ACCA Applied Knowledge · Financial Accounting
Intangible Non-Current Assets and Amortisation for ACCA FA
Intangible non-current assets are identifiable assets without physical form, such as patents, licences and capitalised development costs. IAS 38 sets recognition rules. You capitalise qualifying costs, amortise them over useful life, and expense research. Purchased goodwill is not amortised but is tested for impairment. Practise the calculations and the capitalise-or-expense decision.
What this chapter covers
This chapter covers assets you cannot touch: patents, licences, brands, software and goodwill. The key standard is IAS 38 Intangible Assets. It tells you when a cost becomes an asset in the statement of financial position and when it must be charged to profit or loss as an expense.
You will work through four linked ideas. First, the recognition criteria: identifiable, controlled, and expected to give future economic benefits, with a cost that can be measured reliably. Second, research and development: research is always expensed, while development is capitalised only when specific criteria are met. Third, amortisation: spreading the cost of a finite-life intangible over its useful life. Fourth, purchased goodwill and other intangibles bought in a business combination.
This chapter connects to tangible non-current assets, where depreciation follows a similar logic, and to impairment. It also feeds into the consolidation question in Section B, where goodwill arises on acquisition. Accurate treatment affects profit, assets and the accounting equation, so errors flow through the whole set of financial statements.
Financial Accounting Section A has 35 two-mark objective test questions, and this chapter produces quick, predictable ones: which costs to capitalise, what the amortisation charge is, and what the carrying amount is. The rules are short and the calculations are simple, so this is a good chapter for secure marks. The same ideas also appear in accounts preparation and in consolidations through goodwill, so effort here pays off in the 15-mark multi-task questions too.
Intangible non-current assets and amortisation: topics in the order to study them
- 1Intangible Assets and IAS 38 Recognition CriteriaStart here because every later rule depends on knowing what counts as an intangible asset and when it can be recognised.
- 2Research and Development ExpenditureStudy this next because it applies the recognition rules to the most commonly tested capitalise-or-expense decision.
- 3Amortisation of Intangible AssetsOnce you know what is capitalised, learn how to write the cost off over useful life and find the carrying amount.
- 4Purchased Goodwill and Other IntangiblesFinish with goodwill, which builds on all earlier ideas and links to impairment and consolidation.
How to prepare Intangible non-current assets and amortisation
Aim to learn the rules first, then drill the numbers, then practise objective test questions under time pressure.
- Write the IAS 38 recognition criteria from memory until you can list them without prompting.
- Learn the difference between research (always expensed) and development (capitalised only when all criteria are met), and test yourself on short cost scenarios.
- Practise amortisation: cost less residual value, divided by useful life, with part-year charges where an asset is bought mid-year.
- Calculate carrying amount after one, two and three years, and check the statement of financial position and profit or loss effects.
- Learn how purchased goodwill arises, why it is not amortised, and that it is tested for impairment.
- Do timed objective test questions in all three formats: multiple choice, multiple response and number entry. For multiple response, select exactly the stated number of options.
- Review every wrong answer and note whether the error was a rule or an arithmetic slip.
Common mistakes in Intangible non-current assets and amortisation
Capitalising research costs as an asset.
Fix: Remember that research is always expensed. Only development costs meeting every criterion can be capitalised.
Capitalising development costs incurred before the criteria are met.
Fix: Capitalise only costs incurred from the date the criteria are first met. Earlier costs stay expensed.
Amortising purchased goodwill each year.
Fix: Do not amortise goodwill. Test it for impairment instead.
Getting part-year amortisation wrong.
Fix: Work out the monthly charge and multiply by the months from when the asset is available for use.
Recognising internally generated goodwill or brands.
Fix: Only purchased goodwill is recognised. Internally generated goodwill and brands cannot be capitalised.
Confusing carrying amount with cost in number entry questions.
Fix: Re-read the question and subtract accumulated amortisation from cost if carrying amount is asked.
Last-day revision: Intangible non-current assets and amortisation
- 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.
Intangible non-current assets and amortisation practice questions
- Dunmore Co buys a patent on 1 April 20X1 for $240,000. It has a useful life of 8 years, no residual value, and the straight-line method is u…
- Which of the following items must be recognised as an intangible asset in the statement of financial position of the entity that incurred th…
- Omega Co purchased a patent for $90,000 on 1 October 20X4 with a legal life of 10 years. Omega uses straight-line amortisation with a full-m…
- Kestrel Co has an intangible asset with a carrying amount of $45,000 at 1 January 20X2, being cost $75,000 less accumulated amortisation $30…
- Orion Co bought a licence on 1 April 20X1 for $90,000 with a useful life of 5 years, amortised straight-line on a monthly basis with no resi…
- Under IAS 38, which statement about capitalised development costs is correct once the asset is available for use?
- Kestrel Co acquired 100% of the net assets of Finch Co for $900,000 cash. The fair values of Finch's identifiable net assets were: property …
- Under IAS 38, which treatment applies to development expenditure that was previously expensed because the capitalisation criteria were not m…
Intangible non-current assets and amortisation in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Intangible non-current assets and amortisation: frequently asked questions
What is the difference between research and development under IAS 38?
Research is original investigation to gain new knowledge, and it is always expensed. Development applies research findings to a plan or design before commercial production. It is capitalised only when all the criteria are met.
Is goodwill amortised in ACCA FA?
No. Purchased goodwill is not amortised. It is tested for impairment at least annually, and any impairment loss is charged to profit or loss.
How do I calculate amortisation?
Take the cost, deduct any residual value, and divide by the useful life. For an asset bought part-way through a year, charge only for the months it is available for use.
Can I capitalise internally generated brands?
No. IAS 38 does not allow recognition of internally generated brands, mastheads, publishing titles or customer lists. A brand can be recognised if it is purchased.