000 – 0) / 4 years]
• An impairment test should be performed if there is indication of impairment.
• The carrying amount of the licence will therefore be measured at Rs. 450,000
(Cost: Rs. 600,000 – Accumulated amortisation: 150,000 – Accumulated impairments: 0).

Disclosure:
• The carrying amount of the licence would be included in the line item "intangible assets" on the face of the
statement of financial position
• The amortisation expense would be included in the calculation of the profit before tax line item in the
statement of comprehensive income.
• Accounting policies relating to intangible asset would need to be disclosed.
• The detail of opening and closing carrying amount for the licence is included in the intangible asset note.

44
CHAPTER-1 IAS 38: Intangible Assets

Answer # 03:

There are two conditions for capitalization of the cost of an acquired intangible asset.
(i) Economic benefits are expected to flow to entity and
(ii) Cost can be measured reliably.
As both conditions are met in the given case, so the cost of intangible shall be capitalized.
As at present, management believes the life of asset to be indefinite, no amortisation shall be charged.
However, an entity shall check the asset for impairment annually.

Answer # 04:

Entries for Patent

Date Particulars Dr. Cr.
01.01.09 Patent 700,000
Cash 700,000
(Patent acquired)
31.12.09 Amortisation expense (700,000/10 years) 70,000
Accumulated amortization 70,000
(Recording of amortisation of patent)
31.12.10 Amortisation expense (700,000/10 years) 70,000
Accumulated amortization 70,000
(Recording of amortisation of patent)

Entries for Franchise

Date Particulars Dr. Cr.
01.01.11 Franchises 500,000
Cash 500,000
(Franchise acquired)
31.12.11 Amortisation expense ({700,000 – 140,000}/5 years) 112,000
Accumulated amortisation 112,000
(Recording of amortisation of patent)
31.12.11 Amortisation expense (500,000/10 years) 50,000
Accumulated amortisation 50,000
(Recording of amortisation of Franchise)

Answer # 05:

Date Particulars Dr. Cr.

31.12.01 Research expense (120,000 x 8/12) 80,000
Development cost – asset (120,000 x 4/12) 40,000
Bank 120,000
(Recording of development & research expenses)

No need of recording impairment loss as recoverable amount is greater than book value of Rs. 40,000

45
CHAPTER-1 IAS 38: Intangible Assets

31.12.02 Development cost – asset 100,000

Cash 100,000
(Capitalisation of development cost)
31.12.02 Impairment Loss (140,000 – 110,000) 30,000
Accumulated Impairment Loss 30,000
(Recording of Impairment Loss)
(BV = 140,000 – (Recoverable amount = 10,000)

Answer # 06:

Date Particulars Dr. Cr.

01.01.01 Development cost – asset 400,000
Bank 400,000
(In process research and development phase)
31.12.01 Research expense 200,000
Development expense (480,000 x 5/12) 200,000
Development cost – asset 280,000
Bank 680,000
(Recording of development & research expenses)

Answer # 07:

Statement number 3, 4 and 5 are correct.

Answer # 08:

Entry in the books of Kenoly Corporation

Date Particulars Dr. Cr.
31.12.12 Impairment loss (W-1) 90,000
Accumulated impairment 90,000
(Recording of impairment loss of patent)

(W-1) Calculation of impairment loss

Rs. Rs.
Carrying amount 300,000
Less: Recoverable amount
(Higher of):
Value in use 210,000
Fair value 110,000
(210,000)
Impairment loss 90,000

46
CHAPTER-1 IAS 38: Intangible Assets

Answer # 09:

Duration of license = 8 years

License cost = 8,300,000
Amortization for 1 year = 8,300,000 / 8
= 1,037,500
st
Life passed up to 31 December 2007 = 3,112,500 / 1,037,500
= 3 years
Amortisation charged up to 01.01.09 = 1,037,500 x 4 years
= 4,150,000
As the company decided to stop the sale of drug therefore the license is impaired on January 01, 2009.
4,150,000 being impairment loss will be charged to statement of comprehensive income in 2009.
Rs.
Book value (8,300,000 – 4,150,000) 4,150,000
Recoverable amount (0)
Impairment loss 4,150,000

Answer # 10:
Entries in the books of Greshwin Corporation
Date Particulars Dr. Cr.
01.04.10 Franchise 120,000
Cash 120,000
(Franchise acquired)
31.12.10 Amortisation expense (120,000/8 years × 9/12) 11,250
Accumulated amortisation 11,250
(Recording of amortisation of franchise rights)

Answer # 11:
Entry in the books of Winans Corporation
Date Particulars Dr. Cr.
01.09.10 Net assets 620,000
Goodwill (bal.) 80,000
Cash 700,000
(Purchase of business)
Note: Goodwill is not amortised as it has indefinite useful life.

Answer # 12:

Date Particulars Dr. Cr.

Trade name 68,000
Cash 68,000
(Registration cost of intangible asset)
Amortisation expense (68,000/8 years) 8,500
Accumulated amortization 8,500
(Recording of amortisation of trade name)

47
CHAPTER-1 IAS 38: Intangible Assets

Answer # 13:

At the end of 2005, the production process is recognised as an intangible asset at a cost of Rs. 100 (expenditure
incurred since the date when the recognition criteria were met, i.e. 1 December 2005). The Rs. 900 expenditure
incurred before 1 December 2005 is recognized as an expense because the recognition criteria were not met
until 1 December 2005.
At the end of 2006, the cost of the production process is Rs. 2,100 (Rs. 100 expenditure recognised at the end of
2005 plus Rs. 2,000 expenditure recognised in 2006). The entity recognises an impairment loss of Rs. 200 to
adjust the carrying amount of the process to its recoverable amount of Rs. 1,900.

Answer # 14:

A)
As the costs associated with the renewal are insignificant, the asset must be amortised over the 8 years useful
life. The entity intends to renew the licence and the government intends to re-issue the licence to Ace Ltd, and
therefore it must be treated as an asset with a 8 year useful life.

B)
As the costs associated with the renewal are significant, and almost equaling the initial cost of the licence, the
asset must be amortised over the 5 years useful life. Although the entity intends to renew the licence. the
renewed licence, when it is acquired, must be treated a separate asset and amortised over a useful life of 3
years

Answer # 15:

Old brand
The capitalisation of the cost of the original brand name is correct. Since the brand was considered to have an
indefinite useful life, it was correct not to amortise the cost.
Similarly, the recoverable amount of old brand should have been calculated at the end of every year,
irrespective of the fact there is an indication of impairment, since it has 'an indefinite useful life'.
On abandonment of the Yog-Nog brand name, it is correct to write-off the balance of its carrying amount.

New brand
The accounting treatment made is incorrect. IAS 38 specifically disallows the capitalisation of the internally
generated brand name ‘Yogi-Yippi' on the grounds that it is too difficult to prove that the recognition criteria
have been met (i.e., reliable estimates of the costs of creation are almost impossible since the costs incurred will
be difficult to separate from the general costs of running the business). The launch costs of Yogi-Yippi should
therefore be expensed as marketing costs.

48
CHAPTER-1 IAS 38: Intangible Assets

Answer # 16:

Part a) N-Gee brand

(i) Acquisition of N-Gee brand

In terms of lAS 38, an item must meet all the components of the definition of an intangible asset in order to be
capitalized.

Definition of an asset
• Resource controlled by enterprise from past events
• from which future economic benefits are expected to flow

Definition of an intangible asset

• Identifiable
• non-monetary asset
• without physical substance

The brand, N-Gee has been purchased and is therefore a resource which is controlled due to the fact that it can
restrict the access of others to these benefits. This would be legally enforceable in a court.

The past event is the purchase transaction of the brand, which occurred on 1 April 20X5.

Future economic benefits expected to flow from the purchase will result from sale of N-Gee soft drinks.

Identifiability is met, as the brand name is capable of being separated and arises from a legal right.

The brand purchased has no physical substance and is considered intangible.

Recognition:
However, an intangible asset can only be recognised if:
• it is probable that the future benefits that are attributable to the asset will flow to the entity
• and the cost can be reliably measured.
It is probable that the brand should give rise to future economic benefits, which will arise from future sales of
the N-Gee drink.
The cost can he reliably measured as this is known the purchase price paid for the brand was Rs. 2.5 million

The brand, N-Gee should therefore be recognised as an asset in terms of IAS 38: Intangible Assets.

ii) Accounting treatment of all N-Gee costs

The amount capitalized should be the purchase price plus any directly attributable expenditure. Therefore, an
amount of Rs. 2,675,000 (the purchase price of Rs. 2,500,000, as well as the legal fees incurred of Rs. 175,000)
should be Capitalized.
The brand should be amortised over its estimated useful life of 15 years.
The staff training costs of Rs. 200,000 to produce this new product should be expensed. The definition of an
asset is not met since the trained staff members may not necessarily be under sufficient control of the entity.

49
CHAPTER-1 IAS 38: Intangible Assets

Part b) Internal generation of patent for Flip top can

For an item to be recognised as an asset, it must meet the asset definition and also meet the recognition
Criteria: (the cast or value must be reliably measurable; and the inflow of expected 'future economic benefits
must be probable.)
Expenditure on the research phase of the project should be expensed. For the year end 31 May 20X5, this will be
Rs. 240,000 and will include:
• Rs. 40,000 for market surveys
• Rs. 200,000 for evaluations of designs
The research phase of the project should end on 30.09.20X4, once the design is chosen and engineers produce a
plan which indicates that it is technically possible to produce the Flip top can.
Expenditures from 01.10.20X4 relating to the development phase may be Capitalized as an intangible asset if
Quenchers can demonstrate that the 6 conditions have been met:
1. The technical feasibility of completing the After the evaluation of a number of prototypes and
intangible asset so that it will be available for use designs, Quenchers began development of a pilot
or sale. plant, and engineers produced a plan which indicated
that it was technically possible to produce the flip top
can.
2. Its intention to complete the intangible asset and Quencher has applied to register the Flip top can as a
use or sell it. patent.
3. Its ability to use or sell the intangible asset. Market surveys
4. How the intangible asset will generate probable Detailed market research was carried out by
future economic benefits. Quenchers, prior to 01.10.20X4, which indicates that
the cans will be able to be used and will generate
future economic benefits for the company as there is
a market for the product.
5. The availability of adequate technical, financial Adequate funding was obtained prior to the project
and other resources to complete the beginning, which indicates that the company has the
development and to use or sell the intangible necessary resources to complete development.
asset.
6. Its ability to measure reliably the expenditure The expenditure attributable to the development of
attributable to the intangible asset during its the asset have been able to have been reliably
development. measured.
Development costs amounting to Rs. 1,700,000 should be Capitalized at 31.05.20X5. This includes the following:
• Rs. 1,100,000 – Design and construction of a pilot plant
• Rs. 600,000 – Testing of a pilot plant
Since the development is not yet completed and therefore has not yet been put into production, amortization of
this intangible asset should not yet begin. As a result, this is classified as an intangible asset not yet available for
use'. This means that impairment testing must be done every year.

