ACCA Applied Knowledge · Financial Accounting

Intangible non-current assets and amortisation: formula sheet

Full chapter guide

Key formulas

Definition of an intangible asset: Identifiable + non-monetary + no physical substance; All three parts are needed. Receivables fail the non-monetary test.
Recognition criteria (IAS 38): Definition met + future economic benefits probable + cost measured reliably; The definition includes identifiability, control and future economic benefits. If any test fails, expense the cost.
Purchased goodwill: Goodwill = consideration paid − fair value of net identifiable assets acquired; Recognised only on acquisition of a business. Never recognise internally generated goodwill.
Initial measurement of a separately acquired intangible: Cost = purchase price + import duties and non-refundable taxes + directly attributable costs − trade discounts; Costs of staff training and general overheads are excluded.
Items never capitalised if internally generated: Brands, mastheads, publishing titles, customer lists, goodwill; These are expensed even if the business believes they have value.
Research expenditure: Research costs → expense in profit or loss when incurred; No exceptions. Never capitalise research.
Development expenditure: Development costs → capitalise only if ALL criteria are met; otherwise expense; Capitalise only costs incurred from the date the criteria are first met.
Recognition criteria (PIRATE): Probable benefits, Intention, Resources, Ability to use or sell, Technical feasibility, Expenditure measurable; All six must be demonstrated. One failure means expense.
Amortisation: Annual amortisation = Capitalised cost ÷ Useful life (straight-line); Start when commercial production begins, not when the project starts. Prorate for part years.
Carrying amount: Carrying amount = Cost − Accumulated amortisation − Impairment; This is the figure shown in the statement of financial position.
Internally generated brands and similar items: Internally generated brands, mastheads, customer lists → not recognised; They cannot be distinguished from the cost of developing the business as a whole.
Straight-line amortisation: Annual charge = (Cost − Residual value) ÷ Useful life in years; Residual value is usually zero for intangibles, so this is often Cost ÷ Life.
Part-year charge: Charge = Annual charge × Months in use ÷ 12; Use the policy stated in the question. Amortisation starts when the asset is available for use.
Carrying amount: Carrying amount = Cost − Accumulated amortisation; This is the figure shown in non-current assets.
Amortisation journal: Dr Amortisation expense (profit or loss); Cr Accumulated amortisation; Post this each year. The expense account is closed to profit or loss.
Reducing balance (if specified): Charge = Opening carrying amount × Rate %; Only use it if the question says so.
Purchased goodwill: Goodwill = Consideration paid − Fair value of identifiable net assets acquired; Net assets means identifiable assets less liabilities, all at fair value, not book value. A positive result is goodwill.
Carrying amount of goodwill: Carrying amount = Cost − Accumulated impairment losses; No amortisation is charged on goodwill.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (if carrying amount is higher); Recoverable amount is the higher of fair value less costs of disposal and value in use.
Gain or loss on disposal: Gain or loss = Proceeds − Carrying amount; Shown in profit or loss, not in revenue.
Recognition rule: Purchased goodwill: recognise. Internally generated goodwill and brands: do not recognise.; Spending on internal goodwill and brands is an expense when incurred.

Quick revision

An intangible asset is identifiable, non-monetary and has no physical substance.
Recognise it only if future economic benefits are probable and cost is measured reliably.
Research expenditure is always expensed when incurred.
Development costs are capitalised only when all the IAS 38 criteria are met.
Costs expensed in an earlier period cannot later be reinstated as an asset.
Amortisation spreads cost less residual value over the useful life.
Amortisation starts when the asset is available for use.
Internally generated goodwill is never recognised.
Purchased goodwill is recognised as an asset and is not amortised.
Goodwill is tested for impairment at least annually.
Carrying amount = cost less accumulated amortisation and impairment.
Amortisation is an expense in profit or loss, not a cash payment.

Common mistakes

Capitalising an internally generated brand Fix: IAS 38 bans recognising internally generated brands. Expense the spending. A brand bought as part of buying a business can be recognised.
Treating all goodwill as an intangible asset Fix: Only purchased goodwill, from acquiring a business, is recognised. Internally generated goodwill is never recognised.
Capitalising research costs because the project later succeeded. Fix: Research is always expensed. Success later does not change this.
Capitalising all development costs, including those before the criteria were met. Fix: Capitalise only costs from the date all criteria are met. Earlier costs stay expensed.
Amortising goodwill arising on acquisition Fix: Remember goodwill is not amortised under IFRS. It is tested annually for impairment.
Debiting the asset account instead of crediting accumulated amortisation Fix: Amortisation reduces the asset. Credit accumulated amortisation and debit the expense.
Capitalising an internally generated brand because it is clearly valuable. Fix: Remember that only purchased brands are recognised. Internal brand spending goes to profit or loss.
Amortising purchased goodwill. Fix: Goodwill is tested for impairment only. No annual amortisation charge.

Exam tips

In multiple response questions, read how many answers to select and test every item against the criteria before choosing.
Learn the never-recognise list: internally generated goodwill, brands, mastheads, publishing titles and customer lists.
In number entry questions, build cost from price, less trade discounts, plus directly attributable costs, and leave out training and overheads.
Separate purchased from internally generated. The same word, such as brand or goodwill, can be recognised or not depending on its source.
Do not mix up this topic with research and development. Keep IAS 38 recognition rules separate from the development-phase tests.
Check the wording. Words like investigating, exploring and searching point to research. Words like design, prototype and testing point to development.
Look for the date the criteria were met. Only costs after it can be capitalised.
Remember that amortisation starts at commercial production, not at capitalisation.