INTANGIBLE ASSETS (IAS 38) OBJECTIVE The objective of this IAS is to prescribe the accounting treatment of intangible assets not dealt in any other

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1 INTANGIBLE ASSETS (IAS 38) OBJECTIVE The objective of this IAS is to prescribe the accounting treatment of intangible assets not dealt in any other IAS. SCOPE This IAS shall be applied in accounting for intangible assets, except: - a) Intangible assets that are within the scope of another IAS b) Financial assets, as defined in IAS 39; and c) Mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative resources DEFINITIONS Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life. An asset is resource (a) controlled by an entity as a result of past events; and (b) from which future economic benefits are expected to flow to the entity. 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 before the start of commercial production or use. An intangible asset is an identifiable non-monetary asset without physical substance. Identifiable An asset meets the identifiably criteria when: - a) is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, wither individually or together with a related contract, asset or liability; or b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. Monetary assets are money held and assets to be received in fixed or determinable amounts of money. Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. RECOGNITION The recognition of an intangible asset requires an entity to demonstrate that the item meets: - a) the definition of an intangible asset b) the recognition criterian that: - i.e. it can be identified separately from other items of entity and in the control of the entity as a result of past event. it is probable that the expected economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably The examples of intangible assets are: - Brand name Mastheads and publishing titles Computer software Licences and franchises Copyrights, patents and other industrial property rights, service and operating rights Recipes, formulae, models, designs and prototypes; and

2 Intangible assets under development However, technical knowledge of staff, customer loyalty, long term training benefits, expected benefits from initial advertisement etc. will be difficult to recognize because of not having valid control on them. MEASUREMENT The conditions under which an asset is acquired determine the measurement of its cost. Separate acquisition The cost of a separately acquired intangible asset can be measured reliably when purchase consideration is in the form of cash or other monetary assets. The cost comprises: - a) its purchase price, including import duties and non-refundable purchase taxes after deducting trade discounts and rebates; and b) any directly attributable cost of preparing the asset for its intended use Examples of directly attributable costs are: - a) costs of employee benefits arising directly from bringing the asset to its working condition; and b) professional fees arising directly from bringing the asset to its working condition; and c) costs of testing whether the asset is functioning properly Examples of expenditures that are not part of cost of an intangible asset are: - a) costs of introducing a new product or service (advertising cost) b) costs of conducting business in a new location or with a new class of customers (training cost of staff) c) administration and other general overheads The capitalization of expenses ceases when the asset is ready for its intended use therefore; the expenditures incurred afterwards are not capitalized. The examples are: - a) cost incurred while an asset capable of operating in the manner intended by management has yet to be brought into use; and b) initial operating losses, such as those incurred while demand for the asset s output build up Exchanges of asset An asset may be acquired in exchange or part exchange for a non-monetary asset or assets or a combination of monetary and non-monetary assets. The cost of such an item is the fair value unless the exchange transaction lacks commercial substance or the fair value of the asset given up / acquired is not reliably measurable. Then the cost of the asset acquired will be the carrying value of the asset given up. If the entity is able to measure the fair value of any of the asset given up/acquired then the cost of the new asset is the fair value of the asset given up unless the fair value of the asset acquired is more reliable. Deferred payments If the payment for an intangible asset is deferred beyond normal credit terms, its cost will be the cash price equivalent. The difference between this amount and the total payments will be recognized as interest expense or will be capitalized if meets the requirements of IAS 23.

