Non-current Assets. Prof.(FH) Dr. Walter Egger

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1 Non-current Assets Prof.(FH) Dr. Walter Egger

2 IAS 38 Intangible Assets Intangible Asset Is an identifiable non-monetary asset without physical substance Identifiability Seperable (can be seperated, divided from the entity, sold, transfered, licensed, rented or exchanged) or Arises from contractual or other legal rights Control The entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access to others to those benefits

3 IAS 38 Intangible Assets Future Economic Benefit Revenue from the sale of products or services, Cost savings, Benefits resulting from the use of the asset (e.g. use of intellectual property in a production process) Recognition and measurement Item meets the definition of an intangible asset Item meets the recognition criterias

4 IAS 38 Intangible Assets Recognition Criterias Probability of the expected future benefit Cost of the asset can be measured reliably Assumptions for the future benefit are reasonable and supportable, at management s best estimate

5 IAS 38 Intangible Assets Initial Measuring At cost Seperate Acquisition The expectations of the acquirer about the expected future economic benefits are reflected in the cost of an asset (The effect of probability is reflected in the cost of the asset) Cost» Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates» Any directly attributable cost of preparing the asset for its intended use

6 IAS 38 Intangible Assets Expenditures that are not part of an intangible asset Cost of introducing a new product or service Cost of conducting business in a new location Administration and other general overhead cost Cost in a carrying amount ceases when the asset ist in the condition necessary for it to be capable of operating in the manner intended by managment Asset is capable of operating but not brought into use Initial operating losses

7 IAS 38 Intangible Assets Acquisition as Part of a Business Combination Intangible asset meets the definition of an asset Is identifiable, seperable or arises from contractual or other legal rights Subsequent Expenditure on an acquired inprocess R&D project To be capitalised in the carrying amount if the criterias of initially generated intangible assets are met Government Grants IAS 20

8 IAS 38 Intangible Assets Internally generated Goodwill Not an asset Internally generated Intangible Assets Problems: Identifying whether and when there is an identifyable asset that will generate future economic benefits and Determining the cost of the asset reliably

9 IAS 38 Intangible Assets Initially generated intangible assets: expenses capitalisation amortisation Research phase Development use Techn.Feasibility Ready to use

10 IAS 38 Intangible Assets Research Phase Recognised as an expense Future economic benefit is not reliable Examples 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 Formulation, design, evaluation, final selection of possible alternatives

11 IAS 38 Intangible Assets Development Phase The technical feasibility of completing Intention to complete the intangible asset and use and sell it Ability to use or sell it Probablilty of generating future economic benefits (existence of a market for the output of the intangible asset) Availability of adequate technical, financial and other resources to complete the development and to use or sell it Ability to measure reliably the expenditure to the intangible asset during ist development

12 IAS 38 Intangible Assets No recognition as an asset of Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance Cost of an internally generated intangible assets Cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management Cost of materials and services used or consumed in generating the intangible asset Cost of employee benefits arising from the generation of the intangible asset Fees to register a legal right Amortisation of patents and licences that are used to generate the intangible asset

13 IAS 38 Intangible Assets No components of cost Selling, administrative and other general expenditure unless this expenditure can be directly attributed to preparing the asset for use Identified inefficiencies and initial operating losses incurred before the asset achieves planned performance Expenditure on training staff to operate the asset

14 IAS 38 Intangible Assets Recognition as an expense (Even if providing future economic benefit) Start-UP Cost Training activities Expenditure on advertising and promotional activities Expenditure on relocating or reorganising part or all of an entity

15 IAS 38 Intangible Assets Measurement after recognition Cost model Cost less any accumulated amortisation and any accumulated impairment loss Revaluation Model Fair value shall be determined by reference to an active market Not for: brands, newspaper mastheads, music and film publishing rights, patents or trademarks, because each of such asset is unique Frequency of refvaluations depend on the volatility of the fair value, probably annual revaluation

16 IAS 38 Intangible Assets If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market recognition at cost No longer be determined by reference to an active market revalued amount (but IAS 36) Increase of the amount of an intangible asset as a result of a revaluation Recognition direct in equity (revaluation surplus) Decrease Direct in equity unless it is more than the existing revaluation surplus (in this case recognised in profit and loss) Realisation because of disposal or retirement of the surplus not through profit and loss (direct to retained earnings)

17 IAS 38 Intangible Assets Useful life An entity shall assess whether the useful life of an intangible asset is finite or infinite Infinite when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period of generating cash flows Factors in determining the useful life Expected usage Typical product life cycles and public information on estimates of useful lives of similar assets

