Question 4

Recognition & measurement of assets

1. R&D costs
Recognition
IAS 38 states intangible asset is to be recognized if, and only if, the following criteria are met:
It is probable that future economic benefits from the asset will flow to the entity
Cost of the asset can be reliably measured.
Research phase
IAS 38 states that all expenditure incurred at the research stage should be written off to the income
statement as an expense when incurred, and will never be capitalized as an intangible asset.

Development phase
Under IAS 38, an intangible asset arising from development must be capitalized if an entity can
demonstrate all of the following criteria:
the technical feasibility of completing the intangible asset (so that it will be available for
use or sale)
intention to complete and use or sell the asset
ability to use or sell the asset
existence of a market or, if to be used internally, the usefulness of the asset
availability of adequate technical, financial, and other resources to complete the asset
the cost of the asset can be measured reliably.

If any of the recognition criteria are NOT met then the expenditure must be charged to the income
statement as incurred. Note that if the recognition criteria have been met, capitalisation must take place.

Measurement
Development cost (Prefer this answer)
Treatment of capitalised development costs
Once development costs have been capitalised, the asset should be amortised in accordance with the
accruals concept over its finite life. Amortisation must only begin when commercial production has
commenced (hence matching the income and expenditure to the period in which it relates).

Each development project must be reviewed at the end of each accounting period to ensure that the
recognition criteria are still met. If the criteria are no longer met, then the previously capitalised costs
must be written off to the income statement immediately.

OR

Amortisation of Development Costs

The amount of development costs recognised as an asset should be amortised and recognised as an expense
on a systematic basis so as to reflect the pattern in which the related economic benefits are recognised.

Impairment of Development Costs

The development costs of a project should be written down to the extent that the unamortised
balance, taken together with further development costs, related production costs, and selling and
administrative costs directly incurred in marketing the product, is no longer probable of being
 recovered from the expected futureneconomic benefits. The unamortised balance of development
costs of a project should be written off as soon as any of the criteria in paragraph 17 for
recognition of development costs as an asset cease to be met. The amount of the write-down or
write-off should be recognised as an expense in the period in which the write-down or write-off
occurs.
The amount of development costs written down or written off should be written back when the
circumstances and events that led to the write-down or write-off cease to exist and there is
persuasive evidence that the new circumstances and events will persist for the foreseeable future.
The amount written back should be reduced by the amount that would have been recognised as
amortisation in accordance with paragraph 21 had the write-down or write-off not occurred. The
amount written back should be recognised as a reduction in the amount of development costs
recognised as an expense for the period.

2. Writing off intangibles assets such as goodwill and brand name

Brand name
A trademark is a symbol, design, or logo used in conjunction with a particular product or company. A trade
name is a brand name under which a product is sold or a company does business. Often trademarks and
trade names are extremely valuable to a company, but if they have been internally developed, they have no
recorded asset cost. However, when a business purchases such items from an external source, it records
them at cost and amortizes them over their finite useful life.

Goodwill
A goodwill account appears in the accounting records only if goodwill has been purchased. A company
cannot purchase goodwill by itself; it must buy an entire business or a part of a business to obtain the
accompanying intangible asset, goodwill. Specific reasons for a companys goodwill include a good
reputation, customer loyalty, superior product design, unrecorded intangible assets (because they were
developed internally), and superior human resources. The intangible asset goodwill is not amortized.
Goodwill is to be tested periodically for impairment. The amount of any goodwill impairment loss is to
be recognized in the income statement as a separate line before the subtotal income from continuing
operations (or similar caption). The goodwill account would be reduced by the same amount.

Goodwill is never amortized. Instead, management is responsible for valuing goodwill every year and to
determine if impairment is required. If the fair market value goes below historical cost (what goodwill
was purchased for), impairment must be recorded to bring it down to its fair market value. However,
an increase in the fair market value would not be accounted for in the financial statements.

3. Contingent asset
possible asset that arises from past events,
Whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.
Contingent assets should not be recognised but should be disclosed where an inflow of economic
benefits is probable. When the realisation of income is virtually certain, then the related asset is not a
contingent asset and its recognition is appropriate