3 Acquisition by way of Government Grant then the related asset and government grant will be recognized as per the requirements of IAS-20. Acquisition as part of business combination An acquirer recognizes at the acquisition date separately from goodwill an intangible asset of the acquiree if the asset s fair value can be measured reliably, irrespective of whether the asset had been recognized by the acquiree before the business combination. Internally generated goodwill will not be recognized as an asset because it is not separable nor does it arises from contractual or other legal rights. Internally Generated Intangible Assets It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition. It is often difficult to: (a) identify whether, and the point of time when, there is an identifiable asset that (b) will generate probable future economic benefits; and determine the cost of the asset reliably. In some cases, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the enterprise s internally generated goodwill or of running day-today operations. Therefore, in addition to complying with the general requirements for the recognition and initial measurement of an intangible asset an enterprise applies the requirements and guidance in paragraphs below to all internally generated intangible assets. To assess whether an internally generated intangible assets meets the criteria for recognition, an enterprise classifies the generation of the asset into: (a) a research phase; and (b) a development phase. If an enterprise cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the enterprise treats the expenditure on that project as if it were incurred in the research phase only. Research Phase No intangible asset arising from research shall be recognized. Expenditure on research should be recognized as an expense when it is incurred. Examples of research activities are: (a) (b) (c) (d) activities aimed at obtaining new knowledge. the search for, evaluation and final selection of, applications of research findings or other knowledge. the search for alternatives for materials, devices, products, processes, systems or services; and the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, procedures, systems or services. Development Phase An intangible asset arising from development should be recognized if, and only if, an enterprise can demonstrate all of the following: (a) (b) (c) (d) the technical feasibility of completing the intangible asset so that it will be available for use or sale; its intention to complete the intangible asset and use or sell it; its ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a

4 market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and (f) its ability to measure the expenditure attributable to the intangible asset during its development reliably. Examples of development activities are: (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; and (d) the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services. Cost of an internally generated intangible asset The cost comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by the management. a) costs of materials and services used or consumed in generating the intangible asset; b) costs of employee benefits arising from the generation of intangible assets c) fees to register a legal right; and d) amortization of patents and licenses that are used to generate the intangible asset The following are not components of the cost of an internally generated intangible asset: (a) selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use; (b) clearly identified inefficiencies and initial operating losses incurred before an asset achieves planned performance; an d (c) expenditure on training staff to operate the asset. Past expense not be recognized as an asset Expenditure on an intangible asset that was initially recognized as an expense shall not be recognized as part of the cost of an intangible asset. Subsequent expenses Normally there are no additions to intangible assets and subsequent expenditures are incurred to maintain the economic benefits embodied in an intangible asset therefore, they are rarely capitalized. However, when subsequent expenditures are incurred on an acquired in process research and development project can be recognized if meets the recognition criteria. Measurement after recognition (i) (ii) Cost model After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortization and any accumulated impairment loss. Revaluation model After initial recognition an intangible asset whose fair value can be determined with reference to the active market shall be carried at revalued amount, less

5 subsequent accumulated amortization and subsequent accumulated impairment losses. Useful life In entity shall access whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units constituting, that useful life. 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. Many factors are considered in determining the useful life of an intangible asset, including: a) The expected usage of the asset by the entity and whether the asset could be managed efficiently by another management team; b) Typical product life cycles for the asset and public information on estimates of useful lives of similar assets that are used in a similar way; c) Technical, technological, commercial or other types of obsolescence; d) The stability of the industry in which the asset operates and changes in the market demand for the products or services output for the asset; e) Expected actions by competitors or potential competitors; f) The level of maintenance expenditure required to obtain the expected future economic benefits from the asset and the entity s ability and intention to reach such as level; g) The period of control over the asset and legal or similar limits on the use of the asset, such as the expiry dates of related leases; and h) Whether the useful life of the asset is dependent on the useful life of other assets of the entity. 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. 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. INTANGIBLE ASSETS WITH FINITE USEFUL LIVES Amortization Period and Amortization Method The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortization shall begin when the asset is available for use. Amortization shall cease at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 and the date that the asset is derecognized. The amortization 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. Residual Value 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;

