9825031

2011 KPMG AS, a Norwegian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

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Tangible and Intangible Assets

IAS 16, IAS 38

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What will you learn By completing this module you will be able to: 1) Explain the definitions of PPE

and intangible assets 2) Explain the initial recognition

and measurement of PPE and intangible assets

3) Describe the criteria for capitalising R&D costs

4) Explain the subsequent measurement of PPE and intangible assets

5) Evaluate the quality of disclosures

PPE = property, plant and equipment R&D = research and development

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Agenda

Definitions

Initial recognition and measurement

Internally generated intangible assets

Subsequent measurement

Derecognition and compensation


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Definitions

Controlled by the entity

Expected future economic benefits

Expected to be used > 1 period

Held for production, rental, administrative use

Identifiable asset without physical

substance


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A question for you: Definition (1)

Lila-Clean uses clean-bods (PPE) as an integral part of their business

Lila-Clean keeps a full suite of robot parts as spare parts

The smaller parts are used up within about 6 months, but the more major parts are used as temporary parts in clean-bods and can last for up to 5 years

Are the spare parts PPE?


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What is identifiable?

Arises from contractual / other legal rights

Is separable or


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Lila-Harvest has an exclusive right to harvest slime-trees from the forests of Planet Lila

The licence was granted for an initial period of 10 years by the Planet Lila Council

The licence is specific to Lila-Harvest and cannot be sold to another forest operator

Is the licence an intangible asset?


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What is control?

Power to obtain future economic benefits

Restrict access of others to benefits &


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Lila-Pharma has:

Customised software that runs its DNA Replicator that produces botanical pharmaceuticals

Skilled engineers that mix the potions used in the DNA Replicator; engineers have a 1-month notice period but most have been at the company since colonisation

An 80% share of the market for inter-galactic pharmaceuticals

Which of the above are intangible assets?

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Agenda

Definitions






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Recognition

Probable future economic benefits

Cost can be measured reliably


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Three ways to acquire

Acquire separately Recognise asset

Acquire in a business

combination Recognise asset

Develop internally Further tests for intangible assets


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Measurement at cost

Expenditure directly attributable to bringing asset to location and condition necessary for intended use


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Examples of costs

Part of cost

Import duties Dismantling and removal costs Borrowing costs on

qualifying asset

Not part of cost

Feasibility assessment costs

Costs of staff training

Administration and overhead costs


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A question for you: Initial measurement

Lila-Pharma has just bought a new particle accelerator to use in its new cloning line Double-Fun

The particle accelerator was manufactured on Earth and will have to be transported to Planet Lila by space-boat

The transport costs are L$ 80,000

A party is planned to celebrate the launch of Double-Fun, at an estimated cost of L$ 20,000

Can the transport costs and launch party costs be capitalised as part of the asset?

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Agenda

Definitions






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Research vs development

Application of research findings

Development

Original and planned investigation

Research

Capitalised if certain criteria met Expensed as incurred


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Development costs capitalised when

Technical feasibility established

Intention to complete and use or sell

Ability to use or sell

How economic benefits will be generated

Availability of adequate technical, financial, other resources

Ability to measure expenditure reliably


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A question for you: R&D

Lila-Innovation is developing a new bedtime drink that will wake humans up at a certain time each morning without the need for an alarm

The primary market for Wake-Me is Earth, where 9 to 5 working hours are still common

Lila-Innovation is very confident about the product, but is seeking US FDA approval, which is a rigorous process

Can Lila-Innovation start capitalising development costs prior to FDA approval?

FDA = Food and Drug Administration


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Additional restrictions

Not recognised as internally generated intangible assets

Internally generated goodwill

Expenditure on brands etc Start-up costs

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Agenda

Definitions






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Principles of depreciation / amortisation

Review of key assumptions at least each reporting date

Amount determined after deducting residual value

Systematic allocation of cost to profit or loss over useful life

Changes are changes in estimates


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Useful lives

Will be finite Might be indefinite


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Factors in assessing useful life

Expected usage, life cycles, obsolescence, industry

Periods of control and legal limits

Contractual terms and renewal periods


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A question for you: Useful life

Lila-Harvest has an exclusive right to harvest slime-trees from the forests of Planet Lila

The licence was granted for an initial period of 10 years by the Planet Lila Council, but can be renewed after 10 years

The renewal process is not competitive and Lila-Harvest is confident of renewal

Can the amortisation period be longer than 10 years?


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Indefinite-lived intangible assets

No foreseeable limit on period of cash inflows

Planned future expenditure other than to maintain standard is not included

Indefinite does not mean infinite


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Methods of depreciation / amortisation

Straight-line

Unit-of-production

Reducing balance

Revenue-based

Amortisation examples

Straight-line

Unit-of-production

Reducing balance

Depreciation examples


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A question for you: Depreciation

Lila-Cosmetics has a newly acquired DNA Replicator:

Date of acquisition: 1 January Year 1

Initial carrying amount: L$ 31 million

Estimated useful life: 10 years

Price of a new machine at the end of Year 2: L$ 33 million

Price of a 10-year old machine at the end of Year 2: L$ 1 million

Is Lila-Cosmetics required to recognise depreciation in Year 2?


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Component accounting

Components significant in relation to total cost of item

Depreciation method / useful life different for each component

Item consists of individual components

Components can be physical (parts) or non-physical (e.g. overhaul costs)


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Measurement model

Cost model or revaluation model

Some conditions Severe restrictions


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Cost vs revaluation model

Revaluation model Cost model

Cost less:

Depreciation / amortisation

Impairment losses

Revalued amount less:

Depreciation / amortisation

Impairment losses


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Revalue by class Keep up to date

Revalue by class Need an active market

Revaluation model restrictions


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Active market

Items traded are homogenous

Willing buyers / sellers normally can be found at any time &

Prices available to the public &


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Revaluation of PPE

All assets in the class at the same time

Gain or loss on an asset-by-asset basis

Gains generally recognised in OCI

OCI = other comprehensive income

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Agenda

Definitions






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Derecognition

Held for sale

Derecognise

Disposed of

or

Permanent withdrawal

or

Gai

n or

loss

in p

rofit

or l

oss


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Compensation

Recognised when receivable

Compensation

Loss or impairment recognised separately

Separate events


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Some differences compared to NGAAP

Different practise for component accounting

Accounting for change in estimates, under NGAAP can choose to take the effect in the year the estimate is changed

Revaluation model not allowed under NGAAP

Development costs may be expensed as incurred under NGAAP

Insurance settlement NGAAP allows in certain situation that the net effect is recognized

IFRS has standards for different types of assets NGAAP relies on the general accounting principles in RL

Thank You!

Tangible and Intangible AssetsWhat will you learnAgendaDefinitionsA question for you: Definition (1)What is identifiable?A question for you: Definition (2)What is control?A question for you: Definition (3)AgendaRecognitionThree ways to acquireMeasurement at costExamples of costsA question for you: Initial measurementAgendaResearch vs developmentDevelopment costs capitalised whenA question for you: R&DAdditional restrictionsAgendaPrinciples of depreciation / amortisationUseful livesFactors in assessing useful lifeA question for you: Useful lifeIndefinite-lived intangible assetsMethods of depreciation / amortisationA question for you: DepreciationComponent accountingMeasurement modelCost vs revaluation modelRevaluation model restrictionsActive marketRevaluation of PPE AgendaDerecognitionCompensationSome differences compared to NGAAPThank You!

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