CAF 5: FINANCIAL ACCOUNTING AND REPORTING II CHAPTER 1: IAS 38 INTANGIBLE ASSETS

 ANSWER:

Goodwill
Rs. m Rs. m
1 Jan X4 Acquisition (W1) 270 31 Dec X4 Impairment loss 50
31 Dec X4 Balance c/d 220
270 270
1 Jan X5 Balance b/d 220
31 Dec X5 Balance c/d 220
220 220

AT A GLANCE
Brand “Badar”
Rs. m Rs. m
1 Jan X4 Acquisition (fair value) 100 31 Dec X4 Amortisation 10
31 Dec X4 Balance c/d 90
100 100
1 Jan X5 Balance b/d 90 31 Dec X5 Amortisation 10
31 Dec X5 Impairment loss 13.5
31 Dec X5 Balance c/d 66.5
90 90

SPOTLIGHT
W1: Value of goodwill Rs. m

Purchase price (50,000,000 x Rs. 30 x 90%) 1,350

Less: Fair value of net identifiable assets and liabilities (990)

(Rs. 1,100,000,000 x 90%)

Less: Value of brand (Rs. 100,000,000 x 90%) (90)

Goodwill recognised 270

STICKY NOTES

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5. MEASUREMENT AFTER RECOGNITION

5.1 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.
For the purpose of revaluations under IAS 38, fair value shall be measured by reference to an active market and
if an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be
accounted for using the same model, unless there is no active market for those assets.
AT A GLANCE

An active market is a market in which transactions for the asset or liability take place with sufficient frequency
and volume to provide pricing information on an ongoing basis. [IFRS 13 Appendix A]
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 shall be carried at cost model.
The items within a class of intangible assets are revalued simultaneously to avoid selective revaluation of assets
and the reporting of mixed amounts.
Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of
the asset does not differ materially from its fair value. The frequency of revaluations depends on the volatility of
the fair values of the intangible assets being revalued.

5.2 Measurement under revaluation model [IAS 38: 76, 77 & 79]
SPOTLIGHT

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
STICKY NOTES

and recognised at a nominal amount.

5.3 Active market valuation [IAS 38: 78, 82 to 84]

It is uncommon for an active market to exist for an intangible asset, although this may happen. An active market
may exist for freely transferable taxi licences, fishing licences or production quotas. However, an active market
cannot exist for brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because
each such asset is unique.
If the fair value of a revalued intangible asset can no longer be measured by reference to an active market, the
carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the
active market less any subsequent accumulated amortisation and any subsequent accumulated impairment
losses.
The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset may be
impaired and that it needs to be tested in accordance with IAS 36.
If the fair value of the asset can be measured by reference to an active market at a subsequent measurement date,
the revaluation model is applied from that date.

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CAF 5: FINANCIAL ACCOUNTING AND REPORTING II CHAPTER 1: IAS 38 INTANGIBLE ASSETS

5.4 Summary of accounting treatment for revaluation [IAS 38: 80, 85 to 87]
The following accounting treatment of revaluation of intangible assets are same as those of property, plant and
equipment under IAS 16:
a) Adjustment to carrying amount on revaluation by either:
i. Proportionate restatement; or
ii. Elimination of accumulated amortisation.
b) Recognition of gain or loss in either:
i. Other comprehensive income
ii. Profit or loss
c) Transfer (realization) of revaluation surplus to retained earnings on:

AT A GLANCE
i. Derecognition; and
ii. Over useful life (incremental amortisation)

5.5 Useful life of intangible assets [IAS 38: 88, 89, 91, 94, 107 to 110]
An entity shall assess whether the useful life of an intangible asset is;
a) Finite; or
b) Indefinite. The term ‘indefinite’ does not mean ‘infinite’.
If useful life is assessed to be finite, the entity shall assess that useful life in terms of:
a) the length of time period, or

SPOTLIGHT
b) number of production or similar units.
An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis
of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity.
The accounting for an intangible asset is based on its useful life:
 An intangible asset with a finite useful life is amortised.
 An intangible asset with an indefinite useful life is not amortised (rather tested for impairment annually
or when there is indication for impairment).