6 i) residual value can be determined by reference to that market; and ii) it is probable that such a market will exist at the end of the asset s useful life. Review of Amortization Period and Amortization Method The amortization period and the amortization method for an intangible asset with a finite useful life shall be reviewed at least at each financial year-end. Such changes shall be accounted for as changes in accounting estimates in accordance with IAS 8. INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES An intangible asset with an indefinite useful life shall not be amortized. Review of Useful Life Assessment The useful life of an intangible asset that is not being amortized shall be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite of finite shall be accounted for as a change in an accounting estimate in accordance with IAS 8. Retirements and Disposals An intangible asset shall be derecognized: a) on disposal; or b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from de-recognition of an intangible asset shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset. Disclosure An entity shall disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets: a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortization rates used; b) the amortization methods used for intangible assets with finite useful lives; (c) the gross carrying amount and the accumulated amortization (aggregated with accumulated impairment losses) at the beginning and end of the period; (d) the line item(s) of the income statement in which the amortization of intangible assets is included; (e) a reconciliation of the carrying amount at the beginning and end of the period showing: (i) additions, indicating separately those from internal development and through business combination; (ii) (iii) (i) (ii) (iii) (iv) (v) retirements and disposals; increases or decreases during the period resulting from revaluations and from impairment losses recognized or reversed directly in equity Impairment of Assets (if any); impairment losses recognized in the income statement during the period. (if any); impairment losses reversed in the income statement during the period (if any); amortization recognized during the period; net exchange differences arising on the translation of the financial statements of a foreign entity; and other changes in the carrying amount during the period.

7 PRACTICE QUESTIONS Q 1 IAS 38 was issued in 1998 and was revised in 2004 deals with intangible assets who meet the recognition criteria under this IAS. a) Define intangible assets and provide recognition criteria for different types of assets covered under this IAS? (5) b) XYZ Limited during the year acquired a broadcasting FM Radio License from the Government. The total cost paid was Rs. 30 million. The license is awarded for thirty years and can be renewed for another thirty years for paying the same amount. The management of XYZ is willing to renew the license for ever. Required: Discuss the nature of the asset and provide accounting treatment? (5) c) XYZ Limited incurred the following expenses on an internally developed production process, which will improve the quality of goods produced. Rs. (000) Identification of alternative processes 100 Selection of best alternative 10 Technical feasibility 50 Raw material for pilot plant 10 Own labor cost of development 60 Trial run cost of pilot plant 20 Designing cost of process 30 Advertisement regarding improved 100 process Manufacturing of dies and tools Required: Calculate the cost of development to be recognized assuming the criteria for internally developed intangible asset under IAS 38 is satisfied? (5) Q 2 IAS 38 deals with accounting treatment of intangible assets held for use and IAS-2 deals with intangible assets developed for others in the ordinary course of business, which have become more important than the tangible assets in the knowledge based economy in the recent time. M/S SLQ Limited is a computer software development and marketing company. During the year ended June 30, 2009 the company has incurred following expenses and sought your opinion for the appropriate accounting treatment. (15) a) The company has developed new accounting software for retailers to facilitate them in filing sales tax returns and also maintaining appropriate books of accounts as required by Income Tax Ordinance The company incurred Rs. 200,000 on marketing the software and trained 10 employees with a cost of Rs. 150,000 for after sale service. The development cost of software worked out is Rs. 300,000. It is assumed that all the requisite criteria for internally developed intangible asset under IAS-38 are satisfied. b) The company made a contract with New Vision Real Estate Developers for developing software worth Rs. 2 million. At the end of the year the software is still under development and the following expenses have been incurred on developing the software. Rs. (000)

8 Salary of Personnel involved in development 200 Allocation of overheads (including 150 depreciation/amortization) Sales person salary involved in securing the contract 20 Profit margin on the contract 250 License cost of a back end software used exclusively for 100 this project The stage of completion of the software is not reliably measurable and the whole amount of revenue will be recognized at the time of completion of the software. c) The company also acquired all the shares of M/S SOFTECH Limited during the year another software development company and paid the consideration to the shareholders of SOFTECH in its own shares. The company issued its two shares for every five shares of SOFTECH. The issued share capital of SOFTECH was 5 million shares of Rs. 10 each and market value of SLQ shares was Rs. 60 per share. The assets and liabilities of SOFTECH along with their fair values was as follows: - Carrying value Fair value Rs. (m) Rs. (m) Brand name Not 35 recognized Computers and accessories License 5 25 Software Customer list Not 15 recognized Land and building Creditors Q - 3 An entity acquired a number of radio frequency licenses, which it has capitalized in accordance with the requirements of IAS 38. The licenses give the entity a contractual right to broadcast exclusively on specified radio frequencies for the next ten years. The licenses can be sold to third parties. Due to the limited availability of these licenses, and the commercial success of the radio stations using those frequencies, management considers the value of the licenses to be considerably more than carrying amount and intends to revalue them. The entity has conducted a valuation using a professional qualified valuer. (5) Q 4 X and Y are both development projects. Both projects are anticipated to be successful. They have clearly defined parameters. The project expenditure is carefully controlled. The prototypes proved successful. The budgets show sales will be in excess of total costs. Finance is readily available. Project X has commenced production and the revenues have started to flow in. X Y Rs.(000) Rs. (000) Cost incurred to Cost incurred to Costs incurred during the year

