GOODWILL AND INTANGIBLE ASSETS (ASPE 3064 AND IAS 38)

Definition and capitlization criteria

Non-monetary assets without physical substance that meets the following criteria;

• identifiable
  • can be separated, licensed, rented or sold from business; or
  • arises from legal or contractual right
• control
  • ability to obtain access to rights to gain benefits or restrict benefits to others
• future economic benefits

An intangible asset cab be recognized as an asset if;

• meets definition above (3 points)
• costs can be measured
• probable future economic benefits will flow to entity

Note that an asset could meet the definition criteria as an intangible if there is some form of future economic benefits even it is unlikely. But in that case, it meets the definition but not the recognition criteria as it must be probable for future economic benefits to flow to the entity. Generally the term probable just means more than 50% of occurring.

When determining which costs can be capitalized or expensed there are specific costs which must be expensed;

• Start-up costs
• Training activities
• Advertising and promotion
• Relocating or reorganizing part or all of an entity
• Internally generated brands, customer lists, publishing titles etc.

Internally Generated Assets (Research and Development)

ASPE 3064

All costs incurred in the research phase are to be expensed.

Examples of research activities are:

(a) activities aimed at obtaining new knowledge;

(b) the search for, evaluation and final selection of, applications of research findings or other knowledge;

(c) the search for alternatives for materials, devices, products, processes, systems or services; and

(d) the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

In accounting for expenditures on internally generated intangible assets during the development phase, an entity shall make an accounting policy choice to either:

(a) expense such expenditures as incurred; or

(b) capitalize such expenditures as an intangible asset (provided the criteria are met).

 

This accounting policy choice shall be applied consistently to expenditures on all internal projects in the development phase. Under IFRS there is no policy choice; if it meets the development criteria it must be capitalized, but the criteria are identical.

 

An intangible asset arising from development (or from the development phase of an internal project) is recognized if, and only if, an entity can demonstrate all of the following:

(a) technical feasibility

(b) intention to complete

(c) ability to use or sell

(d) the availability of adequate technical, financial and other resources to complete

(e) ability to measure reliably costs

(f) how the intangible asset will generate probable future economic benefits

Examples of development activities are:

(a) the design, construction and testing of pre-production or pre-use prototypes and models;

(b) the design of tools, jigs, moulds and dies involving new technology;

(c) the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and

(d) the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

Specifically for internally generated intangible assets, costs that can be capitalized are; any directly attributable costs to create, produce and prepare the asset to be capable of operating as intended such as

• Materials and services
• Employee salaries
• Fees to register a legal right
• Amortization of patents and licenses used to generate intangible asset
• Interest costs (if entity choose policy to do so under ASPE, whereas IFRS requires it)

Examples of expenditures that are to be excluded for internally generated intangible assets are;

• Selling, admin and general overhead
• Identified inefficiencies and initial operating losses
• Training staff to operate the asset

Subsequent Recognition

ASPE 3064

Historical cost model only

Presented net of accumulated amortization for limited life intangible

Indefinite life intangibles are not amortized if it truly is indefinite life

IFRS 38

Choice between historical cost model and revaluation model (must be applied consistently for all assets in a particular class; i.e. all patents can be at cost and all licenses can be at revaluation model)

However the revaluation model is only available if an active market exists for that intangible. This is fair rare but some examples are taxi or fishing licenses that are frequently bought and sold. Just know that there are two options for IFRS. Same goes for amortization under IFRS; if indefinite life no amortization.

Useful Life of Intangible

You may need to determine the appropriate useful life of an intangible when the entity originally believes that it should be indefinite life.

You should consider

• the expected usage of the asset by the entity
• typical product life cycle for the asset
• public information on estimates of similar assets
• technological or commercial obsolescence
• expected actions by competitors or potential competitors
• period of control over the asset and legal limits on use of asset

Website Costs

Under ASPE there is no specific criteria for websites but they would fall under the general criteria for capitalization (identifiable, control, future benefit).

Under IFRS there is a specific SIC for website costs; SIC 32. This interpretation standard falls back to the general criteria for intangible assets but offers addition guidance as well. The main issue is whether a future economic benefit exists (criteria #3). It specifically states that if a website is used solely to promote or advertise products then it cannot be capitalized as it does not have a probable future economic benefit. However if the website can also take orders online then it can be established that a future economic benefit will result.

The treatment under ASPE and IFRS would then be the same for website costs, but just be aware that there is a SIC 38 under IFRS that deals specifically with website costs.

Final Thoughts

Could be tested on the capitalization criteria in terms of multiple choice or on a case. Another possible test question could be to calculate the costs that can be capitalized and/or expensed.

R&D criteria might be hard to memorize but I recommend copy and pasting from the handbook on a case. This makes it easy to apply each criteria to a case fact as you work your way through the criteria. For the CKE, perhaps try to remember examples of R&D activities in order to help you determine which activities should be capitalized or expensed.

Also on a case, you might need to assess the useful life of an intangible asset. Management may want to show it as an indefinite life intangible, but you likely should challenge this assertion if case facts lead to it. You might see things like “the average product life cycle of similar products is 3 years” or “the intangible asset will expire after 10 years”.

There is an increased chance of being tested on websites to keep up to date on IT advances. Apply the general rules, but remember that the website has to be able to take and place orders online (not just advertising products).