50
CHAPTER-1 IAS 38: Intangible Assets

Answer # 17:

1. Website for external access is an intangible asset because economic benefit in the form of online orders will
accrue to the entity and cost can be measured reliably.
However, website for internal use is not an intangible asset because management is not in a position to
estimate economic inflows.
2. Expense incurred on feasibility study of Rs 0.3 million relates to planning phase so it will be expensed when
incurred.
3. The development expenditure of Rs. 4 million on internal website will be expensed out as discussed above.
While the development expenditure of Rs. 11 million (which includes Rs. 6 million for credit card facility and
security tools) will be capitalized as a part of cost of external website.
4. The cost of server as well as its operating software amounting to Rs. 5 million (2 + 3) in total will be
capitalized under lAS 16 and cost for remaining software’s amounting to Rs. 3 million will be capitalized as an
intangible asset.
5. The maintenance, training and advertisement costs amounting to Rs. 2 million, Rs. 0.2 million and Rs. 0.4
million respectively will be charged to statement of comprehensive income (means will be expensed as and
when incurred).

Answer # 18:

a) Journal entries - Net replacement method

Date Particulars Dr. Cr.
------- Rs. -------
31.12.14 Accumulated Depreciation 60
Asset 60
31.12.14 Asset 110
Revaluation surplus 110
(W-1)
Date Description Asset R. Surplus SOCI(P/L)
31.12.14 WDV (200 - 60) 140
31.12.14 Revaluation surplus (bal.) 110 110 -
31.12.14 Revalued Amount 250 110 -

b) Journal entries - Gross replacement method

Date Particulars Dr. Cr.
------- Rs. -------
31.12.14 Asset (357 – 200) 157
Accumulated Depreciation (107 – 60) 47
Revaluation surplus (bal.) 110
(W-2)
Before Factor After
Cost 200 × 250/140 357
Accumulated Depreciation (60) × 250/140 (107)
Book Value 140 250

51
CHAPTER-1 IAS 38: Intangible Assets

Answer # 19:
Date Particulars Dr. Cr.
01.10.01 Depreciation (10,000/2 × 9/12) 3,750
Accumulated depreciation – car engine a/c 3,750
01.10.01 Cash -
Accumulated depreciation (2,000* + 3,750) 5,750
P/L (bal.) 6,250
Car engine-cost (Recording of disposal of old engine) 12,000
01.10.01 Car engine-cost 15,000
Cash (Recording of new engine) 15,000
31.12.01 Depreciation – Car (20,000/10) + (15,000/3) × 3/12 3,250
Accumulated depreciation – car structure a/c 2,000
Accumulated depreciation – car engine a/c 1,250
* This Rs. 2,000 is difference between the original cost and book value on 01.01.20X1. This Rs. 2,000 represents
opening accumulated depreciation of old engine on 01.01.20X1.

Answer # 20:
(i) Payment of Rs. 1.7 million has been paid for improvement in the design if possible. This suggests that
uncertainty exists in respect of improvement in design and this expenditure seems to be a research cost.
Therefore, entire payment of Rs. 1.7 million will be charged as expense.
(ii) After selection of an alternative for new design for “Y” further Rs. 0.65 million have been incurred on
new moulds and Rs. 0.3 million have been incurred on registration. These expenses relate to
development phase and if all conditions of capitalization are met, then these should be capitalized as an
intangible asset. Since the entire consultant fee has been recognized as research cost, it cannot now be
capitalized.
(iii) Since production of “Z” was discontinued, therefore, book value of Rs. 0.5 million of its manufacturing
license should be derecognized and charged to P&L.
(iv) Since entity cannot establish control over the benefits of advertising campaign therefore irrespective of
highly anticipated future sales, Rs. 1 million should not be capitalized as an intangible asset rather
should be charged as an expense.
(v) Product T seems to be an internally generated brand therefore it is currently having no book value in
financial statements. As per IAS 38, revaluation is not allowed for items which have not been recognized
as intangible assets.

Answer # 20:

An entity may have a team of skilled staff and may be able to identify incremental staff skills leading to future
economic benefits from training. The entity may also expect that the staff will continue to make their skills
available to the entity.
However, an entity usually has insufficient control over the expected future economic benefits arising from a
team of skilled staff and from training for these items to meet the definition of an intangible asset.
Therefore, IAS 38 specifically states that training costs should not be capitalised. Hence the treatment adopted
by Fazal is not correct and the training costs should be charged to P & L.

52
CHAPTER-1 IAS 38: Intangible Assets

Past Paper Questions

Question # 01:

The following transactions pertain to Amused Limited (AL):

(i) In 2020, AL started development of a new product. The recognition criteria for capitalization of internally
generated intangible asset was met on 1 January 2021. On this date, AL started development of a plant
which completed in 3 months. It is pilot plant for testing the new product and is not of a scale
economically feasible for commercial production. AL incurred cost of Rs. 3 million and Rs. 7 million on
design and construction of plant respectively. AL expects to operate the plant for two years till end of
development phase. During 2021, AL incurred Rs. 5 million in operating the pilot plant.
(ii) On 1 March 2021, AL acquired a patent with indefinite life in exchange of its old equipment and cash
consideration of Rs. 25 million. The fair values of the patent and equipment were assessed at Rs. 57
million and Rs. 35 million respectively. On the date of exchange, the equipment had a carrying value of
Rs. 30 million. AL believes that its future cash flows will change as a result of this exchange. AL incurred
cost of Rs. 2 million for transferring the title of the patent to its name.
(iii) On 1 June 2021, the government granted a license to AL free of cost to import raw material upto 10 tons
from international market for its intended use. The license is non-transferable. There are no further
conditions attached by the government. The fair value of the license is Rs. 50 million.
Required:
Explain how each of the above transactions should be accounted for in the financial statements of AL for the
year ended 31 December 2021, in accordance with the requirements of IFRSs. (05)
{Spring-22, Q # 04}

Question # 02: (ICAP Example # 24)

Ajwa Limited (AL) is engaged in the business of manufacturing and trading of consumer goods. On 1 July 2021,
AL launched its own website for online sale of its products. The website was developed internally which met the
criteria for recognition as an intangible asset on 1 May 2021. Directly attributable costs incurred for the website
are as follows:
*Incurred in 2021 Rs. in million
Defining hardware and software specifications January to March 0.5
Salaries and general overheads January to June 6.0
Development of the content May to June 7.0
Registering website with search engines June 1.0
Annual fees for website hosting June 0.6
Employees training costs June to July 1.5
Discount offers for logging on the website July to August 2.0
*All costs were incurred evenly throughout the mentioned period.
Required: Compute the cost of the website for initial measurement. Also discuss the reason(s) for not inclusion
of any of the above costs in the computation. (07)
{Autumn-21, Q # 03}

53
CHAPTER-1 IAS 38: Intangible Assets

Question # 03: (ICAP Example # 26)

Dove Limited (DL) commenced development of a new product on 1 January 2020. In this regard, following
expenditures have been incurred:
Description Incurred in Rs. in million
Evaluation of possible alternatives January 2020 2
Pre-production prototypes February and March 2020 17
Pilot plant April to July 2020 40
Fee to register legal rights August 2020 15
Cost of manufacturing samples August to October 2020 32*
Brand building cost October to December 2020 16
*NRV of Rs. 20 million
DL has also incurred directly attributable salaries and overheads of Rs. 5 million and Rs. 1.5 million respectively
in each month over the development period of new product.
The recognition criteria for capitalization of internally generated intangible asset was met on 1 April 2020 and
commercial production of the product was commenced from 1 November 2020.
Required: Compute the cost of the new product for initial measurement. Also discuss the reason(s) for ignoring
any of the above expenditures in the computation. (08)
{Spring-21, Q # 03}
Question # 04: (ICAP Example # 31)

Qabil Limited (QL) is in process of finalizing its financial statements for the year ended 31 December 2019.
Following information pertains to QL's intangible assets:
(i) Intangible assets as at 31 December 2018 were as follows:
Product design ERP software
-------- Rs. in million --------
Cost 750 200
Accumulated amortization / impairment 75 80
-------- Years --------
Useful life 10 8
(ii) Cost incurred on development of product design was capitalised in 2018. The competition for the product
is increasing. QL has estimated the following net cash inflows from the product:
2025 &
Year 2020 2021 2022 2023 2024
onwards
Net cash inflows
190 170 140 100 80 Nil
(Rs. in million)
Pre-tax and post-tax discount rates are 12% and 10% respectively.

(iii) On 1 January 2019, QL entered into an agreement to replace existing ERP software with a new ERP
software at a cost of Rs. 360 million. According to the agreement, 40% payment was made on signing of
the contract while the remaining amount will be paid on 31 May 2019.
The entire cost of project was financed through a running finance from Honehaar Bank at markup of 15%
per annum. The software became operational on I November 2019. QL expects to use it for a period of 9
years. The existing ERP software will be continued till 31 December 2020.