STICKY NOTES
 The intangible assets with indefinite useful life shall be reviewed each period to determine whether
useful life continues to be indefinite.
 The change in the useful life assessment from indefinite to finite shall be accounted for as a change in an
accounting estimate in accordance with IAS 8.
 The change in the useful life assessment from indefinite to finite is an indicator that the asset may be
impaired.
The contractual period and/or renewal options may also impact the assessment of useful life of intangible assets:
a) The useful life of an intangible asset that arises from contractual or other legal rights shall not exceed
the period of the contractual or other legal rights, but may be shorter depending on the period over
which the entity expects to use the asset.
b) If the contractual or other legal rights are conveyed for a limited term that can be renewed, the useful
life of the intangible asset shall include the renewal period(s) only if there is evidence to support renewal
by the entity without significant cost.

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5.6 Amortisation [IAS 38: 97, 98, 98A & 100]

The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis
over its useful life.
Amortisation shall begin when the asset is available for use, i.e. when it is in the location and condition necessary
for it to be capable of operating in the manner intended by management. 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.
The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected
to be consumed by the entity. If that pattern cannot be determined reliably, the straight‑ line method shall be
used. There is a rebuttable presumption that an amortisation method that is based on the revenue generated by
an activity that includes the use of an intangible asset is inappropriate.
A variety of amortisation methods can be used;
AT A GLANCE

i. Straight line method,

ii. Diminishing balance method;
iii. The units of production method.
The method used is selected on the basis of the expected pattern of consumption of the expected future economic
benefits embodied in the asset and is applied consistently from period to period
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.
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
SPOTLIGHT

 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.
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.
 Example 19:
During the year ended 31 December 20X7, following transactions were made by Zebra Limited
(ZL):
On 1 April 20X7 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of which
STICKY NOTES

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.

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CAF 5: FINANCIAL ACCOUNTING AND REPORTING II 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

AT A GLANCE
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.

5.7 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

SPOTLIGHT
b) when no future economic benefits are expected from its use or disposal.
Gain (or loss) is difference of ‘net disposal proceeds’ and ‘carrying amount’ of disposed intangible asset. Gain
(loss) shall be recognised in profit or loss when the asset is derecognized and gains shall not be classified as
revenue.
If a part of an intangible asset is being disposed of and replaced, then an entity:
a) derecognises the carrying amount of the replaced part; and
b) recognises the cost of the replacement part.
If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of
the replacement as an indication of what the cost of the replaced part was at the time it was acquired or internally

STICKY NOTES
generated.
 Example 20:
Raisin International (RI) is planning to expand its line of products. The related information for
the year ended 31 December 20X5 is as follows:
(i) Research and development of a new product commenced on 1 January 20X5. On 1
October 20X5, the product development resources were complete and available for use.
It is estimated that the product would have a useful life of 7 years. Details of
expenditures incurred are as follows:
Rs. m
Research work 4.50
Development work* 9.00
Training of production staff* 0.50
Cost of trial run* 0.80
Total costs 14.80
*incurred after all the criteria for capitalisation of development costs were met.

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(ii) The right to manufacture a well-established product under a patent for a period of five
years was purchased on 1 March 20X5 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 million.
(iii) RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the month of
June 20X5. 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 20X6.
(iv) In September 20X4, RI developed a new production process and capitalised it as an
intangible asset at Rs. 7 million. The new process is expected to have an indefinite
useful life. During 20X5, RI incurred further development expenditure of Rs. 3 million
on the new process which meets the recognition criteria for capitalization of an
AT A GLANCE

intangible asset.
Required:
In the light of IFRSs, explain how each of the above transaction should be accounted for in the
financial statements of Raisin International for the year ended 31 December 20X5.
 ANSWER:
(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 (SFP) of the company.
However, RI should capitalize only the development work (i.e. Rs.9.80 million) as
intangible asset. IAS 38 does not allow capitalization of cost relating to the research
work and training of staff.
SPOTLIGHT