9 Total anticipated net revenue 30,000 15,000 Net revenue during the year 6, The company has however, charged all the expenses to profit and loss account although project X and Y were satisfying all the criteria under IAS 38 for internally developed intangible assets. The amortization of the contracts is based on the revenue to date to total expected revenue. No intangible asset has however been charged to profit and loss account before Required: -Describe with reasons the accounting treatment for the above issues and provide extracts to all the financial statements? (14) Q 5 An entity has developed a brand over many years now well known to business community and customers. The management of the entity has now decided to incorporate the value of brand in its financial statement and hired the services of a professional valuer. The valuer has placed a value of Rs. 100 million and the management of the entity delighted by the figure and put the query before you being the IFRS advisor for incorporating the brand in books of account. Now you are required to provide appropriate accounting treatment of the brand in the books of accounts? (10) Q 6 Haroon Limited got a favorable inspection from the Government, which awarded a license to manufacture a medicine free of cost. The fair value of the license is Rs. 2,000,000. This license can be renewed after ten years at a nominal cost of Rs. 25,000 for next ten years. The company intends to use this license for only seven years, which is also the expected life cycle of the medicine. Haroon Limited has entered into a binding sale agreement with the companyto sell the license after seven years to another manufacturer for Rs. 600,000. Required: - Determine whether it s an intangible asset and if yes the value at which it should be recognized and also amortization expense for the first year if any? (08) Q 7 Identify whether the following intangible assets should be recognized? (10) a) An assembled workforce of thirty people having lot of experience of production and binding contract to work with the company for five years. b) Internally generated brand developed over many years and having current fair value of Rs. 12 million. c) List of customers developed over many years in past having fair value of Rs. 2 million. d) Internally generated software costing Rs. 2 million, which can be sold to outsiders and have wide market of customers. e) The entity has recently got a free of cost license from Government having fair value of Rs. 3.5 million for five years. Q 8 Haroon Limited got a favorable inspection from the Government, which awarded a license to manufacture a medicine free of cost. The fair value of the license is Rs. 2,000,000. This license can be renewed after ten years at a nominal cost of Rs. 25,000 for next ten years. The company intends to use this license for only seven years, which is also the expected life cycle of the medicine. Haroon Limited has entered into a binding

10 sale agreement with the companyto sell the license after seven years to another manufacturer for Rs. 600,000. Required: - Determine whether it s an intangible asset and if yes the value at which it should be recognized and also amortization expense for the first year if any? (08) Q - 9 (a) A company has incurred following expenditure during the year: Rs. (i) Activities aimed at obtaining new knowledge 150,000 (ii) Designing dies involving new technology 100,000 (iii) Internally generated customer list 125,000 Assume that any of the above items that can be recognized as an intangible asset meets the recognition criteria. Required: Compute cost of intangible asset and amount to be charged to profit and loss account. (08) (b) The company is developing a new software program to sell it in open market. During year 2, the company has incurred expenditure on it amounting to Rs. 1 million. The company is able to demonstrate that at year end, the new software meets the criteria for recognition as an intangible asset except that the company is not sure whether it can sell the software in the market. Required: (i) Whether the cost incurred be carried as an intangible asset or charged to profit in the financial statements at the end of year 2. (03) (ii) Give short reasons for the treatment you suggest in (i) above. (03) Q 10 PDF Steel Manufacturing Company Ltd. purchased a building for its proposed research and development laboratory at a cost of Rs million. The building was placed in service on July 10, The estimated useful life of the building for depreciation purpose is 20 years. The company uses straight-line method for calculating depreciation and there is no estimated net salvage value. The laboratory has been designed to carry out research on various projects and will also help the company in the production of a highly technical tool which has a wide use in the manufacturing of ammunition. A summary of the number of projects and the cost incurred on research and development for the year ended June 30, 2006 are as follows:

