ch11 SM Leo 10e

Solutions Manual
to accompany
Company Accounting 10e

prepared by
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
© John Wiley & Sons Australia, Ltd 2015

Chapter 11: Intangible assets
Chapter 11 – Intangible assets
REVIEW QUESTIONS
1. What are the key characteristics of an intangible asset?
Para 8 of AASB 138 defines an intangible asset as:
An identifiable non-monetary asset without physical substance.
Key characteristics are:

 Identifiable [see 2 below]: because of its emphasis on markets is inserted to exclude
many possible intangibles that are difficult to measure eg staff morale, good customer
relations
 Non-monetary: this characteristic excludes financial assets such as receivables from
being classified as intangibles
 Without physical substance: excludes items of PP&E covered by AASB 116
2. Explain what is meant by ‘identifiability’.
Para 12 of AASB 138 states:
An asset meets the identifiability criterion in the definition of an intangible asset when
it:
(a) is separable, ie is capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a
related contract, asset or liability; or
(b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
(c) excludes goodwill, and other possible assets such as staff morale
(d) is included to allow such assets as water rights, where these were allocated by a
government but if not used were unable to be on-sold and so were not separable, to
be classified as intangible assets
3. How do the principles for amortisation of intangible assets differ from those for
depreciation of property, plant and equipment?
 Basic principle of allocation of the depreciable amount on a systematic basis over

useful life is the same.
 With intangibles, straight-line method is the default method where the pattern of
receipt of benefits cannot be reliably determined. Not so for PPE.
 With intangibles can have indefinite lives, not so for PPE
 With intangibles with finite lives, residual value is assumed to be zero unless para 100
criteria are met. Not so for PPE.
© John Wiley and Sons Australia, Ltd 2015 11.1

Solutions manual to accompany Company Accounting 10e
4. Explain what is meant by an ‘active market’.
AASB 13, Appendix A, defines an active market as:

“a market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis.”
Consider markets such as property and used cars compared with brand names.
5. How is the useful life of an intangible asset determined?
Useful life must be assessed as finite or indefinite. Note para 90 in relation to assessment of
whether an indefinite useful life exists:
Many factors are considered in determining the useful life of an intangible asset,
including:
(a) the expected usage of the asset by the entity and whether the asset could be
managed efficiently by another management team;
(b) typical product life cycles for the asset and public information on estimates of
useful lives of similar assets that are used in a similar way;
(c) technical, technological, commercial or other types of obsolescence;
(d) the stability of the industry in which the asset operates and changes in the market
demand for the products or services output from the asset;
(e) expected actions by competitors or potential competitors;
(f) the level of maintenance expenditure required to obtain the expected future
economic benefits from the asset and the entity's ability and intention to reach such
a level;
(g) the period of control over the asset and legal or similar limits on the use of the
asset, such as the expiry dates of related leases; and
(h) whether the useful life of the asset is dependent on the useful life of other assets of
the entity.
6. What intangibles can never be recognised if internally generated? Why?
Para 63 states:
Internally generated brands, mastheads, publishing titles, customer lists and items similar
in substance shall not be recognised as intangible assets
Para 64 gives the reason:
Expenditure on internally generated brands, mastheads, publishing titles, customer lists

and items similar in substance cannot be distinguished from the cost of developing the
business as a whole. Therefore, such items are not recognised as intangible assets.

7. Explain the difference between ‘research’ and ‘development’.
Para 8 contains the following definitions:
Research:
is original and planned investigation undertaken with the prospect of gaining new
scientific or technical 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.
Para 56 gives examples of research activities:
(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.
Para 59 gives examples of development activities:
(a) the design, construction and testing of pre-production or pre-use prototypes and
models;
(b) the design of tools, jigs, moulds and dies involving new technology;
(c) the design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
(d) the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services
8. Explain when development outlays can be capitalised.
Para 57 states that when all the following criteria are met, development outlays can be
capitalised:
(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.
9. Explain how intangible assets are initially measured, and whether the measurement
differs dependent on whether the assets are acquired in a business combination or
internally generated by an entity.
Para 24 states that an intangible asset must be initially measured at cost.
When internally generated cost is based upon capitalisation of development costs.
When acquired in a business combination cost is measured as the fair value of the asset at
acquisition date, and a hierarchy of measures of fair value is available – see paras 39-41.
10. Give two ways in which it is easier to recognise intangibles that are acquired in a
business combination than those that are internally generated.
1. Reliable measurement: For internally generated assets, the criteria in para 57 must
be met. With assets acquired in a business combination, valuations including those
given by valuers can be used.
2. Banned assets: Para 63 bans the recognition of certain intangibles. These can be
recognised when acquired in a business combination.
3. Research: When internally generated outlays on research are expensed. In-process
research can be capitalised on a business combination.
11. What are the recognition criteria for intangible assets?
Para 21 states:
An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
12. Explain why managers may prefer to expense outlays on intangibles rather than
capitalise them.
See section 9.2.7 of the text. Some reasons are:
1. Managers prefer to inflate future profits

2. Investors generally consider write-offs as one-time items, of no consequence for

valuation.
3. Immediate expensing obviates the need to provide explanations in case of failure.
4. Cost and benefit
5. Lack of relevance of capitalised numbers
6. Volatility
13. Explain why capitalisation of outlays may not provide relevant information about
the intangible assets held by an entity.
 There is no necessary link between capitalised costs and expected future benefits
 Time gap: the gap between outlay and the determination of outcome
 Correlation gap: there level of expenditure is not necessarily proportional to eventual
worth of the outcome.
14. Explain the application of the revaluation model for intangible assets.
Relevant paras are:
75. 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
amortisation and any subsequent accumulated impairment losses. For the purpose
of revaluations under this Standard, fair value shall be determined by reference to an
active market. Revaluations shall be made with such regularity that at the balance
sheet date the carrying amount of the asset does not differ materially from its fair
value.
81. If an intangible asset in a class of revalued intangible assets cannot be revalued
because there is no active market for this asset, the asset shall be carried at its cost
less any accumulated amortisation and impairment losses.
82. If the fair value of a revalued intangible asset can no longer be determined by
reference to an active market, the carrying amount of the asset shall be its revalued
amount at the date of the last revaluation by reference to the active market less any
subsequent accumulated amortisation and any subsequent accumulated impairment
losses.
85. If an intangible asset's carrying amount is increased as a result of a revaluation, the
increase shall be credited directly to equity under the heading of revaluation surplus.
However, the increase shall be recognised in profit or loss to the extent that it
reverses a revaluation decrease of the same asset previously recognised in profit or
loss.
86. If an intangible asset's carrying amount is decreased as a result of a revaluation, the
decrease shall be recognised in profit or loss. However, the decrease shall be
debited directly to equity under the heading of revaluation surplus to the extent of
any credit balance in the revaluation surplus in respect of that asset.
Method is basically the same as that under AASB 116 for PP&E. AASB 138 has a restriction
on use of fair value in that it must be measured by reference to an active market.

15. Explain the use of fair values in the accounting for intangible assets.
1. Initial recognition: Fair values are used to measure cost when intangibles are acquired
in a business combination. Fair values may be measured in a variety of ways – see
paras 39-41.
2. Subsequent to initial recognition: After initial recognition, all intangibles may be
measured under the cost model or the revaluation model. However, to use the
revaluation model, fair value can only be measured by reference to an active market.

CASE STUDY QUESTIONS
Case Study 1 Characteristics of intangible assets
David James (2001b) stated:
The Australian company Health Communications Network (HCN), for example,

has most of its balance sheet assets in the form of either cash or intangible assets.
In its 2000–01 annual report, out of combined assets of $49.7 million, cash assets
were $20.4 million and intangible assets were $22.2 million. Plant and equipment
were only $1.47 million.
This is characteristic of the shift to intangible assets, but the recent fate of HCN
demonstrates some of the difficulties of ownership in the post-industrial
environment. The company was the subject of a public furore when it was alleged
it had plans to sell prescription information, collected from general practitioners,
to undisclosed third parties, possibly pharmaceutical companies. The matter has
been referred to the privacy commissioner, but the message is clear: just because
a company possesses information, does not mean it can always do with it as it
wishes. HCN ‘owns’ the information, but this does not give it the same rights of
ownership as, say, ownership of plant and equipment.
Required
Using the information in the above quotation, discuss the characteristics of intangible
assets.
The characteristics of intangibles should be discussed at 2 levels:

1. the definition of an asset;
2. the definition of an intangible asset – noting the characteristics specific to intangibles,
particularly identifiability.
Ownership is not a characteristic of either tangible or intangible assets.
Compare plant and equipment with prescription information as assets in terms of the definition of an
asset and the definition of an intangible asset.

Case Study 2 Non-recognition of intangible assets
David James (2001b) stated:
According to its 1999–2000 annual report, Qantas had total assets of $12 billion.
Intangible assets were only $25 million, around 2% of the asset base. Yet Stuckey
believes the airline’s intangibles are of far greater importance to the company.
‘Qantas is interesting because it combines a fantastic brand — an intangible asset
— with a heap of capital-intensive tangible assets — the planes they have tried to
keep well utilised. They have done very well in an industry that has been a real
financial under-performer internationally. They stand out as one of the best
performers in that sector.’
Required
In relation to a major airline such as Qantas, discuss what intangible assets are
probably not on the statement of financial position, and possible reasons for their non-
recognition.
Possible assets for an airline that are not on the balance sheet:
Brand name
Safety record
Customer service
Computer systems for reservations, seating arrangements, customer profiles
In-flight entertainment
Monopoly protection by Government – e.g. Australian 2 airline policy restricts competition
Some of the above are not intangible assets as they are not identifiable eg safety record
Some intangibles that could be on the balance sheet are:

Patents
Trade names
Question: Is the brand name “Qantas” inclusive of many of the assets listed above?
Could the brand name be valued separately from these assets?

Case Study 3 Non-amortisation of assets
Nick Tabakoff (1999) stated:
ASIC (Australian Securities and Investments Commission) may have plans to

change the treatment of television licences in company accounts, as a precursor to
the possible introduction of IAS 38. The commission is seeking the views of the
main television networks regarding a change to the accounting rules that apply to
their licences which, as intangibles, may be amortised. They have not been
amortised in the past because of the view held by leading media companies that
licences have an ongoing life.
Some ASIC officials beg to differ — because licences need to be reapplied for
and renewed every five years, they should be amortised on the grounds that they
could be taken away by the Government at any time. The Seven and Nine
television networks have been steadily increasing the value placed on their
television licences in recent years, a practice that would almost certainly be
prevented if IAS 38 was introduced.
Required
Obtain access to the most recent financial statements of your local television stations,
and review their policies and accounting for television licences. Critically analyse the
arguments for and against the non-amortisation of these assets.
The licences only last for 5 years.
The TV company may expect to have the licence renewed, but does the company have an asset
beyond the 5 years:
- are there expected future benefits?
- Can the entity control those benefits [are they controlled by the government that issues
the licence? Compare with the employee who may leave]
- What is the past transaction given the licence for any subsequent term has not yet been
issued?
Does it depend on the rules for issuing the licence? For example, if the legislation states that the
company will have its licence renewed if it meets certain tests such as:
no offending material presented to the public
25% local content shown
provides for local sporting events
These events are then within the control of the company to achieve, in comparison to the licence
renewal being at the “pleasure of the government minister in the best interests of the Australian
public” which is beyond the company to control. In other words, what grounds are there for non-
renewal occurring and what control does the company have over renewal.

Case Study 4 Amortisation of intangibles
Nick Tabakoff (1999) stated:
News Corporation is far from convinced of the merits of the standard [IAS 38]. At
the Australian division, News Limited, finance director and deputy chief executive
Peter McCourt says: ‘The reason you get standards like that is that they are
prepared by people who are not really responsible to anybody. The business
community gains nothing from writing off the value of intangibles over a limited
time frame. If the standard comes in, the market will simply add back the
amortisation.’
McCourt believes the standard penalises companies that are acquisitive when it
comes to intangible assets. He can see no reason for the existence of the standard.
‘Who is it aimed at, who is being better informed by taking that charge? I don’t
think it gets you anywhere.’
He is not alone in getting worked up about preventing accountants from
minimising the values placed on intangibles. Even the legendary Berkshire
Hathaway chief Warren Buffett has strong views on the issue. He has been quoted
as saying: ‘Amortisation of intangibles is rubbish. It distorts true cashflows and
thus economic reality. For example, the economic earnings of Disney are much
greater than reported earnings. Accounting is pushing people to do things that are
nuts.’
These comments were made before the latest revisions to AASB 138.
Required
Comment on whether the current AASB 138 has resolved the issues raised in this
article.
4 key issues:
1. Amortisation: should intangibles be amortised?

Argument for: the benefits are consumed; need to allocate the cost of past, consumed benefits.
Assets should not be overstated.
Argument against: The benefits have not declined. Also, AASB 138 does not allow the
recognition of new internally generated benefits, so to write off old benefits but not allow the
recognition of new benefits means a double hit to income – eg consider depreciation of a brand as
well as expensing the costs of advertising to maintain the brand.
AASB 138 allows non-amortisation under certain conditions.

Is there any distortion of cash flows? No.
2. Are acquisitive companies penalised under AASB 138?

Advantages to acquirers:
 Easier to recognise intangibles
 Can use fair value to measure compared with measurement of cost
 Can recognise assets listed in para 63.
Disadvantages to acquirers:
 Recognition leads to amortisation expenses on recognised intangibles; affects profits.
 See arguments in text as to why managers may prefer current non-recognition rules

3. Do annual reports show economic reality?
This is based on the comment re economic earnings of Disney being greater than reported earnings.
See the Zeff graph in the chapter comparing reported assets and market capitalisation of entities.
Many internally generated assets are not recognised under AASB 138.
See figure 7.1 from Jenkins and Upton again comparing the difference between market capitalisation
& reported assets.
4. Is there a need for a separate standard on intangibles?
The argument for a separate standard for intangibles is related to the unique measurement and
relevance issues relating to intangibles.
For example with measurement:
Cost model: hard to isolate costs, hard to determine depreciation
Revaluation model: lack of markets

Case Study 5 Human resource accounting
In the following article, Whiting and Chapman (2003) consider whether the value of
rugby players, being a team’s most valuable asset, should be placed on the balance sheet
(statement of financial position).
Sporting glory — the great intangible

While rugby stars are heroes to many, when checking the books they become a complex
intangible. Rosalind Whiting and Kyla Chapman investigate the merits of Human Resource
Accounting in professional sport.
Australia, New Zealand and rugby union – a combination guaranteed to stir patriotic feelings
across the Tasman! But what if we add accounting to this equation? Rugby players are the
teams’ most valuable assets, so should we be placing their value on the balance sheet? And if
so, does it make any difference to the decisions that users of financial statements make?
Human resource accounting in professional sport
Professional sport has been prevalent in the United Kingdom and the United States for nearly
200 years. However, professional sport arrived later to Australia and New Zealand. In
particular, the Kiwis only entered this arena in 1995 when the New Zealand Rugby Football
Union (NZRFU) signed the Tri Nations sponsorship deal and removed all barriers preventing
rugby union players being paid for their services. Player contract expenses in New Zealand
now amount to over NZ$20 million annually, according to the NZRFU.
In the United Kingdom and the United States, the professional teams’ financial accounts
quite often incorporate human resource accounting (HRA). HRA is basically an addition to
traditional accounting, in which a value for the employees is placed on the balance sheet and
is amortised over a period of time, instead of expensing costs such as professional
development.
There is debate about the merits of this process and the arguments are in line with those we
have been hearing about intangibles in general. More recently, there has been worldwide
movement towards recognising acquired identifiable intangible assets at fair value in the
financial statements. So why not include an organisation’s human resources? While
(thankfully) most people agree that employees are valuable, there are accounting difficulties
with the concept of ownership or control of the employees (asset definition) and the
reliability of measurement.
Despite these concerns, one area where HRA does have some international acceptability is
in accounting for professional sport, mainly because of the measurable player transfer costs.
But there is still some variability in the reporting of human resource value, ranging from the
capitalisation of signing and transfer fees through to player development costs or valuations.
To the authors’ knowledge, HRA is not currently practised with Australia and New
Zealand’s professional sports teams. The absence of transfer fees between clubs when trading
players may explain this.
Decision making
Accountants are required to provide information that assists users in assessing an
organisation’s financial and service performance and in making decisions about providing
resources to, or doing business with the firm.
The big question is whether HRA information is more useful to the decision maker than the
alternative expensing treatment. Supporters of HRA argue that capitalised information is
useful for strategic planning and management of employees, and provides a more accurate
measure of the firm’s status and total performance.
Those against HRA say it is too subjective to be useful and that it just imposes another cost
on the organisation. Some detractors argue that it makes unprofitable organisations appear

profitable simply because smart people work there. But those who believe in the efficiency of
the market would argue that investors are not naive, and decisions would be unaffected by the
way in which human resource information is presented.
Past research has shown that sophisticated users of financial information do make
significantly different decisions with the different presentations. With this in mind we
decided to test this outcome in New Zealand.
The New Zealand study
In June 2001, 64 members of the New Zealand professional body, the Institute of Chartered
Accountants of New Zealand (ICANZ) responded to our postal questionnaire. This
constituted a 20 per cent response rate from the 300 randomly selected ICANZ members.
All respondents were provided with the CEO’s report, and the financial statements and
notes of the fictitious Gladiator Super Twelve rugby franchise.
Half of the respondents were sent financial statements in which player training and
development costs were expensed in the year that they were incurred.
The other half received an identical set of statements; however, the team was capitalised on
the balance sheet.
It was stated in the notes to the accounts that the team was periodically revalued every five
years, and then annual player training and development costs were capitalised and added to
the valuation and subsequently amortised over a period of three years (average contract
length). Respondents were asked a series of decision making questions and then the answers
from the two groups (expensing and capitalising) were statistically compared.
Generally, the presentation of the human resource information made no difference to the
assessments and decisions made by our respondents. They assessed financial position and
performance, risk and future financial performance to be at the same level regardless of the
presentation. And even when presented with an investment decision where they had to divide
$100,000 between the franchise and a fixed term New Zealand bank investment, there was no
difference in the levels of investment between the two groups.
In most cases respondents in the two groups gave similar reasons for their assessments.
However, when assessing current performance, the group with the expensed player
development costs mainly used statement of financial performance information, whereas the
group with the capitalised statements also used the statement of financial position. This
suggests that they understood the nature of the information with which they were provided.
Differences in opinion
Women and men showed no overall differences in their responses. However, it was with
investment experience that we uncovered some contrasting results. Most of our respondents
fell into two groups, those with limited investment experience (less than one year) and those
having extensive experience (five or more years).
We felt that the experienced group would more closely represent the sophisticated users as
studied in previous research.
We found some differences in assessments between the experienced and the limited
experience group. The groups rated financial performance and risk of the franchise
differently and invested significantly different amounts in the franchise. Interestingly,
members of the limited experience group rated growth as a more important reason for their
investment decisions — whereas the experienced group said net profit levels were more
important.
Of greater interest was whether experience level affected respondents’ ability to cope with
the different presentations of human resource information. In most cases it did not. However,
limited experience investors did make significantly different assessments of the risk and
future performance of the franchise according to the presentation of the human resource
information. In these situations the limited experience expensing group acted like the