Since the product has a useful life of 7 years, the amortization expense amounting to
Rs.0.35 million [(Rs. 9.8 million ÷ 7 years × 3/12)] should be recorded in the statement
of profit or loss.
(ii) This purchasing of right to manufacture should be recognised as an intangible in the SFP
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 amortised 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
STICKY NOTES

amortization to be recorded in profit or loss is Rs. 2.83 million (Rs. 17 million × 10/12
÷ 5).
(iii) The acquired brand should be recognised as an intangible in the SFP because acquisition
price is a reliable measure of its value. The amortization to be recorded in profit or loss
is Rs. 0.12 million (Rs. 2 million ÷ 10 years x 7/12).
(iv) The carrying value of the intangible asset should be increased to Rs. 10 million in the
SFP. Since there is an indefinite useful life of the intangible assets, it should not be
amortised. Instead, RI should test the intangible asset for impairment by comparing its
recoverable amount with its carrying amount.

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CAF 5: FINANCIAL ACCOUNTING AND REPORTING II CHAPTER 1: IAS 38 INTANGIBLE ASSETS

6. 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) licences and franchises;
e) copyrights, patents and other industrial property rights, service and operating rights;

AT A GLANCE
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;

SPOTLIGHT
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

STICKY NOTES
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.

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 Example 21:
The below is a note to the financial statement with disclosures about intangible assets:
Internally
Acquired
Disclosure Note generated
Total
– Intangible assets Development Software
Goodwill
cost license
Rs. m Rs. m Rs. m Rs. m
Cost
At the start of the year 290 64 900 1,254
Additions 60 14 - 74
Business combination - - 20 20
AT A GLANCE

Disposals (30) (4) - (34)

At the end of the year 320 74 920 1,314

Accumulated amortisation and impairment losses

At the start of the year 140 31 120 291
Amortisation 25 10 - 35
Impairment losses - - 15 15
Disposals (10) (2) - (12)
At the end of the year 155 39 135 329
SPOTLIGHT

Net carrying amount

At the end of the year 165 35 785 985
At the start of the year 150 33 780 963
 Example 22:
Accounting Policy (Illustrative) – Intangible assets
The intangible assets of the group comprise patents, licences and computer software.
The entity accounts for all intangible assets at historical cost less accumulated amortisation and
accumulated impairment losses.
Computer software
STICKY NOTES

Development costs that are directly attributable to the design and testing of identifiable and
unique software products controlled by the group are recognised as intangible assets when the
following criteria are met:
a) it is technically feasible to complete the software product so that it will be available for
use;
b) management intends to complete the software product and use or sell it;
c) there is an ability to use or sell the software product;
d) it can be demonstrated how the software product will generate probable future
economic benefits;
e) adequate technical, financial and other resources to complete the development and to
use or sell the software product are available; and
f) The expenditure attributable to the software product during its development can be
reliably measured.

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Directly attributable costs that are capitalised as part of the software product include the
software development employee costs and an appropriate portion of relevant overheads.
Development expenditures that do not meet these criteria are recognised as an expense as
incurred. Costs associated with maintaining computer software programmes are recognised as
an expense as incurred.
Useful lives
Amortisation is calculated using the straight-line method to allocate their cost or revalued
amounts to their residual values over their estimated useful lives, as follows:
 Patents: 25 to 30 years
 Licenses 5 to15 years

AT A GLANCE
 Computer software 3 years
All intangible assets are estimated as having a zero residual value.

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.

SPOTLIGHT
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.

STICKY NOTES
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.

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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.
 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.
AT A GLANCE

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.
SPOTLIGHT

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:
STICKY NOTES

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

26 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN