IAS 38 intangible assets

PART A - KONDI LTD

Jomo brand
In order to raise the brand as an intangible asset in the statement of financial position, the
brand would need to satisfy the definition and recognition criteria for an intangible asset.
The definition of an intangible asset and an application of the facts of the case study to the
definition, is as follows:an identifiable non-monetary asset (the brand is
(a) identifiable: Jomo; and is
(b) non monetary: is not receivable in a fixed or determinable amount of money; and is (c) an asset:
resource under the control of the enterprise (other enterprises cannot make use of the
brand name and Kondi Ltd could sell or further develop the brand) as a result of past events
(development and registration of the brand) and is expected to result in the inflow of future
economic benefits (super-profits from the sale of branded goods
• without physical substance (cannot touch the Jomo brand);
In addition to satisfying the definition of an intangible asset, the recognition criteria for
intangible assets must be satisfied in order for the brand to be raised in the financial
statements. The recognition criteria are as follows:
• it is probable that future economic benefits attributable to the asset will flow to the
enterprise
(the fact that the brand was independently valued at $20 million supports the probable
benefit requirement)
• the asset has a cost that can be measured reliably (the cost of developing the brand
internally cannot be determined reliably as these costs cannot be distinguished from the
cost of developing the business as a whole)
Because internally generated brands fail the recognition criteria they cannot be raised in
the company’s statement of financial position. IAS 38.63 accordingly expressly prohibits the
raising (as an asset) of internally generated brands.
Kondi Ltd has applied fair value accounting to its brand. This is not allowed in terms of IAS
38.76(b). However, IAS 38.75 permits the revaluation of intangible assets, using the
revaluation model, only where there is an active market for that item. An active market
cannot exist for brands as they are unique, neither homogenous nor traded in a public
forum. Furthermore IAS 38.76(a) expressly prohibits the revaluation of intangible assets
that have not previously been recognised as assets. (The Jomo brand was not previously
recognised - see the discussions above.)
Kondi Ltd must reverse the journal entry Mr Bright Spark processed in respect of the brand
during the current reporting period.
It is not appropriate to discuss amortisation as there is no amount to amortise

PART B - ZONDI (PVT) LTD

Initial recognition
In accordance with IAS 38.24, Zondi (Pvt) Ltd correctly recorded the casino licence
(intangible asset) initially at cost. The casino licence meets both the definition and
recognition criteria of an intangible asset (See Kondi Ltd - Jomo brand above, but note that
the cost of the casino licence is known to be $15 million, i.e. the second recognition criteria
is satisfied).
As the government grant took the form of a non-monetary asset (i.e. casino licence
intangible asset),
Zondi (Pvt) Ltd also has the alternative to initially account for both the asset and the grant
at fair value. The casino licence could thus be recognised initially as an intangible asset for
$50 million with deferred income being raised for $48.5 million ($50 million fair value – $15
million paid).
Applying the provisions of IAS 20.24, Zondi (Pvt) Ltd has the choice (accounting policy to be
selected) to present the grant of $48.5 million (deferred income) in the statement of
financial position by:
- Alternative A: Accounting for the grant as deferred income which will be recognised in
profit or loss over the same useful life and using the same amortisation method applicable
to the intangible asset.
- Alternative B: Deducting the grant from the carrying amount of the asset which would
result in the intangible asset being effectively recognised at the nominal amount of $15
million ($50 million less $48.5 million).
Assuming a residual value of zero (see discussion under amortisation), the depreciable
amount of the casino licence would be $50.0 million under alternative A and $15 million
under alternative B.
Although Zondi (Pvt) Ltd’s initial recording of the casino licence at a nominal amount of $15
million results in the same carrying amount as alternative B, disclosure of the government
grant in terms of IAS 20 must still be adhered to.
Amortisation
IAS 38.88 requires Zondi (Pvt) Ltd to assess whether the casino licence (intangible asset) has
a finite or indefinite useful life for the purpose of determining whether the asset is subject
to amortisation or not. The casino licence does have a finite useful life because it was
awarded to Zondi (Pvt) Ltd for a non renewal period of 25 years and should therefore be
amortised over this useful life. As a result, Zondi (Pvt) Ltd’s policy not to amortise the casino
licence, despite it having a finite useful life, is in contravention of IAS 38.89.
Although the amortisation charge for an intangible asset can be zero where the asset’s
residual value increases to an amount equal or greater than its carrying amount (IAS
38.103), the residual value of Zondi (Pvt) Ltd’s casino licence is required to be assumed as
zero as the
exceptions provided in IAS 38.100 are not applicable. There is neither:
• an active market (as defined by IAS 38) for casino licences in South Africa, nor
• has Zondi (Pvt) Ltd secured a commitment from a third party (will sell to the highest
bidder) for the purchase of the casino licence at the end of its useful life (i.e. the period over
which Zondi (Pvt) Ltd expects to receive benefits from the licence).
With the residual value of the casino licence being assumed to be zero, Zondi (Pvt) Ltd
cannot argue that no amortisation must take place because the selling price of the casino
licence is in excess of its nominal cost.
As the casino licence is for a 25 year period it should be amortised over 25 years,
commencing 2 January 20.15. The fact that it was brought into use only three months after
acquisition (1 April 20.15) is not relevant, as amortisation should commence when an
intangible asset is available for its intended use.
The amortisation method should reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by Zondi (Pvt) Ltd. If that pattern cannot be
determined reliably, the straight-line method should be used.
The residual value, amortisation period and amortisation method of the casino licence
should be reviewed at least at each financial year-end, with any changes thereto to be
accounted for as a change in accounting estimate in accordance with IAS 8.

