Topic 6

MFRS 138 INTANGIBLE ASSET

LEARNING OBJECTIVES
By the end of this chapter, you should be able to: Measure the intangible assets at initial recognition Measure the intangible asset at subsequent measurement

Record the derecognition of intangible asset

Explain the disclosure requirement

INTRODUCTION
Before we starts, can you answer the following questions? What is intangible asset? Examples of intangible asset? What are the recognition criteria of intangible asset as per MFRS138?
If you cannot answer them, please refer to FAR1 subject for revisions. The following discussions focus on measurement, derecognition and disclosures issues of Intangible Assets as stated in MFRS 138.

Definition
an identifiable non-monetary (not associated to money or claims to money) asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative services

MEASUREMENT AT INITIAL RECOGNITION

Para 24- IA is measured at cost at its initial recognition date.

Cost = the amount of cash or cash equivalent paid to acquire or construct the asset at the time of its acquisition

MEASUREMENT AT INITIAL RECOGNITION

Types of Intangible Assets: (1) When IA is acquired separately

(2) When IA is acquired from business combination

(3) IA acquired from government grant (4) IA acquired through exchanges with other assets (5) (a) IA internally generated (b) IA internally generated Research and development (R&D) or Development Cost

MEASUREMENT AT INITIAL RECOGNITION

(1) When IA is acquired separately :
Cost = Purchase price + taxes + duties discount rebates + any directly attributable cost to prepare for its intended use + expenditure that meet recognition criteria Expenditures for advertising, promotion, cost to conduct at new location, training new staff, administrative and general overhead cost expense (not capitalized) para 29

MEASUREMENT AT INITIAL RECOGNITION

(1) When IA is acquired separately (cont) :

Para 28:Examples of directly attributable costs are:

a) costs of employee benefits (as defined in MFRS 1192004 Employee Benefits) arising directly from bringing the asset to its working condition; b) professional fees arising directly from bringing the asset to its working condition; and c) costs of testing whether the asset is functioning properly.

MEASUREMENT AT INITIAL RECOGNITION

(1) When IA is acquired separately (cont) : Example 1: ABC purchased trademark from PRS at RM50,000. ABC also incurred legal fees of RM8,000 and legal cost to defend the trademark of RM15,000. The company also incurred additional RM5,000 for promotional cost and obtained rebate of RM2,000. Determine the cost of trademark and prepare journal entry.

MEASUREMENT AT INITIAL RECOGNITION

(1) When IA is acquired separately (cont) : Answer:
Cost of the trademark = RM50,000+RM8,000+RM15,000-RM2,000 = RM71,000 Journal entry: Dr. Intangible asset-Trademark Cr. Cash Dr. Promotional expense Cr. Cash 71,000 71,000 5,000 5,000

MEASUREMENT AT INITIAL RECOGNITION

(2) When IA is acquired from business combination:
Cost = the Fair value of IA
*Fair value = quoted market price in active market (Para 39) OR Value of the most recent transaction for similar IA (Para 40)market method OR Discounted future net cash flows income method

Goodwill from consolidation (GOC) must be recorded separately from other Intangible assets.

MEASUREMENT AT INITIAL RECOGNITION

Example 2: ABC Bhd. acquired XYZ Bhd. at RM5 million. It was determined that the fair value of XYZs net assets was RM4 million at the combination date. Included in this amount was a patent owned by XYZ Bhd. with fair value of RM200,000. REQUIRED: Identify the cost of intangible assets acquired by ABC Bhd from this business combination arrangement.

MEASUREMENT AT INITIAL RECOGNITION

ANSWER 2: Intangible assets Patent Goodwill

RM 200,000 RM1,000,000 (RM5m RM4m)

Note: Goodwill must be separated from other intangible assets as required by MFRS 138.