54
CHAPTER-1 IAS 38: Intangible Assets

(iv) On 1 January 2019, QL acquired a licence for Rs. 600 million for a period of 5 years. QL made an initial
payment of Rs. 100 million and the remaining amount will be paid in two equal instalments on 1 January
2020 and 2021. Cash price equivalent of the license is Rs. 520 million.
On expiry of 5 years, the license is renewable for further five years at an insignificant cost of Rs. 15
million. QL intends to renew the license and sell it at the end of 8th year.
In the absence of any active market, QL has estimated that residual value of the license would be Rs. 80
million and Rs. 60 million at the end of 8th year and 10th year respectively.
Required: Prepare a note on ‘Intangible assets’ for inclusion in QL's financial statements for the year ended 31
December 2019 in accordance with the requirements of IFSs. (15)
{Autumn-20, Q # 06}

Question # 05: (ICAP Example # 25)

Zinc Limited (ZL), a broadcasting company, uses revaluation model for subsequent measurement of its intangible
assets, wherever possible. Following information pertains to ZL's intangible assets:
(i) On 1 January 2018, ZL bought an incomplete research and development project from Bee Tech at its fair
value of Rs. 90 million. The purchase price was analysed as follows:
Rs. in “million”
Research 30
Development 60
Subsequent expenditures incurred on this project are as follows:
Rs. in “million”
Further research to identify possible markets 10
Development 48
Recognition criteria for capitalization of development was met on 1 March 2018. All costs are incurred
evenly from 1 January 2018 till project completion date i.e., 31 August 2018. It is expected that newly
developed technology will provide economic benefits to ZL for the next 10 years.
• On 31 December 2018, ZL received an offer of Rs. 170 million for its developed technology.
(ii) On 31 December 2018, ZL launched its new website for online streaming of TV shows, movies and web
series. The website's content is also used to advertise and promote ZL's products. The website was
developed internally and met the criteria for recognition as an intangible asset. Directly attributable costs
incurred for the website are as follows:
Rs. in “million”
Undertaking feasibility studies 3
Evaluating alternative products 1
Acquisition of web servers 16
Acquisition cost of operating system of web servers 7
Registration of domain names 2
Stress testing to ensure that website operates in the intended manner 3
Designing the appearance of web pages 5
Development cost of new content related to:
• online streaming 11
• advertising and promoting ZL's products 8
Advertising of the website 6

55
CHAPTER-1 IAS 38: Intangible Assets

(iii) During 2018, the licensing authority intimated that broadcasting license of one of ZL's channels will not
be further renewed.
ZL had obtained this license for indefinite period on 1 January 2012 by paying Rs. 150 million, subject to
renewal fee of Rs. 0.3 million at every five years. Upto last year, this license was expected to contribute
to ZL's cash inflows for indefinite period.
As on 31 December 2018, the recoverable amount of this license was assessed as Rs. 105 million.
Required: In accordance with the requirements of IFSs, prepare a note on intangible assets, for inclusion in ZL's
financial statements for the year ended 31 December 2018 in respect of the above intangible assets. (15)
('Total' column is not required) {Autumn-19, Q # 08}

Question # 06: (ICAP Example # 32)

Apple Limited (AL) is in the process of finalizing its consolidated financial statements for the year ended 30 June
2018. Following information pertains to the Group's intangible assets:
(i) As on 30 June 2017, revalued amount of AL's license and related revaluation surplus were Rs. 450 million
and Rs. 30 million respectively.
(ii) On 1 July 2017, AL acquired entire shareholding of Mango Limited (ML) for Rs. 1,950 million. Fair values
of net assets appearing in ML's books on acquisition date are given below:
Rs. in “million”
Software (Rs. 100 million each) 200
Other net assets 1,545
In respect of acquisition of ML, following information is also available:
• Till acquisition date, ML had incurred research & development cost of Rs. 80 million on product 'ABC'.
ML had not recognised this as an asset because criteria for recognition of the internally generated
intangible asset was met on 1 July 2017. On this date, AL estimated that the fair value of research and
development work on ABC was Rs. 95 million.
• On acquisition date, fair value of ML's customer list was assessed at Rs. 20 million.
(iii) ML incurred following expenditures on this project from 1 July 2017 till ABC's launching date i.e., 01.05.18.
Rs. in “million”
Market research 5
Product design 12
Cost of pilot plant (not for commercial production) 48
Refinement of product before commercial production 6
Training of production staff 8
Testing of pre-production 4
Production and launching of product 105
188
(iv) As on 1 July 2017, the fair value of AL's own customer list was assessed at Rs. 35 million.
(v) As on 1 July 2017, remaining useful life of all intangible assets except goodwill was 10 years.
(vi) On 31 March 2018, ML sold one of its software for Rs. 110 million.
(vii) Group follows the revaluation model for license whereas cost model is used for other intangible assets.
(viii) As on 30 June 2018:
• fair value of licence was assessed at Rs. 350 million.
• goodwill of ML has been impaired by 20%.

56
CHAPTER-1 IAS 38: Intangible Assets

Required: Prepare a note on intangible assets, for inclusion in AL's consolidated financial statements for the year
ended 30 June 2018 in accordance with the requirements of IRSs. (14)
('Total' column is not required) {Autumn-18, Q # 04}

Question # 07: (ICAP Example # 27)

On 1 July 2016, Sunshine Limited (SL) acquired four licenses namely A, B, C and D for a period of ten years. The
following information is available in respect of these licenses:
(i) A B C D
Cost of license (Rs. in million) 200 230 90 60
Expected period of cash generation from
12 years Indefinite 6 years 12 years
acquisition date
Active market value at 30 June 2017 No active
170 300 65
(Rs. in million) market
Renewal cost (Rs. in million) 65 85 2 1
(ii) The renewal would allow SL to use the licenses for another five years.
(iii) SL uses the revaluation model for subsequent measurement of its intangible assets.
(iv) An independent valuer has estimated the value of license ‘D' at Rs. 130 million.
Required: Determine the amounts that should be recognised in respect of the licenses in the statement of
financial position and statement of profit or loss for the year ended 30 June 2017. (10)
{Autumn-17, Q # 03}
Question # 08: (ICAP Example # 30)
Following information pertains to International Associates Limited (AL):
(i) Intangible assets as at 30 June 2015 were as follows:
Brands Software License
Useful life (years) 10 5 Indefinite
---------- Rs. in “million” ----------
Cost 200 80 15
Accumulated amortization / impairment 40 48 -
(ii) Details of expenses incurred on a project to improve IAL's existing production process are as under:
Period Rs. in “million”
Up to June 2015 20
July 2015 – March 2016 45
Expenses were incurred evenly during the above period. On 30 September 2015, it was established that
the project is commercially viable. The new process became operational with effect from 1 April 2016
and it is anticipated that it will generate cost savings of Rs. 10 million per annum for a period of 10 years.
(iii) On 1 August 2015, IAL entered into an agreement to acquire ERP software which would replace its
existing accounting software. The new software became operational on 1 April 2016. IAL incurred
following expenditure in respect of the ERP software:
Description Rs. in “million”
Purchase price (including 15% sales tax) 115
Training of staff 2
Consultancy charges for implementation of ERP 5
ERP software has an estimated useful life of 15 years. However, IAL expects to use it for a period of 10
years. The existing accounting software has become redundant and is of no use for the company.

57
CHAPTER-1 IAS 38: Intangible Assets

(iv) During the year ended 30 June 2016, IAL spent Rs. 10 million on development of a new brand. Useful life
of the brand is estimated as ten years.
(v) The license appearing in IAL's books was issued by the government for an indefinite period. However, on
1 January 2016 the Government introduced a legislation under which the existing license would have to
be renewed after ten years.
(vi) IAL uses cost model to value its intangible assets and amortize them on straight-line basis.
Required: Prepare a note on 'intangible assets' for inclusion in IAL's financial statements for the year ended 30
June 2016 in accordance with International Financial Reporting Standards. (16)
{Autumn-16, Q # 05}
Question # 09: (ICAP Example # 28)

Opal Limited (OL) commenced research work on a new product on 1 July 2013 and entered the development
phase on 1 July 2014. In this respect, the following expenses were incurred and debited to capital work in
progress.
For the year ended
30 June 2015 30 June 2014
Rs. in “million”
Research and development cost 12.00 8.00
Training of technical staff 0.90
Cost of laboratory equipment *4.00
Cost of trial run 0.60
13.50 12.00
* Purchased on 1 January 2014, having estimated useful life of five years.
Criteria for recognition of the internally generated intangible asset have been met. The commercial production
was started from 1 January 2015. It is estimated that the related product would have a shelf life of 10 years.
Required: Explain accounting treatment of the above in the financial statements for the year ended 30 June
2015 in the light of International Financial Reporting Standards. (07)
{Autumn-15, Q # 08}
Question # 10:
English Pharmaceutical Limited (EL), a listed company, has provided you with the following information related
to the year ended 30 June 2013:
(i) EPL has developed and patented two new vaccines A & B at a cost of Rs. 160 million and Rs. 120 million
respectively. Based on market analysis, it is estimated that Vaccine A would generate revenue of Rs. 300
million per annum for next five years whereas Vaccine B would generate annual revenue of Rs. 80 million
for an indefinite period.
(ii) Rs. 6 million was paid for a television advertising campaign that will cover a period of 6 months from 1
May 2013 to 31 October 2013. The directors believe that the campaign would help to achieve the sales
growth target of 8% for the next two years. (02)
(iii) Rs. 5 million were spent on training of technical staff. The training courses were conducted by leading
experts of pharma production and are expected to improve the production quality significantly and
reduce costs. (01)
Required: In the light of International Financial Reporting Standard, explain how the above expenditure may be
accounted for in EPL's financial statements for the year ended 30 June 2013. {Autumn-13, Q # 05}

58
CHAPTER-1 IAS 38: Intangible Assets

Question # 11:

(a) On 01 January 2012, Top Foods Limited (TFL) acquired manufacturing rights of an assorted range of juice
and ice creams from a well-known multinational company for Rs. 50 million.
Following are the relevant clauses of the agreement executed between the two companies:
• The agreement is valid for five years and is renewable for another five years at a nominal price.
• The manufacturing rights are not transferable and cannot be sub-let.
After erection of its plant, TFL started manufacturing the products on 01 July 2012. Due to intense
competition, the new products were not able to achieve the desired sale in the first six months of their
launching.
Required: Explain with reasons how TFL should have accounted for the above payment on: (08)
(i) 01 January 2012
(ii) 31 December 2012

(b) On 01 January 2012, Matchless Enterprises Limited (MEL) acquired research data along with partially
developed product design from a company for Rs. 2 million (Research costs – Rs. 0.5 million,
development costs – Rs. 1.5 million).
The product design was handed over to the production department on 01 November 2012.
Subsequent to acquisition, MEL incurred Rs. 0.7 million on research and Rs. 2.5 million on the
development/finalization of the product design. It is expected that this product design would provide
economic benefits to the company for next five years.
Required: Prepare journal entries to record the above transactions. (04)
{Spring-13, Q # 07}
Question # 12: (ICAP Example # 20)

(a) Discuss the criteria that should be used while recognizing intangible assets arising from research and
development work. (05)

(b) Raisin International (RI) is planning to expand its line of products. The related information for the year
ended 31 December 2011 is as follows:
(i) Research and development of a new product commenced on 1 January 2011. On 1 October 2011, the
intangible is commercially launched. It is estimated that the product would have a useful life of
7 years. Details of expenditures incurred are as follows:
Rs. in “million”
Research work 4.50
Development work 9.00
Training of production staff 0.50
Cost of trial run 0.80
Total costs 14.80
(ii) The right to manufacture a well-established product under a patent for a period of five years was
purchased on 1 March 2011 for Rs. 17 million. The patent has an expected remaining useful life of 10
years. RI has the option to renew the patent for a further period of five years for a sum of Rs. 12 m.