experienced group of investors, whereas the limited experience capitalising group did not.
The capitalised information may have confused the less experienced investors.
In general, the users (sophisticated and unsophisticated) were unaffected in their
assessments and decisions by the presentation of the human resource information. This
conflicts with prior studies, which found that HRA did make a difference to decision making.
This variation could be due to accountants now having a better understanding of the issues
surrounding intangibles recognition and the effect of accounting method choice on financial
statement numbers and ratios. Also accountants are spending less time in accounting number
preparation and more time in interpretation and business advice.
However, our exercise only explored one type of decision-making process, that of an
investment. Prior studies may have been of a wider nature, which could explain the differing
result.
Overall, our study shows that generally accountants will make the same investment
decisions regardless of whether human resource information is expensed or capitalised. If
HRA is to follow the international trends emerging in intangibles reporting, then capitalised
human resource information may become more prevalent. This study suggests that this won’t
negatively affect those accountants who provide interpretative and investment advice.
Required
Critically analyse the arguments made in the article and assess whether there should be
any changes made to AASB 138 as a result.
The key question relates to what information about human resources in a football team where players
are contracted is useful to readers of financial accounts.
Are players intangible assets? They are assets in that being under contract the company/sporting entity
can control them in terms of the players’ ability to move clubs. In relation to the criterion of
identifiability, the club has the legal right to trade the players, and the players are separable from the
club.
However players are physical assets and as such are not intangible assets. Accounting for the players
must be accounted for under AASB 116 Property, plant & equipment.
However, the existence of great players can add intangible assets to an entity such as increasing the
brand worth of the name of the club, which assists in increasing sales of club merchandise,
membership and gate takings.
Other intangibles associated with sporting clubs relate to training, and attitude. Clubs can generate
pride because of past and current performance, which increases the value of the club. Many supporters
follow a club through good times and bad times, regardless of the worth of current players.
Whiting and Chapman discuss two forms of measurement in relation to players, namely expensing of
costs relating to the players and capitalisation of those costs. An alternative, being valuation of the
player is not discussed. The authors endeavoured to assess whether different decisions would be made
if capitalised outlays were included in the balance sheet. In general users weer unaffected in their
assessments.
AASB 138 considers whether a well trained work force is an asset – see para. 15. In the ED for that
standard, the IASB signalled an intention that an assembled workforce [compare with a team of
players] would not be considered an intangible asset.

Case Study 6 Accounting for brands

In the following article by Peacock (2004), it was reported that the clothing and
footwear giant Pacific Brands was set to list on the stockmarket with a $1 billion +
initial public offering (IPO). Patersons Securities analyst, Rob Brierley, was quoted as
saying, ‘The high brand awareness will certainly be its [Pacific Brand’s] marketing
strength.’
A history of most popular brands
Pacific Brands can trace its history back to 1893 when it began making Dunlop bicycle tyres.
Along the way, it has collected an astonishing array of brands, many remarkable stories in
their own right.
Bonds, one of the company’s flagship brands, was founded in 1915 by American immigrant
George A. Bond who started out making hosiery and gloves in Sydney. In 1928, Bonds
underwear and hosiery secured Charles Kingsford-Smith and Charles Ulm on their historic
first flight across the Pacific.
King Gee workwear has been with Australians for more than 75 years, with the first overalls
produced in tiny rented premises in Sydney. Its name is derived from a colloquial expression
popular during the reign of King George V.
According to PacBrands’ website ‘King Gee’ became Australian slang for a show-off. ‘For
example, in the 1920s someone who had a high opinion of themselves might have attracted the
comment, “he’s so good he thinks he’s King G”,’ it said.
Holeproof was first made in Australia in the late 1920s when a hosiery manufacturer started
turning out ladieswear under licence from the Holeproof Hosiery Company in the US. The
company opened its first Australian mill in Melbourne in 1930, becoming the first manufacturer
to make and market Australian-made, self-supporting socks.
Unique Corsets, later better known as bra maker Berlei, was already nearly 20 years old by
then.
Founded by Fred R. Burley with a nominal capital of £10 000 in Sydney, the company set out
‘to design, manufacture and sell corsets and brassieres of such perfect fit, quality and
workmanship as will bring pleasure and profit to all concerned’.
Clarks shoes go back even further, to 1825, and a small sheepskin slipper business founded by
Cyrus and James Clark in the small English village of Street. Sixty years later, the company was
credited with creating the first shoe to follow the natural shape of the foot — ‘a revolutionary
concept in its time’.
Required
Given the perceived importance of the brands to the success of the IPO, discuss whether
the AASB in AASB 138 has adopted too conservative an approach to the accounting for
brands.
Accounting for brands under AASB 138:
(a) internally generated

- internally generated intangibles must meet the recognition criteria in para 57
- para 63 specifically excludes the recognition of internally generated brands
(b) acquired brands:

- Recognised at cost
- If acquired as part of a business combination must meet the recognition criteria of AASB
3, para 37 (c) , namely that fair value can be measured reliably [ see also paras 45-46 of
AASB 3]
- Initially measured at cost = fair value.

- Subsequently can be measured at cost or revalued amount, but use of the latter requires
the existence of an active market.
- Amortisation based on useful life, or non-amortisation on indefinite life
Pacific Brands has a history back to 1893, the history including the internal generation of brands as
well as the acquisition of brands such as Bonds
Two key questions are:

- whether there should be different treatment within the one company for internally
generated and acquired brands
- whether old acquired brands such as Bonds and King Gee cannot be revalued due to no
active market being available

Case Study 7 Accounting for brands

Jon West Ltd is a leading company in the sale of frozen and canned fish produce. These
products are sold under two brand names. Fish caught in southern Australian waters
are sold under the brand ‘Artic Fresh’, which is the brand the company developed
when it commenced operations and which is still used today. Fish caught in the
northern oceans are sold under the brand name ‘Tropical Taste’, the brand developed
by Fishy Tales Ltd. Jon West Ltd acquired all the assets and liabilities of Fishy Tales
Ltd a number of years ago when it took over that company’s operations.
Jon West Ltd has always marketed itself as operating in an environmentally
responsible manner, and is an advocate of sustainable fishing. The public regards it as a
dolphin-friendly company as a result of its previous campaigns to ensure dolphins are
not affected by tuna fishing. The marketing manager of Jon West Ltd has noted the
efforts of the ship, the Steve Irwin, to disrupt and hopefully stop the efforts of Japanese
whalers in the southern oceans and the publicity that this has received. He has
recommended to the board of directors that Jon West Ltd strengthen its
environmentally responsible image by guaranteeing to repair any damage caused to the
Steve Irwin as a result of attempts to disrupt the Japanese whalers. He believes that this
action will increase Jon West Ltd’s environmental reputation, adding to the company’s
goodwill. He has told the board that such a guarantee will have no effect on Jon West
Ltd’s reported profitability. He has explained that, if any damage to the Steve Irwin
occurs, Jon West Ltd can capitalise the resulting repair costs to the carrying amounts of
its brands, as such costs will have been incurred basically for marketing purposes.
Accordingly, as the company’s net asset position will increase, and there will be no
effect on the statement of profit or loss and other comprehensive income, this will be a
win–win situation for everyone.
Required
The chairman of the board knows that the marketing manager is very effective at
selling ideas but knows very little about accounting. The chairman has, therefore, asked
you to provide him with a report advising the board on how the proposal should be
accounted for under International Financial Reporting Standards and how such a
proposal would affect Jon West Ltd’s financial statements.
1. Accounting for the Guarantee
 Is there a liability? Legal or constructive? What is the past event? What obligation exists?
 Should it be recognised?
 How is it to be measured?
 Contingent liability?
Expect that a provision/contingent liability would need to be raised in relation to the guarantee.
Measurement issues may lead to the need for a contingent liability.
2. Can costs be capitalised into brands?

 Note one brand is internally generated and one is acquired. The internally generated brand
“Artic Fresh” will not be recognised while “Tropical Taste” was acquired in a business
combination.
Accounting for internally generated brands differs from that for brands acquired in a business
combination - explain
 Extra outlays on the brand cannot be capitalised into an already existing brand as the outlays
are generally to maintain the existing asset rather than increase the asset. Also, hard to
distinguish the expenditure from that spent to develop the business as a whole.
 AASB 138 says that brands cannot be revalued as no active market exists.
 Can the outlay be related to the brand or is it internally generated goodwill: does it relate to
the entity as a whole rather than a single asset? Cannot recognise internally generated
goodwill.
 Expected result is that any outlays would need to be expensed
3. Effects on financial statements
 Liability? Provision?
 Contingent liability – notes only
 Asset? No
 Profit: expense relating to the guarantee provision?

Case Study 8 Accounting for intangible assets
Pics Ltd is an Australian mail-order film developer. Although the photo developing
business in Australia is growing slowly, Pics Ltd has reported significant increases in
sales and net income in recent years. While sales increased from $50 million in 2009 to
$120 million in 2015, profit increased from $3 million to $12 million over the same
period. The stock market and analysts believe that the company’s future is very
promising. In early 2016, the company was valued at $350 million, which was three
times 2015 sales and 26 times estimated 2016 profit.
What is the secret of Pics Ltd’s success? Company management and many investors
attribute the company’s success to its marketing flair and expertise. Instead of
competing on price, Pics Ltd prefers to focus on service and innovation, including:
• Customers are offered a CD and a set of prints from the same roll of film for a set
price.
• Customers are given, at no extra charge, a ‘picture index’ of mini-photos of the roll.
• A replacement roll is given to every customer (at no extra charge) with every
development order.
As a result of such innovations, customers accept prices that are 60% above those of
competitor discount film developers, and Pics Ltd maintains a gross profit margin of
around 40%.
Nevertheless, some investors have doubts about the company as they are uneasy about
certain accounting policies the company has adopted. For example, Pics Ltd capitalises
the costs of its direct mailings to prospective customers ($4.2 million at 30 June 2015)
and amortises them on a straight-line basis over 3 years. This practice is considered to
be questionable as there is no guarantee that customers will be obtained and retained
from direct mailings.
In addition to the mailing lists developed by in-house marketing staff, Pics Ltd
purchased a customer list from a competitor for $800 000 on 4 July 2016. This list is
also recognised as a non-current asset. Pics Ltd estimates that this list will generate sales
for at least another 2 years, more likely another 3 years. The company also plans to add
names, obtained from a phone survey conducted in August 2016, to the list. These extra
names are expected to extend the list’s useful life by another year.
Pics Ltd’s 2015 statement of financial position also reported $7.5 million of marketing
costs as non-current assets. If the company had expensed marketing costs as incurred,
2015 net income would have been $10 million instead of the reported $12 million. The
concerned investors are uneasy about this capitalisation of marketing costs, as they
believe that Pics Ltd’s marketing practices are relatively easy to replicate. However,
Pics Ltd argues that its accounting is appropriate. Marketing costs are amortised at an
accelerated rate (55% in year 1, 29% in year 2, and 16% in year 3), based on 25 years’
knowledge and experience of customer purchasing behaviour.
Required
Explain how Pics Ltd’s costs should be accounted for under AASB 138 Intangible
Assets, giving reasons for your answer.
AASB 138 definitions
 Asset: A resource:

