Tangible and Intangible Assets: IAS 16, IAS 38

Tangible and Intangible
Assets
IAS 16, IAS 38
2011 KPMG AS, a Norwegian member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
What will you learn

By completing this module you
will be able to:
1) Explain the definitions of PPE

and intangible assets
2) Explain the initial recognition
and measurement of PPE
and intangible assets
3) Describe the criteria for
capitalising R&D costs
4) Explain the subsequent
measurement of PPE and
intangible assets
5) Evaluate the quality of
disclosures
PPE = property, plant and equipment

R&D = research and development
2
Agenda
Definitions
Initial recognition and measurement
Internally generated intangible assets
Subsequent measurement
Derecognition and compensation
Definitions
Controlled
by the entity
Expected future
economic benefits
Held for
production, rental,
administrative use
Expected to be
used > 1 period
Identifiable asset
without physical
substance
A question for you: Definition (1)
Lila-Clean uses clean-bods (PPE) as an integral part of their business

Lila-Clean keeps a full suite of robot parts as spare parts
The smaller parts are used up within about 6 months, but the more major
parts are used as temporary parts in clean-bods and can last for up to 5
years
Are the spare parts PPE?
What is identifiable?
Arises from contractual / other legal rights
or
Is separable
Lila-Harvest has an exclusive right to harvest slime-trees from the forests of

Planet Lila
The licence was granted for an initial period of 10 years by the Planet Lila
Council
The licence is specific to Lila-Harvest and cannot be sold to another forest
operator
Is the licence an intangible asset?
What is control?
Power to obtain future economic benefits
&
Restrict access of others to benefits
Lila-Pharma has:
Customised software that runs its DNA Replicator that produces botanical
pharmaceuticals
Skilled engineers that mix the potions used in the DNA Replicator; engineers
have a 1-month notice period but most have been at the company since
colonisation
An 80% share of the market for inter-galactic pharmaceuticals
Which of the above are intangible assets?
Agenda
Definitions
10
Recognition
Probable future
economic benefits
Cost can be
measured reliably
11
Three ways to acquire
Acquire
separately
Recognise asset
Acquire in a
business
combination
Recognise asset
Develop
internally
Further tests for intangible assets
12
Measurement at cost
Expenditure directly attributable to bringing asset to

location and condition necessary for intended use
13
Examples of costs
Import duties
Dismantling and
removal costs
Borrowing costs on
qualifying asset
Part of cost
Feasibility
assessment costs
Costs of staff
training
Administration and
overhead costs
Not part of cost
14
A question for you: Initial measurement
Lila-Pharma has just bought a new particle accelerator to use in its new
cloning line Double-Fun
The particle accelerator was manufactured on Earth and will have to be
transported to Planet Lila by space-boat
The transport costs are L$ 80,000
A party is planned to celebrate the launch of
Double-Fun, at an estimated cost of L$ 20,000
Can the transport costs and launch party costs be capitalised as part of
the asset?
15
Agenda
Definitions
16
Research vs development
Research
Development
Original and planned

investigation
Application of
research findings
Expensed as incurred
Capitalised if certain
criteria met
17
Development costs capitalised when
Technical feasibility established

Intention to complete and use or sell
Ability to use or sell
How economic benefits will be generated
Availability of adequate technical, financial, other resources
Ability to measure expenditure reliably
18
A question for you: R&D
Lila-Innovation is developing a new bedtime drink that will wake humans up

at a certain time each morning without the need for an alarm
The primary market for Wake-Me is Earth, where 9 to 5 working hours are
still common
Lila-Innovation is very confident about the product, but is seeking US FDA
approval, which is a rigorous process
Can Lila-Innovation start capitalising development costs prior to FDA
approval?
FDA = Food and Drug Administration

19
Additional restrictions
Internally generated
goodwill
Expenditure on
brands etc
Start-up costs
Not recognised as internally generated intangible assets
20
Agenda
Definitions
21
Principles of depreciation / amortisation
Systematic allocation of cost to

profit or loss over useful life
Changes are changes in estimates
Amount determined after

deducting residual value
Review of key assumptions at

least each reporting date
22
Useful lives
Will be finite
Might be
indefinite
23
Factors in assessing useful life
Expected usage, life cycles,

obsolescence, industry
Periods of control and legal limits
Contractual terms and renewal periods
24
A question for you: Useful life
Lila-Harvest has an exclusive right to harvest slime-trees from the forests of