59
CHAPTER-1 IAS 38: Intangible Assets

(iii) RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the month of June 2011.
The life of the brand is expected to be 10 years. Currently, there is no active market for this brand.
However, RI is planning to launch an aggressive marketing campaign in February 2012.
(iv) In September 2010, RI developed a new production process and capitalized it as an intangible asset at
Rs. 7 million. The new process is expected to have an indefinite useful life. During 2011, RI incurred
further development expenditure of Rs. 3 million on the new process which meets the recognition
criteria for capitalization of an intangible asset.
Required: In the light of International Financial Reporting Standards, explain how each of the above transaction
should be accounted for in the financial statements of Raisin International for the year ended 31 December
2011. (11)
{Spring-12, Q # 04}
Question # 13: (ICAP Example # 18)

Zouq Inc. is a multinational company. As part of its vision to expand its business in South Asia, it purchased
majority shares in a locally incorporated company, Momin Limited.
Following are the brief details of the acquisition:
Date of acquisition January 1, 2007
% of shares acquired by Zouq Inc. 90%
Total paid up capital of Momin Limited (Rs. 10 each) 500,000,000
Purchase price per share Rs. 30
Net assets of Momin Limited (as per 2006 audited financial statements) 650,000,000
Fair value of net assets (other than intangible assets) of Momin Limited 1,100,000,000
Momin Limited has an established line of products under the brand name of "Badar". On behalf of Zouq Inc., a
firm of specialists has valued the brand name at Rs. 100 million with an estimated useful life of 10 years at
January 1, 2007. It is expected that the benefits will be spread equally over the brand's useful life.
An impairment test of goodwill and brand was carried out on December 31, 2007 which indicated an
impairment of Rs. 50 million in the value of goodwill. Impairment test carried out on December 31, 2008
indicated a decrease of Rs. 13.5 million in the carrying value of the brand.
Required:
a) What are the requirements of International Accounting Standards relating to amortization of intangible
assets having finite life?
b) Prepare the ledger accounts of the Goodwill and the Brand, showing initial recognition and all
subsequent adjustments. (15)
{Spring-12, Q # 04}
Question # 14:

Focus Limited is engaged in manufacturing multimedia projectors. The company spends heavily on research and
development to introduce improvements in the existing products.
A free-lance researcher Mr. Talent sent a conceptual paper to the company on development of a new type of
projector which will significantly enhance the life and quality of the product.
An agreement was reached between Mr. Talent and the company whereby Mr. Talent agreed to conduct and
supervise the research and development process at a lump sum remuneration of Rs. 8 million.

60
CHAPTER-1 IAS 38: Intangible Assets

However, in case the research was unsuccessful, he agreed to reduce his remuneration to a time-based salary of
Rs. 2,000 per hour. The process of research commenced from July 2006 and the following costs were incurred
upto June 30, 2007.
Rs. in “million”
Tools purchased 2.000
Furnishing of the new laboratory 0.800
Salaries paid to research associates 1.620
Cost of conducting tests in U.K. on a device which was ultimately used in the final product 0.400
Remuneration paid to Mr. Talent on successful completion of research 4.500
Cost of manufacturing the samples before commencement of commercial production 0.240
Material imported for commercial production 1.700
Final payment to Mr. Talent 3.500
Product launching expenses 1.200
Required: Discuss the accounting treatment of each of the above costs incurred by the company in the light of
International Accounting Standard 38 ‘Intangible Assets’. (15)
{Autumn-07, Q # 06}
Question # 15:

Childcare Pharmaceuticals Ltd dealing in pediatric medicines sends one of their research scientists to U.K. for
advance research program for development of a medicine for children with chest related diseases. The research
went successful and the initial laboratory tests gave positive results of the medicine. The company intends to
market the product and for this purpose a technical feasibility was prepared which proves that if the medicine is
developed, for which all the technical and financial resources are available; there is a good market for the
product. However the company has to design one of its production lines. The company registered the patent of
the medicine, named CHILD-HEALTH.
Following is the detail of cost incurred during the research and development phase of the medicine CHILD-
HEALTH:
Rs. in “000”
Cost of research scientist stay in U.K. including fees for
3,500
attending seminars and lectures
Fee for preparation of research report 500
Designing cost of the process after feasibility study 4,000
Patent registration cost including attorney fees. etc 250
Required: In the light of IAS-38 (Intangible Assets)
a) Compute the amount to be expensed out. (02)
b) Compute the amount to be capitalized as an intangible asset. (02)
{Spring-05, Q # 05}
Question # 16:

You are required to identity following items pertaining to Research and Development Activities and briefly
elaborate the treatment of every item in the Financial Statements in light of lAS 38.
(i) Personnel Cost
(ii) Purchase of Intangibles (05)
{Autumn-03, Q # 08}

61
CHAPTER-1 IAS 38: Intangible Assets

Question # 17:

The Board of Directors of Hotel Seaview approved a huge fund specifically for carrying out research and
development activities, aimed at expanding the customer base of the hotel. At the time of finalisation of the
annual accounts of the company, the Finance Manager of the company has approached you with the following
problems:
(a) Expenditure on applied research during the year, amounted to Rs. 1,200,000 which is the first annual
installment of the cost of the applied research on a specified project.
(b) Contribution to a research foundation amounted to Rs. 200,000. This contribution was for pure research,
related to the hotel industry.
(c) Research and development expenditure related to a patent granted for the manufacture and sale of a
product amounted to Rs. 500,000.
(d) Cost in the acquisition of specialised knowledge relating to a specified process amounted to Rs. 80,000.
Required: You are required to assist the Finance Manager on the accounting treatment of each of the four
items, keeping in view the requirements of IAS. (10)
{Spring-02, Q # 01}
Question # 18: (ICAP Example # 29)

Draft financial statements of Tulip Limited (TL) for the year ended 31 December 2017 show the following
amounts:
Rs. in “million”
Total assets 2,700
Total liabilities 1,620
Net profit for the year 398
While reviewing the draft financial statements, following matters have been noted:
TL commenced development of a new product on 1 January 2017. Following directly attributable costs have
been incurred upto the launching date of 1 October 2017 and have been capitalized as intangible asset:
` Rs. in “million”
Staff salary 30
Equipment (having useful life of 5 years) 360
Consumables 90
Consultant fee 212
Total 692
The recognition criteria for capitalization of internally generated intangible assets was met on 1 March 2017. All
costs have been incurred evenly during the period except equipment which was purchased specifically for this
product on 1 January 2017.
TL estimated that useful life of this new product will be 10 years. However, TL had not charged any amortization
in 2017.
Required: Determine the revised amounts of total assets, total liabilities and net profit, after incorporating the
impact of above adjustment(s), if any.

62
CHAPTER-1 IAS 38: Intangible Assets

Past Paper Answers

Answer # 01:

(i) Cost incurred on pilot plant should be recorded as intangible as it falls under development activities. As
criteria for capitalizing development cost has been met, all cost (i.e., designing, constructing and
operating) incurred on pilot plant should be capitalized as an intangible. Amortization will begin once
development activity ends and commercial production starts over the life of product.

(ii) This exchange has a commercial substance and future cash flows are expected to change as a result of
this exchange. Therefore, the exchange should be recognized at fair value. As fair value of both assets
exchanged is given, the exchange should be recorded at the fair value of equipment given. So, the patent
should be recorded at Rs. 60 million i.e., sum of fair value of equipment given up (Rs. 35 million) and cash
consideration (Rs. 25 million). Further, cost of transferring title of Rs. 2 million should be added to cost of
patent. No amortization will be charged on patent due to indefinite life. However, the patent will be
tested for impairment annually.

(iii) Grant of license by government should be treated as government grant. The license can be recorded as
intangible asset at its fair value of Rs. 50 million. Government grant so recognized should be amortized to
P & L over the life of license. Alternatively, intangible asset can be recorded at a nominal amount. AL
should select an accounting policy in this regard and apply it consistently.

Answer # 02:

Ajwa Limited (AL)

Amount to be capitalized
Cost of website: Rs. in million
Salaries and general overheads (Rs. 6 million/6 month x 2 month) 2.0
Development of the content 7.0
9.0
Reasons for ignoring cost:
Description Rs. in million Reasons
Defining hardware and software This activity relates to planning phase (which is similar in
0.5
specifications nature to research phase) so should be expensed out.
Salaries and general overheads from January 2021 to
Salaries and general overheads 6.0 April 2021 should be expensed out as incurred before
meeting recognition criteria.
Registering websites with search It is an expense of operational phase so should be
1.0
engines expensed out
This is operating expense which is of recurring nature so
Annual fees for hosting website 0.6
should be expensed out.
This is not eligible cost for capitalization so should be
Employees training costs 1.5
expensed out.
Discounts offers for logging on This is promotional activity and relates to post
2.0
the website development so should be expensed out.