(a) controlled by an entity as a result of past events; and

(b) from which future economic benefits are expected to flow to the entity.
 Intangible asset: An identifiable non-monetary asset without physical substance.
 Identifiable: An asset is identifiable when it:
(a) is separable – ie can be separated or divided from the entity and sold, transferred, licensed,
rented or exchanged, either individually or together with a related contract, asset or liability;
or
(b) arises from contractual or other legal rights.
Costs of direct mailings to prospective customers (capitalised and amortised)
 Under AASB 138 internally generated customer lists and items similar in substance shall not be
recognised as intangible assets.
 Accordingly, Pics Ltd should:
- Write off all costs capitalised to date; and
- Expense all such costs as incurred from now on.
Purchased customer list (capitalised and amortised)
 It meets the asset definition. Pics Ltd has control as it has the power to obtain the future
economic benefits flowing from it and can restrict the access of others to it. Future economic
benefits exist in the form of potential sales.
 It also meets the intangible asset definition, as it is non-monetary, has no physical substance, and
is identifiable as it can be sold.
 Assuming that it is probable that future economic benefits will be obtained from this list, Pics
Ltd’s treatment is correct – ie recognise it as an intangible asset at cost and then, as the question
indicates that Pics Ltd has chosen the cost model, amortise it.
Cost of phone survey conducted after customer list purchased (to be capitalised)
 Under AASB 138 subsequent expenditure on customer lists and items similar in substance
(whether externally acquired or internally generated) is always expensed as incurred.
 Hence, Pics Ltd should expense the cost of the phone survey.
Marketing costs (capitalised and amortised)
 They do not meet the asset definition. Pics Ltd cannot demonstrate control over he future
economic benefits flowing from them, as it cannot restrict the access of others to those benefits.
AASB 138 states that control normally arises fron legal rights (eg. restraint of trade agreements).
Without such rights it is difficult to demonstrate control.
 Pics Ltd’s marketing practices and flair are known to competitors and accordingly could be
replicated.
 Hence, Pics Ltd should:
- Write off all costs capitalised to date; and
- Expense all such costs as incurred from now on.

Case Study 9 Patents

Song Ltd has recently obtained some patents considered useful in its manufacture of
men’s shoes. The patents consist of:
• Patent XC456, acquired from a leather manufacturing firm for $425 000.
• Patent CU254, obtained as part of a bundle of assets acquired from the conglomerate
U-Beaut Fashions.
Song Ltd is also in the process of preparing an application for a patent for a new
process of softening leather. It has spent a number of years refining this process.
The accountant for Song Ltd is unsure how to account for patents under IFRSs. He
has asked you to prepare a detailed report for him on the principles of how to account
for patents, using the examples above to illustrate the appropriate accounting
procedures.
Required
Prepare a report for Song Ltd’s accountant.
1. Which accounting standard should be applied to determine the appropriate accounting

principles?
Patents are an intangible asset as per AASB 138:
- non-monetary
- identifiable
- lacking physical substance
AASB 138 Intangibles is therefore the relevant accounting standard to apply for patents.
2. How should the various patents be accounted for at initial recognition?

 Patent XC456: This is an asset acquired as a single acquisition.
The probable flow recognition criterion is always met. The recognition criterion that
needs to be met is the reliable measurement criterion.
The asset must be measured at cost, being purchase price plus any directly attributable
costs.
 Patent CU254:
This asset was acquired as part of a bundle of assets. The accounting will depend on
whether the bundle of assets constituted a business:
(a) if the bundle of assets does not constitute a business, then the patent must be
recognised at cost. The cost will be determined by allocating the cost for the
bundle of assets across the assets acquired on a pro rata basis, that is, using the fair
value of the asset in proportion to the fair values of the total assets acquired. This
means that it is necessary to determine the fair value of the patent. The hierarchy
of measures of fair value will be used:
- quoted market prices in an active market: this will not be applicable for patents;
- prices in recent transactions of the same or similar assets: unlikely to be
available for patents;
- measurement techniques such as present value calculations, multiples using
royalty rates etc
(b) if the bundle of assets does constitute a business using the definition of “business”
in AASB 3 Business Combinations – an integrated set of activities and assets
capable of being conducted and managed for the purpose of providing a return

[inputs, processes and outputs] - then there are no recognition to be applied as all
recognition are assumed to be met.
The asset is initially measured at cost which is the fair value of the asset,
determined as described in (a) above.
 Internally generated patent: Amounts spent on internally generating a patent must be
classified into research and development. If classified as research, then the outlays
must be expensed. If classified as development, then para 57 is applied and when all
six of the criteria are met, subsequent outlays are capitalised as an asset. Examples of
these criteria are: the technical feasibility of completing the asset, and an intention to
complete the asset and use or sell it. Para 63 does exclude some assets from
recognition, but patents are not in this list.
3. How should patents be accounted for subsequent to initial measurement?
Under AASB 138, subsequent to initial recognition, an entity may choose to use the
revaluation model or the cost model. However the use of the revaluation model requires the
existence of an active market in order to measure the fair value. Given the unique nature of
patents, an active market is unlikely to exist. Therefore the cost model must be used.
Under the cost model there is the question of subsequent depreciation/amortisation of the
asset. The first question will be that of the useful life of the asset.
IF the asset is considered to have an indefinite useful life no amortisation is required. If the
expected useful life is finite, depreciation must be charged. The determination of useful life
will require an analysis of a number of factors (as per para 90) such as expected actions by
competitors and the stability of the industry and changes in market demand. If an indefinite
useful life is selected for a patent, then an annual impairment test is required under AASB
136 Impairment of Assets.
IF a finite useful life is determined, the depreciable amount of the asset will be written off
over the useful life on a systematic basis, with the method chosen reflecting the pattern in
which the expected benefits are expected to be consumed by the entity. Where the pattern of
flow of benefits cannot be determined reliably, the straight-line method must be used.
Further, the residual value is assumed to be zero, unless there is a commitment by a third
party to acquire the asset in the future or there exists an active market. The latter will not
exist for patents.

PRACTICE QUESTIONS
Question 11.1 Recognition of intangibles
A list of items that could be accounted for as intangible assets by Dory Ltd is as follows:
1. Cost of purchasing a trademark
2. Unrecovered costs of a successful lawsuit to protect a patent
3. Goodwill acquired in the purchase of a business
4. Costs of developing a patent
5. Cost of engineering activity to advance the design of a product to the manufacturing
stage
6. Deposits with an advertising agency for advertisements to increase the goodwill of the
company
Required
Discuss which of these should be included as an intangible asset in the accounts of Dory
Ltd. Give reasons for your answers.
The key characteristics are:

- identifiable
- non-monetary
- lack of physical substance
1. Cost of purchasing a trademark

A trademark meets each of the above characteristics of an intangible asset. Hence
acquisition of a trademark would mean that an intangible asset could be recognised.
Initially intangible assets are measured at cost.
2. Unrecovered costs of a successful law suit to protect a patent

These cannot be recognised as an asset as they are not separable.
Can they be capitalised into the cost of the patent? As they do not add to the benefits of
the patent no extra asset is acquired. The costs are of the same nature as “repairs and
maintenance costs” for PPE and should be expensed.
In the late 1990s Walt Disney Company faced the loss of its copyright on “Mickey
Mouse” which could have led to the loss of millions of dollars of sales. It went to the
Supreme Court and won an extension of copyright lives from 50 to 70 years. These court
costs could be capitalised into the copyright on Mickey Mouse as there was an extension
to the useful life of the copyright.
3. Goodwill acquired in the purchase of a business

This can be recognised as an asset under AASB 3.
However goodwill is not an intangible asset as it is not separable.
4. Costs of developing a patent

The costs of developing a patent must be assessed under the accounting for research and
development principles.
Any research costs must be expensed.
Development costs can only be capitalised after the criteria in para 57 are all met.

5. Costs of engineering activity to advance the design of a product to the manufacturing

stage.
If the para 57 criteria are all met then these costs can be capitalised into an intangible
asset, being the design of the product.
6. Deposits with an advertising agency for advertisements to increase the goodwill of the
company.
Internally generated goodwill cannot be recognised. Only acquired goodwill can be
recognised as an asset – but not as an intangible asset.
These costs are not costs of acquiring goodwill – goodwill cannot be acquired as a
separate asset.
The costs must be expensed.

A list of some of items that could be accounted for as intangible assets by Flathead Ltd
is as follows:
1. Investment in a subsidiary company
2. Training costs associated with a new product
3. Cost of testing in search for product alternatives
4. Legal costs incurred in securing a patent
5. Long-term receivables
Required
Discuss which of these should be included as an intangible asset in the accounts of
Flathead Ltd. Give reasons for your answers.
The key characteristics are:

- identifiable
- non-monetary
- lack of physical substance
1. Investment in a subsidiary company

Paragraph 2 excludes financial assets from AASB 138 as these are accounted for under
AASB 132
2. Training costs
These are not separable; hence training costs are not identifiable as an asset. Para 29(b)
also excludes costs of staff training as part of the cost of an intangible asset as it is not a
directly attributable cost.
3. Cost of testing in search of product alternatives

Paragraph 56(c) gives as an example of research “the search for alternatives for
materials, devices, products, processes, systems or services;” Being research these costs
are expensed.
4. Legal costs incurred in securing a patent

These would be costs that are directly attributable to preparing the asset for its intended
use and would be capitalised into the cost of the patent as an intangible asset.
5. Long-term receivables
Monetary items are money held and assets to be received in fixed or determinable
amounts of money.
Receivables – short or long term – are monetary assets.
Hence they are not intangible assets.