11 No. of project s Salaries and employee benefits *Other directly attributabl e expenses Training of staff Completed projects with long term benefits 15 5,400,000 3,000,000 1,000,000 Abandoned projects or projects that benefit the current period only 10 3,900, , ,000 Projects in process results indeterminate 5 2,400, , ,000 Total 30 11,700,000 4,620,000 1,620,000 * excluding depreciation In view of the importance of some of the projects, the Government of Pakistan (GoP) provided the company a team of experts to support the research and development activities of the company. This team of experts worked on five projects which were successfully completed and have long term benefits to the company. It was worked out that had the company hired such team of experts, it would have cost them Rs. 7.5 million. On the recommendation of the research and development team, the company acquired a patent for manufacturing rights at a cost of Rs million. The patent was acquired on October 01, 2005, and has an economic life of 10 years. Required: How the above items relating to research and development activities would be reported on the company s financial statements. Show all necessary disclosures including the accounting policy. Assume that long term benefits mean 10 years on the average. (12) Q 11 In 2001, the management of Comfort Shoes Limited planned to acquire an international trademark to boost its sales and enter into the international market. In this respect, the management carried out a market survey and analyzed the information obtained to initiate the process. The relevant information is as follows: (i) The cost incurred on the survey and related activities during the year 2001 amounted to Rs. 1 million. (ii) An agreement was finalised and the company acquired the trademark effective January 1, According to the agreement Rs. 5 million were paid on signing

12 (iii) (iv) of the agreement and Comfort Shoes was required to pay 1% of sale proceeds of the related products on yearly basis. The analysis carried out at that time indicated that the trademark would have an indefinite useful life. The company has developed many new models under this trademark and successfully marketed them in the country as well as in international markets. However, in 2008 the company faced unexpected competition and had to discontinue the exports. It was estimated that due to discontinuation of exports, net cash inflows for the foreseeable future, would reduce by 30%. As a result the management was of the view that as of December 31, 2008 the carrying value of the trademark had reduced to 90%. Due to continuous inflation and flooding of markets with very low priced shoes, it was decided in December 2009 that use of the trademark would be discontinued with effect from January 1, Required: (a) Explain how the above transactions should have been accounted for in the years 2001 to 2007 according to International Financial Reporting Standards (IFRSs). (b) Prepare a note to the financial statements for the year ended December 31, 2009 in accordance with the requirements of IFRSs. Show comparative figures. (12) Q 12 Costs incurred for development and promotion of a brand are enumerated below: Rupees (i) Research on size of potential market 800,000 (ii) Products designing 1,500,000 (iii) Labour costs in refinement of products 950,000 (iv) Development work undertaken to finalize the product design 11,000,000 (v) Cost of upgrading the machine 18,000,000 (vi) Staff training costs 600,000 (vii) Advertisement costs 3,400,000 (06) Required: Discuss how the above investments/costs would be accounted for in the consolidated financial statement for the year ended 30 June ANSWERS A 1 a) An intangible asset is an identifiable non-monetary asset without physical substance. The recognition criteria for different types of assets are as under: - Externally acquired intangible assets The recognition of an intangible asset requires an entity to demonstrate that the item meets: - c) the definition of an intangible asset d) the recognition criterian that: - it is probable that the expected economic benefits that are attributable to the asset will flow to the entity; and the cost of the asset can be measured reliably

