F7 – FINANCIAL REPORTING

Previous weeks
- Chapter 1: Conceptual Framework
- Chapter 2: Regulatory Framework
- Chapter 3: Tangible non-current asset
This week:
- Chapter 4: Intangible assets
- Chapter 5: Impairment of Assets
TOPI
C IAS 38
Intangible
Assets
IAS 36
Impairment of
Assets
IFRS 3
Business
Combination
IAS 38
IAS 38 – INTANGIBLE
ASSETS
 STRUCTURE OF A
STANDARD

PROBLEMS ADDRESSED
SCOPE OF THE STANDARD
ACCOUNTING CONCEPTS
ACCOUNTING TREATMENT
PRESENTATION & DISCLOSURE
IAS 38
- PROBLEMS ADDRESSED
- SCOPE OF THE STANDARD
- DEFINITION, RECOGNITION AND
CLASSIFICATION
IAS 38 PROBLEMS
+ ADDRESSED
Outlines the accounting requirements for
intangible assets
+ recognition criteria, subsequently
measurement at cost or revaluation model
+ and amortization (unless the asset has an
indefinite useful life, in which case it is not
SCOPE OF THE
amortised).
STANDARD
IAS 38 applies to all
intangibles

EXCLUDE:
financial assets (IAS
32)
exploration and evaluation assets
(IFRS 6)
expenditure on the development and extraction of
minerals, oil, gas, and similar resources
intangible assets arising from insurance contracts
issued by insurance companies
intangibles covered by another IFRSs, (tangibles
held for sale IFRS 5 , deferred tax assets (IAS 12 ,
lease assets (IAS 17), assets arising from employee
 ON
AN INTANGIBLE

ITI
is an identifiable
ASSET non-monetary

FIN
asset without physical substance.
The asset must be:

DE
(a) Controlled by the entity as a
result of events in the past
(b) Something from which the entity
expects future economic benefits to
ON
flow
ITI

(a) It is probable that the future

GN

economic benefits that are

CO

attributable to the asset will flow

RE

to the entity.
(b)The cost can be measured
reliably
 AN ASSET IS IDENTIFIABLE
Identifiable
EITHER

It isseparable from the

It arises from
entity and sold/ OR
transferred/licensed/re contractual or other
nted/exchanged legal rights.
 CLASSIFICATIO
IAS 38 BREAK DOWN INTO N

Acquired intangible Internally generated

assets AND intangible asset (R&D)
- Acquired separately
(software, license,
…)
- Acquired as part of
a business
combination
IAS 38
- ACCOUNTING TREATMENTS
Measurement of intangible
assets subsequent to initial
recognition
Initial measurement

Acquired Measure at
separately cost

Acquired as
Meassure at
Initial part of
Fairvalue
measurement business
(IFRS 3)
combination
Interanally Only recognised
generated
intangible if PIRATE
asset criteria met
 Internally generated intangible assets

RESEARCH
•COSTS
Research activities by definition do not meet the criteria for
recognition under IAS 38. This is because, at the research stage
of a project, it cannot be certain that future economic benefits
will probably flow to the entity from the project. There is too
much uncertainty about the likely success or otherwise of the
project. Research costs should therefore be written off as an
Exampl
expense as they are incurred. 3. The search for
es 1. Activities alternatives for
aimed at materials, devices,
obtaining new products, processes,
knowledge systems or services

2. The search for, 4.The formulation, design

evaluation and evaluation and final
final selection of, selection of possible
applications of alternatives for new or
research findings improved materials,
or other devices, products,
knowledge
IAS 38 - Research and development costs
DEVELOPM
ENT COSTS

DEVELOPMENT COSTS may qualify for recognition as intangible assets

provided that the following strict criteria can be demonstrated.
(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) There will be future economic benefits for the entity. The entity
should demonstrate the existence of a market for the output of
the intangible asset or the intangible asset itself or the usefulness
of the intangible asset to the business
(e) The availability of technical, financial and other resources to
complete the development and to use or sell the intangible asset
(f) Its ability to measure the expenditure attributable to the
intangible asset during its development
In contrast with research costs development costs are incurred at a
later stage in a project, and the probability of success should be more
 IAS 38 - Research and development costs

DEVELOPM
ENT

• Examples of development costs include:

(a) The design, construction and testing of pre-production
or pre-use 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
(d) The design, construction and testing of a chosen
Internally generated intangible
assets
Probable future economic benefits

