Week 9: Tutorial questions

Question 1
Chambers, P (2022), “Beefing up creativity in ready meals market”, The Australian – Online,
27 March 2022.
“Trying to create tangibility from something intangible like creativity could be a challenge –
but a worthy one. However, it’s the thing that keeps me up at night because unfortunately,
the easiest things to measure are not sometimes the things that are the most important to
measure: and creativity is notoriously hard to quantify.”(My Muscle Chef, Head of
Marketing, Liam Loan-Lack)
Required:

1. Discuss whether an organisation’s creativity would meet the AASB138 Intangible

Assets definition of an intangible asset.
2. Discuss whether AASB138 Intangible Assets resolves the issue of measurement
implied in Mr Loan-Lack’s statement that “creativity is notoriously hard to
quantify”.

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1. According to AASB138, intangible assets are an identifiable non-monetary asset without
physical substance (AASB, 2021, p.7)

 It is clear that an employee’s creativity is non-physical, and can lead to future

economic benefits in the form of potential revenue
 However, two key aspects that would be difficult to argue are:
- The organisation controls the resource that brings FEB (ie, controls creativity of
employees)
- Identifiability: in the absence of legal protection of something more specific, the
organisation is not able to separate creativity from the business as a whole
 This is further confirmed by paragraph 15:
“An entity may have a team of skilled staff and may be able to identify incremental staff
skills leading to future economic benefits from training. The entity may also expect that the
staff will continue to make their skills available to the entity. However, an entity usually has
insufficient control over the expected future economic benefits arising from a team of
skilled staff…for these items to meet the definition of an intangible asset. For a similar
reason, specific management or technical talent is unlikely to meet the definition of an
intangible asset, unless it is protected by legal rights to use it and to obtain the future
economic benefits expected from it, and it also meets the other parts of the definition”
(AASB, 2021, p. 8)

2.
Ignoring the above, assume that creativity meets the definition of an IA. It would need to
meet recognition criteria, one of which requires a reliable measure of cost.
Mr Loan-Lack states how difficult it is to quantify creativity. The measure needed is cost:
purchase price plus directly attributable costs.
There is an absence of a single (or several) transaction(s) that is linked to creativity.

It would seem more likely that creativity would require an estimated value, rather than a
cost. AASB138 does not permit valuation, and requires initial measurement at cost.

Creativity is part of internally generated goodwill, and until a business is sold, goodwill
cannot be recognised.

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Question 2
MadSurf Magazine is an Australian based business who distribute their magazine across the
nation. The profits of the company are growing steadily and management and investors are
seeing great results overall. The belief is that the company’s success is due to its marketing
flair and expertise.
The company offer free delivery, although their magazine subscriptions are a little higher in
price compared to other surf related magazines.
The company is growing its customer list by advertising on social media platforms, and has
even started to target prospective customers directly via emails and phone calls.

The 30 June 2022 costs of delivery, advertising, mailings and phone calls is significant at
$65,000 and MadSurf would like to capitalise these costs as an intangible asset, specifically
as a customer list. For the year-end 30 June 2022, MadSurf also obtained an independent
value of $80,000 for this customer list.

Additionally, on 1 October 2021, MadSurf purchased a customer list from a competitor for
$100,000, estimating that it would generate sales for another 3 years. After the purchase,
MadSurf started conducting the phone calls (as noted above) and believes that alternatively
the costs of these phone calls could be added to the purchased customer list. The extra
names of customers obtained in the phone calls are expected to increase the useful life of
this customer list by another year.

Required
1. Using AASB138 Intangible Assets, explain how MadSurf should account for the costs of:
a) Delivery, advertising, mailings and phone calls totalling $65,000
b) The 1 October 2021 purchased customer list
2. According to AASB138 Intangible Assets, explain whether MadSurf can:
a) use a fair value to initially measure a customer list
b) capitalise the costs of phone calls to the purchased customer list

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1. a) According to AASB138, intangible assets are an identifiable non-monetary asset
without physical substance (AASB, 2021, p.7)
Costs of deliveries, advertising, mailings and phone calls must be expensed. Individually,
each does not meet the definition of an IA. MadSurf cannot demonstrate control over the
future economic benefits flowing from advertising, for example, as it cannot restrict the
access of others to those benefits. AASB 138 states that control normally arises from legal
rights (e.g. restraint of trade agreements). Without such rights it is difficult to demonstrate
control.