13 An entity shall assess the probability of expected 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. Acquired in the business combination An acquirer recognizes at the acquisition date separately from goodwill an intangible asset of the acquiree if the asset s fair value can be measured reliably, irrespective of whether the asset had been recognized by the acquiree before the business combination (Research and development). The circumstances when an entity cannot measure the fair value are when the intangible asset arises from legal or other contractual rights and either: - a) is not separable; or b) is separable, but there is no history or evidence of exchange transactions for the same or similar assets, and otherwise estimating fair value would be depended on immeasurable variables. Internally developed An intangible asset arising from development (or from the development phase of an internal project) should be recognized if, and only if, an enterprise can demonstrate all of the following: (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) (d) (e) (f) its ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and its ability to measure the expenditure attributable to the intangible asset during its development reliably. b) The FM radio license will be recognized as intangible asset having limited life because the substantial amount will be required to renew the license. Therefore, the license will be amortized over thirty years using straight line basis. The amortization expenses of 1 million will be recognized in each year. c) Cost of internally generated intangible asset Rs. (000) Raw material for pilot plant 10 Own labor cost 60 Trial run cost 20 Designing cost 30 Manufacturing of dies and tools A 2 a) The internally generated intangible assets are very difficult to recognize because of non-availability of reliable measure of historic cost and identification of point of time when the assets become ready to generate economic benefits. The cost of internally generated intangible assets are recognized initially at cost just like

14 inventory and included all the attributable cost incurred to develop but the cost of intangible assets will not include marketing and staff training cost. Therefore, the software must be recognized at Rs. 300,000 assuming all the expenses have been incurred after satisfaction of general and specific criteria given for internally developed intangible assets. b) The software under development on behalf of others in ordinary course of business will be dealt under IAS-2 (Inventory). IAS-2 will be applied to determine the cost of inventory, as the stage of completion is not reliably measurable; the cost incurred will be treated as inventory but only those costs which are permitted by the IAS. Therefore, the cost of software at the end of the year will be as follows: Rs. (000) Salary of personnel involved in 200 development Overheads directly attributable 150 License cost 100 Total cost of inventory 450 c) The accounting for business acquisitions and mergers are accounted for under IFRS-3 at the date of acquisition. The IFRS provide information for determining cost of investment, identifying the fair value of net assets of the acquiree and calculation of any resultant goodwill. Under the provisions of IFRS-3, the treatment will be as under: - Cost of investment is [(5x2/5) x 60] Rs. 120 million. The cost of investment is then compared with the fair value of net assets acquired at the date of acquisition, the resultant figure if positive will be goodwill otherwise is bargain purchase gain. Rs. (m) Cos of investment 120 Less: fair value of net asset acquired Brand name 35 Computer and accessories 10 License 25 Software 30 Customer list 15 Land and building Creditors (40) Net assets 135 Bargain purchase gain (15) The bargain purchase gain will be immediately recognized in income statement of the group. A -3 The entity should not carry the licenses at a revalued amount because a qualifying market for the sale of licenses does not exist. IAS 38 only permits the use of revaluation where the intangible asset s fair value can be determined by reference to an active market.

15 An active market is one where all the following condition exist the items traded within the market are homogeneous; willing buyers and sellers can normally be found at any time; and prices are available to the public. It will not be possible to carry the licenses at revalued amounts unless there is a highly liquid, public market for the trading of such licenses, such that they are freely transferable. The nature of the licenses themselves, whereby certain licenses/frequencies may be more sought-after than others and with certain frequencies only being for certain types of use, means that there will not be a homogeneous market. A-4 The internally generated intangible assets which do not meet the recognition criteria initially cannot be recognized subsequently through revaluation or fair valuation. The internally generated intangible assets can only be recognized by the acquirer at the date of acquisition at fair value. A-5 This can be recognized as intangible asset at fair value of Rs. 2,000,000. The amortization expense will be Rs. 200,000. [(2,000, ,000)/7] A-6 a) Intangible assets can only be recognized if they are identifiable and they can only identifiable if they are either separable or generated from contract of agreement. As the assembled work force does not meet the identifiable criteria and also the management cannot exert valid control over the employees therefore, it cannot be recognized as intangible asset under IAS 38. b) The recognition criteria under IAS 38 for internally generated intangible assets do not allow recognizing those assets whose cost is not reliably measurable. If an asset not initially recognized because it does not satisfy the recognition criteria cannot be recognized afterwards even through revaluation model. c) The list of customers internally generated cannot be recognized on same conditions discussed in b) above. d) The internally generated software can be recognized as intangible asset because it satisfies the recognition criteria under IAS 38. e) The entity has the choice to recognize this intangible asset at fair value or at nominal value. If the entity wants to recognize this at fair value then Government Grant will also be recognized as deferred income and then amortized over the useful of the asset in the same pattern in which the intangible asset will be amortized. A-7 This can be recognized as intangible asset at fair value of Rs. 2,000,000. The amortization expense will be Rs. 200,000. [(2,000, ,000)/7] A-8 a) The training cost cannot be recognized as an intangible asset because it does not satisfy the recognition criteria given under IAS 38. The training cost mainly fails the identifiable and control criteria under IAS 38. b) The operating system will not be recognized as intangible asset. The cost of operating system will be added in the cost of hardware. The total cost of hardware will be Rs million.

