WELCOME TO THE TRAINING SESSION

ON
“AUDITING INTANGIBLE ASSETS”
Presented By
Mohammad Mutasim Hossain

Slide show development

Abul kalam Azad

12 April, 2012
INTRODUCTION – INTANGIBLE ASSET
• An intangible asset is an identifiable non monetary asset without
physical substance controlled by the entity from which future
economic benefits are expected to flow to the entity.

No
Non- Physic Intan
Identi
mone al gible
fiable
tary Subst Asset
ance

• Common Example of intangible assets are computer software,

patents, copyrights, trademarks, customer lists, licenses, import
quotas, franchises etc.
INTRODUCTION – LEGAL FRAMEWORK
Legal framework for intangible assets in Bangladesh –
• Legal framework for intangible assets encompasses

Intellectual Property
Copyright: Literacy, artistic works such
Industrial Property: Inventions (patents)
as novels, poems and plays, films,
trademarks, industrial designs and
geographical indications of source; musical works, artistic works such as
drawings, paintings, photographs
INTRODUCTION – RELATED LAWS
In Bangladesh, protection of intellectual property comes under the
purview of Ministry of Industries. On behalf of M/O Industries
Department of Patents, Designs & Trademarks (DPDT) administers all
the activities relating to industrial property.
Following IP related laws are prevailing in Bangladesh –

The Patents The The Copyrights

Act – 2000
and Designs Trademark (Amended in
Act -1911 s Act – 2009 2005)
●
Patents are granted under Ttrademark provides protection
●
Copyrights are protected for original
●

the Patents and Designs Act-
1911. Patents provide 16
years protection from the
date of filing of the
application
to the owner of the mark by
ensuring the exclusive right to
use it to identify goods or
services, or to authorize another
to use it in return for payment
intellectual work of literature, art,
music, software, etc. under the
copyrights Act – 2000 (Amended in
2005). Copyright exist up to 60 years
after the death of copyright owner.
AUDITING INTANGIBLE ASSET
AUDIT STRATEGY
BSA 300: Planning an audit of Financial Statements provides
guidelines on auditing intangible assets. In developing audit strategy
for intangible assets we would consider:
The financial reporting framework on which the financial information to be audited has been prepared

Industry specific reporting requirements

Recognition and measurement of goodwill in Business Combination.

Any expected communication with third parties. e.g. confirming existence of patent, copyright with Department of Patent, Design and Trademark of
GOB

Changes in information technology and business process & in industry regulations and new reporting requirements e.g. value added service licensing
guidelines, 2012, Licensing Guidelines for Nationwide Telecommunication Transmission Network (NTTN).
AUDITING INTANGIBLE ASSET
AUDIT RISK
Audit risks in intangible assets can be classified by following -
Inherent risk
●
Inherent audit risk for
intangible assets may be
high for the following
industries -
●
entities operating in rapidly
changing IT
●
research firms
●
pharmaceutical industries
●
Licenses having dispute in
legal perspective and public
at large having effect of
going concern threat.
Control risk Detection risk
●
In assessing control risk, the To minimize the
●
auditor considers factors such as
- detection risk we
Objectives and scope of the work
would utilize the
●
●
Relationship to the client
●
Documentation and recording of
in house development of
custom developed
intangible assets work program for
●
The expertise and experience of
those determining the fair value, intangible assets
the process of valuation and the
assumptions made during as provided in
valuation
Annex-A.
AUDITING INTANGIBLE ASSET
RISK
An auditor ASSESSMENT
performs risk assessment procedures to provide a basis for
the identification and assessment of risks of material misstatement at
the financial statement and assertion levels. The risk assessment
procedure may include:

Inquiries of management and of others

Analytical Procedure

Observation and inspection

• Inquiries of management and of others within the entity who in the auditor’s
judgment may have information that is likely to assist in identifying risks of
material misstatements due to frauds and error. Inquiries toward in house
legal counsel may provide information about intellectual property right i.e.
copyright, trademark, patent, licenses and any pending litigation and legal expiry
date.
AUDITING INTANGIBLE ASSET
RISK ASSESSMENT
Analytical Procedure: May identify aspects of the entity of which the
auditor was unaware and may assist in assessing the risks of material
misstatements. This may include –
 both financial and nonfinancial information
 the relation between sales and amortization of intangible assets and any
related payment in case of copyright, patent etc.

