PwC

Intangible Assets

http://www.cc.cec/budg/
Overview of session

1. Scope and key concepts

2. Recognition

3. Measurement

4. Disclosures

5. Specific implications and next steps

6. Questions

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Intangible Assets

1. Scope and key concepts

Scope

• Intellectual property (“IP”) in general

• 3 broad categories:
– Research and development

– Patents, copyrights, brand names, trade secrets, trade marks,

franchises, concessions, operating right or right of use

– Computer software (developed internally or acquired from a third

party)

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Key definitions

• An intangible asset is an identifiable non-monetary asset without

physical substance held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
• Useful life is the period of time over which an asset is expected to be
used by the entity
• 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, processes, systems or services prior to the
commencement of commercial production or use

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Scope

• Fall back on IAS 38 since no specific IPSAS

• Covers accounting for all Intangible Assets, excluding:
– Goodwill

– Financial assets

– Mineral rights and other similar expenditure

– Those arising in insurance companies through contracts with

policy holders

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Intangible Assets

2. Recognition
 Criteria for recognition
No

Not an 3. Capable of generating Defined

intangible future economic benefits?
asset
No Yes
2. Controlled? 4. Probable that future economic
benefits will be generated?

No Yes
Yes No
5. Cost reliably
1. Identifiable? measured?

Yes No
Intangible Yes
Not
resource Recognised recognised

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Identifiable

• An asset is identifiable if it is separable:

– An asset is separable if the enterprise could rent, sell, exchange
or distribute the specific future economic benefits attributable to
the asset without also disposing of future economic benefits that
flow from other assets used in the same revenue earning activity.

• But an enterprise may be able to identify an asset in some

other way:
– For example, if an intangible asset is acquired with a group of
assets, the transaction may involve the transfer of legal rights
that enable an enterprise to identify the intangible asset.

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Control

• The capacity of an enterprise to control the future economic

benefits from an intangible asset would normally stem from
legal rights that are enforceable in a court of law (e.g.
copyrights or a legal duty on employees to maintain
confidentiality).
• In the absence of legal rights, it is more difficult to demonstrate
control. However, legal enforceability of a right is not a
necessary condition for control since an enterprise may be able
to control the future economic benefits in some other way.

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Future economic benefits

• Future economic benefits flowing from an intangible asset may

include revenue from the sale of products or services, cost
savings, or other benefits resulting from the use of the asset by
the enterprise
– For example, the use of intellectual property in a production
process may reduce future production costs rather than increase
future revenues

• Requires the exercise of sound judgement based on verifiable

information

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Measurement of cost

• Cost can be measured:

– Either directly (cost of acquisition of the asset when it is
separately acquired); or

– Indirectly (e.g. by reference to an active market or using

discounted cash flows techniques when the asset is acquired as
part of a business combination)

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Recognition – Internally
generated intangible assets

Internally
Internally
generated
generated goodwill
intangible assets

Research Development
NO! phase phase

Only if strict
NO! criteria met

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Research phase

• Examples of research activities:

– Activities aimed at obtaining new knowledge

– The search for, and evaluation and final selection of, applications
of research findings or other knowledge

– The search for alternatives for materials, devices, products,

processes, systems or services

– The formulation, design, evaluation and final selection of possible

alternatives for new or improved materials, devices, products,
processes, systems or services

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Development phase

• Conditions to be met before capitalisation:

– Technical feasibility of completing the asset

– Intention to complete it and use/sell the asset

– Ability to use/sell the asset

– An analysis of whether the asset will generate future economic

benefits

– Availability of resources to complete the asset and to use/sell it

AND

– Ability to reliably measure the attributable expenditure

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Cannot capitalise…

Internally
generated Mastheads
brands

Publishing Customer
titles lists

…and similar items

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Date for recognition

• During the year, the date of acquisition or date of entry shall

correspond to the date on which the risks of ownership of the
assets are transferred to the E.C., which in general
corresponds to the accepted delivery of the asset

• If an item does not meet the definition of an intangible asset,

expenditure to acquire it or generate it internally is recognised
as an expense when incurred.

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Intangible Assets

3. Measurement
 Measurement

The E.C.s’
choice

Subsequent Benchmark treatment

costs: • continue to carry at cost*
Initial expense
measurement: (unless can
cost prove Alternative treatment
enhanced • carry at re-valued amount*
economic by reference to active market
benefits)

* less amortisation and

impairment provisions

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Cost of internally generated
intangible assets

• Cost = directly attributable expenditure

• Begin when asset first meets recognition criteria
• Cannot back-date to include costs expensed previously
• Specific costs CANNOT be capitalised
– Start-up costs

– Training activities

– Advertising/promotional activities

– Re-locating/re-organising costs

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Measurement -
amortisation

Evidence must
Presumption Rebuttal be persuasive

Disclose
evidence
UEL ≤ 20 years UEL > 20 years & perform
annual
impairment test
Amortise over UEL

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Measurement –
disposal

• Disposal
– Gain/loss = Net Disposal Proceeds – Carrying Amount

– Recognise in economic outturn account

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4. Disclosures
 Major disclosures

Internally Disclose Acquired

generated separately

Useful lives Gross

Reconciliation
or opening & Re-valued
of movements
amortisation closing intangibles
in year
rates balances

Also, R&D costs expensed in the period

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Intangible Assets

5. Specific implications and

next steps
 Proposed E.C. general
accounting policies
Computer software

Software are stated at historical cost less depreciation. Costs associated with maintaining computer software programmes are recognized as an expense

as incurred.

Expenditure, which enhances or extends the performance of computer software programmes beyond their original specifications is recognized as a

capital improvement and added to the original cost of the software.

Computer software recognized as assets are amortized using the straight-line method over their useful lives, not exceeding a period of 4 years.

Research and development

Research expenditure is recognized as an expense as incurred. Costs incurred on development projects are recognized as intangible assets when it is

probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other

development expenditures are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an

asset in a subsequent period. Development costs that have been capitalized are amortized from the commencement of the commercial production of the

product on a straight-line basis over the period of its expected benefit, not exceeding five years.

Other intangible assets

Expenditure to acquire patents, trademarks and licenses is capitalized and amortized using the straight-line method over their useful lives, but not

exceeding 20 years.

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 Compliance issues

Issue As per former As per IPSAS Accounting rules

regulation EC transition
period 5 years

Internally developed Expensed Capitalise if identifiable, expensed

software controlled, future economic
benefits and measurable cost

Development costs Expensed Capitalise if identifiable, expensed

controlled, future economic
benefits and measurable cost

Assets under construction N/A To be disclosed as a separate expensed

category within intangible assets

Amortisation rules Full year from the Pro-rata temporis from the date
date when the asset when the asset is available for
is available for use use

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Intangible Assets

6. Questions

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