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STRUCTURE OF A STANDARD
IAS 38
PART 4
Intangible
Assets
IAS 36
Impairment of IFRS 3
Assets Business ✓SCOPE OF THE ✓ACCOUNTING
Combination STANDARD TREATMENT
✓ACCOUNTING ✓PRESENTATION
✓OBJECTIVES
CONCEPTS & DISCLOSURE

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✓IAS 36

IAS 36 - PROBLEMS ADDRESSED

- SCOPE OF THE STANDARD
- ACCOUNTING CONCEPTS

3 4

OBJECTIVES KEY DEFINITIONS

IAS 36 + Prudence principle: assets should not be carried over their ✓ Impairment loss: the amount by which the carrying amount of an asset
recoverable amount
+ Account for impairment loss as well as reversal of impairment loss or cash-generating unit exceeds its recoverable amount
✓ Carrying amount: the amount at which an asset is recognised in the
SCOPE OF THE STANDARD balance sheet after deducting accumulated depreciation and accumulated
IAS 36 applies to all tangible, intangible & financial assets impairment losses
✓ Recoverable amount: the higher of an asset's fair value less costs of
disposal (sometimes called net selling price) and its value in use
Inventories; assets arising from construction
✓ Fair value: the price that would be received to sell an asset or paid to
contracts, deferred tax assets…
transfer a liability in an orderly transaction between market participants
Assets arising under IAS 19 (Employee benefits) at the measurement date (see IFRS 13 Fair Value Measurement)

Financial assets within IAS 32 (Financial instruments) ✓ Value in use: the present value of the future cash flows expected to be
derived from an asset or cash-generating unit
NCA held for sale in IFRS 5 (NCA held for sale & ✓ A cash-generating unit is the smallest identifiable group of assets for
discontinued operation) which independent cash flows can be identified and measured

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INDICATIONS OF IMPAIRMENT
REVIEWING AND CHANGING
✓ External indicators of impairment: ✓ Internal indicators of USEFUL LIFE OR RESIDUAL VALUE
– A fall in the asset's market value that impairment: AFTER IMPAIRMENT
is more than is expected as a result of – Evidence of obsolescence or
passage of time or normal use. physical damage.
– A significant change in the
– Adverse changes in the use to
technological, market, legal or economic When an impairment loss is recognised,
which the asset is put, or the
environment of the business in which the
economic performance the asset's remaining useful life and residual value
assets are employed.
- An increase in market interest rates or should also be reviewed and revised if appropriate.
market rates of return on investments
likely to affect the discount rate used in Note:
calculating value in use Test for impairment annually even no indications
– The CA of the entity's net assets being (a) An intangible asset with an indefinite useful life
more than its market capitalisation. (b) Goodwill acquired in a business combination

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CARRYING Compared with RECOVERABLE

IMPAIRMENT LOSS
AMOUNT AMOUNT
CA of an asset exceeds
its recoverable amount, HIGHER OF
an impairment loss is
Fair value less and
said to have occurred. Value in use
costs to sell
the present value
CARRYING Compared with RECOVERABLE of the future cash
AMOUNT AMOUNT flows expected to
flow from the
asset.
Fair value less
and Value in use
costs to sell Impairment loss = carrying amount - recoverable amount

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CALCULATING AND ACCOUNTING FOR AN IMPAIRMENT LOSS

CALCULATION
£

✓IAS 36 Carrying amount of the asset

Less recoverable amount of the asset
X
(X)
- ACCOUNTING TREATMENTS Impairment loss X

ACCOUNTING FOR IMPAIRMENT LOSS

When an asset has suffered an impairment loss:
DR. Impairment expense (statement of profit or loss) £X
CR. Carrying amount of asset (statement of financial position) £X