63
CHAPTER-1 IAS 38: Intangible Assets

Answer # 03:
Dove Limited (DL)
Amount to be capitalized:
Rs. in million
Pilot plant 40
Fee to register legal rights 15
Cost of manufacturing samples (32 - 20) 12
Directly attributable salaries (5 x 7M) 35
Directly attributable Overheads (1.5 x 7M) 10.5
112.5
Reasons for ignoring cost:
Description Rs. in million Reasons
Evaluation of possible 2 This is part of research and therefore should not be
alternatives capitalized.
Pre-production 17 Since this cost was incurred before meeting of recognition
prototypes criteria, this should be charged to P & L.
Brand building 16 This is selling cost and therefore should not be capitalized.
19.5 Since salaries and overheads from January 2020 to March
Salaries and overheads [5 x 3M + 1.5 x 3M] 2020 were incurred before meeting of recognition criteria,
this should be charged to P/L a/c.

Answer # 04:
Qabil Limited
Notes to the Financial Statement
For the year ended 31 December 2019
9. Intangibles
Product
ERP software License
Description design
---------------- Rs. in “million” ----------------
Cost
Opening 750 200 -
Additions
- Separate acquisition (W-1) - 391.5 520
Closing 750 591.5 520
Less: Accumulated Depreciation
Opening 75 80 -
Amortisation (W-2): (W-3): (W-4) 112.5 67.25 65
Closing (187.5) (147.25) (65)
Less: Accumulated Impairment loss
Opening - - -
Impairment loss (W-6) 48.5 - -
Closing (48.5) - -
WDV as on 31/12/19 514 444.25 455
Measurement basis Cost Model Cost Model Cost Model
Useful life (in years) 6 years 2 - 9 years 8 years
Amortisation method Straight line Straight line Straight line

64
CHAPTER-1 IAS 38: Intangible Assets

(W-1) Cost of ERP Software

Rs. in ‘million
Purchase price 360
Borrowing cost:
On advance [(360 x 40%) = 144 x 15% x 10/12] 18
On remaining payment [(360 x 60%) = 216 x 15% x 5/12] 13.5
391.5

(W-2) Amortisation on Product design

Amortisation (750 - 75) = 675/6* 112.5
*Remaining life standing on 01.01.19 from 2019 to 2024 is 6 years. No benefits are expected from 2025 and
onwards so these years are ignored while calculating life.

(W-3) Amortisation on Product design

On opening (200 – 80) = 120/2
60
(Remaining life standing on 01.01.19 is 2 years i.e., 2019 and 2020)
On Additions (391.5/9 x 2/12) 7.25
67.25

(W-4) Amortisation on License

Amortisation [(520 - 0) /8] 65

Note:
As renewal cost is insignificant so we will add up the renewal period while calculating the legal life. So, the legal
life is 10 (5 + 5) years. However, management intends to use it for 8 years only so 8 being shorter will be used in
amortization calculation.
Residual value given is ignored because there is no active market available.

(W-5) Value-in-use of product design

Value-in-use = 120 (1.12)-1 + 170 (1.12)-2 + 140 (1.12)-3 + 100 (1.12)-4 + 80 (1.12)-5 514

(W-6) Impairment loss

31.12.19 Carrying amount [750 - 75 - 112.5 (W-2)1 562.5
31.12.19 Recoverable amount (W-5) Value-in-use is taken as recoverable amount) (514)
31.12.19 Impairment loss 48.5

65
CHAPTER-1 IAS 38: Intangible Assets

Answer # 05:
Note for Students:
1. Rs. 170 million in adjustment () is ignored as it cannot be revalued because there is no active market.
2. Acquisition cost of Web server of Rs. 16 million in adjustment (ii) is ignored as it falls under IAS-16.
3. In adjustment (iii) the license was renewed in 2017 and licensing authority intimated in 2018 that license
cannot be renewed so remaining life is 4 years only.
Zinc Limited (ZL)
Notes to the Financial Statement
For the year ended 31 December 2018
9. Intangibles
Research & Website License
Description Development
---------------- Rs. in “million” ----------------
Cost
Opening - - 150
Additions
- Separate acquisition [90: (2 + 3 + 5 + 11)] 90 21 -
- Development (48 × 6/8) 36 - -
Closing 126 21 150
Less: Accumulated Amortisation
Opening - - -
Amortisation [((90+36) =126/10 x 4/12) : (150/4) 4.2 - 37.5
Closing (4.2) - (37.5)
Less: Accumulated Impairment loss
Opening -
Impairment loss (W-1) 7.5
Closing (7.5)
WDV as on 31/12/18 121.8 21 105

Useful life 10 N/A 4

Amortisation method Straight line N/A Straight line

(W-1)
License
Carrying amount as on 31/12/18 (150 – 37.5) 112.5
Recoverable amount (105)
Impairment loss 7.5

66
CHAPTER-1 IAS 38: Intangible Assets

Answer # 06:
Apple Limited
Notes to the Consolidated Financial Statement
For the year ended June 30, 2018
9. Intangibles
Research & Customer
Description License Software Goodwill
Development List
---------------------------------- Rs. in “million” ----------------------------------
Cost
Opening 450 - - - -
Additions
- Business Acq. - 200 95 20 90 (W-1)
- Others - - 70 (W-2) - -
Transferred (45) - - - -
Revaluation loss (W-5) (55) - - - -
Disposals - (100) - - -
Closing 350 100 165 20 90
Acc. Depreciation
Opening - - - - -
Amortisation 45 (W-5) 17.5 (W-4) 2.8 (W-3) 2 (W-7) -
Transferred (45) - - - -
Disposals - (7.5) - - --
Closing - (10) (2.8) (2) -
Acc. Impairment
Opening - - - - -
Impairment loss - - - - 18 (W-)
Closing (18)
WDV as on 30.06.18 350 90 162.2 18 72

Useful life 10 10 10 10 N/A

Amortisation method Straight line Straight line Straight line Straight line N/A
Measurement Model Revaluation Cost Cost Cost N/A

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment 1.950 Fair value net assets (200 + 1,545) 1,745
Revaluation Surplus – R & D 95
Revaluation Surplus – Customer List 20
1,860
Goodwill (bal.) 90

(W-2)
Research and development (12 + 48 + 6 + 4) 70

(W-3)
Amortisation on R & D Product (95 + 70) = 165/10 x 2/12 2.8

67
CHAPTER-1 IAS 38: Intangible Assets

(W-4) Amortisation Software

- on additions (100/10) 10
- on disposals (100/10 x 9/12) 7.5
17.5

(W-5) Calculation of revaluation surplus and Amortisation of License

Date Description License Rev. Surplus SOCI(P/L)
01.07.17 Opening 450 30
30.06.18 Amortisation (450/10) : (30/10) (45) (3)
30.06.18 WDV 405 27
30.06.18 Revaluation loss (bal.) (55) (27) (28)
30.06.18 Revalued amount 350 - (28)

(W-6)
Impairment loss of Goodwill (90 × 20%) 18

(W-7)
Amortisation of Customer list (20/10) 2

Note: In adjustment (iv) AL Customer list F.V is ignored because internally generated. Customer list cannot be
recorded as an intangible asset. It is important to mention here that ML Customer list is recorded as an
intangible asset because it is purchased Customer list. (Meeting recognition criteria as per IAS -38)

Answer # 07:
Sunshine Limited
Year ended 30 June 2017
Amount to be recognised in SOFP
Rs. in ‘million’
Intangibles – Licenses (170 + 300 + 65 + 55) (W-1) 590
Revaluation Surplus (W-1) 93

Amount to be recognised in profit and loss

Rs. in ‘million’
Amortization (20 + 23 + 15 + 5) (W-1) 63
Revaluation loss (10 + 10) (W-1) 20

(W-1)
Date Description A B C D
01.07.16 Cost 200 230 90 60
30.06.17 Amortisation (200/10) : (230/10): (90/6) : (60/12) (20) (23) (15) (5)
30.06.17 WDV 180 207 75 55
30.06.17 Revaluation surplus/(loss) (bal.) (10) 93 (10) -
30.06.17 Revalued amount 170 300 65 N/A
D will not be revalued as it has no active market.

68
CHAPTER-1 IAS 38: Intangible Assets

(W-2) Legal life and useful life

Legal life 10 10 15* 15*
Useful life 12 Indefinite 6 12
Lower of above 10 10 6 12
*As renewal cost is insignificant so renewal period is considered while calculating legal life.

Answer # 08:
International Associates limited
Notes to the Financial Statements
For the year ended 30 June, 2016
9. Intangibles
Brands Software License Development Total
(W-4) (W-2) (W-3) (W-1)
---------------------------------- Rs. in “million” ----------------------------------
Cost
Opening 200 80 15 - 295
Additions - 120 - 30 150
Disposals - (80) - - (80)
Closing 200 120 15 30 365
Acc. Amortisation
Opening 40 48 - - 88
Amortisation 20 15 0.75 0.75 36.5
Disposals - (60) - - (60)
Closing (60) (3) (0.75) (0.75) (64.5)
WDV (30.06.06) 140 117 14.25 29.25 300.5

Useful life 10 10 10 10
Straight Straight Straight Straight
Amortisation method
line line line line

(W-1) Production process (adj. ii)

Development expenditure to be capitalized ((45/9) × 6) 30
Amortisation expense ((30/10) × 3/12) 0.75

(W-2) ERP Software (adj. iii)

Cost of asset (115+5) (It is assumed that sales tax is non-refundable) 120
Amortisation expense
ERP Software
Amortisation expense ((120/10) × 3/12) 3
Old software
Amortisation expense ((80/5) × 9/12) 12
Total amortization (12 + 3) 15
Disposal Entry for old software which has become redundant:
Acc. Amortization (48 + 12) 60
P/L (bal.) 20
Software 80

69
CHAPTER-1 IAS 38: Intangible Assets

(W-3): License (adj. v)

Amortisation expense ((15/10) × 6/12) 0.75
(W-4): Brands
Amortisation expense (200/10) 20

Answer # 09:
Opal Limited
Accounting treatment for research and development expenses
Development cost recognition as Intangible asset:
Since the new product met all the criteria for the development of a product, an intangible asset should be
recognized at Rs. 13 million (12 + 0.4 + 0.6) as detailed under:
o Cost of Rs. 12 million incurred daring the development phase that is 1 July 2014 to 31 December 2014.
o Depreciation of Rs. 0.4 million (4.0/5 x 0.5) on laboratory equipment for the development phase of six
months from 1 July 2014 to 31 December 2014
o Cost of trial run amounted to Rs. 0.6 million

Amortization of intangible asset:

Since the product has a shelf life of 10 years, the amortization expense amounting Rs.0.65 million (13/10 × 6/12)
should be charged to profit and loss account for the period of six months i.e., 1 January to 30 June 2015.