MEASUREMENT AT INITIAL RECOGNITION

3) IA acquired from government grant Examples: airport landing rights, licences to operate radio or television stations, import licences or quotas or rights to access other restricted resources. Cost of IA= FV of the grant

4) IA acquired through exchanges with other assets Cost of IA= FV of assets given up

MEASUREMENT AT INITIAL RECOGNITION

5 (a) IA internally generated
Cost = total sum of expenditure incurred that are directly attributable to create, produce and prepare the asset for its intended use (Para 66). Examples: cost of materials, services, registration fee, cost to defend the IA, amortization cost, interest on capital Cost that are not directly attributable shall be excluded such as selling and administrative expenses, identified inefficiencies, initial operating loss, and training cost.

MEASUREMENT AT INITIAL RECOGNITION

Example 3: ABC develop a trademark. It incur cost for registration fees (RM15,000), design fee(RM3,000), legal fee(RM20,000) and promotional cost (RM6,000).
Therefore, Cost of trademark = RM15,000+RM3,000+RM20,000 =RM38,000 (exclude promotional cost).

Journal entry Dr. IA- trademark Dr. Promotional expense Cr. Cash

38,000 6,000 44,000

MEASUREMENT AT INITIAL RECOGNITION

5 (b) IA internally generated Research & development (R&D) or Development Cost
Cost = total sum of expenditure incurred from the date it met the recognition criteria of an intangible asset as in Para 57, MFRS138 Includes all directly attributable costs to create, produce, and prepare asset as intended (usually in development phase)

Example: cost of materials, services, registration fee, cost to defend IA, amortization cost, interest on capital
Cost that are not directly attributable expense (such as administrative expense, initial operating losses).

MEASUREMENT AT INITIAL RECOGNITION

Example 4:
The following costs incurred during the research phase and development phase in R&D activity of producing new product, Research Development Materials 12,000 7,000 Labour 10,000 6,000 Professional fees 8,000 5,000 Testing cost 8,000 4,000 Depreciation of equipment used in R&D 3,000 3,000 Training new staff cost 7,000 2,000 Other directly attributable cost 3,000 1,000
Provided that all expenses incurred during the development phase has fulfill the recognition criteria in Para. 57 MFRS138. Prepare journal entry to record the Intangible asset-R&D cost and other related expenses.

MEASUREMENT AT INITIAL RECOGNITION

Cost of capitalized IA-R&D = all expenses in development phase (after fulfill recognition criteria except training cost) = RM26,000 Journal entry: Dr. IA- R&D Cr. Cash Dr. Research expense Dr. Training expense Cr. Cash

26,000

26,000
44,000 9,000

53,000

MEASUREMENT AT SUBSEQUENT MEASUREMENT

Para. 72- after its initial recognition, an intangible asset shall be measured either using:
a) the cost model, or

b) the revaluation model.

MEASUREMENT AT SUBSEQUENT MEASUREMENT

COST MODEL:
IA shall be carried at its cost less accumulated amortization and any accumulated impairment loss (Para. 74). Carrying amount = Cost accumulated amortization - Impairment loss

MEASUREMENT AT SUBSEQUENT MEASUREMENT

REVALUATION MODEL
IA shall be carried at revalued amount less any subsequent accumulated amortization and any accumulated impairment losses (Para. 75) Carrying amount = Revalued amount Subsq. Accm. Amortization Accm. Impairment

MEASUREMENT AT SUBSEQUENT MEASUREMENT

REVALUATION MODEL (cont)
Revalued amount = Fair value If FV>CA revaluation increase (credited to revaluation surplus) If FV<CA revaluation decrease (debited to revaluation surplus OR recognize as loss) Previous amortization shall be restated proportionately or eliminated (Para. 80) Any changes from in estimation shall be treated according to MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors.

