What do we use when??

◦Please note that the definition and recognition criteria

above are from the old 2010 CF and differ from the
new 2018 CF.
◦Read your required carefully to understand
which definition and recognition criteria to
discuss
◦If Reqd: Discuss in terms of IAS 38 or IFRS – use
old CF 2010
◦If Reqd: Discuss in terms of CF – use new CF
2018
Discussion
questions
Plan your answer use a
mind map

- Key words
- Mark
allocation to
guide how
much to
write
- Format
- Intro body &
conclusion
Summary: Break down the
required
◦ Dates?
◦ Recognition? What should I discuss here?
◦ Measurement? What should I discuss here?
◦ Conceptual Framework? Which definition?
◦ Which standard?
◦ PLAN your answer: Mind map/Spider diagram
◦ Practice your idea generation technique
◦ Format? Introduction, body (headings, bullet point form,
theory and application.
◦ The conclusion.
◦ Sign off REMEMBER NO NAMES REMAIN ANONYMOUS
◦ Do not waffle or pad your answer. Be concise/to the point
Journal entries
◦28 February 2021
DR Patent: Cost (A) or (SOFP) W1 XXX
CR BANK (A) or (SOFP) W1 XXX
◦Patent purchased via EFT

◦ Labelling of accounts
◦ SOCI/SOFP/SOCIE/ELEMENT indication
◦ DR or CR
◦ AMOUNT
◦ WORKINGS REFERENCED or no marks for the amount if incorrect
◦ DATES
◦ NARRATIONS
Disclosure
◦The end of every standard and chapter discusses disclosure.
◦Learn format of AFS and related notes
◦Refer back to IAS 1
◦Remember Entity name, heading and full dates.
◦Remember to provide comparatives
◦Show and Reference workings. Reference notes to AFS.
◦Do not abbreviate
◦Take note of potential method marks that are mentioned in
class
 QUESTION 9.7
◦ Drench Limited is a company involved in the hair industry supplying products to some
of the most expensive hair salons around the world. In a bid to expand its market, it
acquired a well known brand, Droplets, on 1 January 20X5, for an amount of C2
500 000. The salons will now have the exclusive right to market this product to its
customers.
◦ This purchase price was paid in full on 1 January 20X5.
◦ The Drench Limited hair stylists had to be sent on extensive training before they could
use and sell the Droplet range of hair products. The training took place in Italy during
January 20X5.
◦ The training manuals cost C80 000 and the accommodation and transport cost
C120 000.
◦ Further to this, an amount of C175 000 was spent on legal fees regarding the drafting of
the purchase agreement and to register the transfer of ownership. The legal fees were
paid on 1 January 20X5.
◦ The use and sale of the Droplet range began on 15 February 20X5.
◦ The Droplet brand has an estimated useful life of ten years.
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◦ The accountant believes that the brand will probably be able to be sold at the end of its
◦Required:
◦IAS 38 Intangible Assets, defines an intangible
asset .With reference to IAS 38 Intangible assets,
explain:
◦a) whether the Droplet brand can be recognised as an
intangible asset; and
◦b) how to measure the Droplet brand in Drench Ltd’s
financial statements for the year
◦ended 31 March 20X5.

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Identifiable?:
Separable?
◦ For something to be separable, it must be:
◦ 􀁸 capable of being separated or divided from the entity, and
◦ 􀁸 sold, transferred, licensed, rented or exchanged,
◦ 􀁸 either individually or together with a related contract, identifiable asset or liability,
◦ 􀁸 regardless of whether the entity intends to do so

OR
Arises from contractual or legal rights?

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 Identifiable:
Separable?
The identifiability criterion is met, as the brand name is capable
of being separated from the entity since it was purchased &
could be sold separately
Arises from contractual or legal rights?
The brand arises from a legal right as it has been acquired
individually and salons will now have the exclusive legal right to
market this product to its customers

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Non monetary
◦The brand is non monetary: The brand is
not cash nor is it receivable in fixed or
determinable amounts of money;
No physical substance
◦Although there may be legal documentation
on paper, the brand purchased has no physical
substance and is considered intangible.
Definition of an intangible asset
◦ • Identifiable
◦ • non-monetary asset
◦ • without physical substance

◦ Definition of an asset
◦ • Resource controlled by enterprise
◦ • from past events
◦ • from which future economic benefits are expected to flow

◦ Recognition criteria of an asset

However, an intangible asset can only be recognised if:
◦ • it is probable that the future benefits that are attributable to the asset will flow
to the entity
◦ • and the cost can be reliably measured.

