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Audit For Intangible Asset
Audit For Intangible Asset
ON
“AUDITING INTANGIBLE ASSETS”
Presented By
Mohammad Mutasim Hossain
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
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 and Designs Act- to the owner of the mark by intellectual work of literature, art,
1911. Patents provide 16 ensuring the exclusive right to music, software, etc. under the
years protection from the use it to identify goods or copyrights Act – 2000 (Amended in
date of filing of the services, or to authorize another 2005). Copyright exist up to 60 years
to use it in return for payment after the death of copyright owner.
application
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
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 audit risk for
intangible assets may be
●
In assessing control risk, the To minimize the
●
●
entities operating in rapidly
●
Relationship to the client
changing IT
●
Documentation and recording of
in house development of
custom developed
●
research firms intangible assets work program for
●
pharmaceutical industries ●
The expertise and experience of
●
Licenses having dispute in those determining the fair value, intangible assets
legal perspective and public the process of valuation and the
assumptions made during as provided in
at large having effect of valuation
going concern threat. 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:
Analytical Procedure
• 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
Assertions about classes of transactions and events for the period under
audit
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.
●
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
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)
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
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
●
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 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
●
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: