TH_CPA f7 ch9

"f7 ch9 - 14 The nature of goodwill"

"Goodwill - is the difference between the value of a business as a whole and the aggregate of the fair values of its separable net assets; Separable net assets - are those assets (and liabilities) which can be identified and sold off separately without necessarily disposing of the business as a whole. they include identifiable intangibles such as patents, licences and trade marks. Fair value - is the amount at which an asset or liability could be exchanged in an arm's length transaction between informed and willing parties, other than in a forced or liquidation sale;"

"f7 ch9 - 1 Intangible assets"

"IFRS3 - Goodwill IAS38 - Intangible assets IAS38 - R&D"

"f7 ch9 - 17 IFRS 3 revised business combinations"

"IFRS3 revised governs accounting for all business combinations and deals with the accounting treatment of goodwill. Goodwill is defined in IFRS3 as an asset representign the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized."

"f7 ch9 - 16 Purchased and non-purchased goodwill"

"Purchased goodwill: arises when one business acquires another as a going concern; includes goodwill arising on the consolidation of a subsidiary or associated company; will be recognized in the financial statements as its value at a particular point in time is certain; Non-purchased goodwill: is also known as inherent goodwill; has no identifiable value; is not recognized in the financial statements;"

"f7 ch9 - 22 R&D - definitions"

"Research - is original and planned investigation undertaken with the prospect of gaining new scientific knowledge and understanding. Development - is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or service before the start of commercial production or use."

"f7 ch9 - 23 R&D - Accounting treatment"

"Research expenditure - write off as incurred to the income statement; Development expenditure - recognize as an intangible asset if, and only if, an entity can demonstrate all of the following: the technical feasibility of completing the intangible asset so that it will be available for use or sale; its intention to complete the intangible asset and use or sell it; its ability to use or sell the intangible asset; how the intangible asset will generate probably future economic benefits. Among other things, the entity should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; its ability to reliably measure the expenditure attributable to the intangible asset during its development"

"f7 ch9 - 13 Amortisation"

"an intangible asset with a finite useful life must be amortized over that life, normally using the straight line method with a zero-residual value. An intangible asset with an indefinite useful life: should not be amortized; should be tested for impairment annually, and more often if there is an actual indication of possible impairment;"

"f7 ch9 - 15 Goodwill may exist"

"because of any combination of a number of possible factors: reputation for quality or serrvice; technical expertise; possession of favourable contracts; good management and staff;"

"f7 ch9 - 7 Purchased intangibles"

"if an intangible asset is acquired in a business combination, the fair value of that asset at the date of acquisition is taken. The determination of that asset at the date of acquisition is taken. The determination fo that fair value is easy if an active market exists, otherwise it may be necessary to take the price the entity would have paid in an arm's length transaction; Any intangible which cannot be measured reliably in an acquisition has to be included in goodwill"

"f7 ch9 - 10 Cost model"

"intangible asset should be carried at cost less amorisation and any impairment losses; this model is more commonly used in practice;"

"f7 ch9 - 4 Definition of intangible asset"

"is an identifiable non-monetart asset without physical substance; to meet the definition the asset must be identifialbe, i.e. separable from the rest of the business or arising from legal rights. It must also meet the normal definition of an asset: controlled by the entity as a result of past events (normally by enforceable legal rights); a resource from which future economic benefits are epxected to flow (either from revenue or cost saving);"

"f7 ch9 - 21 Accounting for goodwill - purchased"

"is dealt with in two accounting standards, according to how it arose. Goodwill arising on the purchase of a subsidiary is covered by IFRS3 revised, while all other goodwill is covered by IAS38. When the purchased consideration is less than the value of the acquired identifiable net assets this is known as a bargain purchase (negative goodwill) and should be recognized as a credit in the consolidated income statement and not taken to the statement of financial position. Goodwill acquired on the purchase of a subsidiary should be carried at cost less accumulated impairment losses. it must be tested for impairment annually, or more frequently if events or circumstances indicate that it might be impaired."

"f7 ch9 - 2 Intangible assets - introduction"

"many businesses invest significant amounts with the intention of obtaining future value on areas such as: scientific / technical knowledge; design of new processes and systems; licences and quotas; intellectual property, e.g. patents and copyrights; market knowledge, e.g. customer lists, relationships and loyalty; trademarks;"

"f7 ch9 - 8 Brands"

"the accounting treatment of brands has been a matter of controversy for some years. IAS 38 intangible assets has now ended the controversy by statign that internally-generated brands and similar assets may never be recognized. Expenditure on internally-generated brands cannot be distinguished from the cost of developing the business as a whole, so should be written off as incurred; where a brand name is separately acquired and can be measured reliably, then it should be separately recognized as an intagible non-current asset, and accounted for in accordance with the general rules of IAS38."

"f7 ch9 - 6 Internally-generated intangibles"

"the following internally-generated items may never be recognized: goodwill brands, mastheads, publishing titles, customer lists"

"f7 ch9 - 11 Revaluation model"

"the intangible asset may be revalued to a carrying value of fair value less subsequent amortization and impairment losses; fair value should be determined by reference to an active market;"

"f7 ch9 - 12 Features of an active market"

"the items traded within the market are homogeneous; willing buyers and sellers can normally be found at any time; prices are available to the public"

"f7 ch9 - 5 Recognition of intangible assets"

"to be recognized in the financial statements, an intangible asset must: meet the definition of an intangible asset, and meet the recognition criteria of the framework: it is probable that future economic benefits attributable to the asset will flow to the entity; the cost of the asset can be measured reliably; if these criteria are met, the asset should be initially recognized at cost."

"f7 ch9 - 9 Measurement of intangible assets"

"two choices: cost model; revaluation model"

"f7 ch9 - 19 non-purchased goodwill"

goodwill exists in any successful business. However, if the business has never changed hands, this goodwill should not be recognized in the financial statements because no event has occurred to identify its value. It can only be subjectively estimated.

"f7 ch9 - 18 Purchased goodwill"

is recognized within the financial statements because at a specific point in time there was a market transaction by which it can be measured. The purchase has established the fair value for the business as a whole which can be compared with the fair value of the separable net assets of the acquiree. the difference is purchased goodwill.

"f7 ch9 - 24 R&D - Amortization"

should be amortized over its useful life as soon as commercial production begins.

"f7 ch9 - 20 Accounting for goodwill - non-purchased goodwill"

should not be recognized in the financial statements. It certainly exists, but fails to satisfy the recognition criteria in the framework, since it is not capable of being measured reliably.

"f7 ch9 - 3 Objective of IAS38 Intangible assets"

the objective of IAS38 is to prescribe the specific criteria that must be met before an intangible asset can be recognized in the accounts.