Question

Part B Short answer questions

Assume you are the financial controller of a new established company. The CEO has asked your choice of accounting policy regarding the measurement of intangible assets at the time of recognition and after the acquisition.

Required:

State your choice of accounting policy regarding the measurement of intangible assets at the time of recognition and after the initial acquisition. Explain the reason (s) of your choice (s). You should provide comments regarding the choice of accounting method.      

Answer 1

Ans: Recognition criteria for Intangible Assets- IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if:

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

Intangible assets are initially measured at cost.

Initial recognition: research and development costs

• Charge all research cost to expense.
• Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits.

Initial recognition: in-process research and development acquired in a business combination

A research and development project acquired in a business combination is recognised as an asset at cost, even if a component is research. Subsequent expenditure on that project is accounted for as any other research and development cost

Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated should not be recognised as assets.

• Measurement subsequent to acquisition: cost model and revaluation models allowed

An entity must choose either the cost model or the revaluation model for each class of intangible asset

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

Being finacial controllar of new company, reserch may be at initial stage hence all expenses would have to be expensed in profit & Loss account. However if technical feasibility of Asset have been established and fair value is more than cost, then recognise it at Fair value method because it will enhance valuation of company.