Chapter 5 Intangible assets

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Template ID CD1
Source 2.5 INT Text Ch 13
2.5 INT study notes session 6
Fill in this box with where the
information came from

Chapter Learning Objectives Common to this chapter

Upon completion of this chapter you will be able to: Common to this chapter

 Explain the nature of internally generated and purchased

intangibles
Bullet point text
 Explain the accounting treatment of internally generated and
No limit to number of
purchased intangibles bullets here as the
 Distinguish between goodwill and other intangible assets number of bullets
depends purely on
 Describe the criteria for the initial recognition of intangible assets the number of
content objectives
 Describe the criteria for the initial measurement of intangible covered in this
assets chapter
 Explain the subsequent accounting treatment of goodwill
 Explain the principle of impairment tests in relation to goodwill
 Explain why the value of the purchase consideration for an
investment may be less than the value of the acquired net assets
 Explain how this difference should be accounted for Draw diagram here
Either draw in word
 Define research expenditure and development expenditure or insert a picture
according to IAS 38
 Explain the accounting requirements of IAS 38 for research
expenditure and development expenditure
 Account for research expenditure and development expenditure

REPORTING CH5ACCAF7INTJCV1 - 1 -
 GOODWILL

INTANGIBLE
ASSETS

RECOGNITION MEASUREMENT

RESEARCH AND
DEVELOPMENT
EXPENDITURE

REPORTING CH5ACCAF7INTJCV1 - 2 -
1 INTANGIBLE ASSETS

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Content Objective Explain the nature of internally
generated and purchased intangibles
Content, illustration and
TYU included? Fill in this box with where the
Source (esp. vital) information came from

Qualification ACCA
Paper F7 INT
Chapter 5
Content Objective Explain the accounting treatment of
internally generated and purchased
intangibles
Content, illustration and TYU 1 – new
TYU included? TYU 2 – new
Source (esp. vital)

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Content Objective Describe the criteria for the initial
recognition of intangible assets
Content, illustration and
TYU included? Fill in this box with where the
Source (esp. vital) information came from

Qualification ACCA
Paper F7 INT
Chapter 5
Content Objective Describe the criteria for the initial
measurement of intangible assets
Content, illustration and Ill 1 – 2.5 INT study notes session 6 Eg
TYU included? 7

Source (esp. vital)

REPORTING CH5ACCAF7INTJCV1 - 3 -
1.1 Introduction
Many businesses invest significant amounts with the intention of obtaining future value on
areas such as:
 scientific/technical knowledge
 design of new processes and systems
 licences and quotas
 intellectual property e.g. patents and copyrights
 market knowledge e.g. customer lists, relationships and loyalty
 trademarks.
All of these expenses may result in future benefits to the business, but not all can be
recognised as assets.

1.2 Objective of IAS 38 Intangible assets

The objective of IAS 38 is to prescribe the specific criteria that must be met before an
intangible asset can be recognised in the accounts.

1.3 Definition

An intangible asset is an identifiable non-monetary asset without physical substance.

Therefore, to meet the definition the asset must be:

 identifiable (separable from the rest of the business or arising from legal rights)
and meet the normal definition of an asset:
 controlled by the entity as a result of past events (normally by enforceable legal rights)
 a resource from which future economic benefits are expected to flow (either from
revenue or cost saving).

1.4 Recognition
To be recognised in the financial statements, an intangible asset must:

REPORTING CH5ACCAF7INTJCV1 - 4 -
 meet the definition of an intangible asset (discussed above).

Meet the recognition criteria of the framework i.e.

 it is probable that future economic benefits attributable to the asset will flow to the entity
 the cost of the asset can be measured reliably.

1.5 Recognising purchased intangibles

Recognition Separate acquisition Acquisition as part of a business

criteria combination

Probable Always satisfied since price paid Always satisfied since fair value
inflow reflects probability of inflow attributed reflects probability of inflow

Reliable Measure at price paid Rebuttable presumptions that a fair

measurement value can be measured reliably if part
of business combination
Use
Market price on active market
Price that would be paid in arms
length transaction
Other techniques

1.6 Internally generated intangibles

The following internally generated items may never be recognised:
 goodwill
 brands
 mastheads
 publishing titles
 customer lists.

Expandable text
Recognising purchased and internally generated intangibles
The rationale is that it is impossible to separate the costs of such intangibles from the normal
costs of running and developing a business, so these intangibles cannot be measured
reliably.
Recognition of intangible assets is initially at cost, which could be in cash or the fair value of
equity shares given in exchange.

REPORTING CH5ACCAF7INTJCV1 - 5 -
If an intangible asset is acquired in a business combination, the fair value of that asset at the
date of acquisition is taken. The determination of that fair value is easy if an active market
exists (see definition above). Otherwise it may be necessary to take the price the enterprise
would have paid in an arm’s length transaction.
Any intangible which cannot be measured reliably in an acquisition has to be included in
goodwill.
Brands
The accounting treatment of brands has been a matter of controversy for some years. IAS 38
Intangible assets has now ended the controversy by stating that internally generated brands
and similar assets may never be recognised.
Expenditure on internally generated brands cannot be distinguished from the cost of
developing the business as a whole, so should be written off as incurred.
Where a brand name is separately acquired and can be measured reliably, then it should be
separately recognised as an intangible non-current asset, and accounted for in accordance
with the general rules of IAS 38..

Illustration 1
A company has the following accounting issues
Asset A
The company acquired a five year licence to manufacture specialised paint at a cost of
$100,000; at the year start. Production commenced immediately.
Asset B
The company also purchased a subsidiary at the year start. As part of that acquisition the
company acquired a brand with a fair value of $500,000 based on sales revenue. The life of
the product is estimated at 10 years.
Asset C
The company spent $90,000 on an advertising campaign during the first month. Subsequent
sales have shown a significant improvement and it is expected this will continue for three
years.
Required:
Describe with reasons the accounting for the above issues.

Solution
Asset A: intangible asset (separate purchase)
Asset B: intangible asset (purchase as part of sub acquisition)
Asset C: cost (inherent goodwill)

REPORTING CH5ACCAF7INTJCV1 - 6 -
 Test your understanding 1

What internally generated intangibles will never be recognised?

Solution

 goodwill
 brands
 mastheads
 publishing titles
 customer lists.

1.7 Measurement after initial recognition

There is a choice between:
. the cost model and
. the revaluation model.

Cost model (more commonly used in practice):

. intangible asset should be carried at cost less amortisation and any impairment losses

The allowed alternative is the revaluation model:

. intangible asset may be revalued to a carrying value of fair value less subsequent
amortisation and impairment losses.
. fair value should be determined by reference to an active market.

Features of an active market are that:

 the items traded within the market are homogeneous
 willing buyers and sellers can normally be found at any time
 prices are available to the public.

REPORTING CH5ACCAF7INTJCV1 - 7 -
 Expandable text
Cost model and revaluation model
Under the cost model (more commonly used in practice), the accounting treatment is that
intangible assets should be carried at cost less amortisation and any impairment losses.
The allowed alternative is that intangibles may be revalued to a carrying value of fair value
less subsequent amortisation and impairment losses. For the purpose of revaluations under
this standard, fair value should be determined by reference to an active market. Revaluations
should be made with sufficient regularity such that the carrying amount does not differ
materially from fair value at the balance sheet date.
The allowed alternative treatment does not allow:
 the revaluation of intangible assets that have not previously been recognised as assets; or
 the initial recognition of intangible assets at amounts other than their cost.
Note that if no active market exists, the revaluation model is not permitted.
If an intangible asset is revalued, all other assets in its class should also be revalued, unless
there is no active market for those assets.

1.8 Amortisation
An intangible asset with a finite useful life:
. must be amortised over that life
. normally using the straight-line method should be used with a zero residual value.

An intangible asset with an indefinite useful life:

. should not be amortised
. should be tested for impairment annually, and more often if there is an actual indication
of possible impairment.

Expandable text
Amortisation
An enterprise must assess whether the useful life of an intangible asset is finite or indefinite.
An asset should be regarded as having an indefinite life if there is no foreseeable limit to the
period over which the asset is expected to generate net cash inflows for the enterprise.
An intangible asset with a finite useful life must be amortised over that life. Normally the
straight-line method should be used with a zero residual value.
An intangible asset with an indefinite useful life should not be amortised. It should be tested
for impairment annually, and more often if there is an actual indication of possible impairment.