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Asset Definition
◦ Resource Controlled: Does Drench
◦ have the power to obtain the future economic benefits?
◦ and to restrict the access of others to these benefits?
◦ The past event ?
◦ Future economic benefits expected to flow from the purchase of the brand?
Asset Definition
◦The Droplet brand has been purchased and is therefore a
resource which is controlled by the entity due to the fact that
Drench has the power to obtain the future economic benefits
(sales revenue) flowing from this brand, and to restrict
the access of others to these benefits. This would be legally
enforceable in a court of law.
◦The past event is the purchase transaction of the brand,
which occurred on 1 January 20X5.
◦Future economic benefits expected to flow from the purchase
of the brand, will result from the use and sale of the
Droplet range of hair products.
 Recognition criteria for an asset

◦ However, an intangible asset may only be recognised if the recognition criteria (provided in IAS 38)
are met:
◦ • is it probable that the future economic benefits that are attributable to the asset will
flow to the entity; and
◦ •is the cost reliably measurable?

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 Recognition criteria for an asset

◦It is probable that the brand will give rise to future economic benefits,
which will arise from future sales of the Droplet hair care range.
Since the brand name has been purchased by Drench, all future
benefits will flow directly to the entity.
◦Furthermore, the price an entity pays to separately acquire an
intangible asset reflects the probability that the future economic
benefits embodied in the asset will flow to the entity. In other
words, the effect of probability is reflected in the cost of the asset.

◦The cost can be reliably measured as this is known: the purchase price
paid for the brand was C2 500 000.
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 Measurement
◦ As discussed above, the Droplet brand should be recognised as an asset in terms of IAS 38
Intangible Assets. The amount capitalised should initially be measured at cost, being:
◦ • the purchase price; plus
◦ • any directly attributable expenditure.

◦ Therefore, an amount of C2 675 000 (the purchase price of C2 500 000, as well as the legal
fees incurred of C175 000) should be capitalised.
◦ Please note that the staff training costs of C200 000, which were incurred in order to train staff
on how to use and sell this new branded product, should be expensed during the year ended 31
March 20X5 (i.e. they are not included in the cost of the brand asset). WHY?
◦ This is because the asset definition (provided in IAS 38.8) is not met: the trained staff members
are one of the entity’s resources but, due to the nature of staff, an entity is not considered able to
sufficiently control this resource and thus staff do not meet the definition of an ‘asset’.
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 Measurement
◦ The brand has a finite life and must therefore be amortised.
◦ Intangible assets are usually amortised on the straight-line method unless a more suitable
method can be established (in relation to the expected pattern of expected flow of future
economic benefits). See IAS 38.97
◦ As there is not a more suitable method to amortise the brand, the straight-line method will be
used.

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 Amortisation
◦‘The useful life of an intangible asset that arises from contractual or
other legal rights shall not exceed the period of the contractual or other
legal rights,
◦but may be shorter depending on the period over which the entity
expects to use the asset.
◦If the contractual or other legal rights are conveyed for a limited term
that can be renewed, the useful life of the intangible asset shall
include the renewal period(s) only if there is evidence to support
renewal by the entity without significant cost.’ IAS 38.97

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 Measurement
◦ Amortisation of this brand should be provided over the shorter of:
◦ • its expected useful life – being 10 years; and
◦ • its legal life – no legal life given.

◦ It will therefore be amortised over its estimated useful life of ten years on a straight-line basis.
◦ The residual value of this brand should be assumed to be zero on the grounds that:
◦ • there is no third party who has committed to purchasing the brand at the end of its useful life;
and
◦ • there is no active market for brands, thus making it impossible to estimate the fair value at the
end of its useful life. See IAS 38.100

◦ The amortisation would be: (C2 675 000 – C0)/ 10 years x 3/12 = C66 875.
◦ The brand will thus be carried at C2 608 125 in the financial statements at 31 March 20X5 (cost: 23
Life
◦Intangible assets with finite lives
are amortised whereas intangible
assets with indefinite lives are
not amortised. IAS 38.89
◦The brand has a finite life and
thus must be amortised.

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