Question 11.3 Amortisation of brands

In its 2012 annual report (Note 16, p. 125) Wesfarmers Ltd made the following
statement:
Trade names: the brand names included above have been assessed as having
indefinite lives on the basis of strong brand strength, ongoing expected
profitability and continuing support. The brand name incorporates
complementary assets such as store formats, networks and products offerings.
Gaming and liquor licences: gaming and liquor licences have been assessed as
having indefinite lives on the basis that the licences are expected to be renewed in
line with business continuity requirements.
Required
What are the amortisation policies set down in AASB 138, and how have they been
applied by Wesfarmers Ltd?
In determining the amortisation the first step is to determine whether the life of the asset is
indefinite or definite (AASB 138:88).
Indefinite does not mean infinite – an indefinite life means that with the proper maintenance
there is no foreseeable end to the life of the asset. AASB 138:90 lists factors that should be
considered to determine the life of the asset.
If indefinite life then there is no need to amortise the asset (AASB 138: 107). However
indefinite life assets are subject to annual impairment tests under AASB 136 Impairment of
Assets.
If definite life, the asset is depreciated in a similar fashion to that of PPE. The depreciable
amount of the asset is allocated on a systematic basis over the useful life with the method
chosen reflecting the pattern in which the benefits are received - see AASB 138:97
AASB 138:98 notes that the method used will rarely result in an amortisation charge that is
lower than that that would be calculated under a straight-line basis. Where the pattern of
benefits cannot be reliably determined then the straight-line method should be used – AASB
138:97
The residual value of the asset is assumed to be zero unless there is a commitment by a third
party to purchase the asset at the end of its useful life. Or there is an active market for the
asset - AASB 138: 100.
For intangibles with both definite and indefinite lives the useful life must be reviewed every
year – AASB 138:109.

Question 11.4 Brands and formulas

Wayne Upton (2001, p. 71) in his discussion of the lives of intangible assets noted that
the formula for Coca-Cola has grown more valuable over time, not less, and that Sir
David Tweedie, then chairman of the IASB, jokes that the brand name of his favourite
Scotch whisky is older than the United States of America — and, in Sir David’s view,
the formula for Scotch whisky has contributed more to the sum of human happiness.
Required
Outline the accounting for brands under AASB 138, and discuss the difficulties for
standard setters in allowing the recognition of all brands and formulas on statements of
financial position.
Accounting for brands under AASB 138:
(a) internally generated

- internally generated intangibles must meet the recognition criteria in para 57
- para 63 specifically excludes the recognition of internally generated brands
(b) acquired brands:

- Recognised at cost
- If acquired as part of a business, AASB 3 states that no recognition criteria need be applied.
Provided the asset meets the definition of an intangible asset, it must be recognised as a
separate asset. As with separately acquired intangible assets, para 33 of AASB 3 provides
that, where intangible assets are acquired as part of a business combination, the effect of
probability is reflected in the measurement of the asset. Hence the probability recognition
criterion is automatically met. – see also paras 11-12 of AASB 3.
- Initially measured at cost = fair value.
- Subsequently can be measured at cost or revalued amount, but use of the latter requires the
existence of an active market.
- Amortisation based on useful life, or non-amortisation on indefinite life
Consider a major brand of whisky – Chivas Regal, Johnny Walker etc – and debate the argument that
the brand name is worthless if separated from the company, for example, could Chivas Regal sell the
brand name to another company making whisky that tastes different from the Chivas Regal whisky?
Or is the brand an integral part of the whole company? Compare with Coca-Cola – would a lemonade
company buy the brand name Coca Cola or is the brand an integral part of the whole product of the
company?

Question 11.5 Financial statements and intangibles

Upton (2001, p. 50) notes:
There is a popular view of financial statements that underlies and motivates many
discussions of intangible assets. That popular view often sounds something like
this:
If accountants got all the assets and liabilities into financial statements, and they
measured all those assets and liabilities at the right amounts, stockholders’ equity
would equal market capitalization. Right?
Required
Comment on the truth of this ‘popular view’.
Upton argues that ensuring all the assets and liabilities are in the statement of financial position has
never been an objective of accounting. He argues that financial reporting tries to provide information
about economic resources and the two groups that hold claims against those resources. It helps to
correct or confirm expectations. He provides an example of the mild climate at the entity’s home
office. This is not an asset of the entity but it may affect the value of things that are economic
resources such as the value of the home office building.
Four criteria must be met before including items in a statement of financial position:
- definitions
- measurability of a relevant attribute
- relevance, and
- reliability: representationally faithful, verifiable & neutral
Information about some intangibles may be relevant, but many items are not measurable.
Some assets may be measurable, but the measurement attribute may not be relevant, for example
capitalisation of research costs.
Recognition of expenditure for which economic benefits are not probable as assets does not provide
relevant information. In outlaying the funds, management’s intention was to generate future benefits.
However, the degree of certainty that economic benefits will flow to the entity beyond the current
period is insufficient to warrant the recognition of an asset.

Question 11.6 Useful life of trademark

Snapper Ltd holds a trademark that is well known within consumer circles and has
enabled the company to be a market leader in its area. The trademark has been held by
the company for 9 years. The legal life of the trademark is 5 years, but is renewable by
the company at little cost to it.
Required
Discuss how the company should determine the useful life of the trademark, noting in
particular what form of evidence it should collect to justify its selection of useful life.
1. Does the company have an asset beyond the 5 years:

- are there expected future benefits?
- Can the entity control those benefits [are they controlled by the government that
issues the licence? Compare with the employee who may leave]
- What is the past transaction given the renewal of the trademark for any subsequent
term has not yet been granted?
2. Evidence of control is the crucial element. In particular evidence relating to whether the
company controls the variables that determine renewal of the trademark. For example,
does renewal depend on the company meeting certain criteria which it can control, such as
having good business practices, or does it depend on the whim of a government
bureaucrat, which the entity cannot control.
3. Note para 90 of AASB 138:

Many factors are considered in determining the useful life of an intangible asset,
including:
a level;
the entity.

Question 11.7 Recognition of copyright

Whiting Ltd acquired two copyrights during 2016. One copyright related to a textbook
that was developed internally at a cost of $10 500. This book is estimated to have a
useful life of 5 years from 1 September 2016, the date it was published. The second
copyright was purchased from the King George University Press on 1 December 2016
for $12 000. This book which analyses aboriginal history in Western Australia prior to
2000 is considered to have an indefinite useful life.
Required
Discuss how these two copyrights should be reported in the statement of financial
position of Whiting Ltd at 30 June 2017.
Internally developed copyright

It is unlikely that any asset is recognised with this copyright. Being internally developed
no costs can be capitalised until all the criteria in para 57 are met. Also under para 63,
publishing titles can never be recognised as intangible assets.
Acquired intangible
This copyright will be recognised as an intangible asset.
In terms of recognition criteria, the probability recognition criterion is always met.
Further, the cost can usually be measured reliably.
Intangible assets are measured initially at cost.
In this case the asset will be measured at cost of $12,000.
Having an indefinite life there will be no amortisation charge per annum.

Question 11.8 Research and development

Salmon Ltd’s research and development section has come up with an idea for a project
on using cane toad poison for medicinal purposes. The board of directors of Salmon Ltd
believes that the project has promise and could lead to future profits for the company.
The project is, however, very expensive and needs approval from the board.
The company’s chief financial officer, Mr Pink, has expressed concern that the
profits of the company have not been strong in recent years and he does not want to see
research and development costs charged as expenses to the profit or loss. Mr Pink has
proposed that Salmon Ltd should hire an outside firm, Tuna Ltd, to undertake the
work and obtain the patent. Salmon Ltd could then acquire the patent from Tuna Ltd,
with no effect on the profit or loss of Salmon Ltd.
Required
Discuss whether Mr Pink’s proposal is a sound idea, particularly in relation to the effect
on the profit or loss of Salmon Ltd.
Mr Pink’s proposal is sound.
If Salmon Ltd undertakes the research and development of the patent for the medicine itself
then the accounting for the outlays will be based on AASB 138.
In particular, any outlays spent on research will be expensed as incurred, lowering the profit
for the period.
Any outlays classified as development can only be capitalised once the six tests in AASB
138:57 are met. Until this occurs, any development costs must be expensed, again reducing
profit.
If Salmon Ltd assigns the task to an outside company and pays for the work done then the in-
process research and eventually the patent can be recognised as an asset at cost. Provided the
asset can be reliably measured then an intangible asset can be recognised. There will be no
effect on the profit of the company until the asset is derecognised if failure to create a useful
product occurs, or if it is necessary to amortise the asset once successfully generated – also at
that stage the asset may be considered to have an indefinite life which means no amortisation
will be required.

Question 11.9 Recognition of brands

In its 2012 annual report (Note 17, p.16) Australian Pharmaceutical Industries (API)
Ltd provided the following information:
Brand names
In thousands of AUD 31 August 2012 31 August 2011
Australian pharmaceutical distribution
— Soul Pattinson brand name 37 500 37 500
Australian retailing
— Priceline brand name 61 500 61 500
99 000 99 000
The valuation of Soul Pattinson (SP) brand has been completed as part of Australian Pharmacy
Distribution CGU as predominant economic benefits of the SP brand have been realised in
Pharmacy Distribution business. Additionally, the cash flows derived from the SP brand cannot
be separated from the cash flows derived from the wholesale distribution business and banner
group operations.
Required
Explain the recognition and measurement of the Soul Pattinson brand by API.
API has recognised the Soul Pattinson brand in its records.