The useful life of an intangible asset that is not being amortised must be reviewed each
period to ensure that the life is still indefinite. If it is not, the change must be accounted for as
a change in accounting estimate in line with IAS 8.

REPORTING CH5ACCAF7INTJCV1 - 8 -
1.9 Impairment losses
IAS 36 Impairment of assets should be applied to determine whether the value of an
intangible asset is impaired.
An impairment review will be required:
 whenever there is an indication of impairment (see IAS 36)
 annually for an intangible asset with an indefinite useful life (see IAS 38)
 annually for goodwill arising on consolidation (see IFRS 3).

Test your understanding 2

What is the accounting treatment of a recognised intangible asset with an indefinite useful
life?

Solution
An intangible asset with an indefinite useful life:
. should not be amortised
. should be tested for impairment annually, and more often if there is an actual indication
of possible impairment.

1.10 Key disclosures

The financial statements should disclose the following for each class of intangible assets,
distinguishing between internally generated intangible assets and other intangible assets:
 whether the useful lives are finite or indefinite
 the useful lives or the amortisation rates used for assets with finite lives
 the amortisation methods used for assets with finite lives
 the gross carrying amount and the accumulated amortisation (aggregated with
accumulated impairment losses) at the beginning and end of the period and a
reconciliation between the two
 details of revaluations
 for research and development, the financial statements should also disclose the total
amount of research and development expenditure recognised as an expense during
the period.

REPORTING CH5ACCAF7INTJCV1 - 9 -
 Expandable text
Full disclosures
The financial statements should disclose the following for each class of intangible assets,
distinguishing between internally generated intangible assets and other intangible assets:
 whether the useful lives are finite or indefinite
 the useful lives or the amortisation rates used for assets with finite lives
 the amortisation methods used for assets with finite lives
 the gross carrying amount and the accumulated amortisation (aggregated with
accumulated impairment losses) at the beginning and end of the period
 the line item(s) of the income statement in which any amortisation of intangible assets is
included
 a reconciliation of the carrying amount at the beginning and end of the period showing:
– additions, indicating separately those from internal development, those acquired
separately, and those acquired through business combinations
– retirements and disposals
– increases or decreases during the period resulting from revaluations and from impairment
losses recognised or reversed directly in equity under IAS 36 Impairment of assets (if
any)
– impairment losses recognised in the income statement during the period under IAS 36 (if
any)
– impairment losses reversed in the income statement during the period under IAS 36 (if
any)
– amortisation recognised during the period (if any)
– other changes in the carrying amount during the period.
 details of revaluations
 for research and development, the financial statements should also disclose the total
amount of research and development expenditure recognised as an expense during the
period.

2 Goodwill

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Content Objective Distinguish between goodwill and
other intangible assets
Content, illustration and TYU 5 – 2.5 GBR text Ch 17 Practice Q
TYU included? part b) Fill in this box with where the
Source (esp. vital) information came from

Qualification ACCA
Paper F7 INT
Chapter 5
Content Objective Explain the subsequent accounting
treatment of goodwill
Content, illustration and TYU 3 – new
TYU included? TYU 4 – 2.5 GBR text Ch 17 Practice Q
part a)

REPORTING CH5ACCAF7INTJCV1 - 10 -
 Source (esp. vital)

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Content Objective Explain the principle of impairment
tests in relation to goodwill
Content, illustration and
TYU included? Fill in this box with where the
Source (esp. vital) information came from

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Content Objective Explain why the value of the purchase
consideration for an investment may
be less than the value of the acquired
net assets Fill in this box with where the
Content, illustration and information came from
TYU included?
Source (esp. vital)
Qualification ACCA
Paper F7 INT
Chapter 5
Content Objective Explain how this difference should be
accounted for
Content, illustration and
TYU included?
Source (esp. vital)

2.1 The nature of goodwill

Goodwill is the difference between the value of a business as a whole and the aggregate of
the fair values of its separable net assets.

