Lecture 3 - Intangible Assets

Front 1

What is the definition of an intangible asset?

Back 1

1. An identifiable: separate from goodwill
* Separability: The capacity of being separated from the entity and sold, transferred, licensed, rented or exchanged. Separability is a further definition test in order to be recognised as an asset
* Contractual or other legal rights: Demonstrate control over the asset.

2. Non-monetary assets: Distinguishes from cash and investments

3. without physical substance: intangible - 'incapable of being perceived by the sense of tough'

Front 2

What is the definition of goodwill?

Back 2

Future economic benefits
From assets that are not capable of being individually identified and separated recognised
e.g. loyal and efficiency employees, established clientele. Collectively, referred as goodwill.

AASB 3 ‘Business Combinations”: cost = ‘the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities…’(para.51)

Front 3

What is the recognition criteria for intangible assets?

Back 3

AASB bans recognition of internally generated: brands, mastheads, publishing titles, customer lists

Purchased:
Capitalised: Brand name
FV: Goodwill through a business combination

Internally developed:
Capitalised: Development expenditure if conditions are met; Exploration and evaluation costs
Expense: Brand name, R&D

Front 4

What motivates non-recognition of intangibles?

Back 4

1. Uncertainty about future payoffs and volatility
2. Asymmetry surrounding management incentives
* Economic: Signalling about future value/income; growth potential
* Manipulation: Agency problems with debt and compensation contracts. Tied to debt covenants and remuneration plans.
3. Competing arguments about whether recording all intangibles improves or reduces information sets.

Front 5

What are some issues with intangibles?

Back 5

NOT NORMAL ASSET CHARACTERISTICS
1. Knowledge asset so existence shown by economic transaction =>
2. Not separate/saleable/discrete =>
3. Not well-defined property rights (like PPE and financial resources)
4. Because of the above, no liquid market => difficult to measure reliably.
5. Not separable/saleable + poorly defined property rights => difficult to write fully specified contracts for intangibles

Front 6

What are some issues with non-recognition?

Back 6

1. Doesn't make economic sense
2. Reduces information content of financial statements
3. Understating assets => allow gains to be diverted from external-to-the-entity shareholders to insiders, who are knowledgeable about the non-recognition of intangible items
4. Companies with significant investment in intangible items are likely to be undervalued.

Front 7

What is the value relevance of intangibles?

Back 7

* Evidence shows that information about investments in intangibles and the outcomes of this investment such as patents is highly relevant to investors.

* Researchers have argued that even unreliable numbers can be useful signals that (unobservable) assets exist, pointing investors in the direction of additional relevant information sources.

Front 8

What are the general disclosure requirements?

Back 8

a) Each class of intangible asset, distinguishing between internally generated and other intangible assets.
b) Where useful lives are indefinite and finite. If finite – the useful lives or amortisation rates and the methods used.
c) Opening and closing amounts for accumulated amortisation, impairments, revaluations and movements in income statement line items e.g. amortisation expense
d) Where intangible assets are measured after acquisition using revaluation models, full details of revaluations. Opening and closing balances and reconciliations. Significant assumptions in determining fair values. (AASB 138.118)

Front 9

What is the definition of Research? What is the initial recognition?

Back 9

Original and planned investigation
Undertaken with the prospect of gaining new scientific or
Technical knowledge and understanding

EXPENSED

Front 10

What is the definition of Development?

Back 10

Application of research findings or
Other knowledge to 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

Front 11

What is the initial recognition of Development?

Back 11

AASB138 recognised if and only if:
(a) The TECHNICAL FEASIBILITY of COMPLETING the intangible asset for (use or sale)
(b) Intention to COMPLETE (for use or sale)
(c) The entity's ABILITY TO USE OR SELL
(d) How the intangible asset will GENERATE FUTURE ECONOMIC BENEFITS. Can the entity demonstrate the existence of a MARKET FOR THE OUTPUT, or the usefulness internally?
(e) The availability of ADEQUATE TECHNICAL, FINANCIAL AND OTHER RESOURCES to complete development and use or sell
(f) Entity's ability to MEASURE RELIABILY THE EXPENDITURE attributable to the intangible asset during its development.

Front 12

Do intangible asset add value?

Back 12

Can't measure directly as lack physical substance
Rely on proxies or indirect measures => analyse impact on some market variable e.g. Share price

Does it inform us about accounting standards?
*Too complex, heterogeneous, too subjective?
*Should we allow managerial discretion to report all intangibles in financial accounting reports?

2. Does it inform us about management decision making?
*Justification of budgets?
*Incremental decision making?

Front 13

What is the recognition rules for goodwill?

Back 13

AASB 3 'Business Combinations" - Capitalise
Internal - Not recognised

Front 14

What is the initial recognition for separately purchased intangible assets?

Back 14

Cost = purchase price + costs directly attributable to preparing the assets for its intended use

Front 15

What is the initial recognition for business combinations?

Back 15

Cost = FV at date of acquisition

Front 16

What is the initial recognition for the development phase (internally developed?)?

Back 16

Costs = sum of expenditure incurred from the date the intangible asset first meets the recognition criteria

Front 17

What is the initial recognition for the goodwill from business combinations? What is the subsequent measurement?

Back 17

INITIAL: All acquisition-related costs to be treated as expenses in the period the costs are incurred

SUBSEQUENT: Cost - Acc Impair (no amortisation)

Front 18

What is the subsequent measurement for intangible assets?

Back 18

Purchase separately => Cost - Acc Amort - Acc Impair (includes cost to get to function)

Revaluation model => acquired as part of a business combination => Fv - Acc Amor - Acc Impair

Finite life: Default is straight-line; Residual = 0
* Pattern determined by expected consumption

Indefinite: No Amort

Front 19

What are the two tests of the goodwill impairment test?

Back 19

1. FV of reporting unit as whole compared to FV. FV < CA => Goodwill impairment.
* FV = Quoted market prices OR prices for similar assets/liabilities OR Valuation techniques e.g. multiples of earnings, sales OR Present value technique e.g. discounted cash flows

2. Consider impairment of all other intangible assets. Calculate goodwill impairment.