AMORTIZATION OF IA
Amortization systematic allocation of IA cost over its estimated useful life Amortize from the day the IA is ready for use until it is derecognize or held for sale Assume no residual value for IA

Estimated useful life : the shorter between legal life and economic life.
Amortization method : must reflect the consumption of economic benefit, or use s-line Journal entry: Dr. Amortization expense Cr. Accumulated amortizationIntangible asset xx xx

IMPAIRMENT OF IA
IA is subject to impairment test annually Impairment test Determine the Recoverable Amount (RA) of IA Compare RA to Carrying Amount (CA) If RA<CA : write down the CA to RA and recognize impairment loss (charge to P&L) If RA>CA : asset is not impaired

Journal entry:
Dr. Impairment loss xx Cr. Accm. Impairment-Intangible asset xx

IA WITH FINITE LIFE vs INDEFINITE LIFE

IA with finite life :
when the length of the useful life can be estimated Accounting treatment : Amortize AND do impairment test IA with indefinite life : when it has no foreseeable future limit of future economic benefit Accounting treatment: no need amortize BUT need impairment

Example 5: On 1 January 2008, Zuhal Bhd internally established a distribution right for motorcycles in the northern area of Peninsular Malaysia. The right met the definition and recognition criteria of an intangible asset. The company incurred and capitalized a cost of RM300,000 to develop the distribution right. The right had a legal life over 20 years. However, the company decided that the right might have a shorter economic life of 10 years. The companys policy was to use a straight-line method to amortize the cost of its intangible asset.

On 31 December 2008, it was estimated that the recoverable amount of the right was RM200,000. It was determined that the fair value of the right on 1 January 2009 was RM350,000.

REQUIRED: 1. Calculate and prepare journal entry to record: a) The initial cost of the intangible asset. b) The amortization of the intangible asset for year 2008. c) The impairment loss (if any) of the intangible asset for year 2008. 2. Determine the carrying amount of IA as at 1/1/2009 under: a) Cost model b) Revaluation model

Answers: (a) Cost of IA-right = 300,000 1/1/2008 Dr. Intangible asset-right 300,000 Cr. Cash (to recognize intangible asset-right)

300,000

(b) Amortization charge= Cost / estimated useful life = RM300,000 / 10 years = RM30,000 31/12/2008 Dr. Amortization expense 30,000 Cr. A/Amortizn-Intangible asset-right 30,000

Answers (cont): (c) Carrying amount at 31/12/08= Cost accm. amortization = RM300,000 RM30,000 = RM270,000 At 31/12/2008, the recoverable amount (RM200,000) is lower than the carrying amount (RM270,000). Therefore, the intangible asset needs to be impaired.

Impairment loss = Carrying amount recoverable amount = RM270,000 RM200,000 = RM 70,000

31/12/2008 Dr. Impairment loss Cr. Acm. Impairment-IA(right) (to charge impairment loss) 70,000

70,000

(2) (i) Under cost model, Carrying amount of IA-right as at 1/1/2009 = 300,000 30,000 70,000 = RM200,000 (ii) Under revaluation model, Carrying amount of IA-right as at 1/1/2009 = Fair value = 350,000 * *Revaluation surplus of RM150,000 (350,000 - 200,000) must be recognized. The previous recognized amortization shall be eliminated and the carrying amount of IA shall be restated at new FV amount.

DERECOGNITION OF IA
Para. 112- IA shall be derecognize when it is: Disposed No more future economic benefits expected to flow into entity Difference between the proceeds and the Carrying amount = Gain/loss on disposal Journal entry: Dr. Cash Dr. Accm. Amortzn Dr. Accm. Impairment Dr. Loss on disposal* Cr. Intangible asset Cr. Gain on disposal* *where applicable xx xx xx xx xx xx

DISCLOSURE REQUIREMENT OF INTANGIBLE ASSET

Refer Para 118-128 MFRS138 Among all: Classify all IAs into different classes Determine whether the IA has finite or infinite life Estimated useful life Amortization method Gross carrying amount Accumulated amortization and impairment

References: MFRS138 Intangible Assets NEJ (2010) Zaimah et al (2009)