REPORTING CH5ACCAF7INTJCV1 - 11 -
Separable net assets are those assets (and liabilities) which can be identified and sold off
separately without necessarily disposing of the business as a whole. They include identifiable
intangibles such as patents, licences and trademarks.

Fair value is the amount at which an asset or liability could be exchanged in an arm’s length
transaction between informed and willing parties, other than in a forced or liquidation sale.

Goodwill may exist because of any combination of a number of possible factors: reputation for
quality or service:
. technical expertise
. possession of favourable contracts
. good management and staff.

2.2 Purchased goodwill and non-purchased goodwill

Purchased goodwill:
. arises when one business acquires another as a going concern
. includes goodwill arising on the inclusion of a subsidiary or associated company in the
consolidated accounts
. will be recognised in the financial statements as its value at a particular point in time is
certain

Non-purchased goodwill:
. is also known as inherent goodwill
. has no identifiable value
. is not recognised in the financial statements

2.3 IFRS 3 Business combinations

IFRS 3 governs accounting for all business combinations and deals with the accounting
treatment of goodwill.

Goodwill is calculated at the acquisition date, as the difference between:

 the fair value of the consideration paid (i.e. the fair value of shares issued and cash paid,
plus direct costs); and
 the fair value of the net assets acquired.

REPORTING CH5ACCAF7INTJCV1 - 12 -
2.4 Treatment of goodwill
The purchased goodwill:
. should be capitalised as an intangible non-current asset
. should not be amortised
. must be tested for impairment annually in accordance with IAS 36, or more frequently
if circumstances indicate that it might be impaired.

Expandable text
Purchased and non-purchased goodwill
It is necessary to draw a distinction between purchased and non-purchased (or inherent)
goodwill.
Purchased goodwill arises when one business acquires another as a going concern.
The term therefore includes goodwill arising on the inclusion of a subsidiary in the
consolidated financial statements.
Purchased goodwill is recognised within the financial statements because at a specific point
in time there was a market transaction by which it can be measured. The purchase has
established the fair value for the business as a whole which can be compared with the fair
value of the separable net assets acquired. The difference is purchased goodwill.
Goodwill exists in any successful business. However, if the business has never changed
hands, this goodwill should not be recognised in the financial statements because no event
has occurred to identify its value. It can only be subjectively estimated. This is described as
inherent goodwill or non-purchased goodwill.
Of course, a business which has acquired another and thus purchased goodwill, may then
build up inherent goodwill of its own, but only the former will be recognised in the financial
statements.

Accounting for goodwill

Non-purchased goodwill should not be recognised in the financial statements. It certainly
exists, but fails to satisfy the recognition criteria in the Framework, since it is not capable of
being measured reliably.
Purchased goodwill is dealt with in two accounting standards, according to how it arose.
Goodwill arising on the purchase of a subsidiary is covered by IFRS 3, while all other goodwill
is covered by IAS 38.
IFRS 3 requires goodwill acquired on the purchase of a subsidiary to be carried at cost less
accumulated impairment losses. It must be tested for impairment annually, or more frequently
if events or circumstances indicate that it might be impaired.

REPORTING CH5ACCAF7INTJCV1 - 13 -
 Test your understanding 3
What is the IFRS 3 method of accounting for purchased goodwill?

Solution

The purchased goodwill:

. should be capitalised as an intangible non-current asset
. should not be amortised
. must be tested for impairment annually in accordance with IAS 36, or more frequently
if circumstances indicate that it might be impaired.

2.5 Purchase consideration less than value of net assets acquired

In some instances an entity is purchased for less than the total fair values of its identifiable
net assets. In these instances the purchase consideration is less than the value of the
acquired net assets.

The reasons for this might be that:

. a business was sold at a bargain price because the vendor needs to achieve a quick
sale.
. the purchase price of a business may be reduced to take account of future
reorganisation costs or probable future losses.

IFRS 3 requires the following accounting treatment:

 first check that the measurements of the fair values of the net assets acquired, and of the
price paid, have been carried out accurately
 after this reassessment has been carried out, any excess still remaining should be
credited direct to the income statement.