In relation to brands, AASB 138 specifies:
 Internally generated brands cannot be recognised – para 63
Hence the Soul Pattinson brand must have been acquired either as a separate asset or as part
of a business combination.
If acquired as a single asset it would have been recognised at cost, being purchase price
plus incidental acquisition costs. The probability recognition criteria in AASB 138:21(a) is
always considered to be satisfied for separately acquired intangible assets – AASB 138:25.
Further, according to AASB 138:26, the cost of a separately acquired intangible asset can
usually be measured reliably.
If acquired as part of a business combination it would have been recognised at fair value.
No recognition criteria need be applied for assets acquired in a business combination
Once recognised the asset does not have to be revalued as the asset is initially recognised
at “cost” not as a part of adoption of the revaluation model.
Note that the brand has the same amount, namely $99m in both 2011 and 2012. Hence the
asset is not being amortised. The asset must then be presumed to have an indefinite life.
Hence the asset’s useful life would need to be reviewed every year, and an impairment test
conducted every year.
Note the last sentence in the quotation from the Annual Report: “the cash flows derived
from the SP brand cannot be separated from the cash flows derived from the wholesale
distribution business and banner group operations”. This statement is similar to that in para
64 of AASB 138 where it explains why internally generated brands cannot be recognised as
intangible assets – expenditure “cannot be distinguished from the cost of developing the
business as a whole”. For API, the company cannot distinguish the cash flows attributable to
the CGU that contains the brand from the cash flows of the brand. Hence the recoverable
amount of the brand is determined by observing the recoverable amount of the CGU.

Question 11.10 Acquired vs internally generated intangibles

In their article entitled ‘U.S. firms challenged to get “intangibles” on the books’ Byrnes
and Aubin (2011) noted that in the United States ‘intangible assets such as brands,
customer relationships, patents and other information technology are accounted for in
one if created in-house and another if acquired’. They noted the following comments
made concerning this accounting practice:
The different treatment means a patent that was developed by one company and
then sold to another can go from valued at next to nothing, to being worth
millions — or even billions — of dollars, almost overnight, said Esther Mills,
president of Accounting Policy Plus, a New York-based adviser specializing in
complex accounting issues. . .
The accounting difference could result in distorted behaviour, warns Abraham
Briloff, a professor emeritus of accountancy at Baruch College, tempting
companies to buy intellectual property rather than doing research themselves. . .
Robert Herz, former chairman of the US Financial Accounting Standards
Board, said in 2006 and 2007, when his group and the International Standards
Board consulted with investors, managers and auditors about what the two
standard setters should focus on, accounting for intangibles did not rank as highly
as did a number of other subjects.
Required
A. Explain the accounting for internally generated intangibles in AASB 138.
B. Discuss any differences between accounting for internally generated intangibles and
acquired intangibles in AASB 138.
C. Discuss why companies may be reluctant to press for changes in AASB 138 to
require more recognition of internally generated intangibles.
A. Where there is no related expenditure on the existence of an internally generated asset it

cannot be recognised as under AASB 138:24, intangible assets are initially measured
at cost.
Expenditure on the development of internally generated intangibles may be capitalised
dependent on whether the expenditure is classified as research or development.
Research is original and planned investigation with the prospect of new knowledge –
see AASB 138:56 for examples.
Development is the application of research findings - see AASB 138:59 for examples.
Research expenditure is expensed as incurred – AASB 138:54.
Development expenditure may be capitalised if all the six criteria in para 57 of AASB
138 are met.
AASB 138:63 states that certain internally generated intangibles such as brands and
mastheads “shall not” be recognised. This list does not include patents.
Note that “customer relationships” are mentioned in the beginning of the quoted article.
This should never be recognised as an intangible asset as it does not meet the definition
of an asset as the company has no control over that asset. Even it were regarded as an

asset it does not meet the criterion of identifiability – as it cannot be sold or exchanged
– in the definition of an intangible asset.
If recognised, internally generated intangibles must be amortised unless they have
indefinite lives.
B. It is easier to recognise intangibles when they are acquired in comparison to when they
are internally generated. For acquired intangibles there is a market transaction and the
acquired assets are measured at cost – measured at fair value for business combinations.
For assets acquired in a business combination fair values may be used compared with
having to determine a cost.
With acquired assets, the assets prohibited in para 63 for recognition as internally
generated intangibles, may be recognised.
Once recognised, all intangible assets are subsequently treated the same.
C. See section 11.2.7 of the text.
• Managers prefer to inflate future profits. Where major investments in research
and development are written off, this is a guarantee that future revenues and
earnings derived from these acquisitions will be reported unencumbered by the
major expense item, the amortisation of the intangible asset. The effects on ratios
such as rates of return on assets and equity are better in the future if write-offs
occur now rather than periodic amortisations later.
• Investors generally consider write-offs as one-time items, of no consequence for
valuation. A number of large hits is considered better than periodic amortisation.
Investors discount the effect of one-time write-offs and cheer the improved
profitability of subsequent years.
• Immediate expensing obviates the need to provide explanations in case of failure.
Writing off assets denotes failure, and managers prefer to avoid questions and
lawsuits. Further failure always attracts more attention than success.
• Cost and benefit. Accounting rules involve entities in incurring costs, such as
those for running analytical models, measuring fair values, and paying auditors to
review the measures.
• Lack of relevance of capitalised numbers. Is there a sufficient link between the
capitalised costs and the expected future benefits? For knowledge-based assets,
the measurement of the benefits may be impossible.

Question 11.11 Recognition of patents in a business acquisition

In their article ‘Motorola deal offers Google tax, patent benefits’ Browning and Byrnes
(2011) noted the following:
Google Inc’s blockbuster acquisition of Motorola Mobility Holdings Inc will bring
an unusual stable of tax and accounting benefits to the search-engine giant,
already one of Corporate America’s most savvy users of such perks. . .
By agreeing on August 15 to pay $12.5 billion in cash for struggling Motorola
Mobility’s vast portfolio of 17 000 patents and 7500 pending patent applications
on top of its handset business and television set-top boxes, Google is building a
defensive bulwark for its Android phone software, already available on Motorola
phones among others. . .
The acquisition further highlights the lack of transparency in accounting rules
on how intangibles such as patents, brand names and the like are valued and their
worth to investors.
Google has yet to announce the value it will give Motorola’s intangibles, but
experts agree it will be far more than what is currently on the cell phone maker’s
books. In a recent filing, Motorola Mobility reported an amortized value of $176
million for its intangible assets as of July 2, 2011.
Valuing patents may be more an art than a science.
Kevin Smithen, an analyst at Macquarie Capital, an investment firm in New
York, estimated the $12.5 billion purchase price represented a $4.5 billion value
for Motorola Mobility’s portfolio, $3.2 billion in cash the company holds, a $3
billion handset and TV set-top business, and $1.7 billion in net operating loss tax
benefits it has been unable to use.
Willens [a New York accounting and tax expert] estimated the $12.5 billion deal
will include $3 billion in goodwill, or the value Google expects to generate from
Motorola Mobility’s brand, know-how and other intangibles, not including the
patents.
Required
A.Outline the accounting for identifiable intangible assets at acquisition date when
there is a business combination.
B. Explain the difference in the accounting for patents by Google in comparison to that
of Motorola.
A. The assets are measured at cost which is also equal to their fair value at acquisition date.
Fair value is measured in accordance with AASB 13.
When assets are acquired as part of a business combination there are no recognition
criteria to be applied.
Provided they meet the definition of an asset, they must be recognised as separate assets.
AASB 138:33 states that the effect of probability of the existence of future economic
benefits is reflected in the measurement of the asset at fair value, hence any probability
recognition criteria is automatically met.
AASB 138:33 also states that the reliability of measurement recognition test is always
met as sufficient information is always available in a business combination to reliably
measure intangible assets.

B. Google will account for the patents as per A. above. In essence all patents will be
recognised and will be measured at fair value.
In contrast with Motorola, not all patents are recognised as assets and most likely will be
measured at cost rather than fair value.
If the patents were acquired by Motorola as separate assets, then they will be recognised
only if they meet the asset recognition tests. AASB 138:25 states that the probability
recognition test is always satisfied for separately acquired intangible assets. These assets
can usually be measured reliably. Hence some separately acquired asset may not have
been recognised by Motorola because they were not able to be measured reliably.
Further, if acquired as separate assets they would be measured initially at cost, being the
sum of the purchase price and directly attributable costs. Hence whereas Google will
measure these assets at fair value, Motorola will have measured them at cost.
If the patents had been internally generated by Motorola, in order to be recognised the
costs incurred would have had to meet all the six tests given in AASB 138:57. If these
tests were not met then no asset would have been recognised and the costs outlaid would
have been expensed.
Motorola may have applied the revaluation model subsequent to initial recognition,
meaning that Motorola may have measured some patents at fair value. This would not
have allowed Motorola to recognise any more assets as the assets have firstly to be
initially measured at cost before the revaluation model can be applied. However in order
to apply the revaluation model the fair value must be able to be measured by reference to
an active market – AASB 138:75. An active market is defined in AASB 13 as a market
in which transactions for an asset take place with sufficient frequency and volume to
provide pricing information on an ongoing basis.

Question 11.12 Recognition of intangibles in statements of financial

position
In the article ‘Why are intangibles not on the balance sheet?’ reported on 19 November
2010 at www.i-capitaladvisors.com, Mary Adams provided a number of reasons why
intangibles are not shown on balance sheets in the United States:
 Many intangibles are not owned by the company.
 The value of intangibles is closely linked with related assets.
 The dollar value of intangibles can be difficult to identify since there is no financial
transaction creating them.
Required
Discuss whether these reasons prevent intangibles from being recognised in Australia
under AASB 138.
Many intangibles are not owned by the company
The definition of an asset does not rely on ownership. Assets are recognised based on the
control of future economic benefits rather than ownership. Potentially Mary Adams was
considering such potential assets as good staff relationships, customer satisfaction and good
union-management relationships. These items would not be owned by a company. Also they
probably are not under the control of a company as well.
Even if there were some debate about an entity being able to control such items, these items
could never be recognised as an intangible asset because they fail the identifiability test. In
order to be identifiable an asset must be either:
- Separable ie capable of being separate or divided from an entity and sold, transferred,
licensed, rented or exchanged; or
- Arise from contractual or other legal rights regardless of whether those rights are
transferable or separable.
Hence ownership is not the issue. Control and identifiability are the key issues.
Note however that items such as good customer relationships may lead to the recognition of
goodwill in a business combination. Goodwill is probably neither controllable nor
identifiable.
The value of intangibles is closely linked with related assets
Expenditure by a company may benefit many parts of the company. For example, advertising
by Microsoft may have an effect on the trademarks of Microsoft Word, Excel, Outlook or
other aspects of the Microsoft brand. Potentially advertising expenditure cannot be linked to
specific intangible assets held by an entity.
The reason given for the para 63 exclusion on certain internally generated assets such as
brands, mastheads and publishing titles was that the standard-setters did not believe that the
costs associated with developing the listed assets can be distinguished from the cost of
developing the business as a whole.