Impairment
Zondi (Pvt) Ltd should assess at each reporting date whether there is an indication that the
casino licence may be impaired.
Only if such an indication exists, should the
recoverable amount of the casino licence be estimated with the carrying amount of the
asset written down to its recoverable. The write down should be recognised as an
impairment loss.
Revaluation
Ms Zondi’s accounting for the revaluation (taking the increase in value to profit) amounts
to fair value accounting. Fair value accounting is not permitted in respect of intangible
assets. Revaluations of intangible assets is an allowed alternative accounting treatment of
IAS 38.75 but may only be applied where there is an active market for the intangible asset.
South African casino licences are neither homogenous nor traded in an open forum,
accordingly they do not meet the IAS 38 active market requirements, and hence cannot be
revalued, after initial recognition.
The casino licence must therefore be accounted for, after initial recognition, by applying the
cost model.
The $48.5 million taken to income during the current year must be reversed.

PART C - BUSTANDBOOM LTD

1 Jan 31 Dec Revaluatio 1 Jan 31 Dec Impairment 31 Dec
n /
20.11 20.11 20.12 20.13 20.13
Devaluation
$ $ $ $ $
$ $

Plant 2 000 000 1 800 000 1 000 000 a 2 800 000 2 177 777 b (1 569 081) f 608 696
800 000
Patents 2 000 000 - 1 800 000
1 400 000 c (1 008 696) 391 304
514 286 g
Goodwill 571 - 514 286
400 000 d -
429 e
(400 000)
Expense (impairment loss) recognised in profit or loss – 20.13:
- Plant ($1 569 081 above - $777 777 h reversal of revaluation) $791 304
- Patents $1 008 696
- Goodwill $400 000
$2 200 000

CALCULATIONS
a Given
b 2 800 000 on 1 January 20.8 x 7/9 years = 2 177 777
c 2 000 000 x 7/10 years = 1 400 000
d 571 429 x 7/10 years = 400 000
e First allocate a portion of impairment loss against goodwill
f 2 177 777/ (3 977 777 - 400 000 goodwill) x (2 977 777 - 400 000 allocated to goodwill) =
1 569 081
g 1 400 000/(3 977 777 - 400 000 goodwill) x (2 977 777 - 400 000 allocated to goodwill) =
1 008 696
h $1 000 000 x 7/9 years = 777 777
i $3 977 777 - 1 000 000 = 2 977 777
b) Carrying amount: 31 December 20.13
Carrying amount Carrying Reversal of Carryin
at
amount at impairment g
31 Dec 20.13 /
31 Dec amount
assuming no Devaluati
20.13 after
on
impairment Before reversal
reversa
in previous years l
$ $ $
$
Plant 1 555 556 a 434 783 d 1 120 773 f 1 555
556
Patents 1 000 000 b 279 503 e 720 497 g
1 000
Goodwill
- c - - 000

2 555 556 714 286 1 841 270 -

2 555
556

CALCULATIONS
a 2,8 million x 5/9 years = 1 555 556
b 2 million x 5/10 years = 1 000 000
c The carrying amount of goodwill on 31
December 20.13 was zero d 608 696 x 5/7 years =
434 783
e 391 304 x 5/7 years = 279 503
f 434 783/714 286 x (5 000 000 - 714 286) but limited to 1 120 773
g 279 503/714 286 x (5 000 000 - 714 286) but limited to 720 497
The impairment of goodwill is not reversed as it is prohibited in terms of IAS 36