Expandable text

Advantages and disadvantages of each of the possible methods of accounting for

goodwill
In this section various possible ways of accounting for purchased goodwill are listed, with the
major arguments for and against each of them:
Carry as an asset, amortised over useful life through the income statement
Arguments for
 Goodwill is an asset on which capital has been expended in exchange for benefits which
will materialise in future periods. Although different in quality and character from other
assets, it does exist and can be purchased or sold, and as such it should be treated as an
asset.
 The expense of acquiring purchased goodwill should be matched against the extra
earnings generated from its acquisition.

REPORTING CH5ACCAF7INTJCV1 - 14 -
 Amortisation fits well with the gradual replacement of purchased goodwill by non-purchased
goodwill.
Arguments against
 Comparability is lost when one type of goodwill (‘purchased’) is treated as an asset while
another (‘non-purchased’) is not recognised as such.
 The life of goodwill is indeterminate in the extreme, and even if determined, a single event
may drastically alter that life. Any amortisation period is therefore too arbitrary to be realistic.
Eliminate against reserves on acquisition
Arguments for
 Goodwill is not an asset like any other; it is not independently realisable and many of the
factors contributing to it are beyond the control of management. Thus, it is not prudent to
carry goodwill as an asset in the balance sheet and, as a once-and-for-all expense of
acquisition, it should be written off as it arises, but against retained earnings, not in the
income statement.
 Goodwill will usually be worthless in a forced liquidation.

Arguments against
 Since consideration has been given, then clearly an asset existed. If so, then it would seem
excessively prudent to write it off immediately.
 It is assumed that the accounts are prepared on a going concern basis, which renders the second
‘argument for’ above irrelevant.

Carry as a permanent asset unless impairment in value becomes evident

Arguments for
 Purchased goodwill does not lose value with the passage of time as it should be maintained
in the normal course of business.
 The expenditure incurred in the normal course of business to generate inherent goodwill is
charged to the income statement. If purchased goodwill is also depreciated, there will be a
double charge.
Arguments against
 Purchased goodwill is not maintained, but over a period of time is consumed and replaced by
newly generated inherent goodwill which is not accounted for.
 The expense of maintaining inherent goodwill is a normal trading charge falling on any
business; the depreciation of purchased goodwill is the consequence of a business
acquisition.

The dangling debit

Under this approach, goodwill is shown as a permanent deduction from the subtotal of share
capital and reserves.
Advocates of the ‘dangling debit’ approach argue that goodwill is not an asset in the normal
sense of the word, having no objective value. Goodwill arises only because of the accounting
conventions of double entry bookkeeping, and should be presented in such a way as to
balance the accounts without creating any accounting entries. The dangling debit gives the
fullest possible disclosure and allows the user of financial statements to treat it in any way
considered appropriate. Investment analysts normally disregard goodwill, and the dangling
debit presenting goodwill outside the normal framework of results is in line with this approach.
The separate write-off reserve
This is a development of the dangling debit approach and is designed to overcome the legal
problems associated with the dangling debit in some countries.
A reserve is created and named as a ‘goodwill write-off reserve’ or something similar.
The goodwill is then charged against this reserve leaving a negative balance equivalent in
amount to the goodwill. It is thus effectively the same as the dangling debit approach and thus
the same advantages and disadvantages apply.

REPORTING CH5ACCAF7INTJCV1 - 15 -
 Test your understanding 4

List three possible methods of accounting for purchased goodwill and briefly state the
arguments in favour of each of the three.

Solution

Carry goodwill as an asset and amortise it over its estimated useful economic life
through the income statement.
This method recognises purchased goodwill as an asset which, if the business is a going
concern, is in principle no different from any other asset with a finite useful life. It has a ‘cost’
which should be written off over the periods that are expected to benefit from the existence of
this goodwill.

Eliminate goodwill against reserves immediately on acquisition.

This method treats all goodwill, purchased and inherent (non-purchased), in a consistent
manner. Purchased goodwill may, through effluxion of time, be replaced by inherent goodwill.
Therefore consistent treatment of the two would appear to be appropriate.

Retain goodwill in the accounts indefinitely, unless an impairment in its value becomes
evident.
The method does not require a subjective estimate of its useful life (for amortisation
purposes). In addition, an asset for which consideration has been given continues to be
disclosed in the balance sheet. This may be considered to be more informative than when it is
eliminated as a ‘reserve movement’.

