Intangible Asset

Definition

It is an identifiable non monetary asset without physical substances. Examples of intangible assets
are patents rights motion picture films, computer software, copy right etc.

As 26 deals with intangible assets.

An asset should have three important criteria to be rercognized as intangible assets

a) Identifiability: an asset is identifiable if it is either separable or arises from contractual or

other legal rights.
b) Controls: power of an entity to obtain future benefits.
c) Future economic benefits

Accounting Guidance:
Intangible assets should be classified as capital assets. Additionally, before an intangible
asset can be recognized in the financial statements, it must meet one or both of the
following criteria:
The asset is separable, that is, the asset is capable of being separated or divided from
the entity and sold, transferred, licensed, rented, or exchanged, either individually or
together with a related contract, asset, or liability.

The asset 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.

If the types of intangible assets reported by entity differ in nature and usage, then they
should not be reported collectively as a single major class of capital assets (e.g.,
intangible assets). For example, the nature and usage of patents differs from that of
right-of-way easements such that they should not be aggregated in the same major class
of capital assets.

There are two type of intangible assets

a) Purchased
b) Internally generated

a) purchased - when purchased purchase price including import duties and taxes, any
cost incurred for preparing the assets for its intended use are included.
b) When acquired from government on grants an entity may choose to recognize both
the intangible asset and the grant at fair value or to recognise the asset initially at a
nominal value plus direct expenditures.
Internally generated intangible asset eg R&D, Computer software internally generated in
an organisation, trade mark, trade dress, internet domain, customer list, play operas etc
 Amortisation policy
Amortisation means paying off. Intangible assets having finite useful life are amortised
over a period over useful life.
Intangible asset having indefinite useful life are tested for impairement annually.

IMPAIREMENT of an assets

Impairment: an asset is impaired when its carrying amount exceeds its recoverable amount

Carrying amount: the amount at which an asset is recognised in the balance sheet after
deducting accumulated depreciation and accumulated impairment losses

Recoverable amount: the higher of an asset's fair value less costs to sell (sometimes called net
selling price) and its value in use

Fair value: the amount obtainable from the sale of an asset in an arm's length transaction
between knowledgeable, willing parties

Value in use: the discounted present value of the future cash flows expected to arise from:

 the continuing use of an asset, and from

 its disposal at the end of its useful life

Identifying an Asset That May Be Impaired

At each balance sheet date, review all assets to look for any indication that an asset may be
impaired (its carrying amount may be in excess of the greater of its net selling price and its
value in use). IAS 36 has a list of external and internal indicators of impairment. If there is an
indication that an asset may be impaired, then you must calculate the asset's recoverable
amount. [IAS 36.9]

The recoverable amounts of the following types of intangible assets should be measured
annually whether or not there is any indication that it may be impaired. In some cases, the
most recent detailed calculation of recoverable amount made in a preceding period may be
used in the impairment test for that asset in the current period: [IAS 36.10]

 an intangible asset with an indefinite useful life

 an intangible asset not yet available for use
 goodwill acquired in a business combination

Indications of Impairment [IAS 36.12]

External sources:

 market value declines

 negative changes in technology, markets, economy, or laws
 increases in market interest rates
 company stock price is below book value

Internal sources:

 obsolescence or physical damage

 asset is part of a restructuring or held for disposal
 worse economic performance than expected

These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset
may be impaired may indicate that the asset's useful life, depreciation method, or residual
value may need to be reviewed and adjusted. [IAS 36.17]

Impairment of Goodwill

Goodwill should be tested for impairment annually. [IAS 36.96]

To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating
units, or groups of cash-generating units, that are expected to benefit from the synergies of
the combination, irrespective of whether other assets or liabilities of the acquiree are assigned
to those units or groups of units. Each unit or group of units to which the goodwill is so
allocated shall: [IAS 36.80]

 represent the lowest level within the entity at which the goodwill is monitored for
internal management purposes; and
 not be larger than an operating segment determined in accordance with IFRS 8
Operating Segments.

A cash-generating unit to which goodwill has been allocated shall be tested for impairment at
least annually by comparing the carrying amount of the unit, including the goodwill, with the
recoverable amount of the unit: [IAS 36.90]

 If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit
and the goodwill allocated to that unit is not impaired.
 If the carrying amount of the unit exceeds the recoverable amount of the unit, the
entity must recognise an impairment loss.
The impairment loss is allocated to reduce the carrying amount of the assets of the unit
(group of units) in the following order: [IAS 36.104]

 first, reduce the carrying amount of any goodwill allocated to the cash-generating unit
(group of units); and
 then, reduce the carrying amounts of the other assets of the unit (group of units) pro
rata on the basis.

The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105]

 its fair value less costs to sell (if determinable),

 its value in use (if determinable), and
 zero.

If the preceding rule is applied, further allocation of the impairment loss is made pro
rata to the other assets of the unit (group of units).

Recognition
An item is recognised as an intangible if it meets the definition of an intangible asset, it is probable
that future economic benefits will flow to the University and the cost of the asset can be reliably
measured.

Measurement
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the entity share of
the net identifiable assets of the acquired controlled entity/associate at the date of acquisition.
Goodwill on acquisitions of controlled entities is included in intangible assets. Goodwill on
acquisitions of associates is included in investments in associates.
After initial recognition, goodwill acquired in a business combination is measured at cost less any
accumulated impairment losses. Goodwill is tested for impairment annually, and is carried at cost
less accumulated impairment losses. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
Licences
Licences that have a finite useful life are carried at cost less accumulated amortisation and
impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of
the assets over their estimated useful lives. Licences that have an indefinite useful life are not
amortised and are assessed for impairment annually.
Computer Software
Computer software is carried at cost less accumulated amortisation and impairment losses.
Amortisation is calculated on a straight-line basis over the assets’ estimated useful life of 5 years.
Costs incurred in developing products or systems and costs incurred in acquiring software and
licenses that will contribute to future period financial benefits through revenue generation and/or
cost reduction are capitalised to software. Costs capitalised include external direct costs of
materials, services, direct payroll and payroll related costs of employees’ time spent on the project.
All other repairs and maintenance are charged to the income statement during the financial period
in which they are incurred.
Research and Development - Patents
Research expenditure is recognised as an expense as incurred. Costs incurred on development
projects (relating to the design and testing of new or improved products) are recognised 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 capitalised comprises all directly attributable costs, including
costs of materials, services, direct labour and an appropriate allocation of overheads. Other
development expenditures that do not meet these criteria are recognised as an expense as
incurred. Development costs previously recognised as an expense are not recognised as an asset
in a subsequent period. Capitalised development costs are recorded as intangible assets and
amortised from the point at which the asset is ready for use on a straight-line basis over its estimate
useful life, usually 20 years.