MFRS 138

Intangible Assets
MFRS 138 Intangible Assets covers identification, recognition,
measurement and presentation of intangibles.
Intangible assets are identifiable non-monetary assets that have no
physical substance.
Standard deals generally on intangibles (excluding goodwill) and
including internally generated intangibles classified as research and
development.
Intangibles

Intangibles must have the following qualities:

 Identifiability,
 Control, and
 Future economic benefit.

Identifiability
It is separable, i.e. capable of being separated or removed from the
entity and sold, licensed, entered or exchanged, either individually
or together with related contract, asset or liability; or
Arises from contractual or other legal rights.
Control
 Control is present if the entity has the power to obtain future
economic benefits flowing from the underlying resource and
restrict others from having access to those benefits.
 Legal rights that are enforceable in courts may indicate control.
 An entity may derive economic benefits from skilled workers;
market share and customer list but has no control over them.

Future Economic Benefit

 Future economic benefits may arise from the sale of products or
services, cost saving or renting of the asset.
 MFRS 138 requires an entity to assess the probability of future
economic benefits using reasonable and supportable assumptions
that represent management’s best estimate of the set of economic
conditions that will exist over the useful life of the asset.
 In assessing the degree of certainty attached to the flow of future
economic benefits greater weight should be given to external
evidence.
Initial recognition

An intangible is recognised when it meets:

 the definition of an intangible asset; and
 the recognition criteria which are:
 it is probable that the expected future economic benefits that
are attributable to the asset will flow to the entity; and
 the cost of the asset can be measured reliably.
Recognition of subsequent expenditure

Most subsequent expenditure are written off because:

 Maintenance
 the nature of intangible assets is such that there will not be
replacement of parts or additions to them.
 In addition, it is difficult to attribute the subsequent expenditure
to a particular intangible asset rather than the business as a
whole.

An intangible asset is recognised as a result of:

 Separate acquisition;
 Part of a business combination;
 Acquisition by way of a government grant;
 Exchange of assets; or
 Internally generated in limited circumstances
Measurement
 An intangible asset is measured initially at cost.

Separate acquisition
Costs comprise:
 Purchase price including incidental costs such
as taxes less trade discounts and rebates, and
 Any directly attributable cost of preparing the
asset for intended use.
Example
 TR nix entered into a contract to acquire the franchise for Healthy
Yogurt Ice Cream. Trnix has to pay RM1 million for the franchise
and recipe and can manufacture and sell the yogurt ice cream for
5 years. Additionally, Trnix has to have premises to manufacture
and sell the ice cream. Trnix rented the premises, and the
equipment and furniture were bought from the franchiser for
RM1.5 million. It has also incurred RM300,000 in advertising and
recruiting staff.

 Discussion:-
 RM 1 million – recognised as MFRS 138.
 RM 1.5 million – MFRS 116
 RM 300,000 write off as expenses in SOPLOCI
Example 1
 Tall Enterprise, a manufacturer of ladies handbag hired a
brand consultancy agency to bild up the name brand
‘Tallchamp’ for its line of handbags. The consultancy was
paid of Rm20 million. Massive advertising and marketing
strategy was used and Tallchamp mahnaged to capture a
considerable market share and was a hit with brand
conscious ladies. For years x14 and x15 the brand was a
success and then in year x16 the brand was sold to Long
enterprise for RM45million

 Dicussion:-
 Rm20mill – expense off
 RM45mill – MFRS 138
Acquisition as Part of a Business Combination
 In a business combination, the acquirer is to recognise at
the date of acquisition all identifiable intangibles of the
acquiree, separately from goodwill. These identifiable
intangibles could be those that were recognised and those
that have not been recognised by the acquiree.
 the acquirer should recognise in-process research and
development project of the acquiree if it meets the
definition of intangible and its fair value can be measured
reliably.
 These intangible assets will be measured at fair value which
is the quoted market prices in an active market.
Acquisition by Way of a Government Grant
 Intangible assets acquired free of charge, or for a
nominal consideration, by way of a government
grant, are measured initially at fair value or at
cost.
Example
 Metro Express was given the right to construct and operate
an elusive tramline for 15 years in the centre of town. The
construction cost of the tram line was RM100million and the
tram cost RM60 million. Metro paid the government
RM25,000 as earnest money for the tender. After Metro
Express got the award, it incurred legal and other
administrative fees of RM55,000 in relation to the licence.
The fair value is RM4million

