Goodwill and Intangible Assets
ASPE: 3064
Goodwill and Intangible Assets
ASPE: 3064
Definition
- An intangible asset is an identifiable non-monetary asset without physical substance that the entity has control over
- identifiable
- The definition of an intangible asset requires an intangible asset to be identifiable to distinguish it from goodwill.
- An asset is identifiable if it either:
- is separable, is capable of being separated from the entity and sold, transferred, licensed, rented or exchanged; or
- 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.
- Control = entity has the power to obtain the future economic benefits flowing from the asset
Recognition and measurement
- An item is recognized as an intangible asset, if it meets the following :
- It meets the definition of an intangible asset (identifiable/control); and
- It meets the recognition criteria:
- it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
- the cost of the asset can be measured
- An intangible asset is measured initially at cost
Separate acquisition
- The cost of a separately acquired intangible asset comprises:
- its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and
- any directly attributable cost of preparing the asset for its intended use
- Examples of directly attributable costs are:
- costs of employee benefits arising directly from bringing the asset to its working condition;
- professional fees arising directly from bringing the asset to its working condition; and
- costs of testing whether the asset is functioning properly.
- Examples of expenditures that are not part of the cost of an intangible asset are:
- costs of introducing a new product or service (including costs of advertising and promotional activities);
- costs of conducting business in a new location or with a new class of customer (including costs of staff training); and
- administration and other general overhead costs
Internally generated goodwill
- Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized
- Internally generated goodwill shall not be recognized as an asset
Internally generated intangible assets
- To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into:
- a research phase; and
- a development phase
Research
- original and planned investigation undertaken to gain new scientific or technical knowledge and understanding
- expenditure on research is expensed
- examples of research activities:
- activities aimed at obtaining new knowledge;
- the search for, evaluation and final selection of research findings/other knowledge;
- the search for alternatives for materials, devices, products, processes, systems or services; and
- the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.
Development
- 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
- under ASPE, you can capitalize or expense expenditures during the development phase
- An intangible asset arising from development can only be capitalized if all of the following are met:
- the technical feasibility of completing the intangible asset so that it will be available for use or sale.
- its intention to complete the intangible asset and use or sell it.
- its ability to use or sell the intangible asset.
- how the intangible asset will generate probable future economic benefits
- existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset
- the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
- its ability to measure reliably the expenditure attributable to the intangible asset during its development.
- If an entity cannot distinguish the research phase from the development phase, the entity treats the expenditure as if it were incurred in the research phase only
- Examples of development activities are:
- the design, construction and testing of prototypes and models;
- the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and
- the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.
- Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are not recognised as intangible assets (these are expensed)
What do you capitalize as development costs?
- costs of materials/services used to generate the intangible asset
- costs of employee salaries, wages and benefits to generate intangible asset
- fees to register a legal right
- amortization of patents and licenses used to generate the intangible asset
- interest costs when the entity’s accounting policy is to capitalize interest costs
What not to capitalize as development costs?
- selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use;
- cost of training staff to operate the asset.
Recognition of an Expense
- Expense development costs, where policy choice is to expense
- Expenditures that are incurred that provide future economic benefits but for which no intangible asset is set up are to be expensed
- Examples include:
- Research costs
- Start-up costs
- Establishment costs such as legal and secretarial costs incurred in establishing a legal entity,
- expenditure to open a new facility or business (i.e. pre-opening costs)
- expenditures for starting new operations
- launching new products or processes (i.e. pre-operating costs)
- training costs
- advertising and promotional activities
- relocating costs
- reorganization costs
- Expenditure on an intangible item that was initially recognized as an expense (i.e. initially did not meet criteria to capitalize) shall not be capitalized at a later date.
Measurement after recognition
Intangible assets with finite useful lives
- Intangible assets with finite useful lives need to be amortized
- Amortization expense = (cost – residual value)/useful life
- Residual value
- The residual value is assumed to be $NIL unless, at the end of the useful life, the asset is expected to have a useful life to another entity and;
- There is a commitment from a 3rd party to purchase it @ the end of useful life; or
- Residual value can be determined by referring to transactions in an existing market, and the market is expected to exist at the end of the useful life
- The residual value is assumed to be $NIL unless, at the end of the useful life, the asset is expected to have a useful life to another entity and;
- The method of amortization should reflect the pattern in which the economic benefits are consumed form the intangible asset; if the pattern cannot be determined using the straight-line method
- Must review amortization method and useful life at each year-end
Intangible assets with indefinite useful lives
- An intangible asset with an indefinite useful life is not amortized
- An intangible asset with indefinite useful life shall be tested for impairment whenever events indicate that its carrying amount may exceed its fair value
- Impairment loss = fair value less carrying value
- An impairment loss is not reversed if the fair value subsequently increases
Goodwill
- Goodwill is recognized at the initial cost less any impairment
- Internally generated goodwill is not recognized (i.e. capitalized)
- Goodwill is not amortized
- Goodwill is tested for impairment whenever events indicate that carrying value > fair value
How to test for goodwill impairment?
- When the carrying amount of a reporting unit, including goodwill, exceeds its fair value a goodwill impairment loss shall be recognized in an amount equal to the excess
- The goodwill impairment loss recognized shall not exceed the carrying amount of goodwill
- A goodwill impairment loss shall not be reversed
- A reporting unit is the level of reporting at which goodwill is tested for impairment; and is either an operating segment or a component of an operating segment
- A component constitutes a business for which separate financial information is available and management regularly reviews its operating results
- An operating segment is a part of an enterprise:
- that engages in business from which it may earn revenues and incur expenses
- for which operating results are regularly reviewed by management
- for which discrete financial information is available
Comparison to IFRS
- Revaluation model is available under IFRS
- Under IFRS you must capitalize development costs that meet the 6 criteria
- Under IFRS, the impairment testing is to be done annually and whenever events indicate
- Impairment losses can be reversed under IFRS
- Goodwill impairment testing is covered in IAS 36 and the concept is different