Question

Determine whether each of the following scenarios should be accounted for as an intangible asset and, if so, whether it meets the criteria for recognition. Justify your conclusions.

1. Clothier Entity has developed a successful brand for its designer clothing that allows Clothier to charge a premium. The entity spends large amounts on maintaining and developing the brand.

2. Gumbo Entity purchased a fishing license from the government last year that allows it to fish for the next five years. Gumbo uses the fish in its famous Cajun-style gumbo.

3. Computer Entity has developed an accounting software package. It sells licenses to the software package at a 40% gross profit margin.

Answer 1

Question 1: As per IAS 38, for a intangible asset to be recognized, the two criteria’s are required to be met:

1. Future economic benefits should flow from the asset to the entity
2. The cost of the asset can be measured reliably

If these above two criteria are not met, then it will be recognized as a expense.

So in this case, the costs incurred do not satisfy the recognition criteria as such costs cannot be distinguished from the costs incurred in developing the business a whole. Even though the second criterion is fulfilled, for an intangible asset to be recognized, it needs to satisfy both the conditions.

Question 2

As per IAS 38, for a intangible asset to be recognized, the two criteria’s are required to be met:

1. Future economic benefits should flow from the asset to the entity
2. The cost of the asset can be measured reliably

If these above two criteria are not met, then it will be recognized as a expense.

So in this case, the fishing licenses are intangible assets of the Company. They are assets because they legally have a right to use that license and it is expected to bring future economic benefits. So it should be recognized as a intangible asset.

Question 3

As per IAS 38, for a intangible asset to be recognized, the two criteria’s are required to be met:

1. Future economic benefits should flow from the asset to the entity
2. The cost of the asset can be measured reliably

If these above two criteria are not met, then it will be recognized as a expense.

So in this case, the software licenses are intangible assets, but the licenses cannot be classified as intangible assets of the Company. The licenses are inventory of the Company and IAS 38 has specifically excluded intangible assets held by entity for sale in ordinary course of business. Hence, it cannot be recognized as a intangible asset.