 Discuss:-
 RM160,000,000 – MFRS 116
 Licence (MFRS 138) – maybe recognise at RM 4million or
RM80,000
Exchange of Assets
 The cost of the intangible acquired is
measured at fair value. If the exchange
transaction lacks commercial substance or
the fair value of neither the asset neither
received nor given up can be measured
reliably, the acquired asset will be
measured at the carrying amount of the
asset given up.
Internally Generated Intangible Assets

 MFRS 138 prohibits the recognition of internally generated

goodwill.

 Internally generated brands, mastheads, publishing titles,

customer lists and items similar in substance cannot be
recognised as intangible assets.

 Difficult in identifying whether and when there is an

identifiable asset that will generate expected future
economic benefit

 Determine the cost of the assets reliably. In some cases,

the cost of generating an intangible asset internally cannot
be distinguisehed from the cost of maintaning or enhancing
the entitiy generated asset or of running day to day
operations.
 FAR 510
Research and Development
Research
 Activities aimed at obtaining new knowledge;
 The search for applications of research findings or
other knowledge,
 The search for product or process alternatives;
and
 The formulation and design of possible new or
improved product or process alternatives.

Accounting treatment
Costs incurred by an entity during the research
phase are recognised as expenses in the period
they are incurred.
 FAR 510

Development

Costs incurred during the development phase must be capitalised if

they meet all the following criteria:
 The entity has the technical feasibility of completing the
intangible asset so that it will be available for use or sale;
 The entity intends to complete the intangible asset and use it
or sell it.
 The entity has the ability to use or sell the intangible asset.
 The intangible asset will generate future economic benefits.
 The entity has adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset.
 The cost incurred during development can be measured
reliably.
 FAR 510

 Developments costs that are capitalised are all costs incurred from
the date the intangible asset first meets the recognition criteria,
including the six criteria mentioned above.
 Costs comprise all directly attributable costs necessary to
create, produce and prepare the asset for intended use.
 Examples of directly attributable costs are:
 Costs of materials and services consumed;
 Personnel costs: salaries, wages and other employment related
costs;
 Fees to register a legal right; and
 Amortisation of patents and licences that are used to generate
the intangible asset.
 MFRS 123 Borrowing Costs allows borrowing cost to be capitalised
as part of development costs if it meets the criteria for
capitalisation.
 FAR 510

Example
An entity is developing a new computer software. During year x4, the
expenditure incurred was Rm120,000 of which RM100,000 was incurred
before 1 October x4 and the balance was incurred from October to December
x4.
Only on 1 October was the entity able to demonstrate that the project can
meet all the criteria for recognition s intangible asset.
In year x5, the cost incurred was RM60,000. At the end of x5, the recoverable
amount was RM75,000

Answer
RM100,000 – write off as an expense.
RM20,000 – recognized and capitalized as an assets.
RM60,000 – recognized and capitalized as an assets.
CA is now --- RM80,000
RM100,000 – written off is not reinstated.
The difference between RA and CA of RM 5000 is charged as expenses in
SOPLOCI.
The amount disclosed as intangible assets in Financial Statement is
RM75,000
Subsequent Measurement

Cost model
An intangible asset that has a finite useful life will be carried at cost less
accumulated amortisation and any accumulated impairment losses. The
intangible is amortised systematically over the finite useful life.

Revaluation model
Only allowable if there is fair value in reference to an active market
 Revaluation must be made regularly
 Intangibles in the same class should be revalued.
 Accounting treatment of Surplus/deficit on revaluation ---as for
property, plant and equipment.
 Revaluation surplus
If the fair value of the asset exceeds its carrying value the surplus is
credited to equity unless the surplus is due to a deficit on revaluation;
in which case the surplus reverses a revaluation deficit.