18 IAS 38 Intangible Assets Technical, technological, commercial or other types of obsolescence Stability of the industry (changes in market demand) Expected actions by competitors Level of maintainance Period of control over the asset Whether the useful life of an asset is dependent on the useful life of other assets of the entity Useful life of an intangible asset can be long or even indefinite On a prudent basis it can be amortised but not too short

19 IAS 38 Intangible Assets Intangible assets from contractual or other legal rights period of the contract or shorter Renewal of contractual or other legal rights without significant cost Evidence or contingency concerning renewal Evidence that conditions for renewal will be satisfied Cost are not significant if future benefit is higher than cost of renewal

20 IAS 38 Intangible Assets With finite useful lives Amortisation until classified as held for sale Amortisation shall begin when the asset is available for use Residual value Zero unless Commitment by a third party to purchase the asset at a certain value Active market With indefinite useful lives No amortisation Impairmenttest (annually and whenever there is an indication for impairment)

21 IAS 38 Intangible Assets Retirements and Disposals Derecognition On disposal When no future economic benefit ist to expected Gain or loss Diffence between net proceeds and carrying amount of the asset in P/L Gains are never revenue

22 IAS 38 Intangible Assets Disclosures Useful lives (definite, indefinite) Amortisation methods Analysis of intangible assets (Anlagenspiegel) Grouping of assets with similar nature

23 IAS 38 Intangible Assets Revaluated amounts By class of intangible assets Effective date of revaluation Carrying amount of revalued intangible assets Carrying amount if using the cost model Amount of revaluation surplus arising from intangible assets Methods and significant assumptions applied in estimating the assets fair values R&D expenditure the aggregate amount

24 IAS 16 Property, Plant and Definition Tangible items Equipment Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and Are expected to be used during more than one period

25 IAS 16 Property, Plant and Equipment Recognition Cost of an item shall be recognised as an asset if Probable future economic benefits Cost can be measured reliably Usually spare parts and servicing equipment are carried as inventory and recognised in profit or loss as consumed Major spare parts and stand-by equipment qualify as property, plant and equipment

26 IAS 16 Property, Plant and Equipment Measurement at recognition at cost Elements of cost Purchase price (including import duties, nonrefundable purchase taxes, after deducting trade discounts and rebates) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management Costs of dismantling, removing the item and restoring the site on which it is located

27 IAS 16 Property, Plant and Equipment Directly attributable costs Cost of employee benefits arising directly Costs of site preparation Initial delivery and handling costs Installation and assembly costs Costs of testing Professional fees

28 IAS 16 Property, Plant and Equipment No costs of an item of fixed assets Cost of opening a new facility Cost of introducing a new product or service Cost of conducting business in a new location or with a new class of customer Administration and other overhead cost Expenses after initial recognition Cost incurred because of a new fixed asset which operates at less than full capacity Initial operating losses Costs of relocating or reorganising part or all of an entity s operations

29 IAS 20 Government Grants Presentation of Grants relating to Assets Deferred income + full fixed asset Or Grant is deducted from the cost of the fixed asset

30 IAS 16 Property, Plant and Equipment Measurement after Recognition Cost model Cost less any accumulated depr and accumulated impairment losses Revaluation model Fair value can be measured reliably Fair value less subsequent accumulated depr or less subsequent accumulated impairment loss Revaluation every 3 to 5 years Land and buildings market-based evidence by appraisal, undertaken by professionally qualified valuer With no market-related information depreciated replacement cost approach

31 IAS 16 Property, Plant and Equipment An entire class of property, plant and equipment shall be revalued Examples for classes: Land and buildings Machinery Ships Aircraft Motor vehicles Furniture and fixtures Office equipment Revaluation surplus (reserve) Decrease more than reserve, then through P/L

32 IAS 16 Property, Plant and Depreciation in P/L Useful life Equipment Residual value normally zero Determining the useful life Expected usage of the assets Expected physical wear and tear Technical or commercial obsolescence Legal or similar limits on the use of an asset

33 IAS 16 Property, Plant and Equipment Depreciation method Methods like in UGB (straight line, degressive, progressive ) Impairment IAS 36 is to be applied

34 IAS 36 Impairment of Assets Recoverable amount Of an Asset or an Cash generating unit is the higher of its fair value less costs to sell and its value in use Value in use Present value of the future cash flows expected to be derived from an asset or cashgenerating unit

