Intangible Assets IAS 38, IAS 36, IFRS 3

Intangible Assets IAS 38, IAS 36, IFRS 3 Agenda 1. Introduction 2. Recognition 3. Measurement 4. Impairment of intangible assets (IAS 36) Basic concept Cash-Generating Units 5. Disclosures 2 1

Introduction Definition Intangible assets (IAS 38.8) are characterised as follows: Identifiable Non-monetary and without physical substance Controlled by an entity as a result of a past event Future economic benefits are expected to flow to the entity If an item does not meet all the above mentioned criteria, it can not be accounted for as an intangible asset in the sense of IAS 38.8. 3 Introduction Definition Intangible assets can be achieved by means of: Separate acquisition Acquisition as part of a business combination Acquisition by way of a government grant Exchanges of assets Internal generation 4 2

Agenda 1. Introduction 2. Recognition 3. Measurement 4. Impairment of intangible assets (IAS 36) Basic concept Cash-Generating Units 5. Disclosures 5 Recognition Requirements for recognition The recognition of an item as an intangible asset requires certain conditions: 1. Meeting the definition (IAS 38.18 in conjunction with IAS 38.8-17) Identifiability Control of the item by the entity Future economic benefits 2. Meeting the general recognition requirements (IAS 38.21-23) Expected future economic benefits are probable Cost can be measured reliably 3. Meeting the particular recognition requirements (IAS 38.25-67) for example in case of internally generated intangible assets 6 3

Recognition Identifiability (IAS 38.11-12) Identifiability means: asset can be distinguished from goodwill There are 2 possibilities to demonstrate the identifiability: 1. Asset is separable, ie it is capable of being separated or divided from the entity - sale - transfer - licensing - renting - exchange individually or together with a related contract 2. Contractual or legal right (regardless of whether those rights are transferable or separable from the entity) 7 Recognition Probable future economic benefits (IAS 38.17; 21-23) Evidence of probable future economic benefits is based on (subjective) expectations of the management Probability of economic benefits Reasonable and supportable assumptions Best estimates of the management Relating to the useful life of the asset External evidence with greater weight Reliable measurement Generally transaction price Costs in case of internal generation Further recognition requirements for internally generated intangible assets enclosed in IAS 38 8 4

Recognition If recognition requirements are not met: (IAS 38.68) Expenditure on an intangible asset has to be recognised as expenses when it is incurred (expense of the period) 9 Recognition Additional criteria in case of internal generation Research: original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. (IAS 38.8) Development: 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. (IAS 38.8) 10 5

Recognition Additional criteria in case of internal generation Recognition of an internally generated intangible asset is only allowed for intangible assets resulting from the development phase. Process of generating an asset Research phase (IAS 38.54) Not meeting one of the additional criteria Development phase Meeting all the additional criteria of IAS 38.57 Prohibition to recognise as an intangible asset 11 Obligation to recognise as an intangible asset Recognition Subsequent expenditures Subsequent expenditures for intangible assets are in general expenses of the period as they normally maintain the expected future economic benefits (IAS 38.20). Subsequent expenditures to add or to replace the intangible assets are to be treated in accordance with the general recognition requirements with IAS 38.21 (IAS 38.18). General recognition requirements: It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; The cost of the asset can be measured reliably. Recognition as an intangible asset! 12 6

Agenda 1. Introduction 2. Recognition 3. Measurement 4. Impairment of intangible assets (IAS 36) Basic concept Cash-Generating Units 5. Disclosures 13 Measurement Initial measurement Initial measurement is dependent on the transaction to get the control: Separate acquisition (IAS 38.27 ff.) acquisition cost incl. any directly attributable cost of preparing the asset for its use Internal generation (IAS 38.65 ff.) production cost (incl. borrowing costs according to IAS 23, if applicable) Acquisition as part of a business combination (IAS 38.35 ff.) acquisition cost based on fair value Exchange (IAS 38.45 ff.) in general fair value of the transferred asset Capitalization of those expenses incurred after recognition requirements are fully met! 14 7