Intention to complete and use/sell asset

Resources adequate and available to complete

T E
Ability to use/sell asset

IR A
Technical feasibility

Expenditure can be reliably measured

P
• All expenditure - not meet the criteria for recognition
- should be expensed
• Examples :
• Start up costs
• Advertising costs
• Training costs
• Business relocation costs
• Prepaid costs for services, for example advertising
or marketing costs for campaigns that have been
prepared but not launched, can still be recognised as
a prepayment.
Example: Page 71
Example: Page 72
SUBSEQUENT MEASUREMENT
Accounting
policy

REVALUATIO
COST MODEL
N
MODEL
COS REVALUED AMOUNT
T
-
(accumulated
(FV on revaluation date)

-
amortisation (subsequent
+ impairment losses)
amortisation +
impairment losses)
(a) The fair value must be able to be measured reliably with
reference to an active market in that type of asset.
(b) The entire class of intangible assets of that type must be
revalued at the same time (to prevent selective revaluations).
(c) If an intangible asset in a class of revalued intangible assets
cannot be revalued because there is no active market for this
asset, the asset should be carried at its cost less any
accumulated amortisation and impairment losses.
(d) Revaluations should be made with such regularity that the
carrying amount does not differ from that which would be
determined using fair value at the end of the reporting period.
 An int
angib
ACQUISITI life sh le asset wi
ou l d b t
ON e amo h a finite us
expec rt e
ted us ised over it ful
US eful lif
e.
s
E
DISPOSAL/
AMORTISATIONRETIREMENT
?

(a) Amortisation should start when the asset is available for use.
(b)Amortisation should cease at the earlier of the date that the asset is
classified as held for sale in accordance with IFRS 5 Non-current assets
held for sale and discontinued operations and the date that the asset
is derecognised.
(c) The amortisation method used should reflect the pattern in which the
asset's future economic benefits are consumed. If such a pattern cannot
be predicted reliably, the straight-line method should be used.
(d) The amortisation charge for each period should normally be
recognised in profit or loss.
FACTORS IN COMPUTING AMORTISATION

Initial Cost - Residual Value

(Salvage Value) =
Amount for
amortisation

Finite assets - assumed

to be zero (unless special
cases)
Useful Life

Periodic Amortisation
INTANGIBLE ASSETS WITH INDEFINITE
USEFUL LIVES

An intangible asset with an indefinite useful life should

not be amortised. (IAS 36 requires that such an asset is
tested for impairment at least annually.)

 The useful life of an intangible asset

that is not being amortised should be
reviewed each year to determine
whether it is still appropriate to
assess its useful life as indefinite.
 Reassessing the useful life of an
intangible asset as finite rather than
indefinite is an indicator that the
asset may be impaired and therefore
it should be tested for impairment.
 It may be difficult to establish the useful life of an intangible asset, and
judgement will be needed.
Required:
Consider how to determine the useful life of a purchased brand name.

Answer
Factors to consider would include the following.
(a) Legal protection of the brand name and the control of the entity over the (illegal) use
by others of the brand name (ie control over pirating)
(b) Age of the brand name
(c) Status or position of the brand in its particular market
(d) Ability of the management of the entity to manage the brand name and to measure
activities that support the brand name (eg advertising and PR activities)
(e) Stability and geographical spread of the market in which the branded products are sold
(f) Pattern of benefits that the brand name is expected to generate over time
(g) Intention of the entity to use and promote the brand name over time (as evidenced
perhaps by a business plan in which there will be substantial expenditure to promote
the brand name)
DISPOSALS/ RETIREMENTS OF INTANGIBLE ASSETS

 An intangible asset should be eliminated from the statement of financial

position when it is disposed of or when there is no further expected
economic benefit from its future use.
 On disposal the gain or loss arising from the difference between the net
disposal proceeds and the carrying amount of the asset should be taken to
profit or loss as a gain or loss on disposal (ie treated as income or
expense).
IFRS 3
BUSINESS
COMBINATI
ON

 A transaction or other event in which an acquirer obtains

control of one or more businesses.
 Transactions sometimes referred to as 'true mergers' or
'mergers of equals' are also business combinations as that
term is used in
 OBJECTIVES
+ IFRS 3 (2008): enhance relevance, reliability and
comparability about business combinations (e.g.
IFRS 3 acquisitions and mergers) and their effects.
+ The principles: recognition and measurement (acquired
assets, liabilities, goodwill and the necessary disclosures)

SCOPE OF THE
STANDARD
IFRS 3 must be applied when accounting for
business combinations

C LU The formation of a joint venture

EX
DE The acquisition of an asset or group of
assets that is not a business
Combinations of entities or businesses
under common control
Acquisitions by an investment entity of a
subsidiary …under IFRS 10 Consolidated
Financial Statements.
WHAT IS GOODWILL?

