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12 Cards in this Set
- Front
- Back
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What is an asset? |
According to the conceptual framework, an asset is a present resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits |
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What does the conceptual framework say about the recognition of elements of financial statements? |
Recognition is only appropriate if it results in both relevant information about the element being recognised and faithful representation of that element I.e useful information |
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What is an intangible asset? |
IAS 38 says that an intangible asset is a non-monetary asset which is without physical substance and identifiable Examples: Logo/brand name Goodwill Patent/copyright/trademark Customer list Landing rights |
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Why is Accounting for intangibles important? |
Intangibles are the difference between the book value and the market value of a company It is argues that the lack of good reporting of intangibles could lead to a systemic undervaluation by investors of the shares of companies - especially intangibles-intensive enterprises and higher costs of capita as the raising of finance for such companies is more difficult |
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What is book value and market value? |
Book value: the value of the companies net assets shown in the accounts Market value: the number of shares X share price - also known as market capitalisation |
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What are the two classifications of an intangible? |
1) purchased: either separately or as part of a business combination E.g landing rights Patents Software license 2) internally generated: E.g brands Customer lists |
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What is the recognition criteria for internally generated intangible assets |
If it is probable that future economic benefits will be generated from the asset It can be reliably measured |
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What is goodwill |
Covered by IFRS 3 Goodwill is the future economic benefits arising from assets that are not capable of being individually identified and separately recognised It is measured as the difference between the gait value of net assets and the amount paid for the company |
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How is goodwill treated according to IFRS 3how a |
Is it treated as though it has indefinite life Purchased goodwill is recognised in the SOFP as an asset and is initially shown at cost Internally generated goodwill is not shown in the financial statements as it is not separately identifiable and cannot be reliably measured (recognition criteria is not met) Amortisation is prohibited - test annually for impairment (or more if required) - can have a substantially positive effect on reported profit if there is no impairment - Increases volatility of reported profits If goodwill is negative then you firstly recalculate the fair value of the net assets acquired, if it is still a negative amount then you treat it as profit |
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How are internally generated intangible assets treated according to IAS 38 |
Record at cost if recognition criteria is met and if there is a market which the assets are traded on Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets |
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How are purchased intangible assets treated according to IAS 38? |
If purchased separately: record at cost if recognition criteria is met If purchased as part of business combination: record at FV assuming asset is identifiable and FV is reliable - otherwise include in goodwill
Purchased brands should be shown at cost and amortised over their useful lives. if they have indefinite lives, they should be shown at cost and subject to annual impairment reviews |
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What is the balance sheet approach for an annual impairment review |
Charge only made when the value in the SOFP diminishes below its original cost Comparing recoverable amount: higher of selling price and economic or present value of future cash flows |
