ACCA Applied Skills · Financial Reporting

Intangible assets: formula sheet

Full chapter guide

Key formulas

Definition: Intangible asset = identifiable + non-monetary + no physical substance; The item must also be controlled and expected to give future economic benefits.
Identifiability test: Separable OR arises from contractual/legal rights; Only one limb is needed. Goodwill fails both.
Recognition criteria: Probable future economic benefits AND cost measured reliably; Both must be met, as well as the definition.
Separate acquisition: Cost = purchase price + import duties and non-refundable taxes + directly attributable costs, less trade discounts and rebates; The probability criterion is taken as satisfied for separately acquired items.
Items never recognised: Internally generated goodwill, brands, mastheads, publishing titles, customer lists; Costs are expensed as incurred.
Expense when no asset: Expenditure on an intangible item that fails recognition = expense in profit or loss when incurred; Examples: training, start-up costs, advertising and promotion.
Research costs: Research expenditure → expense in profit or loss when incurred; No exceptions. An entity cannot show that research will generate future benefits.
Development criteria (PIRATE): P – Probable future economic benefits; I – Intention to complete and use or sell; R – Resources adequate to complete; A – Ability to use or sell the asset; T – Technical feasibility; E – Expenditure can be measured reliably; All must be met. Also show how the asset will generate benefits, for example a market exists or it is useful internally. Failing any one means expense.
Cost of capitalised development: Capitalised cost = directly attributable costs incurred from the date the criteria are met; Includes materials, employee costs and fees for registering legal rights. Excludes general overheads, selling costs and earlier expensed costs.
Amortisation: Annual amortisation = (Cost − residual value) ÷ useful life; Starts when the asset is available for use. Residual value is normally nil. Charge it in profit or loss.
Never recognised: Internally generated goodwill, brands, mastheads, publishing titles, customer lists → expense; Purchased versions can be recognised, but internally generated ones cannot.
Initial cost (purchased): Purchase price + import duties + non-refundable taxes + directly attributable costs − trade discounts and rebates; Do not include training, admin overheads or initial operating losses.
Cost model carrying amount: Cost − accumulated amortisation − accumulated impairment losses; Amortise from the date the asset is available for use.
Straight-line amortisation: Annual amortisation = (Cost − residual value) ÷ useful life; Residual value is normally nil for intangibles. Time-apportion in the first and last years if needed.
Revaluation model carrying amount: Fair value at revaluation date − later accumulated amortisation − later impairment losses; Requires an active market. Revalue the whole class, and keep valuations up to date.
Revaluation surplus or deficit: Surplus or deficit = Fair value − carrying amount; Surplus to OCI. Deficit to profit or loss, unless it reverses an earlier surplus on the same asset, which is then charged to OCI against the surplus.
Indefinite life rule: No amortisation. Annual impairment test: carrying amount vs recoverable amount; Also review annually whether indefinite life is still appropriate.
Derecognition: Gain or loss = Net disposal proceeds − carrying amount; Recognise in profit or loss. Not presented as revenue.
Goodwill (full method, subsidiary): Goodwill = Consideration transferred + NCI at acquisition − Fair value of identifiable net assets at acquisition; NCI is measured at fair value (full goodwill) or at its share of net assets (proportionate method). If the result is negative, it is a bargain purchase gain.
Fair value of net assets: Net assets at FV = Share capital + Reserves at acquisition + Fair value adjustments (including newly recognised intangibles); Use values at the acquisition date, not the year-end.
Amortisation of a finite-life intangible: Annual amortisation = (Cost − Residual value) ÷ Useful life; Residual value is usually nil for intangibles. Start when the asset is available for use.
Goodwill impairment: Impairment loss = Carrying amount of CGU (including goodwill) − Recoverable amount; Recoverable amount is the higher of fair value less costs of disposal and value in use. Apply the loss first to goodwill.
Key rules: Purchased goodwill: recognise, no amortisation, annual impairment test. Internally generated goodwill: never recognise.; Impairment of goodwill is never reversed.

Quick revision

An intangible asset is identifiable, non-monetary, without physical substance and controlled by the entity.
Recognise only if future economic benefits are probable and cost can be measured reliably.
Research costs are always expensed as incurred.
Development costs are capitalised only when all the IAS 38 criteria are demonstrated: technical feasibility of completing the asset, intention to complete it, ability to use or sell it, probable future economic benefits, adequate resources to complete it, and reliable measurement of the cost.
Development costs already expensed cannot be reinstated as an asset later; only costs incurred after the criteria are met are capitalised.
Internally generated goodwill, brands, mastheads and customer lists are not recognised.
Amortise over the useful life from the date the asset is available for use.
An intangible with an indefinite life is not amortised but is tested for impairment at least annually.
Impairment loss = carrying amount minus recoverable amount, where carrying amount exceeds recoverable amount. If it does not, there is no impairment loss. Recoverable amount is the higher of fair value less costs of disposal and value in use.
Purchased goodwill is recognised in a business combination and is not amortised; it is tested for impairment. Goodwill impairment losses are never reversed.
Amortisation is charged to profit or loss, usually within expenses.
Check dates in scenarios, because they decide which costs are capitalised.

Common mistakes

Capitalising internally generated brands or customer lists Fix: IAS 38 prohibits recognition of internally generated brands, mastheads, publishing titles, customer lists and goodwill. Expense the costs.
Treating goodwill as an identifiable intangible asset Fix: Goodwill is not identifiable: it is not separable and has no legal right. It is governed by IFRS 3 and IAS 36.
Capitalising research costs because the project looks promising. Fix: Research is always expensed. Only development can be capitalised, and only after all PIRATE criteria are met.
Capitalising development costs incurred before the criteria were met. Fix: Capitalise only from the date all criteria are met. Earlier costs stay expensed and cannot be reinstated.
Amortising an indefinite-life intangible Fix: No amortisation if the life is indefinite. Test for impairment every year instead.
Revaluing a brand or patent without an active market Fix: Check for an active market first. If there is none, you must use the cost model.
Amortising purchased goodwill. Fix: Under IFRS, goodwill is tested annually for impairment and not amortised.
Recognising internally generated goodwill or brands. Fix: Internally generated goodwill, brands, mastheads and customer lists are never recognised. Only purchased ones are.

Exam tips

In OT questions, spot the keyword: 'internally generated' brand, customer list or goodwill means not recognised.
When asked to explain, name the three tests and apply each to the scenario in one sentence.
Show cost workings line by line: discount, taxes, attributable costs, so you earn method marks in Section C.
Do not mix up with research and development: development costs can be capitalised if criteria are met, which is a separate topic.
If a question mentions a business combination, remember acquired goodwill is under IFRS 3, not IAS 38.
In objective tests, look for a trap word such as research, brand or training. These are expensed regardless of how successful the project is.
Write the PIRATE criteria against the facts in the scenario and name the date they are all met. It earns method marks in constructed response questions.
Show a clear table of expensed versus capitalised amounts and check that it adds up to total spend.