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WORKED
Impairment and depreciation
EXAMPLEP p266 WORKED
A business purchased a building on 1 Jan 20X1 at a cost of £100,000; EXAMPLEP p266
20-year useful life, annual depreciation = £100,000/20 = £5,000 pa
At 31 Dec 20X5: Cost =100,000
Acc dep = 25,000
✓ The business should therefore reduce the carrying amount of the
→ Carrying amount at 31 Dec 20X5 = 75,000
building to £60,000 and charge the impairment loss of £15,000 to
✓ During 20X5, property prices fell sharply indicating that the building may be profit or loss.
impaired
✓ In 20X6, depreciation = £60,000 / 15 years = £4,000 per annum
✓ On 31 Dec 20X5, the business undertook an impairment review and determined:
- FV less disposal costs of £60,000 ✓ At 31 Dec 20X6, the carrying amount of the building would be:
Value in use of £50,000. Cost of the building in 1 Jan 20X6: £ 60,000
→ The recoverable amount £60,000. Accumulated depreciation at 31 Dec 20X6 (4,000)
- Impairment loss at 31 Dec 20X5: Carrying amount at 31 Dec 20X6 56,000
→ CA of the building at 31 Dec 20X5 75,000
Recoverable amount at 31 Dec 20X5 (60,000)
Impairment loss 15,000

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INTERACTIVE
INTERACTIVE
QUESTION 5 – p 267
QUESTION 5 – p 267

On 1 Jan 20X1 Tiger buys a NCA for £120,000, useful life of 20 years and no residual
value, straight line basis. On 31 Dec 20X3 the asset has a CA calculated as follows:
NCA at cost 120,000
Accumulated depreciation (3 x(£120,000/20)) (18,000)
CA 102,000
Requirements
Consider each of these alternatives separately.
(a) On 31 Dec 20X3, the remaining useful life is revised to 15 years from that date.
Calculate the revised annual depreciation charge commencing in 20X4.
(b) On 31 Dec 20X3 the remaining useful life is revised to 10 years from that date. An
impairment review has been carried out which shows that the fair value less costs of
disposal are £80,000 and the value in use is £95,000 as at 31 Dec 20X3.
Show how the impairment loss would be recorded in the FS for the year
ended 31 Dec 20X3 and calculate the revised annual depreciation charge
commencing in 20X4.

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✓IAS 36
CASH- GENERATING UNIT

When it is not possible to calculate

the recoverable amount of a single
✓IAS 36 asset, then that of its cash-
CASH- GENERATING UNIT generating unit should be measured
instead

A cash-generating unit is the smallest identifiable

group of assets for which independent cash flows can
be identified and measured.

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A cash-generating unit is the smallest identifiable

group of assets for which independent cash flows can
be identified and measured.

✓IAS 36
CASH- GENERATING UNIT
Nhóm nhỏ nhất có thể xác định của các
tài sản tạo ra dòng tiền vào và gần như
độc lập với dòng tiền vào từ các tài sản
hoặc nhóm tài sản khác
ACCOUNTING TREATMENTS

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ACCOUNTING TREATMENTS ACCOUNTING TREATMENTS

Recoverable amount < carrying amount • Review impaired assets each year if indications of
– further impairment
– impairment reversal
→ means that impairment has occurred
• Reversals of impairment losses
→Journal entry: • Only reverse if original factors of impairment no longer
apply
Dr Profit or loss
• Credit to profit or loss if original impairment was expensed
(or Dr Revaluation surplus of impaired asset) there
Cr Asset Cannot reverse impairment of goodwill
With the difference in amounts (impairment loss) Cannot increase carrying amount to more than
depreciated cost if impairment had not occurred

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IAS 36 - DISCLOSURES
✓Disclosure by class of assets: [IAS 36.para126]
✓impairment losses recognised in profit or loss
✓ impairment losses reversed in profit or loss
✓IAS 36 ✓ which line item(s) of the statement of comprehensive
income
PRESENTATION & DISCLOSURES ✓ impairment losses on revalued assets recognised in other
comprehensive income
✓ impairment losses on revalued assets reversed in other
comprehensive income
✓Disclosure by reportable segment: [IAS 36.para 129]
✓impairment losses recognised
✓ impairment losses reversed
✓Other disclosures
Source: https://www.iasplus.com/en/standards/ias/ias36

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QB 41 (p14) – 2020
q50 – old book QB 39 (p13) – 2020
q47 – old book
IAS 36 Impairment of Assets suggests how indications of impairment
might be recognised. Complete the statement using the options provided
Which TWO of the following would be external indicators that one or more The RECOVERABLE AMOUNT of an asset is the
of an entity's assets may be impaired? higher of: (1)……………….and (2)……………….
A. An unusually significant fall in the market value of one or more assets A. Fair value
B. Evidence of obsolescence of one or more assets B. Fair value less costs of disposal
C. A decline in the economic performance of one or more assets C. Market value
D. An increase in market interest rates used to calculate value in use of the D. Value in use
assets

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QB 40 (p13) – 2020 QB 42 (p14) – 2020

q49 – old book q51 – old book

✓ A machine has a carrying amount of $85,000 at the year end of 31 The following information relates to an item of plant owed by Bazaar Co:
March 20X9. Its market value is $78,000 and costs of disposal are (i) Its carrying amount in the statement of the financial position is $3
estimated at $2,500. A new machine would cost $150,000. million.
✓ The company which owns the machine expects it to produce net cash (ii)The company has received an offer of $2.7 million from a company in
flows of $30,000 per annum for the next three years. Japan interested in buying the plant.
✓ The company has a cost of capital of 8%. (iii) The present value of the estimated cash flows from continued use of
What is the impairment loss on the machine to be recognised in the the plant is $2.6 million.
financial statements at 31 March 20X9? (iv) The estimated cost of shipping the plant to Japan is $50,000.
A. $7,687 What is the amount of the impairment loss that should be recognised on
B. $9,500 the plant?
C. $1,667 ..........$
D. $2,200

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QB 44 (p14) – 2020
q53 – old book QB 46 (p15) – 2020
q55 – old book
✓ Riley acquired a non-current asset on 1 October 20W9 (10 years before 20X9)
at a cost of $100,000 which had a useful life of 10 years and a nil residual
Which of the following is NOT an indicator of impairment under IAS 36
value. The asset had been correctly depreciated up to 30 September 20X4. At
Impairment of Assets?
that date the asset was damaged and an impairment review was performed.
A. Advances in the technological environment in which an asset is
✓ On 30 September 20X4, the FV of the asset less costs of disposal was $30,000
employed have an adverse impact on its future use
and the expected future cash flows were $8,500 per annum for the next 5
B. An increase in interest rates which increases the discount rate an
years.
entity uses
✓ The current cost of capital is 10% and a five-year annuity of $1 per annum at
10% would have a present value of $3.79.
C. The carrying amount of an entity's net assets is lower than the

What amount would be charged to profit or loss for the impairment of this asset entity's number of shares in issue multiplied by its share price
for the year ended 30 September 20X4? D. The estimated net realisable value of inventory has been reduced due
A $17,785 to fire damage although this value is greater than its carrying amount
B $20,000
C $30,000
D $32,215

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QB 38 (p13) – 2020 QB 43 (p15) – 2020

q47 – old book q52 – old book

A cash-generating unit comprises the following assets: A business which comprises a single cash-generating unit has the following assets.
$'000 $m
Goodwill 3
Building 700
Patent 5
Plant and equipment 200
Property 10
Goodwill 90
Plant and equipment 15
Current assets 20 Net current assets 2
1,010 35
One of the machines, carried at $40,000, is damaged and will have to be Following an impairment review it is estimated that the value of the patent is $2
scrapped. The recoverable amount of the cash-generating unit is estimated million and the recoverable amount of the business is $24 million.
at $750,000. At what amount should the property be measured following the impairment
What will be the carrying amount of the building when the impairment review?
loss has been recognised? (to the nearest $'000) A. $8 million
A. $597,000 B. $10 million
B. $577,000 C. $7 million
C. $594,000 D. $5 million
D. $548,000

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STRUCTURE OF A STANDARD

IAS 38
✓PROBLEMS ADDRESSED
✓SCOPE OF THE STANDARD
✓ACCOUNTING CONCEPTS
✓ACCOUNTING TREATMENT
✓PRESENTATION & DISCLOSURE

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IAS 38 PROBLEMS ADDRESSED

+ Outlines the accounting requirements for intangible assets
+ recognition criteria, subsequently measurement at cost or
revaluation model
+ and amortization (unless the asset has an indefinite useful

✓IAS 38
life, in which case it is not amortised).

SCOPE OF THE STANDARD

- PROBLEMS ADDRESSED IAS 38 applies to all intangibles

- SCOPE OF THE STANDARD EXCLUDE:

- ACCOUNTING CONCEPTS financial assets (IAS 32)

exploration and evaluation assets (IFRS 6)
expenditure on the development and extraction of minerals, oil, gas,
and similar resources
intangible assets arising from insurance contracts issued by
insurance companies
intangibles covered by another IFRSs, (tangibles held for sale
IFRS 5 , deferred tax assets (IAS 12 , lease assets (IAS 17), assets
arising from employee benefits (IAS 19) and goodwill (IFRS 3)

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AN INTANGIBLE ASSET
is an identifiable non-monetary asset without EXCHANGES OF ASSETS
physical substance.
The asset must be:
(a) Controlled by the entity as a result of If one intangible asset is exchanged for another,
events in the past the cost of the intangible asset is measured at fair
(b) Something from which the entity expects value unless:
future economic benefits to flow (a) The exchange transaction lacks commercial
substance, or
(b) The fair value of neither the asset received
(a) It is probable that the future economic nor the asset given up can be measured
benefits that are attributable to the asset reliably.
will flow to the entity. Otherwise, its cost is measured at the carrying
(b) The cost can be measured reliably amount of the asset given up.

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IAS 38 - Research and development costs

RESEARCH COSTS
• Research activities by definition do not meet the criteria for recognition under IAS
38. This is because, at the research stage of a project, it cannot be certain that
future economic benefits will probably flow to the entity from the project. There is
Internally generated too much uncertainty about the likely success or otherwise of the project. Research
goodwill may not be costs should therefore be written off as an expense as they are incurred.
recognized as an asset Examples
3. The search for
1. Activities aimed alternatives for materials,
at obtaining new devices, products, processes,
knowledge
✓The standard deliberately prevents recognition of internally systems or services

generated goodwill because the initial amount recognized

for the asset must be its rather than its fair value. 2. The search for, 4.The formulation, design
evaluation and final evaluation and final selection of
✓In this stance, the cost can not be measured reliably (as it is selection of, possible alternatives for new or
internally developed) and is not permitted to be recognized applications of research improved materials, devices,
findings or other products, systems or services
under IAS 38 knowledge

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IAS 38 - Research and development costs IAS 38 - Research and development costs
DEVELOPMENT
COSTS
DEVELOPMENT

DEVELOPMENT COSTS may qualify for recognition as intangible assets provided that the
following strict criteria can be demonstrated.
(a) The technical feasibility of completing the intangible asset so that it will be
available for use or sale
• Examples of development costs include:
(b) Its intention to complete the intangible asset and use or sell it
(c) Its ability to use or sell the intangible asset (a) The design, construction and testing of pre-production or pre-use
(d) There will be future economic benefits for the entity. The entity should demonstrate prototypes and models
the existence of a market for the output of the intangible asset or the intangible
(b) The design of tools, jigs, moulds and dies involving new technology
asset itself or the usefulness of the intangible asset to the business
(e) The availability of technical, financial and other resources to complete the (c) The design, construction and operation of a pilot plant that is not of a
development and to use or sell the intangible asset scale economically feasible for commercial production
(f) Its ability to measure the expenditure attributable to the intangible asset during its
(d) The design, construction and testing of a chosen alternative for new
development
In contrast with research costs development costs are incurred at a later stage in a project, or improved materials, devices, products, processes, systems or
and the probability of success should be more apparent. services

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INTERNALLY GENERATED INTANGIBLE ASSET

EXAMPLE
COST: • Doug Co is developing a new production process.
+ initially be measured at cost, • During 20X3, expenditure incurred was $100,000, of which $90,000 was incurred
+ but subsequently at cost or at a revalued amount. before 1 Dec 20X3 and $10,000 between 1 Dec 20X3 and 31 Dec 20X3.
• Doug Co can demonstrate that, at 1 Dec 20X3, the production process met the
criteria for recognition as an intangible asset.
COST: • The recoverable amount of the know-how embodied in the process is estimated to
directly attributed or allocated be $50,000.
on a reasonable and consistent • Required How should the expenditure be treated?
basis to creating, producing or
preparing the asset for its ✓ At the end of 20X3, the production process is recognised as an
intended use. intangible asset at a cost of $10,000.
✓ This is the expenditure incurred since the date when the recognition
CONSIDERABLE COSTS criteria were met, that is 1 December 20X3.
If, as often happens, have already been recognised as expenses before ✓ The $90,000 expenditure incurred before 1 December 20X3 is
management could demonstrate that the criteria have been met, this earlier expensed, because the recognition criteria were not met.
expenditure should not be retrospectively recognised at a later date as It will never form part of the cost of the production process recognised
part of the cost of an intangible asset. in the statement of financial position.

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• All expenditure - not meet the criteria for recognition - should be

expensed
• Examples :
• Start up costs
• Advertising costs
•
•
Training costs
Business relocation costs
✓IAS 38
• Prepaid costs for services, for example advertising or marketing - ACCOUNTING TREATMENTS
costs for campaigns that have been prepared but not launched,
can still be recognised as a prepayment.

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Measurement of intangible assets MEASUREMENT Accounting

AFTER RECOGNITION policy
subsequent to initial recognition
REVALUATION
COST MODEL
MODEL

COST REVALUED AMOUNT

-
(accumulated amortisation -
(FV on revaluation date)

+ impairment losses) (subsequent amortisation

+ impairment losses)

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ACQUISITION

USE

(a) The fair value must be able to be measured reliably with reference DISPOSAL/RETIREMENT
to an active market in that type of asset. AMORTISATION ?
(b) The entire class of intangible assets of that type must be revalued at (a) Amortisation should start when the asset is available for use.
the same time (to prevent selective revaluations). (b) Amortisation should cease at the earlier of the date that the
(c) If an intangible asset in a class of revalued intangible assets cannot asset is classified as held for sale in accordance with IFRS 5
be revalued because there is no active market for this asset, the asset Non-current assets held for sale and discontinued operations
should be carried at its cost less any accumulated amortisation and and the date that the asset is derecognised.
impairment losses. (c) The amortisation method used should reflect the pattern in

(d) Revaluations should be made with such regularity that the carrying which the asset's future economic benefits are consumed. If such
a pattern cannot be predicted reliably, the straight-line method
amount does not differ from that which would be determined using fair
should be used.
value at the end of the reporting period.
(d) The amortisation charge for each period should normally be
recognised in profit or loss.

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FACTORS IN COMPUTING AMORTISATION INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES

An intangible asset with an indefinite useful life should not be amortised.

(IAS 36 requires that such an asset is tested for impairment at least

- =
annually.)

✓ The useful life of an intangible asset that is not

Residual Value Amount for amortisation being amortised should be reviewed each year
Initial Cost (Salvage Value) to determine whether it is still appropriate to
assess its useful life as indefinite.
Finite assets - assumed to be ✓ Reassessing the useful life of an intangible
zero (unless special cases) asset as finite rather than indefinite is an
Useful Life indicator that the asset may be impaired and
therefore it should be tested for impairment.

Periodic Amortisation

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It may be difficult to establish the useful life of

an intangible asset, and judgement will be 2.10 Disposals/retirements of intangible assets
needed. Required Consider how to determine the
useful life of a purchased brand name. ✓ An intangible asset should be eliminated from the SOFP
Answer when it is disposed of or when there is no further expected
Factors to consider would include the following. economic benefit from its future use.
(a) Legal protection of the brand name and the control of the entity over the (illegal)
use by others of the brand name (ie control over pirating) ✓ On disposal the gain or loss arising from the difference
(b) Age of the brand name between the net disposal proceeds and the carrying
(c) Status or position of the brand in its particular market
(d) Ability of the management of the entity to manage the brand name and to
amount of the asset should be taken to profit or loss as a
measure activities that support the brand name (eg advertising and PR activities) gain or loss on disposal (ie treated as income or expense).
(e) Stability and geographical spread of the market in which the branded products
are sold
(f) Pattern of benefits that the brand name is expected to generate over time
(g) Intention of the entity to use and promote the brand name over time (as
evidenced perhaps by a business plan in which there will be substantial
expenditure to promote the brand name)