Observation and inspection may provide information about the entity and
its environment. Examples may include -
 Obtaining the certificates of trademark, license, software, patents and
copyrights.
 Confirming terms of use, validating the expiry period
 Comparing the amortization with the expiry period and terms of use etc.
AUDITING INTANGIBLE ASSET
RISK ASSESSMENT
The auditor shall identify and assess the risks of material misstatements to
provide a basis for designing and performing further audit procedure at:

Financial
Assertion
Statement
Level Level

Risks that relate pervasively to the financial statements as whole and

potentially affect many assertions
AUDITING INTANGIBLE ASSET
RISK ASSESSMENT
Financial statement level risks may especially relevant to the -
AUDITING INTANGIBLE ASSET
RISK ASSESSMENT
Assertion Level - Risk of material misstatement at the assertion level assists
auditors in determining the nature, timing and extent of audit procedures.
Assertions used by the auditor to consider the different types of potential
misstatements that may occur fall into the following three categories -

Assertions about classes of transactions and events for the period under
audit

Assertions about account balances at the period end

Assertions about presentation and disclosure

AUDITING INTANGIBLE ASSET
RISK ASSESSMENT
Assertions about classes of transactions and events for the period under
audit
Occurrence: transactions and events that
have been recorded have occurred and
Occur
pertain to the entity. rence
Classifi
cation
Completeness: all transactions and events
that should have been recorded have been Compl
recorded. etenes
s

Accuracy: amounts and other data relating

to recorded transactions and events have Accu
racy
been recorded appropriately.
Cut-
Cut-off: transactions and events have been off
recorded in the correct accounting period
Classification: transactions and events have
been recorded in the proper accounts.
AUDITING INTANGIBLE ASSET
RISK ASSESSMENT
Assertions about account balances at the period end
Existence: assets, liabilities and equity
interests exist.

Rights and obligations: the entity holds or Exist

ence
controls the rights to assets, and liabilities Rights
and
are the obligations of the entity. Obligatio
ns

Completeness: all assets, liabilities and

equity interests that should have been Compl
recorded have been recorded. etenes
s

Valuation and allocation: assets, liabilities,

and equity interests are included in the Valuation
and
financial statements at appropriate allocation

amounts and any resulting valuation or

allocation adjustments are appropriately
recorded.
AUDITING INTANGIBLE ASSET
RISK ASSESSMENT
Assertions about presentation and disclosure
Occurrence, rights and obligations:
disclosed events, transactions and other Com
matters have occurred and pertain to the plete
entity. Occurren ness
ce, rights
and
obligatio
Completeness: all disclosures that should ns:

have been included in the financial

statements have been included.
Classifica
tion and
Understa
Classification and understandability: ndability

financial information is appropriately

presented and described, and disclosures Accura
cy and
are clearly expressed. valuati
on

Accuracy and valuation: financial and other

information are disclosed fairly and at
appropriate amounts.
AUDITING INTANGIBLE ASSET
AUDIT EVIDENCE - BSA 500
The Audit procedures that can be used as risk assessment procedure, tests of control
or substantive procedures to obtain sufficient appropriate audit evidence on
intangible assets may be the following:

Inspection ●
Inspection of purchase or acquisition of patents, Trademark, licenses, and internal
records of Capital Work in Progress and capitalized intangibles in development phase

Observation An external confirmation represents audit evidence obtained by the auditor as a direct response to
●

the auditor from a third party i.e. External legal counsel, License issuing authority, Software vendors

●
Recalculation consists of checking the mathematical accuracy of records .i.e. justifying
Recalculation acquisition and capital work in progress of intangibles during the year, confirming
amortization and impairment

●
Inquiry consists of seeking information of knowledgeable persons,
Inquiry both financial and non financial within the entity or outside the entity
IAS 38 – INTANGIBLE ASSETS
OBJECTIVE AND SCOPE
Objective –
The objective of this Standard is to prescribe the accounting treatment for intangible
assets that are not dealt with specifically in another Standard
Scope –
This Standard shall be applied in accounting for intangible assets, except:
• intangible assets that are within the scope of another Standard;
• financial assets, as defined in IAS 32 Financial Instruments: Presentation;
• the recognition and measurement of exploration and evaluation assets
• expenditure on the development and extraction of minerals, oil, natural gas and
similar non-regenerative resources.