As a group of activities, and costs, leading to developing a customer list, the issue is resolved
by examining the definition and recognition criteria for internally generated intangible
assets.
A customer list does meet the definition of an intangible asset: only MadSurf can use this list
and gain future economic benefits that flow from the potential the list has to generate sales;
the list could be separated from the entity by selling to another entity and thus displays the
characteristic of identifiabllity.
However, the rules for internally generated intangible assets excludes some internally
generated intangible assets: paragraph 63 states that internally generated customer lists
and items similar in substance shall not be recognised as intangible assets.
The total costs of $65,000 must be expensed.
1. b) The purchased customer list meets the intangible asset definition, as above
Recognised?
Assuming that it is probable that future economic benefits will be obtained from this list,
MadSurf must recognise the purchased customer list as an intangible asset at cost $100,000.
Subsequently, this list should be amortised over 3 years.

2. a) Paragraph 24: “An intangible asset shall be measured initially at cost”

Paragraph 27: “The cost of a separately acquired intangible asset comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing the asset for its intended use”
Fair value is not permitted as initial measure of the customer list.
2. b) The costs of the phone calls to be added to the purchased customer list.
AASB 138, under paragraph 69, some expenditures are listed that are examples where the
expenditure must be expensed
It could be argued that these phone calls are “expenditure on advertising and promotional
activities (including mail order catalogues)”(para 69 c)
Thus, this expenditure on customer lists should be expensed.
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Question 3
Discuss (providing reasons) if the following items can be recorded as an intangible
asset according to AASB138 Intangible Assets:
 Costs of searching for new ideas for product packaging
 Costs for the design of an improved product packaging
 Employee training costs associated with the new product packaging
 Payments for advertisements to increase the goodwill of the company
 The excess of a payment made to purchase of a competitor business

 Search for new ideas: under paragraph 56, this would be deemed as costs incurred
in the research phase
“Examples of research activities are:
(a) activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications of research findings or other
knowledge;
(c) the search for alternatives for materials, devices, products, processes, systems or
services; and
(d) the formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services”
Any costs incurred as research must be expensed (para 54)

 Costs for design: under paragraph 59, this would be deemed as costs incurred in the
development phase. This does not make it automatic that the costs can be recorded
as an intangible asset. The costs can only be capitalised/recognised as IA if all 6
criteria are met in paragraph 57
“(a) the technical feasibility of completing the intangible asset so that it will be available for
use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(c) its ability to use or sell the intangible asset.
(d) how the intangible asset will generate probable future economic benefits. Among other
things, the entity can 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.
(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset during
its development”
Costs will be expensed until all 6 criteria are met

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 Employee training costs: according to paragraph 67
“The following are not components of the cost of an internally generated intangible asset:
(c) expenditure on training staff to operate the asset.”
Employee costs incurred while developing the new packaging is an example of DAC that can
be part of the cost of IA, but costs of training staff to use the new packaging cannot be
included, and must be expensed.

 Advertising in the belief it will increase goodwill: this is internally generated

goodwill.
According to paragraph 48 internally generated goodwill cannot be recognised.
The costs must be expensed.

 The excess of payment to acquire a business is goodwill and can be recognised as an

asset. Paragraph 11 states that “Goodwill recognised in a business combination is an
asset representing the future economic benefits arising from other assets acquired in a
business combination that are not individually identified and separately recognised.”

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Question 4

The latest annual report of Nine Entertainment states that the principal activities of the
group are:
“Broadcasting and program production across Free to Air television, Broadcast video on
demand and metropolitan radio networks in Australia; Publishing across digital platforms
and newspapers; Real estate media and technology services; and Subscription video on
demand.” (Annual Report, 2021, p. 47)

In the statement of financial position, Nine Entertainment discloses Total Assets of

$3,911,184,000 and Intangibles of $2,266,441,000 (which is 58% of total assets).
https://www.nineforbrands.com.au/wp-content/uploads/2021/09/Nine-2021-Annual-Report-web-
final.pdf

Required:
1. List and briefly define (eg, what are mastheads) the categories of intangible assets that
Nine Entertainment Ltd own.
2. For each category state whether the asset class:
a. Is measured at cost or fair value
b. Is amortised or not amortised, and if amortised, what is the useful life
c. Has been impaired
3. Identify if the company has capitalised any development costs and if so, where did you
find this information?
4. Discuss if it is possible, under AASB 138, that the company has spent more on
intangible assets but has not been permitted to record these transactions as intangible
assets (instead expensed).

1. Mastheads and brand names, Licences, Customer Relationships, Software, Goodwill

 Goodwill: the excess of payment for the acquisition of a business (ie, consideration paid
is greater than the fair value of net assets acquired) represents goodwill.
 Mastheads: these are the titles of newspapers, magazines, and the tops of web pages
that identify the publication or digital site (title, name of owner, logo, etc)
 Brand names: Brand name, a positive image/feeling that comes from an entity’s specific
product/service and is recognisable amongst customers/clients
 Licences: a contract for one entity to use an intangible asset of another entity, Eg Radio
and TV licenses, the right to broadcast TV and radio programs, to use a portion of radio
frequency, to broadcast programs free to air or subscribed channels
 Customer relationships: activities aimed at promoting, advertising, marketing, to develop
positive customer relationships (proactive), and may be through contracts that
customers make with the entity or even noting that regular contact is made between a
customer and the sales reps.
 Software: developed programs for internal company computer use and developed for
web sites.

