What is meant be the term “intangible asset? ” Intangible assets are defined as identifiable non-monetary assets that cannot not be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today’s marketplace.
Intangible assets have 3 critical attributes which are: •Indetifiability. This means that they must be capable of being separated from the rest of the company and can be sold, licensed, rented or exchanged either individually or together with a related item or the intangible asset must be identifiable because it arises from contractual or legal rights even if those rights are not separable from the business. •Control.
Intangible asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) •Future economic benefits. Intangible asset is a resource from which future economic benefits (inflow of cash or other assets) are expected. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations.
However, if a company enters a legal agreement to operate under another company’s patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite assets. Accounting Requirements of IAS 38 Intangible Assets for Brands The objective of this Standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another Standard. This Standard requires an entity to recognise an intangible asset if, and only if, specified criteria are met.
The Standard also specifies how to measure the carrying amount of intangible assets and requires specified disclosures about intangible assets. Recognition and measurement The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets: (a) the definition of an intangible asset; and (b) the recognition criteria. This requirement applies to costs incurred initially to acquire or internally generate an intangible asset and those incurred subsequently to add to, replace part of, or service it.
An asset meets the identifiability criterion in the definition of an intangible asset when it: (a) is separable, it 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. 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. An intangible asset shall be measured initially at cost. Definition- brands: Intangible assets such as a product or company name, sign, symbol, or design that if operated in combination will lead to greater economic benefits from the manufacture and/or sale of a product or service through brand differentiation.
From above the definition of brands, we can see brands should recognise as an intangible asset because they meet the definition of intangible asset and the recognition criteria. Separately Acquired Intangible Assets The cost of a separately acquired intangible asset comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and (b) any directly attributable cost of preparing the asset for its intended use.
In accordance with IFRS 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of that intangible asset is its fair value at the acquisition date. The only circumstances in which it might not be possible to measure reliably the fair value of an intangible asset acquired in a business combination are when the intangible asset arises from legal or other contractual rights and either: (a) is not separable; or b) is separable, but there is no history or evidence of exchange transactions for the same or similar assets, and otherwise estimating fair value would be dependent on immeasurable variables. Just like the above requirements for separately acquired intangible assets, brands that were acquired separately from any other assets should initially be recognised at Cost. Internally generated intangible assets Internally generated goodwill shall not be recognised as an asset.
No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred. An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: (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 bility to measure reliably the expenditure attributable to the intangible asset during its development. Internally generated brands should treat it in the same way which shall not be recognised as intangible assets based on above statements. Measurement after recognition An entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets.
Cost model: After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortisation and any accumulated impairment losses. Revaluation model: After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated 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. Intangible assets with indefinite useful lives An intangible asset with an indefinite useful life shall not be amortised. In accordance with IAS 36 Impairment of Assets, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount (a) annually, and (b) whenever there is an indication that the intangible asset may be impaired.
The useful life of an intangible asset that is not being amortised shall be reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life assessment from indefinite to finite shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Brands are regarded as having indefinite useful economic lives and should not be amortised. Brands are protected in all of the major markets where they are sold by trademarks, which are renewable indefinitely. There are not believed to be any legal, regulatory or contractual provisions that limit the useful lives of these brands. So brands should be tested for impairment each year and reviewed each period to determine whether events and circumstances change.