Laboratory equipment cost recognition as tangible asset:

Laboratory equipment cost should be capitalized as a tangible asset as it is having useful life more than one year
and to be depreciated over its useful life of five years.

Research and other costs:

(i) lAS-38 does not allow capitalization of costs pertaining to research work. Therefore, these costs should
be charged to profit and loss account in the period in which they are incurred. However, research cost of
Rs. 8 million, and depreciation for the research phase of Rs. 0.4 million (4/5 x 0.5) pertained to the last
year, therefore, comparative figures for the year ended 30 June 2014 should be restated and retained
earnings be adjusted for the given amounts.
(ii) Cost for training of staff is also not allowed for capitalization and should be charged to profit and loss
account for the year ended 30 June 2015.
(iii) Depreciation of Rs. 0.4 million on laboratory equipment’s for the period from the commencement of the
commercial production i.e., 1 January to 30 June 2015 should charged to profit and loss account for the
year ended 30 June 2015.

Answer # 10:
(i) Costs of developing the new vaccines should be capitalized as: "intangible assets" because:
• It is probable that future economic benefits i.e., sale of Rs. 300 million per annum for next five years
and sales of Rs. 80 million per annum for indefinite period, are attributable to the vaccines and will
flow to the EPL.
• The cost of the asset can be measured reliably i.e., Rs. 160 million and Rs. 120 million for A & B
respectively.

70
CHAPTER-1 IAS 38: Intangible Assets

Vaccine A should be amortized over its commercial life i.e., five years.
Since there is an indefinite useful life of Vaccine B, it should not be amortized. Instead, EPL should test the
intangible asset for impairment by comparing its recoverable amount with its carrying amount.
(ii) Advertising and promotional costs should be recognised as an expense when incurred.
However, the advertising expense amounting to Rs. 4 million (6 million × 4 months + 6 months) should be
recognized as prepayment.
(iii) Although well trained staff adds value to a business, IAS 38 prohibits the capitalization of training costs.

Answer # 11:
(a)
(i) 01 January 2012 (Initial recognition)
IAS-38 allows the recognition of an identifiable non-monetary assets without physical substance as
intangible assets, subject to fulfillment of the following conditions:
• It is probable that expected future economic benefits that are attributable to the asset flow to the
entity.
• The cost of the assets can be measured reliably.
Since rights acquired by TFL meet the above conditions, it should recognize the right to intangible asset
which should initially be measured at cost.
(ii) 31 December 2012 (Subsequent to initial recognition)
i. IAS-38 permits an entity to adopt the cost or revaluation model as its accounting policy.
ii. The revaluation model can only be adopted if intangible assets are traded in an active market. As the
rights cannot be sold, the revaluation model cannot be used.
iii. The cost model requires intangible assets to be carried at cost less accumulated amortization and
accumulated impairment losses.
iv. Amortization shall begin from 01 January, 2012 when it is available for use.
v. Residual value of intangible assets with finite useful life shall be assumed to be zero.
vi. IAS-38 includes renewal period in useful life if there is evidence to support renewal without
significant cost. Therefore, amortization should be made systematically over the useful life of
intangible assets i.e., 10 years.
vii. An impairment review shall be undertaken at year-end because the failure to achieve the desired
sales is an indication that the new products may not generate required economic benefits and
therefore, the value of the intangible may be impaired.
(b)
Description Dr. Cr.
Intangible asset 2,000,000
Bank 2,000,000
Intangible asset 2,500,000
Research expense 700,000
Bank 3,200,000
Amortisation expense 150,000
Accumulated amortisation 150,000
(2,000,000 + 2,500,000) = 4,500,000/5 x 2/12

71
CHAPTER-1 IAS 38: Intangible Assets

Answer # 12:
(a)
Following are the criteria that should be used while recognizing intangible assets from research and
development work.
(i) No intangible asset arising from research shall be recognized.
(ii) An intangible arising from development shall be recognized if, and only if, an entity can demonstrate all
of the following:
• The technical feasibility of completing the intangible asset so that it will be available for use or sale.
• Its intention to complete the intangible asset and use or sell it.
• Its ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic benefits. Among other things, the
entity can 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.
• The availability of adequate technical, financial and other resources to complete the development
and to use or sell the intangible asset.
• Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.

(b) Raisin International (Accounting treatment)

(i) Since the product met all the criteria for the development of the product, it should be recognized as an
intangible in the statement of financial position (SOFP) of the company.
However, RI should capitalize the development work and trial run cost i.e., Rs. 9.80 million (Rs. 9 million +
0.80 million) as intangible asset. IAS-38 does not allow capitalization of cost relating to the research work
and training of staff.
Since the product has a useful life of 7 years, the amortization expense amounting to Rs. 0.35 million (Rs.
9.80 million + 7 years × 3/12 should be recorded in the statement of comprehensive income (SOCI).

(ii) This purchasing of right to manufacture should be recognized as an intangible in the SOFP because:
• it is for an established product which would generate future economic benefits.
• cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortized over its useful life. The useful life will be shorter
of its actual life (i.e., 10 years) and its legal life (i.e., 5 years). The amortization to be recorded in SOCI is
Rs. 2.83 million (Rs. 17 million + 5 × 10/12).

(iii) The acquired brand should be recognized as an intangible in the SOFP because acquisition price is a
reliable measure of its value. Tie amortization to be recorded in SOCI is Rs. 0.12 million (Rs. 2 million + 10
years × 7/12).
The carrying value of the intangible asset should be increased by Rs. 3 million in the SOFP.

(iv) Since there is an indefinite useful life of the intangible assets, it should not be amortized. Instead, RI
should test the intangible asset for impairment by comparing its recoverable amount with its carrying
amount.

72
CHAPTER-1 IAS 38: Intangible Assets

Answer # 13:

(a) Requirements of IAS relating to Amortisation

(i) The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic
basis over its useful life.
(ii) Amortization shall begin when the asset is available for use
(iii) Amortization shall cease at the earlier of the date that the asset is classified as held for sale and the date
that the asset is derecognised.
(iv) The amortization method used shall reflect the pattern in which the asset's future economic benefits are
expected to be consumed by the entity.
(v) The amortization charge for each period shall be recognised in statement of profit or loss.

(b) Note for students:

As per the requirement of question ledger accounts of goodwill and brand are required, therefore
accumulated amortisation and accumulated impairment accounts are not prepared and these amounts
are directly credited in asset accounts.
Dr. Goodwill Cr.
01.01.07 Cost of Investment 270 31.12.07 Impairment loss 50
31.12.07 c/d 220
270 270
01.01.08 b/d 220
31.12.08 c/d 220
220 220

Dr. Brand account at book value Cr.

01.01.07 Purchase of brand 100 31.12.07 Amortisation (100/10) 10
31.12.07 c/d (bal.) 90
100 100
01.01.08 b/d 90 31.12.08 Amortisation (100/10) 10
31.12.08 Impairment loss 13.5
31.12.08 c/d 66.5
90 90

(W-1)
Dr. Cost of Investment (For calculating Goodwill) Cr.
Investment
1,350 Fair value net assets 1,100
(50 million shares × 90% × Rs. 30/share)
× Rs. 30/share)
NCI (Prop. share) (1,200 x 10%) 120 Revaluation surplus - Recognition of brand 100
1,200
Goodwill (bal.) 270
1,470 1,470`

73
CHAPTER-1 IAS 38: Intangible Assets

Entries for impairment amortisation for understanding only

Date Particulars Dr. Cr.
31.12.07 Impairment loss 50
Goodwill 50
(Good will impaired)
31.12.07 Amortization 10
Brand 10
(Recording of amortisation)
31.12.08 Amortization 10
Brand 10
(Recording of amortisation)
31.12.08 Impairment loss 13.5
Brand 13.5
(Recording of impairment loss)

Answer # 14:

Assuming each activity performed in development phase fulfills all conditions of capitalization as per IAS-38.
i. Tools are purchased normally in "Development Phase" so these will be capitalized.
ii. Cost of furnishing new laboratory is a purchase of fixed asset (tangible asset) and shall be depreciated.
Depreciation related to research phase will be expensed out and depreciation related to development
phase shall be capitalized.
iii. Salaries paid to research associates shall be charged to profit and loss account because it is incurred in
research phase.
iv. Cost of conducting tests is ultimately done in final products so it should be capitalized.
v. Remuneration paid to Mr. Talat on successful completion of research will be expensed out as all expense
incurred in research phase are charged to income statement.
vi. Cost of manufacturing the samples is the part of development phase so shall be capitalized.
vii. Material imported for commercial production shall be initially included in stock and then it will charged
to "Cost of goods sold" in the year of sale.
viii. Final payment to Mr. Talat shall be capitalized as it is given after completion of project i.e., paid in
development phase.
ix. Product launching expense is a selling expense so shall be charged to profit and loss.