Measurement Subsequent measurement 2 ways for subsequent measurement: Cost model (IAS 38.74) cost less any accumulated amortisation less any accumulated impairment losses (IAS 38.111 / IAS 36) reversing of impairment losses (due to IAS 36) Revaluation model (IAS 38.75 ff.) precondition: active market regular (but not annually) accumulated amortisation (after revaluation) decrease in value shall be recognised in profit or loss. However, decrease shall be recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of this asset Reduction of the amount accumulated in equity under the heading of revaluation surplus. increase in value to be recognised in other comprehensive income (revaluation surplus); recognition to profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss (up to amortized cost). 15 Measurement Depreciation over the useful life Subsequent measurement is determind by the useful life: 2 ways Indefinite useful life Finite useful life (IAS 38.107 ff.) (IAS 38.97 ff.; 104) No systematic depreciation Impairment-testing in accordance with IAS 36 at each financial year end and in case of triggering events Review of useful life assessment at least at each financial year-end Depreciation on a systematic basis over the useful life Impairment-testing in accordance with IAS 36 only in case of a triggering event Review of the amortisation period and amortisation method at least at each financial year-end 16 8

Agenda 1. Introduction 2. Recognition 3. Measurement 4. Impairment of intangible assets (IAS 36) Basic concept Cash-Generating Units 5. Disclosures 17 18 9

Agenda 1. Introduction 2. Recognition 3. Measurement 4. Impairment of intangible assets (IAS 36) Basic concept Cash-Generating Units 5. Disclosures 19 Basic concept yes Indication that an asset may be impaired (triggering events; IAS 36.9)? o r Existence of an intangible asset: (IAS 36.10) - not yet available for use, - with indefinite useful life, - Goodwill (no systematic depreciation) 2. Need for impairment? Calculation (estimation) of the recoverable amount + recognition of impairment yes 20 10

Basic concept Indication for Impairment (IAS 36.12 ff.) EXTERNAL sources of information: Significant decline of market value Significant changes in the technological, market, economic or legal environment Increase of market interest rates or other market rates of return on the investment Carrying amount of the net assets is more than the market capitalisation INTERNAL sources of information: Physical damage or obsolescence of an asset Significant changes in the manner in which an asset is used Economic performance will be worse than expected 21 Carrying amount > Basic concept Impairment-Testing Recoverable amount Higher of Fair Value less costs to sell Value in Use objective market price (IFRS 13, IAS 36.28) Present value of future cash inflows and outflows to be derived from continuing use and net cash flows from ultimate disposal (viewpoint of the entity; IAS 36.30ff.) 22 11

Basic concept Impairment-Testing: comparison of value concepts Fair Value = Fair Value less costs to sell = Value in Use Market related determination ( in arm s length transaction ) independent of an existing market price Market related determination ( in arm s length transaction ) independent of an existing market price Consideration of costs to sell (legal costs, transaction taxes etc.) Subject to presumptions and discretionary power of management with respect to valuation items (management s best estimate) Analogy with Fair Value less costs to sell documents equivalence of external expectations and internal estimations of management 23 Basic concept Impairment-Testing: fair value less costs to sell Basics for determination binding sale agreement market price best estimate (e.g. for attributable costs to sell) Evaluation methods (decreasing hierarchy) Market value DCF Value (Present value of cash inflows and outflows or cost savings) Cost value (Cost of reproduction considering depreciation and obsolescence) If fair value less costs to sell > carrying amount after deduction of accumulated depreciation and accumulated impairment losses, no further review or assessment 24 12

