506_136535_lecture-intangible Assets

Government Accounting &

Accounting for non-profit organizations

by: ZEUS VERNON B. MILLAN

Chapter 11 Intangible Assets 

Learning Objectives

1. Define intangible assets. 2. State the recognition, and account for the initial and subsequent measurements, of intangible assets.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Definitions. •

Active Market – is a market in which all the following conditions exist: – the items traded in the market are homogeneous, – willing buyers and sellers can normally be found at any time; and – prices are available to the public.

Amortization – is the systematic allocation of the depreciable amount of an intangible asset over its useful life.

• 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. •  Intangible Assets – are identifiable non-monetary asset without physical substance. •  Intangible Heritage Assets – are intangible assets which displayed the following characteristics:  – Their value in cultural, environmental and historical terms is unlikely to be fully reflected in a financial value based purely on a market price; – Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by sale; – Their value may increase over time; and – It may be difficult to estimate their useful lives, which in some cases could be several hundred years. • Research – is original and planned investigation undertaken with the prospect of gaining new scientific and technical knowledge and understanding.

Intangible Assets  • Intangible Assets are identifiable nonmonetary assets without physical substance.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Essential elements of an intangible asset 1. Identifiability a. separable; or b. arises from binding arrangements 2. Control – the entity has the ability to benefit from the intangible asset or prevent others from benefitting from it. 3. Future economic benefits or service potential GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Examples of Intangible assets • • • • • • • • •

Computer software Patents Copyrights Franchise Motion picture films Trademarks or brand names Licenses Acquired import quotas Customer lists GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Recognition • An intangible asset is recognized if it meets the definition of an intangible asset and the recognition criteria for assets.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Initial Measurement

• An intangible asset is initially measured at cost. Mode of Acquisition a. Purchase

Measurement of Initial Cost  Purchase price plus Direct costs (including non-refundable taxes but excluding trade discounts and rebates).  If payment is deferred, the cost is the cash price equivalent.  fair value at the acquisition date

b. Non-exchange transaction c. Exchange  

d. Entity Combination

 With commercial substance: a. FV of asset given up (+ cash paid/- cash received). b. FV of asset received. c. CA of asset given up (+ cash paid/- cash received).  Without commercial substance: CA of asset given up (plus cash paid/minus cash received).  fair value at the acquisition date

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Internal Generation 1. Research – undertaken to gain new knowledge. Expenditures are recognized as expense. 2. Development – application of research findings to design new or substantially improved products, processes, or systems before the start of commercial production or use. Expenditures are capitalized only if all of the following are met: a. Ability to use or sell b. Intention to complete c. Technical feasibility d. Availability of adequate resources e. probable future Economic benefits f. Measured reliably GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Other accounting requirements

• If it is not clear whether an expenditure is a research or a development cost, it is treated as research cost. • Reinstatement of expenditure previously recognized as an expense is prohibited. • Internally generated brands, mastheads, publishing titles, customer lists, and similar items are not recognized as intangible assets. • Selling, administrative and other general overhead, costs of inefficiencies, initial operating losses, and training costs are expensed. • Subsequent expenditures on recognized intangible assets are generally expensed, unless they meet the definition of an intangible asset and the asset recognition criteria. • The accounting for replacement of a part of an intangible asset is the same as those of PPE and investment property.

Recognition of an Expense • Expenditure on an intangible item shall be recognized as an expense when it is incurred unless it forms part of the cost of an intangible asset that meets the recognition criteria

Subsequent Measurement 1. Indefinite life – not amortized but tested for impairment at least annually. 2. Finite life – amortized using the straight line method over a period of 2 to 10 years. The residual value is assumed to be zero except when the entity has the ability to sell the asset at the end of its useful life.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Impairment • An entity is required to test for impairment an intangible asset with indefinite useful life or an intangible asset not yet available for use at least annually or whenever there is an indication of impairment. • An entity shall test for impairment an intangible asset with definite useful life only when an indication of impairment exists. Indications of impairment shall be assessed at each reporting date. • The accounting for impairment of intangible assets, and reversal thereof, is the same as those of investment property and PPE. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Derecognition • An intangible asset is derecognized when it is disposed or when no future economic benefits or service potential is expected from the asset. • On derecognition, the difference between the carrying amount and the net disposal proceeds, if any, is recognized as gain or loss in surplus or deficit.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Disclosure •

• •

An entity shall disclose the following: 1. Whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortization rates used;  2. The amortization method used, which is straight line method, for intangible assets with finite useful lives; 3. The gross carrying amount, any accumulated amortization and any accumulated impairment losses at the beginning and end of the period; 4. The line item(s) of the statement of financial performance in which any amortization of intangible assets is included 5. A reconciliation of the carrying amount at the beginning and end of the period 6. For an intangible asset assessed as having an indefinite useful life, the carrying amount of that asset and the reasons supporting the assessment of an indefinite useful life . A description, the carrying amount, and remaining amortization period of any individual intangible asset that is material to the entity’s financial statements; 8. For intangible assets acquired through a non-exchange transaction and initially recognized at fair value

Disclosure – cont. • 9. The existence and carrying amounts of intangible assets whose title is restricted and the carrying amounts of intangible assets pledged as security for liabilities; • 10.The amount of contractual commitments for the acquisition of intangible assets; •  11. The aggregate amount of research and development expenditure recognized as an expense during t

Disclosure – cont. • 12. An entity that recognized intangible heritage assets t must apply the following disclosure requirements: •   • The measurement basis used; • The amortization method used, if any; • The gross carrying amount; The accumulated amortization at the end of the period, if any; and • A reconciliation of the carrying amount at the beginning and end of the period showing certain components thereof. • 13. An entity is encouraged, but not required, to disclose the following information: • A description of any fully amortized intangible asset that is still in use; and • A brief description of significant intangible assets controlled by the entity but not recognized as assets.

OPEN FORUM QUESTIONS???? REACTIONS!!!!!

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

END GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan