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• These costs can be measured reliably.
Costs that should be expensed because they do not meet the criteria under IAS 38 include items 1., 3., and 4. Item 9. is a case of an internally generated
intangible asset that can be capitalized only provided it meets the development criterion. The main issue with item 11. is that the entity does not have
“control” over its workforce. Despite the obvious benefit of item (l) to the business, such expenditure on advertisement does not meet the criterion of
“control.”
WEB SITE DEVELOPMENT COSTS
The advent of the Internet has created new ways of performing tasks that were unknown in the past. Most entities have their own Web site that serves as an
introduction of the entity and its products and services to the world at large. A Web site has many of the characteristics of both tangible and intangible assets. With
virtually every entity incurring costs on setting up its own Web site, there was a real need to examine this issue from an accounting perspective. An interpretation was
issued that addressed Web site costs: SIC 32, Intangible Assets—Web site Costs.
SIC 32 lays down guidance on the treatment of Web site costs consistent with the criteria for capitalization of costs established by IAS 38. According to SIC 32, a
Web site that has been developed for the purposes of promoting and advertising an entity’s products and services does not meet the criteria for capitalization of costs
under IAS 38. Thus costs incurred in setting up such a Web site should be expensed.
MEASUREMENT AFTER RECOGNITION
The Standard states that, after recognition, intangible assets may be measured using either a cost model or a revaluation model. However, if the revaluation model is
used, then all assets in the same class are to be treated alike unless there is no active market for those assets.
“Classes of intangible assets” refers to groupings of similar items, such as patents and trademarks, concession rights, or brands. Assets in each class must be treated
alike in order to avoid mixes of costs and values.
If the cost model is selected, then after initial recognition, an intangible asset shall be carried at cost less accumulated amortization and impairment losses.
If the revaluation model is selected, the intangible asset shall be carried at its fair value less subsequent accumulated amortization and impairment losses. Fair values
are to be determined from an active market and are to be reassessed with regularity sufficient to ensure that, at the end of the reporting period, the carrying amount does
not differ materially from its fair value.
PRACTICAL INSIGHT
Revaluations are to be determined only by reference to an active market. Use of valuation models and other techniques is not permitted. In this respect, an
active market is one in which the items traded are homogeneous, willing buyers and sellers can be found at any time, and prices are available to the public.
Therefore, in most instances, the revaluation model will not be a realistically usable model. Brands, trademarks, film titles, and the like are all individually
unique and therefore fail on the homogeneity criterion.
If the revaluation model is used, at the date of the revaluation, accumulated amortization and impairment losses are either eliminated against the cost and then the net
amount is uplifted to the revalued amount or are restated proportionately to the restatement of the gross carrying amount such that the net amount is equal to the fair
value.
Facts
CASE STUDY 4
Active Asset Inc. owns a freely transferable taxi operator’s license, which it acquired on January 1, 20X1, at an initial cost of $10,000. The useful life of
the license is five years (based on the date it is valid for). The entity uses the straight-line method to amortize the intangible.
Such licenses are frequently traded either between existing operators or with aspiring operators. At the balance sheet date, on December 31, 20X2, due to a
government-permitted increase in fixed taxi fares, the traded values of such a license was $12,000. The accumulated amortization on December 31, 20X2,
amounted to $4,000.
Required
What journal entries are required at December 31, 20X2, to reflect the increase/decrease in carrying value (cost or revalued amount less accumulated
depreciation) on the revaluation of the operating license based on the traded values of similar license? Also, what would be the resultant carrying value of
the intangible asset after the revaluation?