Basic concept Impairment-Testing: recognition of impairment If: recoverable amount < carrying amount Reduction of the carrying amount to its recoverable amount; amortisation of the remaining carrying amount over the remaining useful life + Policy: immediate recognition in profit or loss Exception: revalued assets: (e.g. IAS 16, 38) 1. revaluation decrease debited directly to other comprehensive income under revaluation surplus 2. remaining amount after full compensation of the revaluation surplus: recognition in profit or loss 25 Basic concept Reversing an impairment loss Review/assessment based on internal and external information at each end of the reporting period whether there is any indication that an impairment loss recognised in prior years for an asset other than goodwill may no longer exist or may have decreased In case of omission of former reasons for impairment Policy: mandatory reversing of the impairment loss, recognised in profit or loss (except for goodwill) valuation with historical cost: cap: amortised cost revaluation: recognised in profit or loss up to the amount of amortized cost (as the former impairment was previously recognized in the profit or loss); the exceeding amount is credited directly to other comprehensive income (revaluation surplus). 26 13

Agenda 1. Introduction 2. Recognition 3. Measurement 4. Impairment of intangible assets (IAS 36) Basic concept Cash-Generating Units 5. Disclosures 27 Cash-Generating Unit Definition Recoverable amount for the individual asset not determinable and estimable Determination of the recoverable amount of the CGU the asset belongs to Cash-Generating Unit (CGU) Smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets 28 14

Cash-Generating Unit Definition As goodwill normally does not generate own cash flows allocation of goodwill to the CGU for impairment purposes Steps (IAS 36.65 ff.) Definition of the CGU Estimation of the recoverable amount Allocation of goodwill to CGU Testing for impairment Impairment loss and reversing an impairment loss Recognising and measuring an impairment loss for individual assets or goodwill by applying a CGU is heavily influenced by best estimation of management 29 Agenda 1. Introduction 2. Recognition 3. Measurement 4. Impairment of intangible assets (IAS 36) Basic concept Cash-Generating Units 5. Disclosures 30 15

Disclosure requirements Disclosures regarding (IAS 36.126 ff.) Events and circumstances that led to the recognition or reversal of the impairment loss The amount of the impairment loss recognised or reversed Additional disclosure requirements due to IFRS 3 (Business combinations: goodwill) Additional disclosure requirements regarding cash-generating units, especially when the recoverable amount is based on value in use 31 Land, Leasehold rights and Buildings 16

Land and Buildings Summary of accounting for properties Fixed assets for use in production/supply of goods/services or administrative purposes Yes Non-Current No held to earn rentals or for capital appreciation Current Current assets held for sale in the ordinary course of business IAS 16 Property Plant Equipment Revalue to fair value OR Revaluation surplus Depreciation Impairment (IAS 36) Cost Depreciation Impairment (IAS 36) IAS 40 Investment Properties Choose either and apply to all IPs Fair value Changes of fair values are recorded directly to income statement IAS 2 Inventory Lower of cost or Net Realisable Value 33 Property Plant and Equipment IAS 16 17

Agenda Scope of IAS 16 Definitions Recognition Recognition criteria Component approach Subsequent cost Measurement Initial measurement Subsequent measurement Key disclosures 35 IAS 16 shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment Scope IAS 16 does not apply to (not exclusive): property, plant and equipment classified as held for sale (IFRS 5) 36 18

Definitions (I) Property, plant and equipment (PP&E): tangible items that: 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 Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction 37 Definitions (II) Useful life: the period over which an asset is expected to be available for use by an entity, OR the number of production or similar units expected to be obtained from the asset by an entity Carrying amount: the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses Residual value: the estimated amount an entity would currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life 38 19

Recognition (I) Recognition criteria An item of PP&E is recognised as an asset when: item meets definition of a (tangible) asset, AND it is probable that future economic benefits associated with the asset will flow to the entity, AND the cost of the asset to the entity can be measured reliably Component approach! 39 Recognition (II) Component approach Component approach Main concept: Each material component of a composite asset with different useful lives or different patterns of depreciation is accounted for separately for the purpose of depreciation and accounting for subsequent expenditure (including replacement and renewal). Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. If a component is replaced an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing parts. The carrying amount of those parts that are replaced is derecognised. Not part of the component approach are the costs of the day-to-day servicing of the item. 40 20