The dollar value of intangibles can be difficult to identify since there is no financial
transaction creating them.
This may be the case in such companies as Apple and Microsoft where the level of computer
sophistication by the staff is what creates value for the company. As employees become more
skilled the value of the company increases but there is no financial transaction creating this
increase in value – except for salaries and training costs.
The value of brands such as Billabong and Roxy may become more valuable purely because
of teenage trends rather than any outlays by the companies involved.
Note that the initial measure of an intangible asset is at cost rather than value, except in a
business combination where the cost is considered to be the fair value. Measurement of cost
is generally more critical than measuring the dollar value.
Hence many intangibles are not recognised because the cost to create those intangibles cannot
be identified. With internally developed intangibles, this problem is recognised by the need to
meet the six para 57 criteria before any intangible development asset can be recognised.
With separately acquired intangibles, AASB 138:26 states that the cost can usually be
determined reliably.
With intangibles acquired in a business combination, AASB 138:33 argues that there will
always be sufficient information available to ensure that the fair value can always be reliably
measured.


Because of the low level of rainfall in Simonstown, householders find it difficult to keep
their gardens and lawns sufficiently watered. As a result, many householders have
installed bores that allow them to access underground water suitable for using on the
garden. This is a cheaper option than incurring excess water bills by using the
government-provided water system. One of the problems with much of the bore water is
that its heavy iron content leaves a brown stain on paths and garden edges. This can
make homes look unsightly and lower their value.
Noting this problem, Strand Laboratories believed that it should research the
problem with the goal of developing a filter system that could be attached to a bore and
remove the effects of the iron content in the water. This process, if developed, could be
patented and filters sold through local reticulation shops.
In 2011, Strand commenced its work on the problem, resulting in August 2015 in a
patent for the NoMoreIron filter process. Costs incurred in this process were as shown
below.
2011–12 Research conducted to develop filter $125 000
2012–13 Research conducted to develop filter 132 000
2013–14 Design and construction of prototype 152 000
2014–15 Testing of models 51 000
2015–16 Fees for preparing patent application 12 000
2016–17 Research to modify design 34 000
2017–18 Legal fees to protect patent against cheap copies 15 000
Required
Discuss how the company should account for each of these outlays.
The outlays must be analysed using para 57 of AASB 138:
Technical feasibility:
At the end of the 2014-15 period, the company has completed the testing of the models and
planned to prepare a patent application believing the product was technically feasible.
Intention to complete and sell:

The company always had the belief that the product would be saleable but it was not until the
product was tested and found to be feasible that the company could commence plans to sell.
Ability to use or sell:

Because of problems with the design, it had to be modified to make the product saleable and
lessen returns or warranty claims. This was completed at the end of the 2016-17 period.
Existence of a market:
The market was always open to such a product. However, the existence of a market requires the
product to be available at a price that customers would be prepared to pay. This may have been
part of the reason for modifying the design in the 2016-17 period.
Availability of resources:
The company was not short of resources to develop this product.
Ability to measure costs reliably:

Cost of the product was readily available after the modifications to the design in the 2016-17
period.

All costs incurred up to the end of the 2016-17 period must be expensed. The only costs available for
capitalisation are the $15 000 costs incurred in the 2017-18 period.


Stellenbosch Laboratories Ltd manufactures and distributes a wide range of general
pharmaceutical products. Selected audited data for the reporting period ended 31
December 2014 are as follows:
Gross profit $ 17 600 000

Profit before income tax 1 700 000
Income tax expense 500 000
Profit for the period 1 200 000
Total assets:
Current 7 300 000
Non-current 11 500 000
The company uses a standard mark-up on cost.

From your audit files, you ascertain that total research and development expenditure
for the year amounted to $4 700 000. This amount is substantially higher than in
previous years and has eroded the profitability of the company. Mr Bosch, the
company’s finance director, has asked for your firm’s advice on whether it is acceptable
accounting practice for the company to carry forward any of this expenditure to a
future accounting period.
Your audit files disclose that the main reason for the significant increase in research
and development costs was the introduction of a planned 5-year laboratory program to
attempt to find an antidote for the common cold. Salaries and identifiable equipment
costs associated with this program amounted to $2 350 000 for the current year.
The following additional items were included in research and development costs for
the year:
(a) Costs to test a new tamper-proof dispenser pack for the company’s major selling line
(20% of sales) of antibiotic capsules — $760 000. The new packs are to be introduced
in the 2015 financial year.
(b) Experimental costs to convert a line of headache powders to liquid form — $590 000.
The company hopes to phase out the powder form if the tests to convert to the
stronger and better handling liquid form prove successful.
(c) Quality control required by stringent company policy and by law on all items of
production for the year — $750 000.
(d) Costs of a time and motion study aimed at improving production efficiency by
redesigning plant layout of existing equipment — $50 000.
(e) Construction and testing of a new prototype machine for producing hypodermic
needles — $200 000. Testing has been successful to date and is nearing completion.
Hypodermic needles accounted for 1% of the company’s sales in the current year,
but it is expected that the company’s market share will increase following
introduction of this new machine.
Required
Respond to Mr Bosch’s question for each of these items.
The outlays must be analysed using para 57 of AASB 138:
Technical feasibility:
Intention to complete and sell:

Ability to use or sell:

Existence of a market:
Availability of resources:
Ability to measure costs reliably:
(a) Dispenser pack: As the dispenser pack was a new product, costs incurred until the pack
developed met the para 57 tests are expensed. In this case, determining the technical
feasibility of the pack and developing a cost effective product would have been two key
issues.
(b) Converting powders to liquid form: The tests have not yet proven successful, therefore the
technical feasibility test would not be met and the $590 000 must be expensed.
(c) Costs of quality control: These costs relate to products being produced and hence can be
capitalised into the products produced. No separate intangible such as “Superior Quality”
could be raised as such an asset is not identifiable.
(d) Costs of time and motion study: As the equipment is being used in current production, the
costs could be capitalised into the cost of the equipment.
(e) New prototype machine: This is a difficult one to classify. The question hinges on the
“nearing completion” statement. It is a question of what has yet to be done. Questions relating
to the para 57 criteria need to be asked. For example: has technical feasibility been
established, and is it only minor adjustments that are being made? Do any minor adjustments
have a material effect on the determination of the costs of the machine?


Ladysmith Ltd has recently diversified by taking over the operations of Kimberley Ltd
at a cost of $10 million. Kimberley Ltd manufactures and sells a cleaning cloth called
the ‘Supaswipe’, which was developed by Kimberley Ltd’s highly trained and
innovative research staff. The unique nature of the coating used on the ‘Supaswipe’ has
resulted in Kimberley Ltd acquiring a significant share of the South African market. A
recent expansion into the Equatorial African market has proved successful. As a result
of the takeover, Ladysmith Ltd acquired the following assets:
Fair value (at date of
acquisition)
Land and buildings $ 3 200 000
Production machinery 2 000 000
Inventory 1 800 000
Accounts receivable 700 000
$ 7 700 000
In addition to the above, Kimberley Ltd owned, but had not recognised, the following:
• trademark — ‘Supaswipe’
• patent — formula for the special coating.
The research staff of Kimberley Ltd have agreed to join the staff of Ladysmith Ltd
and will continue to work on a number of projects aimed at producing specialised
versions of the ‘Supaswipe’.
The directors have requested your assistance in accounting for the acquisition of
Kimberley Ltd. In particular, they are uncertain as to the treatment of the $2.3 million
discrepancy between the assets recorded by Kimberley Ltd and the price paid for the
company.
Required
Write to the directors outlining the alternative courses of action available in relation to
the $2.3 million discrepancy. Your reply should cover the issues of asset recognition,
measurement, classification and subsequent accounting treatment.
Asset recognition:
The trademark and the patent are intangible assets, meeting the definition in relation to identifiability
as the company has legal rights to both. As the assets are acquired as part of a business combination,
recognition of the assets comes under AASB 3, in particular paras 11-12 and AASB 138 para 33
which state that no recognition criteria need be applied. Provided the assets meet the definition of an
intangible asset, they must be recognise as separate assets based on their fair values at acquisition
date.,
Initial Measurement:
Measurement of the fair value of the assets is based on paras. 39-41 of AASB 138, and may be
determined by:
- quoted market prices in an active market – unlikely in this case;
- recent transactions: unlikely in this case; or
- measurement techniques, using valuers to measure the fair values of the assets.
As the worth of the trademark is related to the owner of the trademark also having the patent to be
able to use the formula for the special coating, it is doubtful whether the two assets can be separately
valued. However, the value of the trademark may relate to the customer awareness and appeal of the
current product in comparison to having to sell a new brand name.

Classification
The assets when recognised are classified as non-current intangible assets.
Subsequent measurement
Having initially recognised the assets, the company can choose to use the cost or the revaluation
models. However, use of the revaluation model is subject to their being an active market to determine
subsequent fair values of the assets.
Any subsequent outlays in relation to the assets are subject to the criteria in relation to para 57 of
AASB 138 prior to capitalisation of the outlays.
The useful lives of the assets need to be determined to see whether they need to be amortised. If an
asset has an indefinite life no amortisation is required. However, an annual impairment test in relation
to such an asset is necessary.
Other assets: goodwill

If the fair values of the patent and the trademark are less than the $2.3 million, then goodwill is
recognised. This is also subject to an impairment test annually, but is not required to be amortised. If
other intangible assets exist they should also be separated out of goodwill.

