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IAS 38: Past exam questions

Intangible Assets: June 2017 Examination:

•On 1 April 2016, Epsilon purchased a brand from a competitor for an agreed price of $80 million. The directors of Epsilon believe that the useful life of the brand is indefinite. On 31 March 2017, no reliable estimate of its selling price was available but the directors of Epsilon estimated that the value in use of the brand was $85 million. The directors of Epsilon wish to use the fair value model for measuring intangible assets whenever permitted by International Financial Reporting Standards. (5 marks)

Proposed Solution: (Good answer)


Intangible assets are defined as “identifiable non-monetary asset without physical substance”

Treatment for initial recognition

Intangible assets should be initially recorded at cost for assets acquired separately.

So on 01.04.2016 it should be recognized at $ 80 Million Only

Subsequent recognition

For subsequent recognition IAS 38 have allowed two methods

1) Cost Method : in which cost is carried at its cost less accumulated amortization

2) Revaluation Method: in which asset is revalued & is carried at its Fair value reduced by

subsequent amortization.

But for adopting revaluation method fair value must be measured reliably in connection with an

active market.

In this case study it said that no reliable estimate of selling price of the brand is available which

indicates that there is no active market available for this brand. So directors can’t measure its

brand as per Fair Value Model. They need to continue with Cost Model instead.

Question: Dec 2016:

•As you know, in the year to September 2016 we spent considerable sums of money designing a new product. We spent the six months from October 2015 to March 2016 researching into the feasibility of the product. We charged these research costs to profit or loss. From April 2016, we were confident that the product would be commercially successful and we fully committed ourselves to financing its future development. We spent most of the rest of the year developing the product, which we will begin to sell in the next few months. These development costs have been recognised as intangible assets in our statement of financial position. How can this be right when all these research and development costs are design costs? Assume year ended 30 September 2016.

Please justify this with reference to relevant reporting standards. (5 marks)

Oct 2015 to March 2016 :Research Phase.

April 2016 to September 2016 :Development phase

IAS 38 provides the treatment for internally generated intangible assets.

It says that cost for internally generated intangible assets need to be bifurcated in two phases

A- Research phase

B- Development Phase

If an entity can’t distinguish between two phases entity has to treat entire the expenses as if the same

were incurred in research phase only.

IAS 38 provides that cost incurred in research phase should be expensed out in profit & loss account

For recognition of expenses in development phase following criteria must be fulfilled

A. Intention to complete the intangible asset (IA) for use or sale

B. Technical feasibility for completing the IA

C. Availability of resources to complete the IA

D. Ability of IA to generate future economic benefits

E. Measurement of expenditure incurred in development phase reliably

IAS 38 provides that if all the above criterias are met, cost incurred incurred in development phase

should be recorded in statement of financial position.

In current scenario it can be observed that

Company is fully committed to finance future development cost – A fulfilled

Company spent first six month in researching the feasibility of product – B fulfilled

Company is confident about commercial success & sell in next few months : D fulfilled

Since above conditions are fulfilled it is correct to recognize the same as intangible assets in statement

of financial postion.


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