16 The cost of technical feasibility will be expensed out and charged to profit or loss account. The cost of pilot plant will be recognized as intangible asset under IAS 38. A 09 a) Cost of intangible asset / expense to profit or loss account Intangible asset Expense in profit of loss account Rs. Rs. Activities aimed at obtaining new knowledge ,000 Designing dies involving new technology 100, Internally generate customer list 125,000 Total 100, ,000 b) Expense on internally generated software i) The whole amount of expense will be charged to profit or loss account as the management was not able to demonstrate, how this asset will generate economic benefits. ii) Under IAS 38 an internally generated asset is required to qualify all six criteria s given under the said IAS. As one of the criteria is failed it cannot be recognized as intangible asset. A 10 a) Intangible asset/expense Intangible asset Expense in profit of loss account Rs. Rs. Completed projects Salaries 5,400, Other attributable expenses 3,000,000 Training cost of staff -- 1,000,000 Abandoned projects Salaries 3,900,000 Other attributable expenses 900,000 Training cost of staff 300,000 Projects in process-results indeterminate Salaries 2,400,000 Other attributable expenses 720,000 Training cost of staff 320,000 Patent acquired 5,890,000 Total 14,290,000 9,540,000 b) Statement of financial position Rs. Rs. Intangible assets 13,995,500

17 Statement of comprehensive income Profit or loss account Research expense 9,540,000 Amortization of development cost 294,500 9,834,500 A 11 (a) Notes to the accounts 1- Intangible assets particulars Cost Rate Accumulated amortization Closing WDV Rs. Rs. Rs. % Rs. Rs. Rs. Rs. Developments -- 8,400,000 8,400, ,400,000 Patents -- 5,890,000 5,890, , ,500 5,595,500 14,290,000 14,290, , ,500 13,995,500 *Note its assumed that development completed at the yearend therefore, no amortization in the current year 2- Accounting policy Research and Development - Patents Research expenditure is recognized as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognized as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably. The expenditure capitalized comprises all directly attributable costs, including costs of materials, services, direct labor and an appropriate allocation of overheads. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Capitalized development costs are recorded as intangible assets and amortized from the point at which the asset is ready for use on a straight-line basis over its estimate useful life, usually 10 years. In accordance with the IAS transactions related to the trademark as given in the question should be accounted for as explained below: (i) As the costs and benefits of the trade mark cannot be measured reliably, and it was not even decided at that time to buy the trademark, the cost of Rs. 1 million incurred in 2001 to carry out market survey should have been expensed out in the year (ii) In 2002, the rights to use the trademark for the company's products have been obtained and costs and benefits of the trademark were measured reliably. Therefore, initially the trademark should have been accounted for as an intangible asset at a cost of Rs. 5 million.

18 (b) At that time the trademark was estimated to have indefinite useful life as there was an expectation that it will contribute to net cash inflows indefinitely. Therefore, the trademark should not have been amortized. However, the trademark should have been tested for impairment and the cost should have been reduced, if required. Trademark fee payable at 1% of annual sales should have been treated as a periodical cost and charged to expense in the year of sales. Comfort Shoes Limited Notes to the Financial Statements For the year ended December 31, 2008 Intangible Assets - Trademark Rupees in '000 Cost January 1 4,500 5,000 For the year - - (500) December 31 4,500 4,500 Amortization January For the year 2,250 - December 31 2,250 - Net book December 31 2,250 4,500 % / useful life 50% / 2 years The amortization expense for the year has been allocated to cost of sales. A 12 Answer -3 (b) The invested amount in Brand should be accounted for as follows: Expense Income Statement Intangible assets Property, plant and equipment Rupees Research on size of potential market (a) 800, Product designing - (b) l,500,000 - Labour costs in refinement of - (b) 950,000 - products Development work undertaken to finalize the product design - (b) l 1,000,000 - C 'dm of upgrading machine - - (c) 18,000,00 0 Staff training costs (a) 600, Advertisement costs (a) 3,400, ,800,000 13,450,000 18,000,000

