Question

Outline three possible arguments for not recognising internally generated Goodwill as an intangible asset in accordance with NZ IAS 38.

(b) As of 30 June 2020, Rezar Ltd has the following intangible assets to report in the financial statements.

(i) The company has acquired patents on 1 July 2016 for $45,000. This patent allows the production of 300,000 units. During the year ended 30 June 2020, the company produced 36,000 units.

(ii) Externally acquired Goodwill as at 1 July 2019 was $85,000. Goodwill has been impaired by $10,000 during the current year.

(iii) On 1 October 2019, the company acquired a franchise for $27,000 for 5 years. There is great demand for this franchise in the current market, and it has a fair value of $23,000 as of 30 June 2020.

Required: Explain how each of the above intangible assets should be measured in accordance with NZ IAS 38 as of 30 June 2020. Your answer should include the most appropriate model or models available to Rezar Ltd to measure above intangible assets, amortisation (if any), impairments (if any) and the closing balances as at 30 June 2020. Show all calculations. No journal entries required.

Answer 1

As per IAS 38 expenditure for an intangible item is recognised as an expense, unless the item meets the definition of an intangible asset, and:

• it is probable that there will be future economic benefits from the asset will flow to the entity; and
• the cost of the asset can be reliably measured.

Possible arguments for not recognising internally generated Goodwill as an intangible asset in accordance with NZ IAS 38

The cost of generating goodwill internally is often difficult to distinguish from the cost of maintaining or enhancing the entity’s operations or goodwill. For this reason, internally generated goodwill are not recognised as intangible assets. The costs of generating other internally generated intangible assets are classified into whether they arise in a research phase or a development phase. Research expenditure is recognised as an expense. Development expenditure that meets specified criteria is recognised as the cost of an intangible asset.

(b) Measurement of intangible assets as of 30 June 2020

Initially Intangible assets are measured at cost. After initial recognition, Intangible assets are measured at cost less accumulated amortisation. It may choose to measure the asset at fair value .

Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation and impairment losses.

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any subsequent amortisation and impairment losses only if fair value can be determined by reference to an active market.

An intangible asset with a finite useful life is amortised and is subject to impairment testing. An intangible asset with an indefinite useful life is not amortised, but is tested annually for impairment. When an intangible asset is disposed of, the gain or loss on disposal is included in profit or loss.

(i) The company has acquired patents on 1 July 2016 for $ 45,000. Because of patent has indeffinite period of life it should measure at cost or fair value subject to impairement testing.

(ii) Externally acquired Goodwill as at 1 July 2019 was $85,000. Goodwill has been impaired by $10,000 during the current year. So goodwill is to recorded at $75,000 ($85,000-$10,000) as on 30 June 2020.

(iii) On 1 October 2019, the company acquired a franchise for $27,000 for 5 years. Life of franchise is defined so it should be amortised over the life of intangible asset. Amortisation for the year = 27000/5 = $5,400,

Amortisation up to 30 June 2020 (9Month) = (5400/12)*9= $4,050.

Value of franchise as on 30 June 2020 = 27000-4050 = 22950

Fair value of franchise as on 30 June 2020 = $23,000

It is at the option of the company to measured at cost or at fair value.