GOODWILL
created by good relationships between a business and its
customers.
(a) By building up a reputation (by word of mouth
perhaps) for high quality products or high standards
of service
(b) By responding promptly and helpfully to queries and
complaints from customers
(c) Through the personality of the staff and their attitudes
to customers The value of goodwill to a business
might be considerable.
Under IFRS 3:
 Purchased goodwill arising on consolidation is
retained in the statement of financial position
as an intangible asset
 Must be reviewed annually for impairment.
IAS 36
 IAS 36 -
IMPAIRMENT
IAS 36
- PROBLEMS ADDRESSED
- SCOPE OF THE STANDARD
- ACCOUNTING CONCEPTS
 OBJECTIVES
+ Prudence principle: assets should not be carried over
IAS 36 their recoverable amount
+ Account for impairment loss as well as reversal of
impairment loss

SCOPE OF THE
STANDARD
IAS 36 applies to all tangible, intangible & financial
assets

C LU Inventories; assets arising from

EX construction contracts, deferred tax
DE assets…
Assets arising under IAS 19 (Employee
benefits)
Financial assets within IAS 32 (Financial
instruments)
NCA held for sale in IFRS 5 (NCA held for
sale & discontinued operation)
 INDICATIONS OF
IMPAIRMENT
 External indicators of  Internal indicators
impairment: of impairment:
– A fall in the asset's market
– Evidence of
value that is more than is
obsolescence or physical
expected as a result of passage
damage.
of time or normal use.
– Adverse changes in the
– A significant change in the
use to which the asset is
technological, market, legal or
put, or the economic
economic environment of the
business in which the assets are performance
employed.
- An increase in market interest
rates or market rates of return
on investments likely to affect
the discount rate used in
calculating value in use
 REVIEWING AND
CHANGING USEFUL LIFE
OR RESIDUAL VALUE AFTER
IMPAIRMENT
When an impairment loss is recognised,
the asset's remaining useful life and residual
value
should also be reviewed and revised if
appropriate.
Note:
Test for impairment annually even no indications
(a) An intangible asset with an indefinite useful life
(b) Goodwill acquired in a business combination
 IMPAIRMENT LOSS

CA of an asset
exceeds its
recoverable
amount, an
impairment loss is
CARRYING said
Comparedto have
RECOVERABLE
AMOUNT occurred.
with AMOUNT

Fair value
less costs to and Value in use
sell
IAS 36
- ACCOUNTING TREATMENTS
CALCULATING AND ACCOUNTING FOR AN IMPAIRMENT LOSS

CALCULATION

£
Carrying amount of the asset
X
Less recoverable amount of the asset (X)
Impairment loss
X
ACCOUNTING FOR IMPAIRMENT LOSS
When an asset has suffered an impairment loss:
DR. Impairment expense (statement of profit or loss) £X
CR. Carrying amount of asset (statement of financial position) £X
 WORKED
Impairment and depreciation
EXAMPLEP
A business purchased a building on 1 Jan 20X1 at a cost of £100,000;
20-year useful life, annual depreciation = £100,000/20 = £5,000 pa
At 31 Dec 20X5: Cost =100,000
Acc dep = 25,000
 Carrying amount at 31 Dec 20X5 = 75,000
 During 20X5, property prices fell sharply indicating that the building may be
impaired
 On 31 Dec 20X5, the business undertook an impairment review and determined:
- FV less disposal costs of £60,000
Value in use of £50,000.
 The recoverable amount £60,000.
- Impairment loss at 31 Dec 20X5:
 CA of the building at 31 Dec 20X5 75,000
Recoverable amount at 31 Dec 20X5 (60,000)
Impairment loss
 WORKED
EXAMPLEP

 The business should therefore reduce the carrying amount of the

building to £60,000 and charge the impairment loss of £15,000 to
profit or loss.
 In 20X6, depreciation = £60,000 / 15 years = £4,000 per annum
 At 31 Dec 20X6, the carrying amount of the building would be:
Cost of the building in 1 Jan 20X6: £ 60,000
Accumulated depreciation at 31 Dec 20X6 (4,000)
Carrying amount at 31 Dec 20X6 56,000
 INTERACTIVE
QUESTION

On 1 Jan 20X1 Tiger buys a NCA for £120,000, useful life of 20 years and no residual
value, straight line basis. On 31 Dec 20X3 the asset has a CA calculated as follows:
NCA at cost 120,000
Accumulated depreciation (3 x(£120,000/20)) (18,000)
CA
102,000
Requirements
Consider each of these alternatives separately.
(a) On 31 Dec 20X3, the remaining useful life is revised to 15 years from that date.
Calculate the revised annual depreciation charge commencing in 20X4.
(b) On 31 Dec 20X3 the remaining useful life is revised to 10 years from that date. An
impairment review has been carried out which shows that the fair value less costs of
disposal are £80,000 and the value in use is £95,000 as at 31 Dec 20X3.
Show how the impairment loss would be recorded in the FS for the year
ended 31 Dec 20X3 and calculate the revised annual depreciation charge
 INTERACTIVE