19 (a) -38 does not allow capitalization of research cost, staff training costs and advertisement costs as these are not directly attributable costs. Therefore these expenditures should be expensed out. (b) Development expenditure is capitalized when CTML demonstrates all the following: The technical feasibility of completing the intangible asset so that it will be available for use or sale. CTML's intention to complete the intangible asset and use or sell it. CTML's ability to use or sell the intangible asset. That the intangible asset will generate probable future economic benefits. The availability of adequate technical, financial and other resources to complete the development and to use or sell it. CTML's ability to measure reliably the expenditure attributable to the intangible asset during its development. Assuming that all these criteria are met, the cost of development should comprise directly attributable costs necessary to create the asset and to make it capable of operating in the manner intended by management. The cost of upgrading the machines is tangible asset and should be regarded as property, plant and equipment.

20 INVESTMENT PROPERTY (IAS-40) OBJECTIVE The objective of this IAS is to prescribe the accounting treatment for investment property and related disclosure requirements. SCOPE This IAS does not deal with the following: - The biological assets related to agricultural activity (IAS 41 and IAS 16) Mineral rights and mineral reserves such as oil, natural gas and similar nonregenerative natural resources. DEFINITIONS The following terms are used in this Standard with the meanings specified: Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business. The investment property is held to earn to rentals or for capital appreciation or both therefore, the investment property unlike owner s occupied property is capable to generate economic benefits independently from other assets held by the entity. Owner-occupied properly is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes. The following are examples of investment property: Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business. Land held for a currently undetermined future use. (If an entity has not determined that it will be use the land as owner-occupied property or for shortterm sale in the ordinary course of business, the land is regarded as held for capital appreciation). A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating lease. A building that is vacant but is held to be leased out under one or more operating leases. The following are examples of items that are not investment property and are therefore outside the scope of this Standard. Property intended for sale in the ordinary course of business or in the process of construction or development for such sale (IAS 2 Inventories), for example, property acquired exclusively with a view to subsequent disposal in the near future or for development and resale. Property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts). Owner-occupied property (IAS 16), including property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees (whether or not the employees pay rent at market rates) and owner-occupied property awaiting disposal. Property that is leased to another entity under a finance lease.

21 Properties for Dual Purpose Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately or leased out separately under finance lease, an entity accounts for the portions separately. If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purpose. Inra-group Properties If an entity owns property that is leased to and occupied by its parent or another subsidiary, the property does not qualify as investment property in the consolidated financial statements, because the property is owner-occupied from the perspective of the group. However, from the perspective of the entity that owns it, the property is investment property if it meets the definition. Therefore, the lessor treats the property as investment property in its individual financial statements. Investment Property and Ancillary Services If an entity provides ancillary services to the occupants then the quantum of services should be determined if those are significant (Hotel) then the property will not be investment property. On the other side if the services are insignificant to the whole arrangement (security and maintenance) the property can be taken as investment property. RECOGNITION Investment property should be recognized as an asset when two conditions are met. It is probable that the future economic benefits that are associated with the investment property will flow to the enterprise. The cost of the investment property can be measured reliably. MEASUREMENT Initial measurement An investment property should be measured initially at its cost, including transaction costs (professional for legal services, property transfer taxes and other transaction cost). The cost of investment property will not include start up cost, operating losses or abnormal amount of wastages. If the payment for investment property is deferred beyond normal credit terms then the cost of the property is cash price. SUBSEQUENT EXPENDITURE This should be added to the carrying amount of the investment property when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing investment property will flow to the enterprise. All other subsequent expenditure should be recognized as an expense in the period in which it is incurred. MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION IAS 40 requires an enterprise to choose between two models. The fair value model; or The cost model Whatever accounting policy has been chosen that should be applied to all of investment properties except: - An entity may choose cost or fair value model for all investment property backing