35 IAS 36 Impairment of Assets If there is an indication for impairment Estimation of the recoverable amount External sources for indication Internal sources for indication Measuring Fair value less cost to sell Best evidence is binding sale agreement in an arm s length transaction Otherwise reliable estimate

36 IAS 36 Impairment of Assets Value in use Calculation out of expected future cash flows Free cash flows Discount rate Reversal Pre-tax rate that reflects current market assessments of time value of money and risk specific to asset At the moment indicated

37 IAS 16 Property, Plant and Derecognition On disposal Equipment When no future economic benefits are expected Gain: proceeds minus carrying amount

38 IAS 16 Property, Plant and Equipment Disclosures For each class of property, plant and Equipment Measurement bases for gross carrying amount Depreciation methods Useful lives Analysis of property, plant and equipment Revaluated items Effective date of the revaluation Whether an independent valuer was involved Methods and significant assumptions Revaluation surplus

39 IAS 17 Leases Finance leases (items to be recognised at the lessee) Indicators The lease transfers ownership of the asset to the lessee by the end of the lease term Bargain purchase option The lease term comprises the major part of the economic life of an item Present value of the lease payment > fair value of the item at the beginning of the lease Assets are of a specilised nature

40 IAS 17 Leases Sale and Leaseback transactions If sale and leaseback transaction result in a finance leaseback Proceeds are to be deferred and amortised over lease term

41 IFRS 5 Non Current Assets held for Classification Sale If the carrying amount will be recovered principally through a sale transaction rather than through continuing use Measurement The lower of ist carrying amount and fair value less cost to sell No more depreciation Impairment and reversals

42 IAS 40 investment properties Property (land or building or part of a building) Held for rentals or for capital appreciation or both Rather than Use in the production or supply of goods or services, or aministrative purposes Sale in the ordinary course of business

43 IAS 40 investment properties examples Long term held for appreciation Land held for undetermined use For rentals with minor sales Vacant but held to be leased out Examples for no investment properties Held for sale in course of business (IAS 2) Property beeing constructed on behalf of third parties Owner occupied properties

44 IAS 40 investment properties recognition The future economic benefits are probable Cost can be measured reliably

45 IAS 40 investment properties Measurement at recognition At cost Transaction costs included Directly attributable costs Not to be increased by Start-up costs Operating losses Abnormal amounts of wasted material, labour, etc

46 IAS 40 investment properties Measurement after recognition Fair value model Cost model

47 IAS 40 investment properties Fair market value After initial recognition at cost Increase or decrease of the fair value direct in P/L No depreciation because of annually revaluation

48 IAS 40 investment properties Fair market Value Determination of a fair value Value has to reflect the market and the individual situation on closing date method: present value of future cash flows (valuer should be an independent professional appraiser) otherwise: cost model like IAS 16

49 IAS 40 investment properties Cost model IAS 16 cost less accumulated depreciations Analysis of assets

50 IAS 40 investment properties Transfers changes in use Commencement of owner-occupation Commencement of use as inventory End of owner-occupation Begin of operating lease End of construction Measurment depends on prior use Owner-occupation revaluation surplus Other cases through P/L

51 IAS 40 Investment properties disposals Disposals or change into finance lease P/L Gains to be deferred if payments in instalments over several years Proceeds less carrying amount

52 IAS 40 Investment properties Disclosures Fair value model and cost model Disclosures like in IAS 17 (Leases) Minimum leasing payments 1 year 2-5 years over 5 years Amount of received Lease payments Description of the contracts

53 IAS 40 Investment properties Cut off against owner occupied properties Methods and assumption for valuation Extent to which independent appraiser have been working P/L Rental income Direct operation expenses (including repairs and maintainance) during use of property Direct operation expenses of vacancies Restrictions to sell properties Other contractual obligation with properties

54 IAS 40 Investment properties Fair value model additions Additions resulting from business combinations Assets classified held for sale or other disposals Net gains or losses from fair value adjustments Net exchange differences arising on the translation of the financial statements Transfers to owner occupation Other changes

55 IAS 40 - disclosures Single properties at cost model description Explanation why no fair value Range of estimate disposal Fact that no fair value Carrying amount at selling date Gains/losses via P/L

56 IAS 40 Investment properties Cost model Additional disclosures Methods of depreciation Useful lives Analysis of assets Fair value, if can t be determined Description of property Explanation why no reliable fair value Range of estimate

University of Economics, Prague. Non-current tangible and intangible assets (IAS 16 & IAS 38)

University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Non-current tangible and intangible assets (IAS 16 & IAS 38) 1FU486 IFRS David Procházka