Recognition (III) Component approach: Example At January 1, 2009, company D purchases a building; the cost of the building amount to 1.000.000. An analysis shows that the building can be divided into five independent components: the roof, the lift, the security system, the bricking and the rest of the building (rest). The company decides that the roof has to be replaced every 10 years, the security system and the lift each after 5 years. The rest of the building can be used over 40 years without any major refurbishments. The company uses the component approach. The costs of the components of the building are as follows: Roof 200.000 Lift 100.000 Security system 20.000 Bricking 400.000 Rest 280.000 1.000.000 41 Recognition (IV) Component approach: Example At December 31, 2010, the book values of the respective components are as follows : Roof 160.000 Lift 60.000 Security system 12.000 Bricking 380.000 Rest 266.000 878.000 By non-application of the component approach but instead depreciating the whole building over its expected useful life of 40 years, the book value of the building would have been 950.000 (1.000.000-(1.000.000/40*2) 42 21

Recognition (V) Subsequent costs Ordinary repairs (= routine, to maintain an asset in working order): expense of the period Extraordinary repairs (= to extend the life and/or increase the productive capacity of an asset): capitalized in one of several ways: Extend the life = extraordinary repair debit the accumulated depreciation and credit cash or other relevant accounts Increase the productive capacity = betterment debit the asset and credit cash or other relevant accounts If the improvement is significant it may be appropriate to remove the old asset, record the gain or loss and then recognise the new asset on the books (substitution approach) 43 Recognition (VI) Subsequent costs: Example Continuing the component approach example July 2011, the lift has to be replaced unexpectedly. The book value of the old lift amounts to 50.000 at June 31, 2011. The new lift costs 120.000 Using the component approach, the replacement has to be accounted for as follows: Impairment of the old lift: Impairment expense 50.000 PP&E 50.000 44 22

Recognition (VII) Subsequent costs: Example Recognition of the new lift: PP&E 120.000 Cash 120.000 The new lift will be depreciated over its expected useful life of 5 years By non-application of the component approach: because the replacement of the lift does not lead to an increase of the operating level over the original condition of the building the cost of the new lift would have been expensed immediately 45 Recognition (VIII) Probing question What are the two conditions that must be met in order for the cost of an item of property, plant and equipment, or an investment property, to be recognised as an asset? 1. It is improbable that future economic benefits associated with the item will flow to the entity, and the cost of the item can be measured reliably. 2. It is improbable that future economic benefits associated with the item will flow to the entity, and the cost of the item cannot be measured reliably. 3. It is probable that future economic benefits associated with the item will flow to the entity, and the cost of the item can be measured reliably. 4. It is probable that future economic benefits associated with the item will flow to the entity, and the cost of the item cannot be measured reliably. 46 23

Recognition (IX) Probing question True or false? IAS 16 takes a component approach to depreciation, meaning each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item will be depreciated separately. 47 Recognition (X) Probing question True or false? Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and that are not expected to be used during more than one period. 48 24

Measurement (I) Initial measurement An item of PP&E which qualifies for recognition as an asset should initially be measured at its cost Purchase price, including cost directly attributable of bringing the asset to working condition and cost of its dismantlement, removal or restoration Cost of a selfconstructed asset is determined using the same principles as for an acquired asset When payment is deferred, cost is the cash price equivalent 49 Acquisition cost Measurement (II) Initial measurement Acquisition price + Inward duties/import duties + Other non-deductible or non-reimbursable taxes + Transportation costs + Handling and processing costs + Additional costs directly attributable to the acquired asset - Reductions in acquisition price + (Borrowing costs) = Acquisition costs The cost of an item of property, plant and equipment includes the costs of its dismantlement, removal or restoration (IAS 16). Recognition of a corresponding provision if criteria in IAS 37 are met 50 25