(a) Revised annual depreciation charge from 20X4

Revised annual charge = Carrying amount at revision – Residual value
Revised remaining life = £ 102,000/15 = £ 6,800 per annum
(b) Impairment loss and revised annual depreciation charge
Recoverable amount: FV less costs of disposal of £ 80,000
and the value in use of £ 95,000
 Recoverable amount 95,000
Carrying amount at 31 Dec 20X3 102,000
Impairment loss 7,000
Accounting for impairment loss of £7,000:
DR P/L impairment loss 7,000
CR PPE carrying amount 7,000
Impairment loss on non-current asset
The revised annual depreciation charge from 20X4 is then calculated as:
£ 95,000/10 = £ 9,500
IAS 36
CASH- GENERATING UNIT
IAS 36
CASH- GENERATING
UNIT
When it is not possible to
calculate the recoverable
amount of a single asset, then
that of its cash-generating
unit should be measured
instead

A cash-generating unit is the smallest

identifiable group of assets for which
independent cash flows can be identified
and measured.
A cash-generating unit is the smallest
identifiable group of assets for which
independent cash flows can be identified
and measured.

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IAS 36
PRESENTATION &
DISCLOSURES
IAS 36 - DISCLOSURES
Disclosure by class of assets: [IAS
36.para126]
impairment losses recognised in profit or loss
 impairment losses reversed in profit or loss
 which line item(s) of the statement of
comprehensive income
 impairment losses on revalued assets
recognised in other comprehensive income
 impairment losses on revalued assets
reversed in other comprehensive income
Disclosure by reportable segment: [IAS
36.para 129]
impairment losses recognised
 impairment losses reversed
 Source:
 IFRS 3- GOOD WILL

 Goodwill
the difference between the purchase consideration and its own valuation
of the net assets acquired
 Two method of valuation
• The seller and buyer agree on a price for the business without
specifically quantifying the goodwill. The purchased goodwill will
then be the difference between the price agreed and the value of the
identifiable net assets in the books of the new business
• Calculation of goodwill to decide and negotiate the purchase price.
Most of the ways are related to the profit record of the business in
question.
 IFRS 3- GOOD WILL

 MEASUREMENT:
• Initially at cost
• Subsequently at cost less any accumulated impairment losses.
• It is not amortised

 NEGATIVE GOODWILL
A gain on a bargain purchase
• Excess of acquirer's interest in the net fair value of acquiree's identifiable
assets, liabilities and contingent liabilities over cost
• Recognised in profit or loss immediately (result from errors or bargain)

12
 CHARACTERISTICS OF GOODWILL - EXAMPLE

1. What are the main characteristics of goodwill? (different with other intangibles)
2. To what extent, these characteristics should affect the accounting treatment of goodwill?

Goodwill may be distinguished from other intangible NCA:

(a) It is incapable of realisation separately from the business as a whole.
(b) Its value has no reliable or predictable relationship to any costs which may
have been incurred.
(c) Its value arises from various intangible factors such as skilled employees,
effective advertising or a strategic location. These indirect factors cannot
be valued.
(d) The value of goodwill may fluctuate widely according to internal and
external circumstances over relatively short periods of time.
(e) The assessment of the value of goodwill is highly subjective. It could be
argued that, because goodwill is so different from other intangible non-
current assets it does not make sense to account for it in the same way.
Thus the capitalisation and amortisation treatment would not be acceptable.
Goodwill is so difficult to value
 QUICK QUIZ

1. Intangible assets can only be recognised in a company's accounts if:

a. It is probable that ……………………… will flow to the entity.
b. The cost can be ………………………..
2. What are the criteria which must be met before development expenditure can be
deferred?
3. Start up costs must be expensed: True or False ?
4. Peggy buys Phil's business for $30,000. The business assets are a bar valued at $20,000,
inventories at $3,000 and receivables of $3,000. How much is goodwill valued at?
5. What method of accounting for goodwill arising on consolidation is required by IFRS 3?
6. How should negative goodwill be accounted for under IFRS 3?
ANSWER QUICK QUIZ

1. Future economic benefits; measured reliably

2. See Section 2.2
3. True
4. $30,000 – $20,000 – $3,000 – $3,000 = $4,000
5. Cost less impairment losses
6. Recognised in profit or loss immediately