Question

Question 3 Intangible Assets
XYZ Ltd reports the following intangible assets on 30 June 2020:
Patents at directors’ valuation	$160 000
Less Accumulated amortisation	(40 000)
Brand name at fair value	100 000
Licence at cost	$100 000
Less Accumulated amortisation	(10 000)

Additional Information:

12. Patents were acquired at a cost of $80 000 on 1 July 2016. They have an estimated life of 16 years, of which 12 years remain on 30 June 2020.
13. The brand name is stated at fair value and is internally generated.
14. The licence, acquired one year ago, has a 10-year life of which nine years remain. The licence can be traded in an active market and has a fair value of 1.1 million.

Some of the treatments by XYZ may be inconsistent with the accounting standards AASB 138 “Intangible Assets”.

REQUIRED:

For EACH intangible asset, specify and briefly justify the following accounting decisions in accordance with AASB 138 ‘Intangible Assets’:

1. How should the intangible asset be initially recognized?
2. What is the appropriate subsequent measurement basis (i.e., measurement model) of the recognised asset?
3. Is the recognised asset subject to amortization?

4. Calculate the carrying amount of each asset at 30 June 2020. No journal entry is required.

Answer 1

An intangible asset is an IDENTIFIABLE non-monetary ASSET without physical existence.

Key components of defination are:

1) identifiability and

2) Asset

Asset is a resource controlled by the entity as result of past events and from which future economic benefits are expected to flow to the entity.

Future economic benefits may include:

a) revenue from sale of products and services,

b) cost savings,

c) other benefits resulting from use of asset by the entity

An asset is identifiable if it is either:
(a) separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented
or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless
of whether the entity intends to do so; or
(b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

An intangible asset shall be recognised if, and only if:
(a) it is probable that future economic benefits that are attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
An entity shall assess the probability of expected future economic benefits using reasonable and supportable
assumptions that represent management’s best estimate of the set of economic conditions that will exist over the
useful life of the asset.

An intangible asset shall be measured initially at cost.

Measurement after initial recognition-

An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same
model, unless there is no active market for those assets.

From the above points we can conclude that-

1) brand name should not recogised because it is not identiable because it cannot be sold separately from the entity itself and it is not arising from contractual or other legal rights.

2) patents are recognised at directors valuation which is not in accordance with the standard because standard say that intangible asset should initially recognised at cost and I am not assuming that they are initially recognised at cost and subsequently fair valued using revaluation model because of accumulated amortization = (inital amount/useful life)×no of years of completed life = (160000/16)×4= 40000 so initial recognition has been done at 160000 which is not in accordance with the standard so it has to recognised at cost.

3) license is recognised at cost which is in accordance with the standard.

4) assuming that patent and license fall within same class entity should choose only either cost or revaluation model for both the assets and you can also assume they fall in different in class and you can any model then.

5) based on patents balance should be cost - amortization= 80000-[(80000/16)×4]

Balance = 80000-20000= 60000

6) brand value should not recogised so balance is zero

7) licence is correctly valued ( cost - amortization )

Balance= 100000-[(100000/10)×1]

= 100000-10000= 90000