Answer # 15:

a) Amount to be expensed out

Rs. in “000”
Cost of research scientist stay in U.K including fee etc. 3,500
Fee for research report 500

b) Amount to be capitalized:
Rs. in “000”
Designing cost of process after feasibility study 4,000
Patent registration cost including attorney fee etc. 250

74
CHAPTER-1 IAS 38: Intangible Assets

Answer # 16:

i. Personnel cost:
If personnel is involved in the construction of an intangible asset (which fulfill the specified condition)
then its costs will be capitalized, otherwise it will be charged to the profit & loss Account.

ii. Purchase of intangible:

Purchased intangibles are capitalized because these are separately acquired and fulfill all of the
conditions for recognition because:
• These will generate probable future economic benefits to the enterprise and
• their costs are reliably measured

Answer # 17:

The Finance Manager,

Hotel Sea view
Dear Sir,
My view in respect of matters regarding research and development expenditure is given below in the light of
IAS-38:
(1) The amount of research cost is charged as an expense in the period in which it is incurred. So, Rs.
1,200,000 should be charged to profit and loss account.
(2) Contribution to research foundation amounting to Rs. 200,000 is for pure research. So, it should also be
charged in the profit and loss account.
(3) Research and development related to a patent granted for manufacture and sale of a product should be
charged as an expense in the period in which it was incurred, however the development cost may be
capitalized if the enterprise can fulfill the following conditions:
i. Product is technically feasible
ii. Its intention is to complete and use or sell it.
iii. It has ability to use or sell it.
iv. There exists future market for the product or its internal usefulness
v. Cost attributable to intangible asset can be measure reliably.
(4) Cost incurred in acquisition of specialized knowledge is research cost. Therefore, this expenditure
amounting to Rs. 80,000 should be charged to profit and account.

If you need more information, please contact.

Yours truly,

75
CHAPTER-1 IAS 38: Intangible Assets

Answer # 18:

Tulip Limited
Profit Total assets Total liabilities
Description
---------- Rs. in million ----------
As per question 398 2,700 1,620
Costs incurred before capitalisation criteria:
Depreciation (Rs. 360/5 years x 2/12) (12) (12)
Other costs (Rs. 332 x 2/9 months) (74) (74)
Expenses after asset is in use:
Depreciation (Rs. 360 /5 years x 3/12) (18) (18)
Amortisation (Rs. 300* /10 years x 3/12) (7.5) (7.5)
Revised amounts 286.5 2,588.5 1,620

*Development asset capitalised at Rs. 42m + 258m = Rs. 300m calculated as given below:
Depreciation Capitalised Rs. 360m/5 years x 7/12 = Rs. 42m
Other costs Capitalised Rs. 332m x 2/9 months = Rs. 258m
Costs other than equipment = Rs. 692m – 360m = Rs. 332m

76
CHAPTER-1 IAS 38: Intangible Assets

ICAP MULTIPLE CHOICE QUESTIONS (MCQs)

01. Power Limited has spent Rs. 200,000 researching new cleaning chemicals in the year ended 31 December
2020. They have also spent Rs. 400,000 developing a new cleaning product which will not go into
commercial production until next year. The development project meets the criteria laid down in IAS 38
Intangible Assets.
How should these costs be treated in the financial statements of Power Limited for the year ended 31
December 2020?
(a) Rs. 600,000 should be capitalised as an intangible asset on the statement of financial position.
(b) Rs. 400,000 should be capitalised as an intangible asset and should be amortised; Rs.200,000 should
be written off to the statement of profit or loss.
(c) Rs. 400,000 should be capitalised as an intangible asset and should not be amortised; Rs. 200,000
should be written off to the statement of profit or loss.
(d) Rs. 600,000 should be written off to the statement of profit or loss

02. Which TWO of the following items below could potentially be classified as intangible assets?
(a) purchased brand name
(b) training of staff
(c) internally generated brand
(d) licences and quotas

03. Star Limited has provided the following information as at 31 December 2016:
(i) Project A – Rs. 500,000 has been spent on the research phase of this project during the year.
(ii) Project B – Rs. 800,000 had been spent on this project in the previous year and Rs. 200,000 this year.
The project was capitalised in the previous year however, it has been decided to abandon this project
at the end of the year.
(iii) Project C – Rs. 1,000,000 was spent on this project this year. The project meets the criteria of IAS 38
and is to be capitalised.
Which of the following adjustments will be made in the financial statements as at 31 December 2016?
(a) Charge to profit or loss Rs. 700,000 and net increase in non-current assets by Rs. 1,000,000
(b) Charge to profit or loss Rs. 1,500,000 and net increase in non-current assets by Rs. 200,000
(c) Charge to profit or loss Rs. 1,300,000 and net increase in non-current assets by Rs. 1,800,000
(d) Charge to profit or loss Rs. 1,300,000 and net increase in non-current assets by Rs. 2,000,000

04. Which of the following statements concerning the accounting treatment of research and development
expenditure are true, according to IAS 38 Intangible Assets?
(i) Research is original and planned investigation undertaken with the prospect of gaining new
knowledge and understanding.
(ii) Development is the application of research findings.

77
CHAPTER-1 IAS 38: Intangible Assets

(iii) Depreciation of plant used specifically on developing a new product can be capitalised as part of
development costs.
(iv) Expenditure once treated as an expense cannot be reinstated as an asset.
(a) (i), (ii) and (iii) (b) (i), (ii) and (iv)
(c) (ii), (iii) and (iv) (d) All of the above

05. Which of the following should be included in a company’s statement of financial position as an intangible
asset under IAS 38 Intangible Assets?
(a) Internally developed brands
(b) Internally generated goodwill
(c) Expenditure on completed research
(d) Payments made on the successful registration of a patent.

06. Which TWO of the following criteria must be met before development expenditure is capitalised according
to IAS 38 Intangible Assets?
(a) the technical feasibility of completing the intangible asset
(b) future revenue is expected
(c) the intention to complete and use or sell the intangible asset
(d) there is no need for reliable measurement of expenditure

07. Which of the following shall be capitalised as intangible asset in financial statements?
(a) Rs. 400,000 developing a new process which will bring in no revenue but is expected to bring
significant cost savings
(b) Rs. 400,000 developing a new product. During development a competitor launched a rival product
and now the entity is hesitant to commit further funds to the process
(c) Rs. 400,000 spent on marketing a new product which has led to increased sales of Rs. 800,000
(d) Rs. 400,000 spent on designing a new corporate logo for the business

08. Which of the following CANNOT be recognised as an intangible non-current asset in Ghalib Limited (GL)’s
consolidated statement of financial position at 30 September 2021?
(a) GL spent Rs. 132 million developing a new type of product. In June 2021 management worried that it
would be too expensive to fund. The finances to complete the project came from a cash injection
from a benefactor received in November 2021.
(b) GL purchased a subsidiary during the year. During the fair value exercise, it was found that the
subsidiary had a brand name with an estimated value of Rs. 50 million but had not been recognised
by the subsidiary as it was internally generated.
(c) GL purchased a brand name from a competitor on 1 November 2020, for Rs. 65 million.
(d) GL spent Rs. 21 million during the year on the development of a new product, after management
concluded it would be viable in November 2020. The product is being launched on the market on 1
December 2021 and is expected to be profitable.

78
CHAPTER-1 IAS 38: Intangible Assets

09. Which of the following could be classified as development expenditure in Mars Limited’s statement of
financial position as at 31 March 2020 according to IAS 38 Intangible Assets?
(a) Rs. 120,000 spent on developing a prototype and testing a new type of propulsion system. The
project needs further work on it as the system is currently not viable.
(b) A payment of Rs. 50,000 to a local university’s engineering faculty to research new environmentally
friendly building techniques.
(c) Rs. 35,000 developing an electric bicycle. This is near completion and the product will be launched
soon. As this project is first of its kind it is expected to make a loss.
(d) Rs. 65,000 developing a special type of new packaging for a new energy-efficient light bulb. The
packaging is expected to reduce Mars Limited distribution costs by Rs. 35,000 a year.

10. Which TWO of the following factors are reasons why key staff cannot be capitalised as an intangible asset
by an entity?
(a) They do not provide expected future economic benefits
(b) They cannot be controlled by an entity
(c) Their value cannot be measured reliably
(d) They are not separable from the business as a whole

11. Which of the following items should be recognised as intangible assets?

(i) Patent for new drug
(ii) Licence for new vaccine
(iii) Specialist training courses
(a) (i) and (ii) (b) (ii) and(iii)
(c) (i) and (iii) (d) (i) only

12. Home Limited (HL) has acquired a subsidiary Stairs Limited (SL) in the current year. SL has a brand which
has been reliably valued by HL at Rs. 500,000, and a customer list which HL has been unable to value.
Which of these describes how HL should treat these intangible assets of SL in their consolidated Financial
Statements?
(a) They should be included in goodwill.
(b) The brand should be capitalised as a separate intangible asset, whereas the customer list should be
included within goodwill.
(c) Both the brand and the customer list should be capitalised as separate intangible assets.
(d) The customer list should be capitalised as a separate intangible asset, whereas the brand should be
included within goodwill.

13. IAS 38 gives examples of activities that would be regarded as research and therefore not eligible for
recognition as an intangible asset.
Which one of the following would be an example of research costs?

79
CHAPTER-1 IAS 38: Intangible Assets

(a) The design and construction of chosen alternative products or processes

(b) The design of pre-production prototypes and models
(c) The design of possible new or improved product or process alternatives
(d) The design, construction and operation of a pilot plant

14. Which of the following statements relating to intangible assets is true?

(a) All intangible assets must be carried at amortised cost or at an impaired amount, they cannot be
revalued upwards.
(b) The development of a new process which is not expected to increase sales revenues may still be
recognised as an intangible asset.
(c) Expenditure on the prototype of a new engine cannot be classified as an intangible asset because the
prototype has physical substance.
(d) Impairment losses for a cash generating unit are first applied to goodwill and then to other intangible
assets before being applied to tangible assets.

15. Hali Limited is developing a new product and expects to be able to capitalise the costs. Which one of the
following would preclude capitalisation of the costs?
(a) Development of the product is not yet complete.
(b) No patent has yet been registered in respect of the product.
(c) No sales contracts have yet been signed in relation to the product.
(d) It has not been possible to reliably allocate costs to development of the product.

