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ACCA Applied Skills · Financial Reporting

Intangible Assets for ACCA Financial Reporting

An intangible asset is an identifiable non-monetary asset without physical substance, controlled by the entity and expected to bring future economic benefits. In FR you apply IAS 38 to decide whether to capitalise or expense a cost, then measure, amortise and test the asset for impairment.

What this chapter covers

This chapter covers how IFRS Accounting Standards treat assets you cannot touch: brands, licences, software, patents, development projects and goodwill. The core standard is IAS 38 Intangible Assets. Its main question is simple: does the cost meet the recognition criteria, or must it go straight to profit or loss?

The chapter has four parts. First you learn the definition and recognition test. Then you apply it to internally generated items, where research is always expensed and development is capitalised only when strict criteria are met. Next you cover measurement after recognition, amortisation and impairment. Finally you deal with purchased goodwill and other intangibles acquired in a business combination.

This chapter links to several other areas of the FR paper. Amortisation and impairment feed into the statement of profit or loss and the statement of financial position. Impairment ties to IAS 36. Goodwill is central to group accounts, where it appears in consolidation workings. Intangibles also appear in the statement of cash flows and in tangible asset questions, so the same skills carry across the paper.

Intangible assets can be tested in objective test questions (Sections A and B) and in constructed response questions (Section C). In objective questions, a single question often tests one rule, such as whether a development cost can be capitalised, and it is marked all or nothing. In Section C, an intangible asset can appear as a working inside a larger financial statements or group question, where a wrong treatment affects profit, assets and equity. The rules are logical and rule-based, so this is a chapter where careful study turns directly into secure marks.

Intangible assets: topics in the order to study them

  1. 1IAS 38 Definition and Recognition of Intangible AssetsStart here because every later topic depends on knowing what counts as an intangible asset and when it is recognised.
  2. 2Internally Generated Intangibles: Research and DevelopmentNext, apply the recognition rules to the most examined case, where costs are split between expense and capitalised development.
  3. 3Measurement, Amortisation and Impairment of IntangiblesOnce an asset is recognised, you need to know how to carry it, charge amortisation and test it for impairment.
  4. 4Purchased Goodwill and Other Acquired IntangiblesStudy this last because it builds on recognition and impairment and links to the group accounts part of the paper.

How to prepare Intangible assets

Treat this chapter as a set of decision rules followed by short calculations. Learn the rules precisely, then practise applying them to scenarios.

  1. Learn the definition of an intangible asset and its key features: identifiable, controlled, future economic benefits, no physical substance.
  2. Memorise the criteria for capitalising development costs, and be able to explain each one in your own words.
  3. Practise splitting a project's costs into research, development before the criteria are met and development after, using dated scenarios.
  4. Work through amortisation calculations, including the start date, useful life, residual value and part-year charges.
  5. Revise impairment: compare carrying amount with recoverable amount, and know where the loss is recorded.
  6. Do objective test questions on each rule, then attempt at least one written question that includes an intangible asset working.
  7. Finish with goodwill and acquired intangibles, tying them to the consolidation workings you use elsewhere in the paper.

Common mistakes in Intangible assets

  • Capitalising research costs.

    Fix: Always expense research. Only development costs after the criteria are met can be capitalised.

  • Capitalising all development costs from the project start.

    Fix: Find the date the criteria are demonstrated and capitalise only costs from that date.

  • Amortising goodwill.

    Fix: Remember that goodwill is tested for impairment and not amortised.

  • Recognising internally generated brands or goodwill.

    Fix: IAS 38 prohibits recognising these. A purchased brand is recognised at cost if the recognition criteria are met, or at fair value if it is acquired in a business combination.

  • Starting amortisation at the wrong date.

    Fix: Start amortisation when the asset is available for use and time-apportion the first year.

  • Mixing up recoverable amount with carrying amount in impairment tests.

    Fix: Write out the comparison each time: carrying amount versus the higher of fair value less costs of disposal and value in use.

Last-day revision: Intangible assets

  • 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.

Intangible assets practice questions

Intangible assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Intangible assets: 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 for new or improved products before commercial production. It is capitalised only when all the criteria are met.

Is goodwill amortised in FR?

No. Purchased goodwill is not amortised under IFRS Accounting Standards. It is tested for impairment at least annually, and any impairment loss is recognised in profit or loss. A goodwill impairment loss is never reversed in a later period.

Can I reverse an expensed development cost later?

No. If development costs were expensed because the criteria were not met, you cannot capitalise them later when the criteria are met. Only costs from that later date are capitalised.

How are intangible assets tested in the FR exam?

Objective questions test single rules such as recognition or amortisation, marked all or nothing. Written questions usually include an intangible asset working inside financial statements or group accounts, so you need to show clear calculations.