Measurement (III) Subsequent measurement Cost Model Revaluation Model Carried at revalued amount (fair value) less accumulated amortisation and accumulated impairment losses Carried at revalued amount (fair value) less accumulated amortisation and accumulated impairment losses Carried at cost less accumulated depreciation and accumulated impairment losses Carried at revalued amount (fair value) less accumulated depreciation and accumulated impairment losses Special requirements for subsequent measurement 51 Measurement (IV) Subsequent measurement Cost model Measurement at cost less accumulated depreciation and impairment Depreciation Depreciation method Depreciation period Over its useful life Depreciation volume Cost less residual value Impairment/ reversal of an impairment loss in accordance with IAS 36 52 26

Revaluation Model Measurement (V) Subsequent measurement Asset carried at revalued amount less subsequent accumulated depreciation and subsequent accumulated impairment losses Revaluation for the whole class of assets Revaluations shall be made with sufficient regularity Increase in carrying amount as a result of revaluation -> OCI (except for a reverse of prior revaluation decrease -> P/L) Decrease in carrying amount as a result of revaluation -> P/L (except for a reverse of prior revaluation surplus -> OCI) 53 Measurement (IX) Probing question Identify the formula for determining the cost of an item of property, plant and equipment, according to the standard if: C = Cost P = Purchase price, including import duties and non-refundable purchase taxes T = Trade discounts R = Rebates A = 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 1. C = P T R A 2. C = P T A 3. C = P T R 4. C = P T R + A 54 27

Key disclosures Measurement basis Depreciation methods Useful lives or depreciation rates Gross carrying amount and accumulated depreciation at beginning and end of the period reconciliation of the carrying amount at the beginning and end of the period Comparative information is required Existence and amounts of restrictions on title to assets PPE pledged as securities for liabilities The amount of expenditures on account for PPE in the course of construction Commitments for acquisition of PPE Compensation from third parties Additional disclosures when using revaluation model 55 Accounting for investment property IAS 40 28

Definitions Investment property is defined as property held to earn rentals or for capital appreciation or both As such it generates cash flows largely independent from other assets held by the entity Owner-occupied properties are NOT investment properties. These are governed by IAS 16 PP&E IAS 40 lists specific examples of land and buildings that are covered by IAS 40, and further examples that are NOT covered by IAS 40. 57 Investment Property Definition (cont d) 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. A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases. A building that is vacant but is held to be leased out under one or more operating leases. 58 29

Investment Property Definition (cont d) The following are examples of items that are not investment property: Property intended for sale in the ordinary course of business or in the process of construction or development for such sale (IAS 2 Inventories). Property being constructed or developed on behalf of third parties Owner occupied property including (among other things) property held for future use as owner-occupied, property held for future development and subsequent use as owner occupied property, property occupied by employees (whether or not employees pay rent at market rates) and owner occupied property awaiting disposal. 59 Partially owneroccupied property Land or buildings held partly as investment property and partly owner-occupied have to be accounted separately, if able to split, owner-occupied property IAS 16 for rental IAS 40 otherwise accounting for dominant purpose 60 30

Investment properties IAS 40 Fair value model Investment Property Measurement Initially, an investment property shall be measured at its cost Subsequently, an enterprise should choose either the fair value model or the cost model This should be applied to all investment property Property interest held under an operating lease can be classified as an investment property : Initial costs is the lower of the fair value of the property and the present value of the minimum lease payments Only the fair value model is to be applied 62 31

Investment property Measurement fair value model What is fair value for IP? (IFRS 13)..the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Exit value Highest and best use A gain or loss arising from a change in fair value should be included in the same period income statement 63 Investment property under construction Measurement IAS 40 Completed investment property and those being redeveloped plus investment property being constructed for which fair value can be reliably estimated. Investment property being constructed for which fair value cannot be reliably estimated. Same historical cost model as IAS 16. Fair value with changes in fair value taken to profit or loss. Cost in accordance with IAS 16 until either its fair value becomes reliably determinable or construction is completed (whichever comes earlier) after which it is measured at fair value. 64 32

