pwc intangible assets . 2 pwc overview of session 1. scope and key concepts 2. recognition 3....
TRANSCRIPT
Intangible Assets
http://www.cc.cec/budg/
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Overview of session
1. Scope and key concepts
2. Recognition
3. Measurement
4. Disclosures
5. Specific implications and next steps
6. Questions
Intangible Assets
1. Scope and key concepts
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Scope
• Intellectual property (“IP”) in general
• 3 broad categories:
– Research and development
– Patents, copyrights, brand names, trade secrets, trade marks,
franchises, concessions, operating right or right of use
– Computer software (developed internally or acquired from a third
party)
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Key definitions
• An intangible asset is an identifiable non-monetary asset without
physical substance held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
• Useful life is the period of time over which an asset is expected to be
used by the entity
• Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding
• 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 prior to the
commencement of commercial production or use
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Scope
• Fall back on IAS 38 since no specific IPSAS
• Covers accounting for all Intangible Assets, excluding:
– Goodwill
– Financial assets
– Mineral rights and other similar expenditure
– Those arising in insurance companies through contracts with
policy holders
Intangible Assets
2. Recognition
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Criteria for recognition
Intangible resource
3. Capable of generating future economic benefits?
1. Identifiable?
2. Controlled?
Defined
4. Probable that future economic benefits will be generated?
5. Cost reliably measured?
Not an intangible
asset
Recognised
Not recognised
Yes
Yes
NoYes
No
No
Yes
Yes
No
No
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Identifiable
• An asset is identifiable if it is separable:
– An asset is separable if the enterprise could rent, sell, exchange
or distribute the specific future economic benefits attributable to
the asset without also disposing of future economic benefits that
flow from other assets used in the same revenue earning activity.
• But an enterprise may be able to identify an asset in some other way:
– For example, if an intangible asset is acquired with a group of
assets, the transaction may involve the transfer of legal rights that
enable an enterprise to identify the intangible asset.
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Control
• The capacity of an enterprise to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law (e.g. copyrights or a legal duty on employees to maintain confidentiality).
• In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control since an enterprise may be able to control the future economic benefits in some other way.
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Future economic benefits
• Future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the enterprise
– For example, the use of intellectual property in a production
process may reduce future production costs rather than increase
future revenues
• Requires the exercise of sound judgement based on verifiable information
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Measurement of cost
• Cost can be measured:
– Either directly (cost of acquisition of the asset when it is
separately acquired); or
– Indirectly (e.g. by reference to an active market or using
discounted cash flows techniques when the asset is acquired as
part of a business combination)
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Recognition – Internally generated intangible assets
Internally generated goodwill
NO!
Internally generated
intangible assets
Research phase
Development phase
NO! Only if strict criteria met
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Research phase
• Examples of research activities:
– Activities aimed at obtaining new knowledge
– The search for, and evaluation and final selection of, applications
of research findings or other knowledge
– The search for alternatives for materials, devices, products,
processes, systems or services
– The formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
processes, systems or services
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Development phase
• Conditions to be met before capitalisation:
– Technical feasibility of completing the asset
– Intention to complete it and use/sell the asset
– Ability to use/sell the asset
– An analysis of whether the asset will generate future economic
benefits
– Availability of resources to complete the asset and to use/sell it
AND
– Ability to reliably measure the attributable expenditure
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Cannot capitalise…
Internally generated
brands
Customer lists
Publishing titles
Mastheads
…and similar items
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Date for recognition
• During the year, the date of acquisition or date of entry shall correspond to the date on which the risks of ownership of the assets are transferred to the E.C., which in general corresponds to the accepted delivery of the asset
• If an item does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is recognised as an expense when incurred.
Intangible Assets
3. Measurement
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Measurement
Initial measurement:
cost
Subsequent costs:
expense (unless can
prove enhanced economic benefits)
Benchmark treatment• continue to carry at cost*
Alternative treatment• carry at re-valued amount*
by reference to active market
* less amortisation and impairment provisions
The E.C.s’ choice
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Cost of internally generated intangible assets
• Cost = directly attributable expenditure
• Begin when asset first meets recognition criteria
• Cannot back-date to include costs expensed previously
• Specific costs CANNOT be capitalised
– Start-up costs
– Training activities
– Advertising/promotional activities
– Re-locating/re-organising costs
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Measurement - amortisation
Presumption
UEL ≤ 20 years
Amortise over UEL
Rebuttal
UEL > 20 years
Disclose evidence& perform
annual impairment test
Evidence must be persuasive
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Measurement – disposal
• Disposal
– Gain/loss = Net Disposal Proceeds – Carrying Amount
– Recognise in economic outturn account
Intangible Assets
4. Disclosures
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Major disclosures
Internally generated
Acquired
Useful lives or
amortisation rates
Gross opening &
closing balances
Reconciliation of movements
in year
Re-valued intangibles
Disclose separately
Also, R&D costs expensed in the period
Intangible Assets
5. Specific implications and next steps
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Proposed E.C. general accounting policies
Computer software
Software are stated at historical cost less depreciation. Costs associated with maintaining computer software programmes are recognized as an expense
as incurred.
Expenditure, which enhances or extends the performance of computer software programmes beyond their original specifications is recognized as a
capital improvement and added to the original cost of the software.
Computer software recognized as assets are amortized using the straight-line method over their useful lives, not exceeding a period of 4 years.
Research and development
Research expenditure is recognized as an expense as incurred. Costs incurred on development projects are recognized as intangible assets when it is
probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other
development expenditures are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an
asset in a subsequent period. Development costs that have been capitalized are amortized from the commencement of the commercial production of the
product on a straight-line basis over the period of its expected benefit, not exceeding five years.
Other intangible assets
Expenditure to acquire patents, trademarks and licenses is capitalized and amortized using the straight-line method over their useful lives, but not
exceeding 20 years.
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Compliance issues
Issue As per former
regulation
As per IPSAS Accounting rules
EC transition
period 5 years
Internally developed
software
Expensed Capitalise if identifiable,
controlled, future economic
benefits and measurable cost
expensed
Development costs Expensed Capitalise if identifiable,
controlled, future economic
benefits and measurable cost
expensed
Assets under construction N/A To be disclosed as a separate
category within intangible assets
expensed
Amortisation rules Full year from the
date when the asset
is available for use
Pro-rata temporis from the date
when the asset is available for
use
Intangible Assets
6. Questions
http://www.cc.cec/budg/