Ch8 - Intangible assets

Question 1

Define intangible assets.

Answer 1

Intangible assets are defined as identifiable non-monetary assets without physical substance that are controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Question 2

List main categories in intangible assets.

Answer 2

• Goodwill
• Research and development (R&D)
• Other intangible assets (patents, trademarks, customer lists, francises, computer software,…)

Question 3

When is goodwill recognized?

Answer 3

Goodwill is recognized in a business combination.

Question 4

Definition of goodwill.

Answer 4

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.

Question 5

How do we calculate goodwill at initial recognition.

Answer 5

Goodwill is calculated as a difference between purchase price of net assets acquired and fair value of net assets acquired.

Question 6

List possible changes of value of intangible assets after initial recognition.

Answer 6

Intangible assets can:

a) decrease in value due to:
- amortization and/or
- impairment (IAS 36)
b) increase in value due to revaluation

Question 7

Specifics of subsequent measurement of goodwill compared to other intangible assets.

Answer 7

Goodwill, as opposed to other intangible assets:

• is not subject to amortization, but is subject to annual impairment test
• once goodwill is impaired, impairment loss can not be reversed

Question 8

List arguments in favour for capitalization of R&D.

Answer 8

R&D expenses, in case of success, should be related to future periods when the benefits will accrue (matching principle), therefore
R&D expenses should be capitalized with the principles of accrual accounting.

Question 9

List arguments against capitalization of R&D.

Answer 9

Future economic benefits derived potentially from R&D are not sufficiently objectively defined at the time the expense is incurred to justify capitalization. Based on the prudence principle R&D expenses are more likely to be expensed .