16. During the year to 31 December 2018 Faiz Limited (FL) incurred Rs. 200,000 of development costs for a new
product. In addition, FL spent Rs. 60,000 on 1 January 2018 on machinery specifically used to help develop
the new product and Rs. 40,000 on building the brand identity.
Commercial production is expected to start during 2019.
The machinery is expected to last 4 years with no residual value.
What value should be included within Intangible Assets in respect of the above in FL’s Statement of
Financial Position as at 31 December 2018?
(a) Rs. 200,000 (b) Rs. 300,000
(c) Rs. 260,000 (d) Rs. 215,000

17. A company had Rs. 20 million of capitalised development expenditure at cost brought forward at 1 October
2017 in respect of products currently in production and a new project began on the same date.
The research stage of the new project lasted until 31 December 2017 and incurred Rs. 1.4 million of costs.
From that date the project incurred development costs of Rs. 800,000 per month.
On 1 April 2018 the directors became confident that the project would be successful and yield a profit well
in excess of costs. The project was still in development at 30 September 2018. Capitalised development
expenditure is amortised at 20% per annum using the straight-line method.

80
CHAPTER-1 IAS 38: Intangible Assets

What amount will be charged to profit or loss for the year ended 30 September 2018 in respect of research
and development costs?
(a) Rs. 1,400,000 (b) Rs. 3,800,000
(c) Rs. 7,800,000 (d) Rs. 8,600,000

18. At 30 September 2019 Shakir Limited (SL)'s trial balance showed a brand at cost of Rs. 30 million, less
accumulated amortisation brought forward at 1 October 2018 of Rs. 9 million. Amortisation is based on a
ten-year useful life.
An impairment review on 1 April 2019 concluded that the brand had a value in use of Rs. 12 million and a
remaining useful life of three years. However, on the same date SL received an offer to purchase the brand
for Rs. 15 million.
What should be the carrying amount of the brand in the statement of financial position of SL as at 30
September 2019?
(a) Rs. 12,500,000 (b) Rs. 39,000,000
(c) Rs. 15,000,000 (d) Rs. 12,000,000

19. Down Limited (DL) owns a pharmaceutical business with a year-end of 30 September 2014. DL commenced
the development stage of a new drug on 1 January 2014.
Rs. 40,000 per month was incurred until the project was completed on 30 June 2014, when the drug went
into immediate production. The directors became confident of the project’s success on 1 March 2014. The
drug has an estimated life span of five years and time apportionment is used by DL where applicable.
What amount will DL charge to profit or loss for development costs, including any amortisation, for the
year ended 30 September 2014?
(a) Rs. 40,000 (b) Rs. 80,000
(c) Rs. 88,000 (d) Rs. 160,000

20. Apollo Limited (AL) carries out research and development. In the year ended 30 June 2015 AL incurred total
costs in relation to project M of Rs. 750,000, spending the same amount each month up to 30 April 2015,
when the project was completed. The product produced by the project went on sale from 31 May 2015.
The project had been confirmed as feasible on 1 January 2015, and the product produced by the project
was expected to have a useful life of five years.
What is the carrying amount of the development expenditure asset as at 30 June 2015?
(a) Rs. 225,000 (b) Rs. 290,000
(c) Rs. 295,000 (d) Rs. 300,000

21. An entity purchased patent for its product A in 2014 for 20 years. In 2019, the entity purchased patent of a
competing product for 20 years to eliminate competition for product A. However, the entity does not
intend to manufacture the competing product. The cost of purchasing second patent for competing
product should be:

81
CHAPTER-1 IAS 38: Intangible Assets

(a) expensed out in 2019

(b) capitalized and amortized over 20 years
(c) capitalized and amortized over 15 years
(d) capitalized and only assessed for impairment at year end

22. Computer hardware and related operating system, which is an integral part of the computer hardware, are
treated under:
(a) IAS 16 as a combined asset
(b) IAS 38 as a combined asset
(c) IAS 16 for computer hardware and IAS 38 for operating system
(d) IAS 16 or IAS 38 at the option of the entity

23. An entity acquired a patent for a period of ten years at cost of Rs. 90 million. The patent can be further
renewed for another five years at renewal cost of Rs. 1 million. The entity estimated that expected period
of cash inflows is twelve years from acquisition date. The useful life of patent in years is:
(a) Five (b) Ten
(c) Twelve (d) Fifteen

82
CHAPTER-1 IAS 38: Intangible Assets

ICAP MULTIPLE CHOICE QUESTIONS (MCQs) SOLUTIONS

01. (c) • Rs. 200,000 is research and should be written off as incurred.
Research expense (P/L) 200,000
Bank 200,000
• Rs. 400,000 should be capitalised as a development asset but is not
amortised until commercial production begins.
Development cost (Asset) 400,000
Bank 400,000

02. (a) & (d) Training cannot be capitalised as a firm cannot control the future economic benefits
by limiting the access of others to the staff.
Internally generated brands cannot be capitalised

03. (b) Research expense (P/L) 200,000

Bank 200,000
Expense (P/L) 1,000,000
Bank 200,000
Development cost (Asset)1 800,000

Development cost (Asset)2 1,000,000

Bank 1,000,000

Net increase in Assets = 2 – 1 = 1,000,000 – 800,000 = 200,000

04. (d) All the statements are true.

05. (d) Internally generated intangible assets cannot be recognised, and research costs are
written off as incurred.

06. (a) & (c) There is no need for revenue, there needs to be probable economic benefits which
may come in the form of cost savings as well as revenue.

07. (a) Cost savings are inflow of economic benefits as well.

Asset provides economic benefits.
Increase in Revenue/Decrease in costs

83
CHAPTER-1 IAS 38: Intangible Assets

08. (a) The finance was only available after the year end. Therefore, the criteria of
recognising an asset were not met, as the resources were not available to complete
the project.
Even though the brand is internally generated in the subsidiary’s accounts, it can be
recognised at fair value for the group. Item (b) can be recognised as a purchased
intangible and item (d) meets the criteria for being capitalised as development costs.

09. (d) Item (a) cannot be capitalised because it does not meet all the criteria as it is not
viable. Item (b) is research and cannot be capitalised. Item (c) cannot be capitalised
because it does not meet all the criteria as it is making a loss.

10. (b) & (c) Key staff cannot be capitalised as firstly they are not controlled by an entity.
Secondly, the value that one member of key staff contributes to an entity cannot be
measured reliably.

11. (a) The training courses should be charged to profit or loss.

12. (b) The brand can be measured reliably, so this should be accounted for as a separate
intangible asset on consolidation. The customer list cannot be valued reliably, and so
will form part of the overall goodwill calculation. It will be subsumed within the
goodwill value.

13. (c) This activity is still at the research stage.

14. (b) A new process may produce benefits (and therefore be recognised as an asset) other
than increased revenues, e.g. it may reduce costs.

15. (d) In order for capitalisation to be allowed it is not necessary for development to be
completed, patents to be registered or sales contracts signed. However, an
intangible asset can only be recognised if its cost can be reliably measured.

16. (d) The development costs of Rs. 200,000 can be capitalised, as can the depreciation on
the asset while the project is being developed. The asset is used for a year on the
project, so the depreciation for the first year (Rs. 60,000/4 years = Rs. 15,000) can be
added to intangible assets. The Rs. 40,000 is an internally generated brand and
cannot be capitalised.

84
CHAPTER-1 IAS 38: Intangible Assets

17. (c)
Rs.
Research costs 1,400,000
Expensed development Jan-Mar (800,000 × 3) 2,400,000
Depreciation on capitalised amount b/d (20m × 20%) 4,000,000
7,800,000
Note that no depreciation is charged on the new project as it is still in development.

Research expense (P/L) 1,400,000

Bank 1,400,000
Development expense (P/L) 2,400,000
Bank (800,000 x 3) 2,400,000
Depreciation (P/L) 4,000,000
Acc. Depreciation (20m x 20%) 4,000,000

18. (a)
Rs.
Carrying amount as on 30.09.19 12,500,000
Impairment Loss (4,500,000)
Recoverable amount (fair value - costs of disposal) (W-1) 15,000,000

(W-1) Recoverable amount

Higher of; 15,000,000
Fair Value less cost to sell 15,000,000
Value in Use 12,000,000

(W-2) Carrying amount as on 30.09.19

Rs.
Carrying amount as on 01.04.19 15,000,000
Depreciation (15,000,000/3 x 6/12) (2,500,000)
Carrying amount as on 30.09.19 12,500,000

19. (c)
Rs.
Write off to 1 Jan 2014 to 28 Feb 2014 (2 x 40,000) 80,000
Amortisation 160,000/5 years x 3/12 (July to Sep) 8,000
88,000
Capitalise March to June = 4 x 40,000 = 160,000

85
CHAPTER-1 IAS 38: Intangible Assets

20. (b) The costs of Rs. 750,000 relate to ten months of the year (up to April 2015).
Therefore, the costs per month were Rs. 75,000. As the project was confirmed as
feasible on 1 January 2015, the costs can be capitalised from this date. So, four
months of these costs can be capitalised = Rs. 75,000 × 4 = Rs. 300,000.
The asset should be amortised from when the project is complete and available for
use, so two month’s amortisation should be charged to 30 June 2015. Amortisation
is (Rs. 300,000/5) × 2/12 = Rs. 10,000. The carrying amount of the asset at 30 June
2015 is Rs. 300,000 – Rs. 10,000 = Rs. 290,000.
Cost of Asset Rs.
Development cost (750,000/10 x 4) 300,000
Depreciation expense (300,000/5 x 2/12) (10,000)
Carrying amount 290,000

21. (c) capitalized and amortized over 15 years

22. (a) Patent for Product A was acquired in 2014 for 20 Years. After 5 Years i.e., in 2019, it
has remaining useful life of 15 Years. In 2019, entity acquired patent of competing
product for 20 Years (legal life). However, entity can use patent of competing project
only for 15 Years (Useful life) because the patent for product A has remaining useful
life of 15 Years. As Useful life of competing product’s patent i.e., 15 Years is shorter
than its Legal life i.e., 20 Years.
So, it should be recognised and amortised over 15 Years.

23. (c) The renewal shall be taken into account as the cost of renewal are insignificant.
However, the useful life shall not exceed the period of use intended by
management.
Legal life vs Useful life
(10 + 5) vs 12
15 vs 12
Useful life is shorter so, patent should be amortised over 12 Years.

86