TOPIC 1

INTANGIBLE ASSETS
(part3)
 Internally Generated Intangibles

Internally generated intangible

assets identified by MFRS 138

Internally generated goodwill

Research and Development Costs
 Goodwill

❑ MFRS 138 prohibited the recognition of internally generated goodwill as

goodwill is not an identifiable resource controlled by the entity and its costs
cannot be reliably measured
❑ In business combination, goodwill is the difference between the purchase
price and the fair value of the net assets of the entity acquired.
 Internally generated intangible assets identified
by MFRS 138

❑ Internally generated brands, mastheads, publishing titles, customer lists

and items similar in substance cannot be recognised as intangible assets.
❑ Expenditure on these intangibles cannot be distinguished from the cost of
developing the business as whole.
❑ Intangibles that were never recognised as assets cannot be recognised as
part of an intangible at a later date.
 Research and Development costs

❑ Intangible assets that may arise from research and development

expenditure include patents, computer software, copyrights and
trademarks.
❑ Entities will expense research cost because it is not probable that future
economic benefits that are attributable to the asset will flow to the entity.
❑ Other expenditure on intangibles will be recognized as an intangible asset if
the recognition criteria of para.21 (MFRS 138) are met.
 Research and Development costs (Con’d)

❑ MFRS 138 provides the following examples of research activities:-

a) Activities aimed at obtaining new knowledge
b) The search for application of new research findings or other
knowledge
c) The search for or evaluation of product or process alternatives; and
d) The formulation and design of possible new or improved product or
process alternatives.
Costs incurred by an entity during the research phase are recognized as
expense in the period they are incurred.
 Research and Development costs (Con’d)

❑ Example of development activities are:-

a) The design, construction and testing of pre-production prototypes and
models
b) The design of tools, jigs, moulds and dies involving new technology
c) The design, construction and operation of a pilot plant that is not of a
scale economically feasible for commercial production; and
d) The assessment of the commercial viability of a product or process
prior to commencement of commercial production or use.
Costs incurred during the development phase must be capitalized if they meet
the recognition criteria.
 Research and Development costs (Con’d)

■ Recognition Criteria

❑ Technically feasible to complete project – available for use or sale.

❑ Intention to complete – to use or sell.
❑ Ability to use or sell.
❑ How intangible asset will generate future economic benefits – e.g.
existence or market.
❑ Availability of adequate technical, financial and other resource to
complete and use or sell.
❑ Ability to measure attributable expenditure reliably.
■ Example 1.7

Some clinical studies suggest that the environment influences the problem of
nearsightedness. As a result, Focus Eye Bhd embarked on a project to
develop a new product, to slow down the progression of nearsightedness. In
the first year of the project, Focus Eye Bhd incurred RM600,000. Focus Eye
Bhd intended to recognize the cost as part of its intangible assets, even though
the outcome of the project is uncertain. Is the development expenditure
recognized as an intangible asset.
■ Answer

In order to recognize an item as an intangible asset, we must ensure that the

item meets the definition of intangible assets.

The development cost is considered as an identifiable non-monetary item as it

can be separated from the business as a whole.

The cost of related to the project can be measured reliably.

However, it is not probable to expect the future economic benefits to flow

to Focus Eye Bhd because the development project is still at an early stage.

Therefore, the development cost of RM600,000 cannot be recognized as an

intangible asset since the future economic benefit criterion is not met.
■ Example 1.8

An entity is developing a new computer software. During year 2014, the

expenditure incurred was RM120,000 of which RM100,000 was incurred
before 1 October 2014 and the balance was incurred from October to
December 2014.
Only on 1 October was the entity able to demonstrate that the project can meet
all the criteria for recognition as an intangible asset.
In year 2015, the cost incurred was RM60,000. At the end of 2015, the
recoverable amount was RM75,000.

Required:
Discuss the accounting treatment.
■ Answer

Year 2014
The RM100,000 incurred before 1 October 2014 is written off as expense. The
RM20,000 incurred after 1 October 2014 is recognized as an asset.

Year 2015
RM60,000 is recognized and the carrying amount of the asset is RM80,000.
the RM100,000 written off is not reinstated.
Since the recoverable amount is RM75,000, there is an impairment loss of
RM5,000 which is charged in the statement of profit or loss.
The amount disclosed in the statement of financial statement is RM75,000.
■ Example 1.9
B is developing a new product.
During financial year 31 December 2019:
 The total related expenditures in developing the new product was RM850,000
 However, RM350,000 of these expenditure were incurred before 1 July 20x1. There was
evidence on 1 July 20x1 that the product developed met the criteria for recognition as an
intangible asset
During financial year end 31 December 2020:
 Additional development costs incurred was RM400,000. The recoverable amount of the
development costs was estimated to be RM800,000. The criteria of internally generated
intangible asset continue to be met.