Planet Lila
The licence was granted for an initial period of 10 years by the Planet Lila
Council, but can be renewed after 10 years
The renewal process is not competitive and Lila-Harvest is confident of
renewal
Can the amortisation period be longer than 10 years?
25
Indefinite-lived intangible assets
No foreseeable limit on
period of cash inflows
Planned future expenditure other than to

maintain standard is not included
Indefinite does not mean infinite
26
Methods of depreciation / amortisation
Depreciation examples
Amortisation examples
Straight-line
Straight-line
Reducing balance
Reducing balance
Unit-of-production
Unit-of-production
Revenue-based
27
A question for you: Depreciation
Lila-Cosmetics has a newly acquired DNA Replicator:

Date of acquisition: 1 January Year 1
Initial carrying amount: L$ 31 million
Estimated useful life: 10 years
Price of a new machine at the end of Year 2:
L$ 33 million
Price of a 10-year old machine at the end of Year 2:
L$ 1 million
Is Lila-Cosmetics required to recognise depreciation in Year 2?
28
Component accounting
Item consists of individual

components
Components can be physical

(parts) or non-physical (e.g.
overhaul costs)
Depreciation method / useful life

different for each component
Components significant in relation

to total cost of item
29
Measurement model
Cost model or revaluation model
Some conditions
Severe
restrictions
30
Cost vs revaluation model
Cost model
Revaluation model
Cost less:
Revalued amount less:
Depreciation / amortisation
Depreciation / amortisation
Impairment losses
Impairment losses
31
Revaluation model restrictions
Revalue by class
Revalue by class
Keep up to date
Need an active market
32
Active market
Items traded are homogenous
&
Willing buyers / sellers normally

can be found at any time
&
Prices available to the public
33
Revaluation of PPE
All assets in the class at the same time
Gain or loss on an asset-by-asset basis
Gains generally recognised in OCI
OCI = other comprehensive income

34
Agenda
Definitions
35
Derecognition
Gain or loss in profit or loss
Derecognise
Held for sale

or
Disposed of
or
Permanent withdrawal
36
Compensation
Compensation
Separate events
Recognised when
receivable
Loss or impairment
recognised separately
37
Some differences compared to NGAAP
Different practise for component accounting

Accounting for change in estimates, under NGAAP can choose to take the
effect in the year the estimate is changed
Revaluation model not allowed under NGAAP
Development costs may be expensed as incurred under NGAAP
Insurance settlement NGAAP allows in certain situation that the net effect is
recognized
IFRS has standards for different types of assets NGAAP relies on the
general accounting principles in RL
38
Thank You!

Tangible and Intangible Assets: IAS 16, IAS 38

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Tangible and Intangible

What will you learn

1) Explain the definitions of PPE

PPE = property, plant and equipment

A question for you: Definition (1)

Lila-Clean uses clean-bods (PPE) as an integral part of their business

Arises from contractual / other legal rights

A question for you: Definition (2)

Lila-Harvest has an exclusive right to harvest slime-trees from the forests of

Power to obtain future economic benefits

Restrict access of others to benefits

A question for you: Definition (3)

Three ways to acquire

Further tests for intangible assets

Expenditure directly attributable to bringing asset to

Not part of cost

A question for you: Initial measurement

Original and planned

Development costs capitalised when

Technical feasibility established

A question for you: R&D

Lila-Innovation is developing a new bedtime drink that will wake humans up

FDA = Food and Drug Administration

Not recognised as internally generated intangible assets

Principles of depreciation / amortisation

Systematic allocation of cost to

Changes are changes in estimates

Amount determined after

Review of key assumptions at

Factors in assessing useful life

Expected usage, life cycles,

Periods of control and legal limits

Contractual terms and renewal periods

A question for you: Useful life

Lila-Harvest has an exclusive right to harvest slime-trees from the forests of

Indefinite-lived intangible assets

Planned future expenditure other than to

Indefinite does not mean infinite

Methods of depreciation / amortisation

A question for you: Depreciation

Lila-Cosmetics has a newly acquired DNA Replicator:

Item consists of individual

Components can be physical

Depreciation method / useful life

Components significant in relation

Cost model or revaluation model

Cost vs revaluation model

Revalued amount less:

Revaluation model restrictions

Need an active market

Items traded are homogenous

Willing buyers / sellers normally

Prices available to the public

All assets in the class at the same time

Gain or loss on an asset-by-asset basis

Gains generally recognised in OCI

OCI = other comprehensive income

Gain or loss in profit or loss

Held for sale

Some differences compared to NGAAP

Different practise for component accounting

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