IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 30 /Lntangible Assets (lAS 38)

Case Study 1

Facts

$10 million $ 2 million $ I million Brilliant Inc. acquires copyrights to the original recordings of a famous singer. The agreement with the singer allows the company to record and rerecord the singer for a period of five years. During the initial six-month period of the agreement, the singer is very sick and consequently cannot record. The studio time that was blocked by the company had to be paid even during the period the singer could not sing. These costs were incurred by the company: (a) Legal cost of acquiring the copyrights (b) Operational loss (studio time lost, etc.) during start-up period (c) Massive advertising campaign to launch the artist Required Which of the above items is a cost that is eligible for capitalization as an intangible asset? Solution (a) The legal cost of acquiring the copyright can be capitalized. 6. INTERNALLY GENERATED INTANGIBLE ASSETS With internall y gene rated intan gible assets, probl ems arise in identifying whether there is an identi– fiable asset that will generate futur e ec onomic ben efit and in reliably determining its cost. 6.1 Goodwill Th e Stand ard proscribes the recogniti on of intern all y generated goodwill as an asset. Th e rati on ale be hind thi s is that any expend iture incurred does not result in an asset tha t is an identi fi abl e re– so urce - it is not separable, nor does it arise from a contrac tua l or other legal rights-or that is co ntro lled by the entity. In addit ion, any cos ts incurred are unlikely to be speci fica lly identifiabl e as ge nerating the goo dwi ll. Th e position that the difference between a valuation of a busin ess and the carrying amount of its ind ividu al assets and liabilit ies may be capitalize d as goodw ill fall s down insofar as that di fference cannot be catego rized as the cos t and therefore cann ot be rec ogni zed as an asset. 6.2 Other Internally Generated Intangible Assets 6.2.1 The Stand ard sets out rules for the recognition of other intern ally gen erated intangible as– sets and broadly defines such expenditures as research and de velopment. It pro scribes the recogni – tion of intern ally ge nerated brand s, masthe ads, publi shing titles, customer lists, and similar items, because expenditure the reon , like expenditure on inte rnally ge nerated goodwill, ca nno t be di stin– guished from the cos t of developing the business as a whole and is therefore not sepa rate ly identifi– able. 6.2.2 In order to determine whether an interna lly generated int angible as set qu alifi es for recogni– tion, its generation is di vided into a research phase and a dev elopment phase. If the two phases ca nnot be distinguished, then the entire expenditure is classified as research . 6.2.3 Exp enditure on rese arch (or the research pha se of an internal project) is to be written off as an expense as and when incurred, as it is not possibl e to demonstrate that an asset exists that will generate future eco nomic benefit. Examples include • Activities aimed at obtaining new knowledge • Th e search for , evaluatio n, and selection of applications of research find ings or knowledge • Th e search for altern ati ves for materi als, devices, products, sys tems, or proc esses • Th e formulatio n, design, evaluat ion, and selection of possible alternatives for new or im– proved mater ials, devices, produ cts, sys tems, or proce sses 6.2.4 Developmen t ex penditure may be recogni zed as an intangibl e ass et whe n, and only when , all of the following can be demonstrated: • The technical feasibility of completin g the asse t so that it will be ava ilable for use or sale (b) "Operational costs" during the start-up period are not allowed to be capitalized. (c) Massive advertising campaign to launch the artist is not allowed to be capitalized.