In determining whether an asset that incorporates both intangible and tangible

elements should be treated under IAS 16 - Property, Plant and Equipment. Is such
case organization should use judgment regarding which element is significant. For
example – Operating System (windows XP, Vista, 7) with a Computer is treated as
Tangible Fixed Assets as the OS is an integral part of the Computer
IAS 38 – INTANGIBLE ASSETS
FEATURES
Identifiability Control Future economic
benefits

●
entity has the ●
revenue from the sale
●
is separable of products or
power to obtain
●
arises from services,
the future cost savings, or
contractual or ●

economic benefits ●
other benefits
other legal rights flowing from it resulting from it

An entity having customer loyalty or relationship does not recognize an intangible

asset because it has insufficient control over it in absence any legal right to protect
customers to other vendors or other way to control.
IAS 38 – INTANGIBLE ASSETS
RECOGNITION & MEASUREMENT
An item may be recognized as an intangible asset when it meets the definition of
an intangible asset and meets these recognition criteria –
 it is probable that the expected future economic benefits that are attributable to
the asset will flow to the entity; and
 the cost of the asset can be measured reliably.

Separate Acquisition
Initially, intangible assets shall be measured at cost. The cost of separately acquired
intangible assets comprises –
 its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates; and
 any directly attributable cost of preparing the asset for use (professional fees &
cost of testing)

Costs that can not be included are –

 Advertising expense, cost of conducting new business, administration cost and
other general overhead cost
IAS 38 – INTANGIBLE ASSETS
RECOGNITION & MEASUREMENT
Acquisition as part of a business combination
If intangible assets are acquired as part of a business combination, as defines on IFRS
3, their cost is their fair value at the acquisition date. In a business combination, such
intangible assets are to be recognized separately from goodwill.
Assessing the fair value of an intangible asset in a business a combination can be
difficult; obvious techniques are the use of comparable market transaction or quoted
prices.

Acquired in exchange of another asset

If an intangible asset is acquired in exchange for another asset, then the acquired
asset is measured at its fair value unless the exchange lacks commercial substance or
the fair value can not be reliably measured.
 IAS 38 – INTANGIBLE ASSETS
INTERNALLY GENERATED
Goodwill
Internally generated goodwill shall not be recognized as an asset because it is not an
identifiable resource controlled by the entity that can be measured reliably at cost.
Other Internally Generated Assets
The standard sets out rules for the recognition of other internally generated
intangible assets. To assess whether an internally generated intangible asset meets
the criteria for recognition, an entity classifies the generation of the asset into –
●
Can not be recognized as an intangible asset.
Research Phase ●
Shall be recognized as an expense & to be written off

istinguished,
Development Phase
then the entire
●
expend
An intangible asset arising from development shall be recognized if,
and only if, an entity can demonstrate following

 the technical feasibility of completing the intangible asset

 its intention to complete the intangible asset
 its ability to use or sell the intangible asset.
 the availability of adequate technical, financial and other resources to complete the
development
 its ability to measure reliably the expenditure attributable to the intangible asset
IAS 38 – INTANGIBLE ASSETS
RECOGNITION OF AN EXPENSE
Expenditure on an intangible item shall be recognized as an expense when it is
incurred unless –
 it meets definition and recognition of intangible assets
 it is part of goodwill as per IFRS 3: business combination

Examples
 expenditure on start-up activities
 expenditure on training activities.
 expenditure on advertising and promotional activities
 Expenditure on relocating or reorganizing part or all of an entity
 Web-site development cost

Conflicting Issue
Preliminary and Pre-operating expense is to be shown as current asset as per Section
185 and corresponding Schedule XI of the Companies Act 1994
IAS 38 – INTANGIBLE ASSET
MEASUREMENT AFTER RECOGNITION
After recognition, intangible assets may be measured using either of the following
Model -
Revaluation
Cost Model
Model

