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no history or evidence of exchange transactions for the asset, and any fair value estimates would be based on immeasurable variables.
If an intangible asset is acquired in exchange for another asset, then the acquired asset is measured at its fair value unless the exchange lacks commercial substance
or the fair value cannot be reliably measured, in which case the acquired asset should be measured at the carrying amount of the asset given up, where carrying amount
is equal to cost less accumulated depreciation and impairment losses. For impairment losses, reference should be made to IAS 36. In this context, any compensation
received for impairment or loss of an asset shall be included in the income statement.
Facts
CASE STUDY 1
Brilliant Inc. acquires copyrights to the original recordings of a famous singer. The agreement with the singer allows the company to record and rerecord
the singer for a period of five years. During the initial six-month period of the agreement, the singer is very sick and consequently cannot record. The
studio time that was blocked by the company had to be paid even during the period the singer could not sing. These costs were incurred by the company:
1. Legal cost of acquiring the copyrights: $10 million
2. Operational loss (studio time lost, etc.) during start-up period: $2 million
3. Massive advertising campaign to launch the artist: $1 million
Required
Which of the above items is a cost that is eligible for capitalization as an intangible asset?
Solution
1. The legal cost of acquiring the copyright can be capitalized.
2. “Operational costs” during the start-up period are not allowed to be capitalized.
3. A massive advertising campaign to launch the artist is not allowed to be capitalized.
INTERNALLY GENERATED INTANGIBLE ASSETS
With internally generated intangible assets, problems arise in identifying whether there is an identifiable asset that will generate future economic benefit and in
reliably determining its cost.
Goodwill
The Standard proscribes the recognition of internally generated goodwill as an asset. The rationale behind this is that any expenditure incurred does not result in an
asset that is an identifiable resource—it is not separable, nor does it arise from contractual or other legal rights—or that is controlled by the entity. In addition, any costs
incurred are unlikely to be specifically identifiable as generating the goodwill. The position that the difference between a valuation of a business and the carrying
amount of its individual assets and liabilities may be capitalized as goodwill falls down insofar as that difference cannot be categorized as the cost and therefore cannot
be recognized as an asset.
Other Internally Generated Intangible Assets
The Standard sets out rules for the recognition of other internally generated intangible assets and broadly defines such expenditures as research and development. It
proscribes the recognition of internally generated brands, mastheads, publishing titles, customer lists, and similar items, because expenditure thereon, like expenditure
on internally generated goodwill, cannot be distinguished from the cost of developing the business as a whole and is therefore not separately identifiable.
In order to determine whether an internally generated intangible asset qualifies for recognition, its generation is divided into a research phase and a development
phase. If the two phases cannot be distinguished, then the entire expenditure is classified as research.
Expenditure on research (or the research phase of an internal project) is to be written off as an expense as and when incurred, as it is not possible to demonstrate that
an asset exists that will generate future economic benefit. Examples include
• Activities aimed at obtaining new knowledge
• The search for, evaluation, and selection of applications of research findings or knowledge
• The search for alternatives for materials, devices, products, systems, or processes
• The formulation, design, evaluation, and selection of possible alternatives for new or improved materials, devices, products, systems, or processes
Development expenditure may be recognized as an intangible asset when, and only when, all of the following can be demonstrated:
• The technical feasibility of completing the asset so that it will be available for use or sale
• The intention to complete the asset and use or sell it
• The ability to use or sell the asset
• How the asset will generate probable future economic benefit, including demonstrating a market for the asset’s output, or for the asset itself, or the asset’s
usefulness
• The availability of sufficient technical, financial, and other resources to complete the development and to use or sell the asset
• The ability to reliably measure the expenditure attributable to the asset during its development