ANSWERS TO INTANGIBLE ASSETS

May 2013 Q1-KKQ Plc

a) Define the term intangible asset and explain the main elements of this
definition.
It is an identifiable non-monetary asset without physical substance.
An asset is a resource controlled by an entity from which future economic benefits
are expected.
It is identifiable either because it arises from a contract or because the entity can
sell it separately.
It is non-monetary-i.e. not cash or assets that will be received in fixed or
measurable amounts of money.
It does not have physical substance this separates an intangible from a tangible
asset like PPE.
(5 marks)
b) CERITA
This asset has a cost that can be measured reliably.
The entity can prove HOW the asset can generate future economic benefits; for
example: Existence of a market for this particular asset or the entity can use the
particular asset.
The entity can prove sufficient technical, monetary and other resources to
complete the asset in order to use it or sell it.
The entity is intent on completing the asset in order to use it internally or sell it.
It is technically possible to complete the intangible asset in order to use it or sell it.

The entity can prove that it is able to use or sell the asset.
(6 marks)
C ) i)
An asset should be reviewed for impairment whenever circumstances indicate that
an impairment may have occurred. An impairment occurs where the assets
carrying value is more than the higher of its value in use and its fair value less cost
to sell. The patents carrying value at 31 March 2013 is 60 000 which is higher
than the higher of its value in use of 40 000 and its fair value 47 000. Therefore
an impairment has occurred and the patent must be written down and shown at 47
000 in the statement of financial position. An impairment loss will be indicated in
the statement of comprehensive income - 13 000.
ii) Entities are not entitled to capitalize internally generated brand names.
iii)Once the entity writes off an expense in relation to research and development
this cannot be capitalized. An entity can also only start capitalizing once the project
meets the criteria for development cost. Therefore the 30 000 expense will remain
an expense. The current years 3 000 will be expensed and the 2 000 will be
capitalized as an intangible asset.
iv) Since the machinery is used in the development project, the depreciation will be
capitalized. Therefore the depreciation of 1, 000 000/10=100 000 is capitalized to
intangible assets.
v) The brand needs to be capitalized at a cost of 500 000. Once capitalized the
brand needs to be amortized to reflect the pattern of usage. Normally the straight
line method is used. Amortization = 500 000 x 1/20 x 3/12=6,250.
vi) The excess of 500,000 paid by KKQ plc for the net assets of TKW plc
is Goodwill. However KKQ plc on acquisition of TKW plc should acknowledge
the customer list as an intangible asset at its fair value of 200 000. Therefore the
resulting goodwill will be 300 000, (500,000 200,000). The customer list
should be amortized over its useful life. The goodwill will not be amortized but
must be tested for impairment annually.
vii) The airport landing strip is an Intangible asset and should be capitalized at a
cost of 1,000 000 and amortized over the useful life (1 000 000/5=200 000). It can
be revalued to 1,200.000. if there is an active market. Therefore the revaluation

surplus of 400k (1.2m 800k (Nbv)) will be taken to reserves. So the intangible
asset will be shown at 1.2m in the statement of financial position. There will be a
revaluation reserve of 400 000 and amortization of 200 000.
August 2013 Q 2 MNO Plc
i)

Brand name 10 million

The brand name could not have been generated internally as internally generated
brand names are not allowed to be capitalized. Instead, it could have come about
on acquisition of another entity or purchase of the brand name. It will be shown at
the initial cost price, which will be the fair value on the date of acquisition if it
came about in a business acquisition. After acquisition it needs to be amortized in
a way that reflects the pattern of benefits and if it is not possible to establish such a
method of amortization, the straight line method is used.
ii)

Goodwill 5 million

The goodwill would have come about in acquisition of another entity. At initiation
this will be shown as the difference between the fair value of the acquired entity
and the purchase price. After initiation, the recoverable amount needs to be
measured annually for impairment. The goodwill is not amortized annually, but
tested for impairment.
iii)

Development cost 4 million

The development cost would have come into existence because the entity is
involved in research and development cost. 6 criteria should be met for the
capitalization of this item:
1) The entity is intent on completing the asset in order to use it internally or sell it.
2) The entity can prove sufficient technical, monetary and other resources to
complete the asset in order to use it or sell it.
3) It is technically possible to complete the intangible asset in order to use it or sell
it.
4) The entity can prove that it is able to use or sell the asset.

5) The entity can prove HOW the asset can generate future economic benefits; for
example: A market exists for this particular asset or the entity can use the particular
asset.
6) This asset has a cost that can be measured reliably.
The development cost should include all the costs involved in getting the
intangible asset to a state where it can be used as intended by management. After
acquisition it needs to be amortized in a way that reflects the pattern of benefits
and if it is not possible to establish such a method of amortization, it needs to be
done on the straight line method.
iv)

Software 1 million

The software could have either been internally generated or purchased. The
software if generated internally is not allowed to be capitalized. If purchased it will
be shown at the initial cost price, which will be the fair value on the date of
acquisition. After acquisition it needs to be amortized in a way that reflects the
pattern of benefits and if it is not possible to establish such a method of
amortization, the straight line method is used.
Q 2a - RESEARCH AND DEVELOPMENT
i) Research costs are written off as an expense in the SoCI because there is no

future economic benefit from research, Thefore the 15 000 should be

expensed to the statement of comprehensive income as research costs.
ii) Development cost can only be capitalized if a project meets all of the following
criteria:
1. The entity is intent on completing the asset in order to use it internally or sell it,
2. The entity can prove sufficient technical, monetary and other resources to
complete the asset in order to use it or sell it.
3. It is technically possible to complete the intangible asset in order to use it or sell
it.
4. The entity can prove that it is able to use or sell the asset.
5. The entity can prove HOW the asset can generate future economic benefits; for
example: A market exists for this particular asset or the entity can use the particular
asset.
6. This asset has a cost that can be measured reliably.

Since the development project meets the conditions for development costs; the
costs must be capitalized (taken to the statement of financial position/ shown as an
asset). The capitalization occurs from the moment the project meets the criteria;
i.e. in this instance the capitalized amount should be: 7 + (5-2)/5x11/12
=7.55million.
The capitalization stops once the intangible asset is ready for its intended use.
Therefore only 11 months depreciation is included in the development cost
capitalized. The intangible asset needs to be amortized on a systematic basis over
its useful life; therefore the 7.55mm needs to be amortized over 4 years =
1.8875million per year. Only one months use has passed in this accounting year;
so amortization of (1.8875mm/12=157 292) needs to be taken to the statement of
comprehensive income and this reduces the intangible asset to 7,39 m (7.55million
157 292=7.39mm).
iii) Internally generated brand names cannot be capitalized.
iv) Development cost can only be capitalized if it meets the recognition criteria laid
down in IAS 38. Previous research expenses written off cannot be reversed.
Therefore the 5million will remain as expenses in the statement of comprehensive
income and the 1m will be capitalized to the statement of financial position i.e.
Debited as an intangible asset.