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2. Measure, Amortised, Impaired

“Intangible assets acquired separately are capitalised at cost, and from a business
combination are capitalised at fair value as at the date of acquisition. Following initial
recognition, the cost model is applied to the class of intangible assets.” (p.108)
 Goodwill
“Initially measured at cost being the excess of the cost of the business combination over
the Group’s interest in the net fair value of the identifiable assets and liabilities. Following
initial recognition, goodwill is measured at cost less any accumulated impairment losses.
Goodwill is not amortised” (p.107)
Goodwill has been significantly impaired, which is noted over several notes to the financial
statements eg, page 104
“During the year an impairment charge was recognised against goodwill in respect of Nine
Radio of $44.8 million (2020: Nine Network ($301.9 million), Nine.com.au ($40.9 million),
Drive ($43.8 million), Pedestrian TV ($5.0 million) and Domain ($188.2 million))”

 Mastheads and brand names

Initially measured at cost, and can only be recognised if purchased separately or in a
business combination. Subsequently measured: “the majority are not amortised” and are
therefore tested for impairment annually.
“The Directors have determined that the majority of mastheads and brand names have
indefinite useful lives as there is no foreseeable limit to the period over which the assets are
expected to generate net cash inflows for the Group. These assets are not amortised but are
tested for impairmen

t annually” (p. 107)

There has been no impairment on this category in the current year, but there has been a
small amount of amortisation recorded.
Currently they have a balance in accumulated amortisation and impairment.
 Licenses
“Licences are carried at cost less any accumulated impairment losses. No amortisation is
provided against these assets as the Directors consider that the licences are indefinite life
intangible assets.” (p.107)
Radio licenses were impaired by $16.7 million” (p.104)

 Customer relationships
They state that these were purchased in a business combination, which means they were
initially measured at fair value under AASB3. Customer relationships that are internally
generated cannot be recognised as IA.
They are “amortised on a straight-line basis over their useful lives, which are between two
and twelve years.” (107). There was no impairment.

 Software
“Costs incurred to develop software for internal use, and websites are capitalised and
amortised over the estimated useful life of the software or website. Costs related to design
or maintenance of software for internal use and websites are expensed as incurred” (p.108)
They have shown some impairment on software: $76 000

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3. Capitalised development costs
The company has development costs that are capitalised and these are the costs of
developing software for internal use and websites. This information is found in note 3.6.

Thus their software expenditure is assessed through the research and development phases
and the cost recorded for the Software intangible asset has therefore met the 6 criteria to
capitalise costs. Other costs earlier in the development phase and all costs in research phase
are expensed.

“Capitalised development costs of software being, in part, an internally generated intangible

asset.” (p.103)

4. Possible that there is expenditure that was not able to be recognised as IA

Yes it is possible as internally generated goodwill and research and development costs
(unless 6 criteria are met) are expensed or not recognised (in respect of goodwill). The
money spent on training staff, TV and radio personalities would all add to the goodwill of
Nine, but this is not an identifiable asset.

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Week 9 Group Activity
Cryptocurrencies as intangible assets?

Required: Discuss how cryptocurrencies held for investing purposes meet the definition of
an intangible asset, and how they should be measured, according to AASB138 Intangible
Assets
 The discussion should only be about cryptocurrencies held for investments. Crypto
used as an exchange medium is another more complex issue, or held for sale would
be inventory.
Definition: According to AASB138, intangible assets are an identifiable non-monetary asset
without physical substance (AASB, 2021, p.7)

 The standard defines monetary as: money held and assets to be received in fixed or
determinable amounts of money
 Non-monetary: Yes, it represents a specific cash value that might be received, is not
fixed and can keep changing over time. It is not cash or cash equivalent. It is at risk of
becoming worthless unlike cash given it has no government backing.
 Non-physical: Yes, only exists digitally and has no link to a physical currency
 Asset: Yes control lies with the entity as it has purchased the crypto, FEB are
expected
 Identifiable: Yes it can be separated from the entity and sold or exchanged in an
active market for cryptocurrencies.
 Measured: According to AASB138, paragraph 24, an intangible asset shall be
measured initially at cost.
 Despite this, many critics argue the best measure for crypto would be fair value and
to record gains and losses through the profit or loss statement. This however is not
permitted under AASB138.

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