Question 11.16 Accounting for research and development
Read the following article from the website of the Australian Trade Commission.
Business spending on research and development hits A17.9 billion

Latest data from the Australian Bureau of statistics reveals business spending on
research and development (R&D) grew to $17.9 billion in 2010–11, an increase of seven
per cent over the previous financial year.
Businesses in the manufacturing industry registered the largest growth in R&D
expenditure, increasing by $499 million or 12 per cent over the past year.
Next best was the professional, scientific and technical services industry which recorded
increased spending by $140 million.
While all states and territories reported higher spending on R&D, the strongest growth
since 2009–10 was in Queensland (up $322 million), followed by Western Australia (up
$265 million), and New South wales (up $255 million).
The Minister for Industry and Innovation, Greg Combet, welcomed the ABS findings
that small firms with up to four employees had increased their R&D spending by 28 per
cent to more than $800 million.
Source: Austrade (2012).
Required
One of the small companies that has been increasing its expenditure on R&D has
contacted you. You are required to provide advice on how R&D expenditure should be
accounted for under AASB 138 (disregard any discussion on amortisation of
intangibles).
Accounting for research and development expenditure will depend on whether the R&D is
acquired as a separate asset, acquired as part of a business combination or whether the
company has spent money on developing its own intangible assets.
Separately acquired assets

If the company acquired in-process research from another company it would be recognised as
an asset if the cost could be reliably measured, which is usually the case – AASB 138:26.
There is no need to apply any probability recognition test – AASB 138:25.
Assets meeting the recognition tests are measured at cost, being the sum of purchase price
and directly attributable costs.
Assets acquired in a business combination

If R&D assets are acquired as part of a business combination there are no recognition tests to
be met. Provided the assets meet the definition of an asset they must be recognised as
separate assets.
The initial measurement of the asset is at cost, being its fair value at acquisition date – AASB
138:33.
Internally generated intangible assets

Where expenditure is made in relation to research and development, the expenditure must be
categorised into whether the expenditure was for research or for development. These terms
are defined in AASB 138:8.

Research is original and planned investigation undertaken with the prospect of gaining new
scientific or technical 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.
Expenditure on research activities is expensed when incurred: AASB 138:54
Expenditure on development is capitalised as an intangible asset if all the six criteria in

AASB 138:57 are met. If the criteria are not met the expenditure is expensed as incurred. If
the criteria are met, the amount to be capitalised is the expenditure incurred from the date
when the intangible asset first meets the para 57 tests. There can be no reinstatement of
amounts previously expensed.
AASB 138:63 provides an exclusion in relation to recognising some internally generated

assets even if the para 57 tests are met: Internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance shall not be recognised as intangible
assets.
Subsequent expenditure
AASB 138:20 discusses subsequent expenditure on intangible assets. In general it is expected
that subsequent expenditure will be expensed rather than capitalised as it generally maintains
currently recognised benefits rather than adds to them. Subsequent expenditure on para 63
assets is always expensed.
Note AASB 138:42 in relation to subsequent expenditures relating to acquired in-process
research and development expenditure. Effectively the same criteria for initially recognising
an asset and expensing are applied to account for subsequent expenditure, namely:
- Research outlays are expensed
- Development outlays are only capitalised in the para 57 criteria are all met, otherwise
they are expensed.

Question 11.17 Amortisation of intangibles

Read the following article from www.crikey.com.au.
With $5b of intangibles, will new Fairfax director wield the axe?
With its share price sliding to record lows, Fairfax Media is now in the invidious position
of having the most widely optimistic balance sheet of any ASX 200 company.
When its latest statutory earnings were released on February 23, page 9 revealed that the
dominant item on the balance sheet was $$5.1 billion worth of intangibles. Note 7 on page
20 of the interim report provided the following breakdown of those intangibles:
 Mastheads and trademarks: $3.21 billion
 Goodwill: $1.8 billion
 Radio licence: $121 million
 Software: $64.5 million
 Customer relationships: $9.5 million
Unfortunately, Australia’s accounting regulations don’t require any specific disclosure or
breakdowns within an asset class. . .
With newspapers in structural and precipitous decline courtesy of the internet, Fairfax
Media is now only capitalised at $1.53 billion, based on a share price of 65 cents.
So how on earth can the Fairfax directors along with the auditor, Douglas Bain from
Ernst & Young, continue to claim the company has net assets of $4.735 billion? The
discrepancy has now blown out to a record $3.2 billion. . .
For mine, it is pretty clear that Fairfax should clear the decks by writing down its
intangibles by at least $2 billion. . .
Source: Mayne, S (2012).
Required
A.Outline the accounting principles on amortisation of intangibles in AASB 138.
B. Discuss what actions should be taken by Fairfax.
A. The accounting principles for intangibles are much the same as those for PPE ie
allocation of the depreciable amount on a systematic basis over the useful life of the
asset.
Method of allocation
Any method that allocates benefits on a systematic basis is allowed. However with
intangibles, straight-line method is the default method where the pattern of receipt of benefits
cannot be reliably determined. This is not the case with PPE.
Useful life
IF the asset is considered to have an indefinite useful life no amortisation is required. If the
expected useful life is finite, depreciation must be charged. The determination of useful life
will require an analysis of a number of factors (as per AASB 138:90) such as expected
actions by competitors and the stability of the industry and changes in market demand. If an
indefinite useful life is selected for a patent, then an annual impairment test is required under
AASB 136 Impairment of Assets.
IF a finite useful life is determined, the depreciable amount of the asset will be written off
over the useful life on a systematic basis, with the method chosen reflecting the pattern in

which the expected benefits are expected to be consumed by the entity. Where the pattern of
flow of benefits cannot be determined reliably, the straight-line method must be used.
Further, the residual value is assumed to be zero, unless there is a commitment by a third
party to acquire the asset in the future or there exists an active market.
Useful life must be assessed as finite or indefinite. Note AASB 138: 90 in relation to
assessment of whether an indefinite useful life exists. Many factors are considered in
determining the useful life of an intangible asset, including:
a level;
the entity.
Residual Value
With intangibles with finite lives, residual value is assumed to be zero unless para 100 criteria
are met – existence of a commitment of a third party to acquire the asset at the end of the
useful life or there is an active market for the asset, and residual value can be determined by
reference to the market and it is probable that the market will exist at the end of the asset’s
useful life (AASB 138:100)
B. If the market capitalisation of Fairfax Media is only $1.53 billion and its assets exceed
that then the best action that should be undertaken by Fairfax is to conduct an
impairment test. The recoverable amount of the assets is potentially lower than the
carrying amount of the assets. There seem to be a number of external indicators namely
the existence of new markets such as competition from internet news with the lowered
demand for print media that would require an impairment test to be undertaken.
Subject to the impairment test the assets may be written down and new depreciation variables
such as useful lives determined.
With any intangibles that are being considered by Fairfax to have indefinite lives, there
should be an annual impairment test of those assets anyway.

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Solutions Manual

Company Accounting 10e

© John Wiley & Sons Australia, Ltd 2015

Chapter 11 – Intangible assets

1. What are the key characteristics of an intangible asset?

Para 8 of AASB 138 defines an intangible asset as:

An identifiable non-monetary asset without physical substance.

Key characteristics are:

2. Explain what is meant by ‘identifiability’.

Para 12 of AASB 138 states:

 Basic principle of allocation of the depreciable amount on a systematic basis over

© John Wiley and Sons Australia, Ltd 2015 11.1

4. Explain what is meant by an ‘active market’.

AASB 13, Appendix A, defines an active market as:

5. How is the useful life of an intangible asset determined?

6. What intangibles can never be recognised if internally generated? Why?

Para 64 gives the reason:

Expenditure on internally generated brands, mastheads, publishing titles, customer lists

© John Wiley and Sons Australia, Ltd 2015 11.2

7. Explain the difference between ‘research’ and ‘development’.

Para 8 contains the following definitions:

Para 56 gives examples of research activities:

(a) activities aimed at obtaining new knowledge;

Para 59 gives examples of development activities:

8. Explain when development outlays can be capitalised.

© John Wiley and Sons Australia, Ltd 2015 11.3

Para 24 states that an intangible asset must be initially measured at cost.

When internally generated cost is based upon capitalisation of development costs.

11. What are the recognition criteria for intangible assets?

An intangible asset shall be recognised if, and only if:

See section 9.2.7 of the text. Some reasons are:

1. Managers prefer to inflate future profits

© John Wiley and Sons Australia, Ltd 2015 11.4

Relevant paras are:

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CASE STUDY QUESTIONS

Case Study 1 Characteristics of intangible assets

David James (2001b) stated:

The Australian company Health Communications Network (HCN), for example,

The characteristics of intangibles should be discussed at 2 levels:

Ownership is not a characteristic of either tangible or intangible assets.

© John Wiley and Sons Australia, Ltd 2015 11.7

Case Study 2 Non-recognition of intangible assets

David James (2001b) stated:

Some intangibles that could be on the balance sheet are:

Could the brand name be valued separately from these assets?

© John Wiley and Sons Australia, Ltd 2015 11.8

Case Study 3 Non-amortisation of assets

Nick Tabakoff (1999) stated:

ASIC (Australian Securities and Investments Commission) may have plans to

The licences only last for 5 years.

© John Wiley and Sons Australia, Ltd 2015 11.9

Case Study 4 Amortisation of intangibles

Nick Tabakoff (1999) stated:

1. Amortisation: should intangibles be amortised?

AASB 138 allows non-amortisation under certain conditions.

2. Are acquisitive companies penalised under AASB 138?

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3. Do annual reports show economic reality?

4. Is there a need for a separate standard on intangibles?

© John Wiley and Sons Australia, Ltd 2015 11.11

Case Study 5 Human resource accounting