Test your understanding 5

What are the main characteristics of goodwill which distinguish it from other intangible
assets? To what extent do you consider that these characteristics should affect the
accounting treatment of goodwill?
State your reasons.

Solution
 It is a ‘balancing figure’. Goodwill itself is not valued but a comparison is made between
the fair value of the whole business and the fair value of the separable net assets of the
business. It cannot be valued on its own.
 Goodwill cannot be disposed of as a separate asset.
 The factors contributing to the value of goodwill cannot be valued, e.g. how can one value
the benefit of a experienced workforce?
 The value of goodwill is volatile  it can only be given a numerical value at the time of
acquisition of the whole business.
If the characteristics listed above are considered to be material, goodwill can be considered to
be unique and requiring special treatment. Due to this uniqueness it may be considered more
appropriate either to eliminate it (therefore ‘removing’ the problem) or effectively ignore it by
leaving it untouched in the balance sheet.

REPORTING CH5ACCAF7INTJCV1 - 16 -
An alternative view is that these characteristics still label goodwill as an asset. If this
argument is favoured, the amortisation method would be the most appropriate.
Thus, while these characteristics label goodwill as an asset, they do not lead automatically to
a single acceptable method of accounting for goodwill.

3 Research and development expenditure

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Content Objective Define research expenditure and
development expenditure according to
IAS 38
Content, illustration and TYU 6 – new Fill in this box with where the
TYU included? information came from
Source

Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Content Objective Explain the accounting requirements
of IAS 38 for research expenditure and
development expenditure
Content, illustration and Fill in this box with where the
TYU included? information came from
Source

Qualification ACCA
Paper F7 INT
Chapter 5
Content Objective Account for research expenditure and
development expenditure
Content, illustration and Ill 2 – 2.5 GBR text Ch 17
TYU included?
TYU 6 – new
TYU 7 – 2.5 INT study notes session 6
Eg 7 (part of)
Source

REPORTING CH5ACCAF7INTJCV1 - 17 -
3.1 Definitions

Research is original and planned investigation undertaken with the prospect of gaining new
scientific knowledge and understanding.

Development is the application of research findings or other knowledge to a plan or design

for the production of new or substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or use.

Test your understanding 6

How does IAS 38 define research expenditure and development expenditure?

Solution

Research is original and planned investigation undertaken with the prospect of gaining new
scientific knowledge and understanding.
Development is the application of research findings or other knowledge to a plan or design
for the production of new or substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or use.

REPORTING CH5ACCAF7INTJCV1 - 18 -
3.2 Accounting treatment

Research expenditure:
. must be written off as incurred to the income statement

Development expenditure should be recognised as an intangible asset if, and only if, an
enterprise can demonstrate all of the following:
 the technical feasibility of completing the intangible asset so that it will be available for
use or sale
 its intention to complete the intangible asset and use or sell it
 its ability to use or sell the intangible asset
 how the intangible asset will generate probable future economic benefits. Among other
things, the enterprise should 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
 the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset
 its ability to measure the expenditure attributable to the intangible asset during its
development reliably.

Expandable text

The amount to be included is the cost of the development. Note that development expenditure
once treated as an expense cannot be reinstated as an asset.

It is only expenditure incurred after the recognition criteria have been met which should be
recognised as an asset. Development expenditure recognised as an expense in profit or loss
cannot subsequently be reinstated as an asset.

3.3 Amortisation

As with all intangible assets which are capitalised:

. development expenditure should be amortised over its useful life.

REPORTING CH5ACCAF7INTJCV1 - 19 -
 Illustration 2

Improve has deferred development expenditure of $600,000 relating to the development of

New Miracle Brand X. It is expected that the demand for the product will stay at a high level
for the next three years. Annual sales of 400,000, 300,000 and 200,000 units respectively are
expected over this period. Brand X sells for $10.
How should the development expenditure be amortised?