Derecognition Assets should be derecognized from the balance sheet on disposal or when they are permanently withdrawn from use and no future economic benefits are expected from disposal. A disposal is achieved upon sale or by entering into a finance lease Gains and losses on retirement or disposal should be taken to the income statement, measured at the difference between: The asset s carrying value, and The net disposal proceeds! Rental guarantees given may delay revenue recognition. 65 When Land & Buildings Change Balance Sheet Classification (IAS 40.57) From To When Accounting treatment Investment property carried at fair value Investment property carried at fair value Owner-occupied property Inventories Owner-occupied property Inventories Commencement of Deemed cost for owner-occupation subsequent accounting shall be fair value at the date of change in use Commencement of development with a view to sale Investment End of owneroccupation property carried at fair value Deemed cost for subsequent accounting shall be fair value at the date of change in use Adjustment to fair value at date of change is treated as a revaluation Investment Commencement of Adjustment to fair value property carried at an operating lease at date of change is fair value recognised in P&L 66 33

Disclosures relating to investment properties Requirements of IAS 40 model (fair value/cost) used for valuing investment property. If cost model is used, the fair value has to be disclosed. whether, and in what circumstances, are operating leases accounted for as investment properties. criteria used to distinguish investment property from owner occupied property and inventories. methods and significant assumptions applied in determining the fair value the extent to which the fair value is based on valuation by an independent, qualified valuer. details of amounts recognised in profit or loss. existence and amounts of restrictions on realisablity of investment property or on remittance of income and disposal proceeds. contractual obligations to purchase, construct or develop investment properties or for repairs, maintenance or enhancements. 67 Disclosures relating to investment properties (cont d) In addition to the disclosures required by IAS 40, IAS 1 requires disclosure of significant judgements and estimates. Some common areas where accounting judgements (other than estimates) could be involved are: Determining whether property is investment property or not, based on the length of the entity s operating cycle What is «significant» in the context of property that is partly owner-occupied? When is property under development complete? Is property under the scope of IFRS 5 subject to the disclosures for the fair valuation assumptions? 68 34

Investment properties IAS 40 Cost model generally follow rules of PPE Lease IAS 17 35

Lease classification A finance lease transfers substantially all the risks and rewards incident to ownership of an asset Lease is classified as either a finance lease or an operating lease An operating lease is a lease other than a finance lease Starting 2019 IFRS 16 is to be applied! 71 Leases of land and buildings Finance lease Classification rules are the same as the ones for leases for other assets. The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification. If title to both elements is expected to pass to the lessee by the end of the lease term, land and building are classified as a finance lease. Separate measurement of the land and buildings elements is not required when the lessee s interest in both land and buildings is classified as an IP accounted for IAS 40 FV model 72 36

Operating lease for the lessor The IP remains in the books of the lessor Lease income is recognised on a straight-line basis over the lease term even if the receipts are not on such a basis. Costs incurred in earning the lease income (eg. depreciation) are recognised as an expense. Costs for services such as insurance and maintenance are expenses and related receipts for services are recognized in income when incurred 73 Operating lease for the lessor (cont d) Initial direct costs incurred by lessors in negotiating and arranging an operating lease (leasing commissions) shall be capitalised to the cost basis of the leased asset and amortised over the lease term on the same basis as the lease income (i.e. straight-line basis). The same rule applies for rent-free period, up-front cash payments, sundry reimbursements for relocation costs, leasehold improvements and other incentives. If IP valued with cost model, then depreciation policies in accordance with IAS 16 74 37

Outlook to IFRS 16 No adjustments for lessors, except for sub-lessors Changes for lessees: Existing operating leases Existing finance leases Do not restate comparative periods Lease liability = present value of remaining lease payments Choice of measurement of ROU asset Impairment test ROU assets Consider use of transition requirements and practical expedients Carry forward asset and lease liability from IAS 17 Leases 75 38