Cost Model
If the cost model is selected, then after initial recognition, an intangible asset shall be
carried at –

Accumulated
Amortization &
COST - impairment
losses
 IAS 38 – INTANGIBLE ASSET
MEASUREMENT AFTER RECOGNITION
After recognition, intangible assets may be measured using either of the following
Model -

Revaluation Revaluation
Is to be classified as a part of equity unless it reverses a previously
●

Cost Model
recognized impairment loss (then credited to income statement)
Model
Increase
Revaluation Such decreases may be deducted from the revaluation reserve applicable
●

to the asset. Otherwise the reduction is to be charged against profit

Decrease
Revaluation Model
After initial recognition, an intangible asset shall be carried at a revalued amount,
being its fair value at the date of the revaluation less any subsequent accumulated
amortization and any subsequent accumulated impairment losses.
●
Revaluation reserve is to be transferred to retained earnings
 fair value shall be determined by reference to an active market
 Revaluations shall be made with such regularity that at the end of the reporting
If Revaluation Reserved
period the carrying amount of the asset does not differ materially from its fair
Realized
value.
IAS 38 – INTANGIBLE ASSET
MEASUREMENT AFTER RECOGNITION
An entity shall assess whether the useful life of an intangible asset is finite or
indefinite .
Finite Life
I f the assessment determines the life to be finite, then the length of life or number of
units to be produced must be determined also.

Indefinite Life
An indefinite life may be determined when there is no foreseeable limit to the period
over which the entity will continue to receive economic benefit from the asset.

All relevant factors must be considered in this assessment and may include –
 Expected usage by the entity
 Product life cycle
 Industry stability
 Legal restrictions
 Likely actions by competitors

The term 'indefinite' does not mean 'infinite'.

IAS 38 – INTANGIBLE ASSET
AMORTIZATION
Period & Method
The depreciable amount of an intangible asset with a finite useful life shall be
allocated on a systematic basis over its useful life. Amortization shall begin when the
asset is available for use.

The amortization method used shall reflect the pattern in which the asset's future
economic benefits are expected to be consumed by the entity. If that pattern cannot
be determined reliably, the straight-line method shall be used.

Residual Value
The residual value of an intangible asset with a finite useful life shall be assumed to be
zero unless:
 there is a commitment by a third party to purchase the asset after useful life
 there is an active market for the asset
IAS 38 – INTANGIBLE ASSET
AMORTIZATION
The amortization period and the amortization method for an intangible asset with
a finite useful life shall be reviewed at least at each financial year-end.

Intangible assets with indefinite useful lives are not to be amortized. However, the
asset must be tested for impairment annually and whenever there is an indication
that it may be impaired.

Entities are to apply the provisions of IAS 36 in assessing the recoverable amount of
intangible assets and when and how to determine whether an asset is impaired

An intangible asset shall be derecognized –

 on disposal; or
 when no future economic benefits are expected from its use or disposal.
IAS 38 – INTANGIBLE ASSET
DISCLOSURE
An entity shall disclose the following for each class of intangible assets, distinguishing
between internally generated intangible assets and other intangible assets –
Useful Life Method Assertion

●
the amortization ●
the gross carrying
●
whether the amount and any
methods used
useful lives are accumulated
for intangible amortization at the
indefinite or assets with finite beginning and end
finite useful lives of the period;
A reconciliation of the carrying amount at the beginning and end of the period
showing -
 Additions,
 Assets classified as held for sale,
 increase or decrease due to revaluation and impairment
If intangible assets are accounted for at
revalued amounts, an entity shall
disclose the following:

 by class of intangible assets:

the effective date of the revaluation;
carrying amount of revalued intangible assets;
and
the carrying amount that would have been
recognized had the revalued class of intangible
assets been measured after recognition using
the cost model;
amount of the revaluation surplus that
relates to intangible assets at the
beginning and end of the period,
indicating the changes during the period
and any restrictions on the distribution
of the balance to shareholders; and

the methods and significant assumption applied

in estimating the assets' fair values.
Thank You All