Solution
There are two possibilities for writing off the development expenditure
 Write off in equal instalments over the three-year period, i.e. $200,000 p.a.
 Write off in relation to total sales expected (900,000 units).
$
400,000
Year 1  $600,000 = 266,667
900,000
300,000
Year 2  $600,000 = 200,000
900,000
200,000
Year 3  $600,000 = 133,333
900,000

3.5 Disclosure
The key disclosures required for development costs are:

 the useful lives or the amortisation rates used for assets with finite lives
 the amortisation methods used for assets with finite lives
 the gross carrying amount and the accumulated amortisation (aggregated with
accumulated impairment losses) at the beginning and end of the period
 the line item(s) of the income statement in which any amortisation of intangible assets is
included
 a reconciliation of the carrying amount at the beginning and end of the period showing:
 for research and development, the financial statements should also disclose the total
amount of research and development expenditure recognised as an expense during the
period.

REPORTING CH5ACCAF7INTJCV1 - 20 -
 Test your understanding 7

Project D&E
These are both development projects. Both projects are anticipated to be successful. They
have clearly defined parameters. The project expenditure is carefully controlled. The
prototypes proved successful. The budgets show sales well in excess of total costs. Finance
is readily available. Project D has commenced production and the revenues have started to
flow in.
Project D Project E
$000 $000
Costs accumulated to 1.1.X5 400 350
Costs incurred during the year 600 250
Total anticipated Net revenues 30,000 15,000
Net revenues during the year 6,000 nil
Project F
The company has also invested $340,000 in development project F but the tests are at
present inconclusive.
Required:
Describe with reasons the accounting for the above issues.

Solution

Project D&E: development costs

Project F: research costs
Development expenditure D E Total

Opening 400 350 750

Capitalised 600 250 850
Amortised (200) Nil (200)
Closing 800 600 1,400
Intangible fixed assets (Note)
Development expenditure $000
as at 1.1.X5 750
costs deferred 850
released to the P&L (200)
–––––––

as at 31.12.X5 1,400
–––––––

REPORTING CH5ACCAF7INTJCV1 - 21 -
 Chapter Summary
Qualification ACCA
Paper F7 INT
Chapter 5 Fill in these boxes
Template ID CS1
Source 2.5 INT text Ch 13
2.5 INT study notes session 6
Fill in this box with where the
information came from

GOODWILL

PURCHASED NON-PURCHASED

INTANGIBLE
ASSETS

RECOGNITION MEASUREMENT

RESEARCH AND
DEVELOPMENT
EXPENDITURE

CRITERIA FOR ACCOUNTING OF

DEVELOPMENT RESEARCH AND
EXPENDITURE DEVELOPMENT
EXPENDITURE

REPORTING CH5ACCAF7INTJCV1 - 22 -
Checklist – submit with each
chapter
NGLM CHECKLIST Tick
1 Table completed per content objective Done
2 Icons Done
3 Followed blueprint Done
4 Read and followed the house style document Done
5 Content, illustrations, TYUs included Done
6 Legacy material used and referenced, although text Done
must be up to date with current standards.
7 Activities etc. taken from legacy material (please list):
Ill 1 – 2.5 int study notes session 6 Eg 7
Ill 2 – 2.5 GBR text Ch 17
TYU 1 – new
TYU 2 – new
TYU 3 – new
TYU 4 – 2.5 GBR text Ch 17 Practice Q a)
TYU 5 – 2.5 GBR text Ch 17 Practice Q b)
TYU 6 - new
TYU 7 – 2.5 INT study notes session 6 Eg 7

8 No bullet after heading – begin with some explanatory Done

text
9 Bullets used, max. 9 bullets per heading, 70 words per Done
bullet
10 Any exceptions to rule 9 as per the syllabus Done
11 Expandable text, 500 words max per paragraph Done
12 Main content Arial 10, headings bold 14, subheadings Done
bold 12, correctly numbered with 1, 1.1, 1.2, etc.
13 Diagrams/tables used Done

14 Tables are 15 cm across and rules on text followed

(more info on balance sheets etc., layout in the house
style guide)
15 Varied style for illustrations Done
16 Reviewed pilot Done
17 Chapter overview, summary and checklist completed Done
18 Saved correctly Done

REPORTING CH5ACCAF7INTJCV1 - 23 -
REPORTING CH5ACCAF7INTJCV1 - 24 -