Decrease on revaluation
 A decrease arising from a revaluation is taken to the income
statement. However, the decrease is debited to revaluation reserve to
the extent of any credit balance in the revaluation reserve in respect
of that asset.
Example
 Hex carried out a development project that met the criteria for
recognition as an asset on 1 April x14. Costs incurred till April 14
were RM4.5million, and RM3million was incurred from April 14 till
the completion of the project on 31st May 15. The fair value of
development cost as at 31 Dec 15 was RM5.2 million. The
economic life of the asset is indefinite.

Discuss
 Intangible recognised at RM3 million.
 Rm4.5million expense off
 31 Dec – Asset CA is at RM5.2 million
 RM2.2 million recognised as surplus on revaluation in equity and
disclose under OCI
 ON 1 jan 11, ZZZ acquired a franchise for RM400,000. The expected
economic life is eight years. The entity adopts revaluation model. On 31
Dec 12, the FV was RM420,000 and on 31 Dec 14 it was RM170,000

Year 11
 Asset recognised at RM 400,000 and amortised over eight years.
 Amortisation first yr Rm50,000
Year 12
 CA = RM300,000
 Revaluation surplus RM120,000 credited to revaluation reserves
Year 13
 Amortisation charge based on the revised amount of RM420,000/6 years
= RM70,000
 CA=RM350,000
 At the same time the balance of RM20,000 will be transferred to Retained
Earnings
Year 14
 CA will be RM280,000
 At the same time the balance of RM20,000 will be transferred to Retained
Earnings. Balance of RR is RM80,000
 (RM280,000 – RM170,000) is RM110,000 is revaluation deficit.
 Rm80,000 debited to the RR and balance of RM30,000 charged to profit or
loss account.
Useful Life and Amortisation

Determine if asset has:

a. Finite life, or
b. Indefinite life

If there is a contractual right, the useful life

should not exceed the legal period.
At times the economic life could be shorter
than legal life, in which the amortisation
should be over the economic life and not
the legal life.
 Finite Life

 Amortise on a systematic basis; straight-line method to be

used unless another method reflects pattern of
consumption more reliably.
 Residual value is zero unless there is a firm commitment by
a 3rd party to buy the asset at the end of the life or there is
an active market and it is probable such a market will exist
at the end of the asset’s life.
 Annual review of useful life and changes are considered as
change in accounting estimate.
 Amortisation begins when the asset is available for use.
 Intangible asset that has a legal life and there are
provisions for renewal, the potential renewals are only
considered in useful life assessment if renewal costs are
not significant.
example
 An entity acquired the copyright to a
popular song and paid RM100,000. It has
a firm offer froma third party to buy the
copyright at the end of five years for
RM40,000.

 Answer.
 amortised over five years
 the depreciable amount will cost
(RM100,000) less present value of RM
40,000
Indefinite Life

 Intangibles with indefinite lives are not

amortised but tested for impairment annually or
whenever there is an indication of impairment.
 Useful life of indefinite life of intangible are
reassessed annually.
 Change from indefinite life to finite life is
accounted for as change in accounting estimate.
 A change from indefinite to finite life is an
indication of impairment.
EXAMPLE

An entity acquired the legal title to a leading brand. The legal life is
five years but is renewable every five years at little cost. The entity
intends to renew it continuously. An analysis of product life cycle,
market and competitive trends indicated that the product will be
generating net cash inflows for an indefinite period.
In the 13th year, there is unexpected competition and the entity may
lose 20% of the market share. However, it has evidence that the
brand product will generate positive cash flow in definitely.
Answer:
For the first 12 years – indefinite life. Need not to be amortised but
must be tested for impairment and its indefinite life to be reviewed
annually.
In the 13th year, brand tested for impairment and may need to be
written down to its recoverable amount if CAis more than RA.
Since there is evidence that the product will generate net cash
inflows indefinitely, the intangible asset can continue not to be
amortised.
Derecognition
 Intangible assets will be derecognized
when:-
 It is disposed
 When no future economic benefits are
expected from its use or disposal.