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BUSINESS
COMBINATION

IFRS 3 ✓ A transaction or other event in which an acquirer obtains

control of one or more businesses.
✓ Transactions sometimes referred to as 'true mergers' or
'mergers of equals' are also business combinations as that
term is used in

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OBJECTIVES
+ IFRS 3 (2008): enhance relevance, reliability and comparability about WHAT IS GOODWILL?
business combinations (e.g. acquisitions and mergers) and their effects.
IFRS 3 + The principles: recognition and measurement (acquired assets, liabilities,
goodwill and the necessary disclosures)
GOODWILL
created by good relationships between a business and its
SCOPE OF THE STANDARD
customers.
IFRS 3 must be applied when accounting for business combinations (a) By building up a reputation (by word of mouth
perhaps) for high quality products or high standards of
service
The formation of a joint venture
(b) By responding promptly and helpfully to queries and
The acquisition of an asset or group of assets that complaints from customers
is not a business (c) Through the personality of the staff and their attitudes
Combinations of entities or businesses under to customers The value of goodwill to a business might
common control be considerable.
Acquisitions by an investment entity of a subsidiary
…under IFRS 10 Consolidated Financial Statements.

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IFRS 3- GOOD WILL

✓ Goodwill
the difference between the purchase consideration and its own valuation of
the net assets acquired
✓ Two method of valuation
• The seller and buyer agree on aprice for the business without
specifically quantifying the goodwill. The purchased goodwill will
Under IFRS 3: then be the difference between the price agreed and the value of the
✓ Purchased goodwill arising on consolidation is identifiable net assets in the books of the new business
retained in the statement of financial position as • Calculation of goodwill to decide and negotiate the purchase price. Most
an intangible asset
of the ways are related to the profit record of the business in question.
✓ Must be reviewed annually for impairment.

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IFRS 3- GOOD WILL CHARACTERISTICS OF GOODWILL - EXAMPLE

1. What are the main characteristics of goodwill? (different with other intangibles)
✓ MEASUREMENT: 2. To what extent, these characteristics should affect the accounting treatment of goodwill?

• Initially at cost Goodwill may be distinguished from other intangible NCA:

• Subsequently at cost less any accumulated impairment losses. (a) It is incapable of realisation separately from the business as a whole.
• It is not amortised (b) Its value has no reliable or predictable relationship to any costs which may
have been incurred.
✓ NEGATIVE GOODWILL (c) Its value arises from various intangible factors such as skilled employees,
A gain on a bargain purchase effective advertising or a strategic location. These indirect factors cannot
• Excess of acquirer's interest in the net be valued.
fair value of acquiree's identifiable (d) The value of goodwill may fluctuate widely according to internal and
external circumstances over relatively short periods of time.
assets, liabilities and contingent
(e) The assessment of the value of goodwill is highly subjective. It could be
liabilities over cost
argued that, because goodwill is so different from other intangible non-
• Recognised in profit or loss
current assets it does not make sense to account for it in the same way.
immediately (result from errors or Thus the capitalisation and amortisation treatment would not be acceptable.
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bargain) Goodwill is so difficult to value

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QUICK QUIZ
ANSWER QUICK QUIZ

1. Intangible assets can only be recognised in a company's accounts if:

a. It is probable that ……………………… will flow to the entity.
b. The cost can be ………………………..
2. What are the criteria which must be met before development expenditure can be deferred?
3. Start up costs must be expensed: True or False ?
4. Peggy buys Phil's business for $30,000. The business assets are a bar valued at $20,000,
inventories at $3,000 and receivables of $3,000. How much is goodwill valued at?
5. What method of accounting for goodwill arising on consolidation is required by IFRS 3?
6. How should negative goodwill be accounted for under IFRS 3?

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