Required:
Discuss the accounting treatment of the above development costs for the years ended 31
December 2019 and 2020.
■ Answer

Year 2019
The RM350,000 incurred is written off as expense.
The amount recognized as intangible asset is RM500,000 (RM850,000-
RM350,000).

Year 2020
Development cost RM400,000 recognized as intangible asset.
Accumulated amount of development costs recognized as intangible asset is
RM900,000 (RM500,000 + RM400,000). As the recoverable amount of the
development costs was estimated to be RM800,000, the amount recognized is
limited to the recoverable amount i.e., RM100,000 (RM900,000 less
RM800,000) is recognized as impairment loss.
 Presentation of Intangible Assets in
Financial Statements
■ For each class of intangible assets, information to distinguish between internally
generated intangible assets and other intangible assets must be disclosed. This
information include:-
❑ Whether the useful lives are indefinite or finite, and if finite, the useful lives or the
amortization rates used;
❑ The amortization methods used for intangible assets within finite useful lives;
❑ The gross carrying amount and any accumulated amortization (aggregated with
accumulated impairment losses) at the beginning and end of the period;
❑ The line item(s) of the statement of comprehensive income in which any
amortization of intangible assets is included; and
❑ A reconciliation of the carrying amount at the beginning and end of the period,
showing additions, increases or decreases during the period resulting from
impairment losses recognized or reversed, and any amortization recognized during
the period.
 Presentation of Intangible Assets in
Financial Statements
■ An entity must also disclose;

❑ For an intangible asset that has an indefinite useful life, the carrying amount of that
asset and the reasons supporting the assessment of an indefinite useful life
❑ A description of the carrying amount, and remaining amortization period of any
individual intangible asset that is material to the entity’s financial statements
❑ The existence and carrying amounts of intangible assets whose titles are restricted,
and the carrying amounts of intangible assets pledged as security for liabilities.
❑ The amount of contractual commitments for the acquisition of intangible assets.
 Presentation of Intangible Assets in
Financial Statements
■ The entity must disclose the following for intangible assets that are accounted
for at revalued amounts;
❑ The effective date of the revaluation, the carrying amount of revalued
intangible assets, and the carrying amount that would have been
recognized had the revalued class of intangible assets been measured
after recognition, using the cost model for each class on intangible assets.
❑ The amount of the revaluation surplus that relates to intangible assets at
the beginning and end of the period.
❑ The methods and significant assumptions applied in estimating the assets’
fair values
■ Example 1.10

Focus Eye Bhd has the following intangible assets:

(a) A trade mark that is useful in distinguishing its new product, which was acquired in 2018 for
RM1,000,000. the trademark is renewable every ten years with minimal cost. All evidence
indicates that the trademark product will generate cash flows for an indefinite period of time.

(b) A patent for its new product, which was purchased for RM700,000 on 1 January 2018. it is
estimated that the useful life of the patent is seven years.

How should these intangible assets be treated?

■ Answer

(a) The trademark is regarded as having an indefinite life because it is

expected that the trademark product will generate cash flows for an
indefinite period of time. Therefore, the trademark will not be amortized.
However, the useful life of the trademark should be reviewed at each
reporting period, to determine whether the events and circumstances
continue to support an indefinite useful life assessment for the trademark.

(a) The patent is considered as having a finite life since it has a limited period
of time in generating net cash inflows. Therefore, the patent is amortized
on a systematic basis over its useful life of seven years.
 Statement of Financial Position as at 31 December 2018

Non Current Assets Note RM

Property, plant and equipment 9 xxx
Intangible asset 10 3,160,000

Statement of Profit and Loss for the year ended 31 December 2018

Note RM

Other expenses xx 240,000

■ Notes 10 – Intangible Assets

Balance as at 1 Balance as at
Addition
Jan 2018 31 Dec 2018
Cost
Trademark 1,000,000 1,000,000
Production rights 1,700,000 1,700,000
Branding righths 700,000 700,000

Balance as at 1 Balance as at
Addition
Jan 2018 31 Dec 2018
Accumulated
amortization
Trademark
Production rights 170,000 170,000
Branding righths 70,000 70,000

Balance as at 1 Jan Balance as at 31 Dec

2018 2018
Carrying amount
Trademark 1,000,000 1,000,000
Production rights 1,530,000
Branding righths 630,000
1,000,000 3,160,000